Fed Vice Chairman Kohn Warns on CRE Concentrations at Small banks
Submitted by
CalculatedRisk on Thu, 04/17/2008 - 5:56am (19 comments)
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Not second?
This is good news!! For Rudy!!
/snark
CORS comes to mind. Also FBC.
The CRE and condo lenders forgot how to do market analysis to evaluate realistic supply-demand in local markets.
If Starbucks said they needed 40 new restuarants in a given town, the banks just said: "How much money do you need?"
They figured Starbucks knew their markets. But all Starbucks knew was the growth story Wall Street wanted to hear.
This was most egregious in the bubble condo markets. The banks were making $100 million construction loans without any independent evaluation of who would buy them. Even after several other lenders would turn a developer down, Corus would fly into town with wads of money.
BARRON'S MONDAY, APRIL 7, 2008
D.C. CURRENT By JIM MCTAGUE
Of the $7 trillion in FDIC deposits in 8,533 banks and thrifts, only $4.2 trillion, or some 61%, is covered by federal insurance. The rest is apparently in accounts exceeding the $100,000 limit for insurance... To appreciate the extent of this risk-taking it's worth remembering that in 1989, at the tail-end of the savings and loan crisis, some 80.7% of all deposits were insured.
More good news:
April 17 (Bloomberg) -- Manufacturing in the Philadelphia region contracted more than forecast in April, as measures of new orders and shipments reflected weakening demand.
The Federal Reserve Bank of Philadelphia's general economic index fell to minus 24.9, the lowest since 2001, from minus 17.4 in March, the bank said today. Readings less than zero signal contraction. The Philadelphia Fed's general economic index averaged 5.1 in 2007.
U.S. Economy: Philadelphia Factory Index Declines (Update1) - Bloomberg.com
Is it me, or did most of the big retail banks miss out on this CRE mess because of getting burned in 2000-01?
So the as the big banks wind down their credit crisis exposure the smaller banks will start dropping like flies?
Many small banks will have shotgun weddings. The busts will then be fewer but more painful.
Here is a blurb from my local paper and a nice little story.
"After counting newly occupied office space during the period, the new building and other new space boosted the office vacancy rate in the region from 15. 7 percent in the previous quarter to 19. 3 percent and from 17. 3 percent in Bentonville to 25. 7 percent. The Week in Review capsulizes state and local news from the Arkansas Democrat-Gazettes business pages."
We just had a 400,000 sq.ft building come on line, it has all the colliers logos on it now, but I can't find out who financed the deal. Another article in a local paper I can't copy quoted the developer saying they have one tenant taking 12,000sq.ft and "We are working on multiple deals totally 50,000 sq.ft that I feel very positive we will get done"
WOW 15% occupied after all the signs were up on this building for the two years they have been building it. Further in the article they talk about their other building across from the Wal-Mart home office they completed two years ago still not being completely occupied, and in the next paragraph talk about building another tower next to it.
I am trying to find out the bank that is financing this madness. I am sure this is some of the same shenanigans going on all around the country, it is going to get ugly.
I don't think too many projects are profitable at 75% occupancy rates, but I don't know the financials of these deals.
Oh, the humanity.
more sleuthing, they have a 22 million dollar loan from the biggest bank in the area, and a permit value of 45 million for the building.
Good news is that the bank that has the loan is where all my money is
Does anyone have any names of small banks that have a high concentration of commercial real estate loans? I understand articles better when I have an example I can examine.
A grade 7 bank examiner in training could give us this bold news. As Jas would say: born & bred American dopes. I'm going to the grocery supermarket you know the one where ALL the prices are higher this week than last. Wish me luck!
At a weekly networking lunch I attend, a guy was talking about his situation last week.
He told his story:
"I developed and built a 12 home neighborhood in Riverside County, CA. My project is now 100% built and I have only sold 3 homes. My construction bank financed 100% of the land acquisition, entitlement costs, building costs and I stopped making payment recently. When I called my bank to make an appointment with the banker to go over work out options he gave me two meeting dates to pick from. Both were over 3 weeks out. Every appointment prior was another builder not making payments or about to stop making payments. My bank will be out of business soon."
That is a scary story and one that I just can't get my head around. How could a bank finance a construction deal that has zero skin from the developer/builder? Crazy stuff.
"The banks were making $100 million construction loans without any independent evaluation of who would buy them."
I've seen market analysis reports, market studies and other 3rd party reports used by developers to bolster a case for funds from a bank. I've never seen a negative one. Much like appraisals they tell you the higher of a. what you want to hear or b. what everybody else did last week.
If you are in the banking business, you should know that, and most probably do. Even so, you have to do business to stay in business and a regional bank has to ride with what is happening in its region and with whoever the regional developers may be.
yippee for local community banks and their tight underwriting.
CR said: This is a key point that we've discussed before - the small to mid-sized institutions were not overexposed to the housing bubble because those loans were mostly securitized. Therefore the housing bust led directly to only a few small bank failures over the last couple of years.
the small and mid-sized banks did not understand the second order affects from the fallout in mortgage defaults and subsequent decline in housing pricings to their large holdings of residential c&d loans. the banks, like most defaulted homedebtors, only thought collateral values went up. there are many bankers up that have yapped on and on about how they never have lost a dime on a residential construction loan. guess what , this tune is about to change as all that is left to compute is the magnitude of the loss.
It also sounds like like it was not so much the case that smaller banks chose to go so heavily into CRE as that securitization essentially sucked up most of other key business segments leaving few other areas for these banks to lend.
When the tide of equity recedes, it exposes the shipwrecks.