As property dips, banks burdened by unsafe assets

Appraising homes during a real estate bust is rough, but appraisers face an even tougher task valuing vacant subdivisions and other troubled assets on many banks’ books.

But billions of dollars — possibly taxpayer dollars — ride on their estimates.

Georgia’s banks collectively hold billions of dollars’ worth of delinquent loans on foreclosed houses, vacant subdivisions and other troubled assets. Many of the state’s banks had bet heavily on the housing boom in metro Atlanta by making substantial loans to builders and developers.

The Federal Deposit Insurance Corp., which insures bank deposits with the backing of the federal government, has seized nine Georgia banks in the past year.

Under accounting rules that have been in place since 1993, banks must reduce the value of assets underlying problem loans to reflect their current value.

That’s where appraisers like Dan Fries come in.

The bust two years ago saddled many banks with difficult-to-value projects such as the Rockdale County townhouse project Fries was asked to appraise recently.

Fries, who has been an appraiser since 1983, lately has been appraising troubled properties for banks and government agencies.

A client he won’t name asked him to appraise the townhouse development, which has more than a dozen buildings, after the bank that made the loan failed. The bank failure shut down the builder with three buildings still unfinished, Fries said.

The project presents a dilemma for his client, he said. Property values have dropped from roughly $80,000 per unit to $50,000, making it possibly unprofitable to complete construction, though some buildings are nearly 60 percent finished.

But even though on paper it might make more sense to bulldoze the unfinished buildings, he added, that would drive down the values of the finished units where more than 100 families live.

“I would imagine they’re scratching their heads wondering what to do,” said Fries, who has essentially appraised that part of the project as worthless. “It’s a tough call.”

Folks in the banking industry face some similarly tough calls.

Last week, accounting rule makers approved changes that will give banks relief from so-called “mark-to-market” accounting that forced them to report heavy losses on “distressed” investments, such as mortgage-backed securities.

However, bankers said the change doesn’t bring relief from a similar accounting rule requiring write-downs on troubled real estate loans in which the underlying property has plunged in value.

That rule “has the potential to make more banks fail,” said Steve Bridges, president of the Community Bankers Association of Georgia. “You’re using real capital to cover theoretical losses [on paper.]”