Full-doc CRE LTV guidelines are (and have been) 75-80% or stricter. (More conservative banks lending on relatively riskier packages typically require LTVs closer to 60%.) In any event, generally speaking, we're talking about deeply collateralized CRE portfolios, especially when assessing the books of more conservative banks dealing in CMBS.
In construction financing, for example, builders typically put up the land itself as the collateral for the loan/LOC, and that land might represent about 30% of the value of a property with its improvements (eg, a finished house). If the builder cannot sell their product for a profit because of a depressed market, and have to declare bankruptcy, the lender can foreclose, retain a specialist marketing broker, and drop the prices on any remaining product by, say, 30% in order to get that product to clear the market, in order to recover whatever balance was in default. Yes, that's a headache for a bank, but generally there is such a substantial cushion that they can, in the end, come out even (or better) in the deal.
In short, the default rates on CMBS generally, and on construction loans specifically, are not so important as with residential mortgages, simply because of the protection the stricter CRE LTV requirements provides.
Thank for your post, Chip. I think you are probably right on target with the BBT philosophy of how to move forward. I imagine we will see them begin acquiring in the first quarter. They are growing their deposits now I imagine. Thanks for your insight!
Yes, I've been a real estate broker in Seattle for 15 years. My focus is in residential, and we occasionally have to deal with builders that are going through foreclosure. It's always the builders that get killed -- the banks come out of the deals fine because the builders put up so much collateral. So the banks just take over the property, slash the prices, and sell the inventory. This isn't to say that there *couldn't* be problems in this arena for banks here and there (this *is* the land of WAMU, after all), but generally construction financing gets done by our local/regional banks that you would never have heard of -- local/regional banks specialize in these kind of deals throughout the nation. Anyway, if BBT has operated in a half-mindful way in underwriting these types of loans, they have very low LTVs in their CRE portfolio, so even in the event of defaults they should have a lot of tangible assets behind those loans. It would surprise me to see massive loan losses coming out of the CRE portfolio, regardless of default levels. Anyone who understands CRE underwriting guidelines for commercial/construction financing would know this -- it's not some great secret.
BTW: good posts on your side. This board is mostly a bunch of nonsense, which is why I don't read it very often. You have a lot of patience, sir.