The northwest Arkansas housing market may be rebounding, but lenders remain a familiar sight among the ownership rolls of residential lots and undeveloped acreage all over Benton County.
Bank-owned residential property in the county tops 900 lots and 2,800 acres among a sampling of major OREO holdings from a group of 15 lenders alone.
Five years after the real estate bubble burst, the balance sheets at Arkansas lenders reflect hundreds of millions of dollars in Other Real Estate Owned. Benton County property that secured loans on failed developments has contributed to the OREO total.
“I’ve been very active with the OREO up there,” said Wallace Fowler, chairman and CEO of Jonesboro’s Liberty Bank of Arkansas. “It’s an asset of the bank that’s not producing, so it bothers me.
“We’re not in an excessive position of ownership, thank goodness.”
Liberty recorded more than $29.6 million in total OREO on its books as of March 31. Five years ago, the total was only $4.9 million.
It’s a fiscal experience shared by lenders who participated in Benton County’s aggressive and competitive real estate development pre-2008. Banking activities have expanded to deal with the management chores associated with overseeing OREO portfolios that have grown to historic levels.
“You have to have reappraisals every year, which tells us what our write-down is,” Fowler said about keeping track of OREO valuations. “We now have six [to] eight employees involved with appraisals. We didn’t used to have any.”
In days gone by, lenders wrote down the value of OREO by 1/60 each month until it was liquidated or reduced to zero. The valuation rules have changed. However, the five-year window of getting OREO off the bank books is still in play to a degree, whether the lender’s primary regulator is state or federal.
The condition of the financial landscape has led to more bankers asking and receiving more time to deal with OREO.
“It’s a fairly common occurrence for an institution to request an extension to the holding period,” said Susannah Marshall, deputy commissioner of the Arkansas State Bank Department. “The commissioner” — Candace Franks — “determines whether to grant an extension on a case-by-case basis.”
State and federal regulators can grant a lender up to five additional years to dispose of OREO. Increased regulatory scrutiny has accompanied the widespread increase of real estate on the books.
“It is something we monitor closely,” Marshall said. “Developed lots are easier to sell. The raw land obviously presents a challenge.”
Ron Pender and Barry Cooksey of Re/Max Real Estate Results in Bentonville have joined forces to invest in OREO opportunities in Benton County.
They bought 33 lots in the Clower Farms subdivision in Rogers from BancorpSouth Bank of Tupelo, Miss., in a series of transactions that began last year. The bank recovered the property in February 2011 from John David Lindsey in the wake of his Chapter 7 bankruptcy.
“There are plenty of lots out there,” Pender said. “But there’s not as many available in what I would call good locations. That supply has been substantially reduced. The price is going up on those remaining lots.”
Pender and Cooksey also purchased 27 lots in the Maple Glenn subdivision of Pea Ridge from Great Southern Bank of Springfield, Mo., for $150,000. Pender thinks the time may be ripe for converting Pea Ridge renters into Pea Ridge homeowners.
“The rental market is very strong in Pea Ridge,” Pender said. “There is no supply of decent rental property. The interest rates are at all-time lows. Some of those renters should be able to get into a house. And in many cases, a house payment is cheaper than renting.”
Their two OREO plays were made in projects where they could buy all the inventory of home sites. They are finishing construction of two homes in Maple Glenn and two more in Clower, where they recently sold a third house.
“We’re trying to buy lots where we control the subdivision,” Pender said. “We want to put a certain product out there, and when you’re competing with other builders, you can’t always do that, even with restrictive covenants. We’re building a higher-quality home.
“We are getting calls from builders wanting to buy lots from us. But we’re not in it just to flip the lots. We’re in it to build and sell houses.”
In Name Only
Sometimes banks hold OREO — Other Real Estate Owned — properties in the name of affiliated limited liability companies or corporations.
For instance, Arvest Bank of Fayetteville controls some OREO property through Southwest Cattlemen’s Corp.
Arvest’s Benton County holdings through SCC include 16 lots and 43 acres in the Angel Falls project in Bentonville, 25 lots and 100 acres in the Summit Meadows project in Pea Ridge and 237 acres along Highway 112 between Rogers and Cave Springs.
Randy Dennis, president of the Little Rock bank consulting firm of DD&F Consulting Group, said the use of another corporate entity is typically done as legal insulation, to create a layer of protection and put some legal distance between a bank and potential liability.
That liability concern could be potential environmental issues or other litigious possibilities.
“If you’re ever in the chain of title with a property like that, it’s not a good thing,” Dennis said.