US Banks Prepare to Sell Real Estate Loans at a Discount to Reduce Exposure

Several US banks are preparing to sell real estate loans at discounted prices, even after borrowers become due, as they try to decrease their exposure to the commercial real estate market.

Several US banks are preparing to sell real estate loans at discounted prices, even after borrowers become due, as they try to decrease their exposure to the commercial real estate market. This willingness of some banks to accept losses on real estate loans comes after warnings that the asset class is "the next shoe to fall" following recent turmoil in the US regional banking industry. With rising interest rates and falling office demand after the pandemic, the commercial real estate market has been strained, but these issues have intensified following the collapse of Silicon Valley Bank, Signature Bank and First Republic raising concerns that other regional banks are taking up the bulk of commercial real estate lending.

HSBC USA is in the process of selling hundreds of millions of dollars in potentially devalued commercial real estate loans. Meanwhile, PacWest last month sold at a loss of $2.6 billion in construction loans. Along with that, a group of other banks are building a process to make similar purchases in the future easier by changing the way they account for commercial real estate liabilities.

Although the practice of offloading outstanding loans is not as common as it was during the 2008 crisis, many market participants expect trading volumes to increase this year and next. The move by banks to ease loans comes as executives and regulators sound the alarm about the health of the commercial real estate sector. Other banks are changing the way they account for loans by moving the designation from “hold to maturity” to “ready-to-sell,” a move that makes it easier to reduce net debt.

Citibank, which has reduced its commercial real estate lending, more than doubled its number of available-for-sale mortgage loans to $1.8 billion in the first quarter. Bancorp, based in suburban Philadelphia, cut commercial real estate lending by nearly $25 million in the first quarter.

The discount applied to the turnover of loans made outside the office sector is still relatively modest and is partly due to rising interest rates. The Kennedy-Wilson real estate investment group, for example, agreed to pay $2.4 billion, or 92 cents per dollar, for PacWest's loan block totaling $2.6 billion in principal. According to two of those briefed on HSBC's sales process, the loans are attracting bids and will value the loans in the mid-1990s as a percentage of their face value. While banks are typically unwilling to accept losses on large loans that will retain their value as long as the borrower repays the loan on time, some are being persuaded to take the plunge amid concern about a rise in delinquent debt.