As Bank of America struggles – successfully, according to its executives – to once again become a “growth company,” one way that it is limiting its losses is by selling off commercial real estate[1]. The lender, which has been hit hard by litigation associated with its acquisition of Countrywide and by the robo-signer scandal hopes to decrease the chance of write-downs on commercial loans by selling off those assets now. Given that commercial property prices have fallen 40 percent since their 2007 peak and the bank’s core portfolio fell 28 percent in 2010 alone, this seems like a wise decision in order to limit loss. However, BofA is not exiting the commercial real estate business completely, says its head of commercial banking division David Darnell, but will remain active and involved in a “very disciplined way.” Chief executive officer Brian Moynihan hopes that this move will help the lender continue to expand without acquisitions like those of Countrywide and Merrill Lynch & Company, which led to litigation and serious losses in real estate and mortgage securities.
The lender said in an official statement that although “credit quality for commercial real estate is showing sign of stabilization,” it expects that “elevated unemployment and ongoing pressure on vacancy and rental rates will continue to affect primarily the non-homebuilder portfolio”[2]. By shedding some of its “excess weight” in commercial loans, BofA may be able to reduce its “legacy assets” left behind by other CEOs and limit losses on the books. Do you think that BofA’s actions are a sign that commercial real estate is not done heading down, or does this make you want to buy?
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[1] http://www.businessweek.com/news/2011-03-08/bofa-selling-commercial-real-estate-assets-risk-chief-says.html
[2]http://www.streetinsider.com/Corporate+News/Bank+of+America+%28BAC%29+Slashing+its+Commercial+Real+Estate+Assets/6353289.html
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