BUSINESS, Page 54Sale of the CenturyThe S & L bailout will saddle the Government with a huge hoard ofreal estate that could rattle the market unless regulators unloadcarefullyBy Barbara Rudolph
FOR SALE: 6,000-acre spread in the rolling hills north of
Dallas. Includes two country clubs, a lake and beach, several small
parks. Semioccupied. All this for less than $100 million. FOR SALE:
Continental Regency Hotel in Peoria, Ill. A city landmark with 333
rooms. Needs work. Anxious owner asks just $4 million. FOR SALE:
First-class polo complex in Selma, Texas. Features corrals,
paddocks, barns, apartments, tennis courts. Will consider all
offers over $7.5 million.
The reluctant owner of these properties, and tens of thousands
more, is the U.S. Government. A federal stockpile of distressed
real estate holdings is suddenly growing to an unprecedented and
ominous size as Government regulators seize insolvent savings and
loan associations and commercial banks. President Bush's plan to
bail out the S & L industry, which won Senate approval last week
by a vote of 91 to 8 and now faces House consideration, calls for
the Federal Deposit Insurance Corporation to take over some 400
hopelessly ill thrifts and sell off their real estate in the next
few years. During this huge liquidation the Government will hawk
everything from office towers to condominiums, sewage plants to
gravel pits, shopping malls to single-family homes.
The disposal of such a huge property glut presents Government
bureaucrats with a very delicate situation. If they try to unload
the property too fast, they could sharply depress the real estate
market and the value of the assets they still hold. The falling
prices could put even more S & Ls in jeopardy by undermining their
outstanding real estate loans. Already the impending sales have
frightened real estate investors and kept a damper on prices,
especially in the hard-hit Southwest. The federal holdings, says
Dallas S & L adviser Richard Kneipper, are like a "tidal wave about
to crush us all and drown everybody."
Yet the U.S. cannot afford to go too slow in selling off the
real estate, because the Government needs the proceeds to pay off
S & L depositors and carry out the bailout, which is expected to
cost more than $150 billion in the next ten years. Moreover, the
Government has never proved to be an entrepreneurial manager of
property, so the real estate it owns is likely to keep diminishing
in value. Says thrift consultant William Ferguson: "Bad assets
don't usually get better, they get worse. Buildings and sites
deteriorate."
A prime reason for the nervousness is that no one is sure just
how much property the Government will be taking over. Stuart
McFarland, chairman of Virginia-based Skyline Financial Services,
which manages 8,000 repossessed properties in 21 states for the
Government, estimates that the real estate might total $200 billion
or more. The load of S & L properties is compounded by a growing
stock of real estate that other Government agencies have taken over
in recent years because of loan defaults. The Farmers Home
Administration will have to dispose of 1.3 million acres of
farmland, a territory roughly the size of Delaware. The Federal
Housing Administration has about 70,000 homes on the market.
Most of the property being acquired in the S & L bailout is
concentrated in the Southwest, where the bulk of insolvent thrifts
overextended themselves during the oil-boom days of the late 1970s
and came to grief in the oil crash of the mid-1980s. The thrifts
began repossessing property when borrowers could no longer meet
payments, often because homeowners lost their jobs or business
owners suffered from plunging sales as the energy-based economy
declined. In many cases the loans should never have been made.
Observes James Noteware, national director of real estate for the
accounting firm of Laventhol and Horwath: "A lot of what the thrift
institutions are passing on to the Government is really junk."
The properties are hitting a real estate market that is
generally far weaker than during the go-go days of the 1970s and
early 1980s. The overbuilding of offices and condos has produced
a huge surplus of such structures all across the Sunbelt, and some
excess properties even in Northeast states like Massachusetts and
Connecticut. "What you're dealing with is the aftermath of a
massive speculative excess. It tends to drive down the value of all
real estate," says Austin-based banking analyst Alex Sheshunoff.
To make matters worse, mortgage rates have risen a full percentage
point in the past year, to an average 11.5%, which has stalled home
sales and depressed residential-property values in many areas.
The Government's objective in liquidating such real estate will
be to get nearly full market value, not only to reduce the eventual
cost of the S & L bailout to taxpayers but also to avoid
undercutting the going rates in the marketplace. Yet the Federal
Savings and Loan Insurance Corporation, which currently holds most
of the repossessed property and will be combined with the FDIC
under the Bush plan, has seldom shown a talent for getting top
dollar. In Guerneville, Calif., a small town north of San
Francisco, the FSLIC took over a condominium project with more than
20 units two years ago. The original owners had been trying to sell
the units a few years earlier for an average of $140,000 each,
though market conditions suggested that a price of $75,000 was more
appropriate. When the FSLIC took over, it sold all the condos for
about $27,000 apiece.
Real estate experts have accused the FSLIC of being inept at
dispensing with property in a speedy but careful manner. The
problem, they charge, is that the agency is riddled with
bureaucrats who cannot make sharp, quick business judgments. Says
Sam Pierce, a Houston-based adviser to the thrifts: "The FSLIC
doesn't know a good deal from a bad one. They don't have the
necessary brainpower or manpower."
Realizing the momentous task ahead, FSLIC officials have made
an attempt to become more savvy in their dealmaking. The agency's
central-region division has taken over three blue-carpeted floors
of a sleek office building in north Dallas, and is opening a
ground-floor showroom to hawk its myriad properties. The 15-member
sales staff is augmented by 100 private contractors and real estate
agents who work for fees and commissions.
If Congress approves the Bush S & L plan, as it probably will,
all thrift real estate will be consolidated into the newly formed
Resolution Trust Corporation, which will be eliminated after five
years. Some experts fear that the RTC, which will be supervised by
the FDIC, will speed up the selling process too much. The FDIC has
a history of moving quickly to dispose of banks' repossessed
assets, generally holding on to Texas and Oklahoma property for
less than a year before selling it.
Government regulators insist they will be cautious. Says Steven
Seelig, acting director of liquidations for the FDIC: "We will make
sure the property hits the market slowly." Richard Breeden, the
presidential assistant who helped put together the bailout scheme,
maintains that "it's not in the Government's interest just to dump
property" and suggests that the five-year time frame for
liquidating the real estate might be extended. In fact, many
investors think the Government may need a decade or more to dispose
of the surplus.
The worst scenario would be a steep rise in interest rates and
an economic downturn, which would sink property values still more
and saddle the Government with the world's largest collection of
white elephants. Even if the economy remains stable, banking
regulators face the biggest cleanup job of the decade, or maybe the
century. The cost of the Bush bailout plan very much depends on
what kinds of deals the regulators can strike. If they fall down
on the job, it will be the U.S. taxpayer who picks up the pieces.
-- Bernard Baumohl/New York, Jerome Cramer/Washington and Richard
