As CRE Sours, Time for a REO Holding Corporation?
As the recession continues and the commercial real estate marketplace sours, more credit unions will unfortunately have to foreclose on commercial real estate properties secured by defaulted member business loans.
When banks foreclose on such properties, they frequently do so in the name of a 100% wholly owned, separate for-profit corporation. The advantage of doing so is that it provides a level of legal shielding to the parent company. In the event that later legal issues arise, the plaintiffs are restricted to suing the real estate holding company and not the parent financial institution. Often these properties are held for one to three years until sold. There is no intent by the bank to permanently retain the properties-rather, the goal is an orderly sale to minimize the amount of loan loss.
Unfortunately, credit unions are legally prohibited from using this same tool. Neither the CUSO enabling regulations, nor any other credit union regulation, allow for an ancillary corporation to temporarily hold foreclosed commercial real estate. Instead, the credit union itself must become the owner and landlord.
Perhaps CUNA and the various state regulatory entities should revisit this issue in the midst of all the current MBL foreclosures.