FDIC Federal Register Citations

From: John Armstrong [mailto:johna@UnitedBankofUnion.com]
Sent: Thursday, March 16, 2006 6:07 PM
To: Comments
Subject: Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices.

Ladies and Gentlemen:

I am writing to express my concern regarding your proposal for additional guidance with regards to Commercial Real Estate Lending. Your proposed guidelines would create an equal appearance of risk for custom homes and homes built for resale. Likewise, the guidelines would place all forms of real estate development lending under an equal criteria of risk consideration. Finally, your criteria has a one size fits all application that treats the United States economy as a single homogenous mass.

Single family construction with a take out commitment is a smaller risk than a home built for resale. The bank has pre-approved the end user/owner of the property and has minimized its reliance upon third party performance. Financing of homes built for resale is largely driven by the banks experience with the builder, consequently it may be prudent and reasonable to have 4 construction loans with builder “A” while builder “B” warrants only one home at a time. The ability of a carpenter to secure financing for a home for resale is a critical avenue for the migration of hourly employees to self employed small business owners. The curtailment of this economic activity by imposing a fiat dictum of conformity will deprive community banks and small business owners of a mutually beneficial relationship.

Single family home values are historically more stable than multifamily housing or retail properties in a given geographic area. The valuation of multifamily and retail properties is more readily impacted by changes in discount rate, than the value of single family housing. In an economic downturn, a retail strip center will suffer as merchants close and consolidate operations. From past experience we know that it takes a significant concentrated economic down turn to adversely impact single family home prices. One of the best examples would be Dallas, TX between 1982 and 1994, when the collapse in oil prices depressed the value of the housing stock.

Finally, the United States economy is not homogenous. Different regions of the country have historically experienced different rates of growth. San Angelo is not San Antonio, which is not San Carlos although all three are communities in Texas. The level of commercial real estate lending that is considered prudent for one community is inadequate for the second and probably excessive for the third. While the shear size of Texas renders such a comparison intuitively obvious, the same comparison can be made in any state. Community Bankers are uniquely suited to assess their community’s needs and opportunities.

In closing, I understand your concern that large interstate banking conglomerates have Agency Issues associated with their lenders. A large publicly traded bank that truncates its financial statements to the nearest $100,000 can incur significant losses before senior management recognizes the existence of a problem. But with smaller community banks there is one additional shield protecting the deposit insurance fund. That shield is the personal presence of ownership. In my professional experience I have found that the individual presence of ownership curtails fiscally foolish endeavors. Annual meetings are a poor substitute for a simple direct inquiry by active ownership.

Thank you for considering my thoughts and concerns.

John H. Armstrong