Loan Concentrations Leave Banks ‘Vulnerable’: FDIC
Some News from the FDIC. “Nearly three out of four of Atlanta-based banks are heavily weighted in construction and development loans and could face trouble if the housing market continues to cool. Eighty-seven of the 118 banks with headquarters in Atlanta have high concentrations of construction and development loans, the vast majority for residential projects, according to the Federal Deposit Insurance Corp.”
“Atlanta banks are significantly more invested in real estate than they were during the last real estate downturn. In 1991, only 29 percent of Atlanta banks, versus 74 percent today, had C&D loans totaling more than 100 percent of their capital.”
“New data released from the FDIC shows that the same banks have concentration of real estate-related loans that are well above that of previous boom years. More than half, or 56 percent of community banks in Florida had an exposure of construction and development loans that were 100 percent or more of capital. In contrast, just 22 percent of banks had such exposure during 1987, the last boom period.”
“Construction and development loans grew 66 percent during 2005, a record increase and the 10th consecutive year of double-digit growth. ‘The majority of C&D lending is for residential housing, and continued strong absorption of new housing units will be a crucial factor,’ the FDIC said.”
“At 421 percent, the median commercial real estate exposures (CRE) loan-to-Tier 1 capital concentration among California-based institutions ranked fourth highest among the states as of year-end 2005. Elevated concentrations of CRE loans may leave institutions more vulnerable to adverse changes in market conditions.”
“Innovative mortgages and investors may be buoying California housing demand. Interest-only and negative amortization loans accounted for 69 percent of non-prime mortgage originations in California in the first 11 months of 2005. During the same period, investors and second-home purchasers accounted for 15 percent of California Alt-A mortgage originations.”
“Residential permit activity declined in 2005 for the first time in ten years, possibly signaling a change in housing markets with important implications for the state’s construction-dependent job growth.”
Thanks to the readers who contributed to this post. This situation has been building for some time. As prices rose above GSE limits, banks were forced to hold greater percentages of residential loans. Check out how your state fares here.
The whole lending system is very vulnerable.They have been living off future demand for some time now. They have lowered the standards and basically giving anyone a loan. It is all based on the notion that real estate only goes up. The whole system will be tested like never before in history.
“Atlanta banks are significantly more invested in real estate than they were during the last real estate downturn. In 1991, only 29 percent of Atlanta banks, versus 74 percent today, had C&D loans totaling more than 100 percent of their capital.
“In fact, the metro area’s banks have the greatest median C&D loan-to-capital ratio among the nation’s top 10 residential construction markets. Las Vegas, No. 2 on the list, has a median C&D loan-to-capital ratio of just 180 percent, versus Atlanta’s 265 percent. ”
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Is 265% a lot?
Let’s assume that the Atlanta banks have 100 in capital. Should they suffer losses in their 265 loan porfolio, the losses will be subtracted from their capital. So assume the loan portfolio has some loans that were 100% loan-to-value. When prices sink some of those will default and have to be foreclosed. Let’s assume 10% are foreclosed. Costs are incurred with foreclosed properties but we will ignore that. Let’s assume that the foreclosed properties are sold for 80% of the loan balances and there is no further recovery from the borrowers. So 25.6 of the banks loans go bad and a loss of 20%(ignoring costs) is incurred. The result is the bank capital is reduced by 5.2.
Do I think it will be that serious? No. I think it will be a lot more serious than that, but this illustrates the relationship between capital and outstanding loans in the Atlanta case.
When banks begin reporting impaired loans, depositors get nervous. In the early 90’s, a New England bank was chock full of loans that it couldn’t collect quickly enough to avoid a run on the bank and it failed. The Feds took it over and caused it to be bought by another bank on favorable terms.
This article will hopefully be read by all who are reading this blog. Think what “suicide loans” mean to our banking system!
dawnal,
I think you’re missing the significance of the phrase ‘construction and development’ when making that analysis. They are not talking about mortgages.
When a C & D loan goes sour, the lender would be very, very lucky to only lose 20%.
OT but I found it humorous. Last weekend I saw a realtor sign with another little sign attached to the top. It read “Honey, stop the car”….at least someone of that ilk has a sense of humor….
OK, and I’ll ask again, does anyone have any idea why the FDIC has increased the deposit protection for IRA’s/401k’s to $250,000, but savings and checking deposits remain at $100,000. The only reason I can think of is the banks don’t want to pay the additional premiums. WTF, they’re not making enough money?
Do you have a link for that change?
Haven’t heard anything on this in the news media either. I watch CNBC all day.
http://www.fdic.gov/news/news/press/2006/pr06029.html
I wouldn’t be surprised if it’s mostly because people tend to have a lot more money in IRA/401ks than they do in regular deposits.
I’m not a big FDIC fan. I still encourage all my family and friends to use the bank rating services like Bauer finanical to make sure your bank is in decent shape. It’s also a good idea to have a back up bank.
CD’s and savings accounts stay at $100,000. If the deposit amounts are as you say, smaller, then why not increase the limits on those accounts also. Furthermore, the goal of FDIC insurance is to instill confidence in the banking system and protect depositors. Could it be the FDIC is protecting future taxable IRA’s and 401K’s at the expense of ordinary savers, CD holders and personal or business checking deposits?
I don’t have any idea as to why this is, but one thought is that for checking and savings accts, you can increase your coverage by having different ownerships on your accts. For instance a husnand and wife with three children can increase their FDIC coverage to $800,000 by putting the accounts “ITF”
On retirement accounts, the same rules do not apply.
Do you think that this FDIC report could soft-pedal the potential impacts of this problem any lighter? These are some of the most amazing numbers I’ve seen, and are at the real core of the coming debaucle. At this point, anything these banks do is self-deflating, and attempts to reduce exposure will simply destroy their profit margins. I would guess that the short term demands on their part will involve raising the GSE limits in an attempt to shake off this overload, but the sudden crush of bundled bonds would surely cause yields to spike. Damned if you do, damned if you don’t.
to fred hooper,
IMO it would be because the IRA and 401k monies need the protection for retirement(future retirees) and the government doesn’t want them at risk. Your $250,000 mark probably represents some sort of a medium. Most people don’t have large sums sitting in savings or checking accounts.
Again, could it be the FDIC is protecting future TAXABLE IRA’s and 401K’s at the expense of ordinary savers, CD holders and personal or business checking deposits? Could it be planning by that insidious PPT I always see references to on this blog? Me suspicious. Don’t trust white man banker
(I just posted this under another article, but I’m hoping to catch some attention. This is the only time I will duplicate it.)
I have a question that is a bit OT: Regarding Massachusetts’ law, does anybody here know whether a new owner of a property (including a bank!) has to honor a lease of any duration signed with the previous owners?
I ask because I am considering renting a $1200/mo. property that was purchased in February 2006 for $280,000. My sleuthing has not turned up a mortgage amount, but given (a) that the previous owners flipped it (purchased in June 2005 for $190,000) and (b) the new owners are two young friends (who happen to be women), I’m not so sure they put the standard 20% down. (LexisNexis should have the info eventually, but not in my decision time frame.) So, you guys can run the numbers, but figuring 6% 30 fixed yields about $1500/mo. before taxes ($2700/year), insurance, and maintenance. Given the slow sales in MA and 0 appreciation, there is a good chance that we’ll see a sale in the next 2 years (maybe not if ARMed).
I need a property for 2 years. Can I sign a two year lease and expect a bank to honor me as tenants on their property?
Thanks for any info!
Just a thought, but in two years the bank will probably gladly unload this house to you at a firesale. Save some dough and make ‘em happy. The ‘friends’ are toast.
I should mention that $1500 amount quoted above includes a generous 10% down payment.
Safe_as_Apartments - I think the legalese is that your lease is an encumbrance. It would have to be honored by the new owner in a property transfer, be it a lender foreclosing or a regular sale. Besides, assuming you are actually paying your rent, as agreed, a foreclosing bank would probably be happy to have you there. They would get the rent, after all.
A lawyer I ain’t, but Massachusetts is probably among those states that provides a relatively high level of protection to renters under the law. In Virginia, for example, a property owner can shoot a tenant, provided, he can demonstrate to the court that the victim “deserved it.” OK, I’m kidding. But you get the point.
I have the same exaxct question, here in Arizona. If people begin leasing a lot of these unsold homes, and if the bank forecloses, will they still honor your lease?
Nope.
Try looking them up at masslandrecords.com, which provides access to most county records in MA. The mortgage amount (but not the specific terms) should be listed with the deed.
Why would the bank be obligated to honor your lease between the former owners?
They would be in default of their mortgage and forfeit their interest in the property.
Your leasehold is contractual and doesn’t run with the title.
My guess is you could sue the former owners for breach of contract but how are you going to get blood from a stone.
You can do the deal, but my guess is you got a 50/50 chance of eventual eviction if the property is foreclosed and goes to sale.
Buyers sometimes toss current tenants-just to get a “new” start.
hehehe…if there was no current uptick in rental incomes, that appraiser who rubber-stamped that $90k valuation increase outta be in jail.
Voila-$90k out of thin air!!!!!!!!!!
LMFAO…you’re f*ckin’ fault Easy Al…
I’m not a real estate lawyer, but I’ve seen a few contracts. In general, a contract should include language that makes it “binding on heirs and assigns”. If it does, then the lease contract is a legal encumbrance on the property and is binding on anyone else who inherits, purchases, or forecloses on the property.
However, if the current owner got a mortgage as a “primary residence”, there is a chance that their mortgage contract forbids them leasing the property out without notifying the bank (i.e., prohibits additional encumbrances on the property). If they did not comply with this, I’m not sure of your legal standing vis-a-vis the bank.
In general, local courts tend to favor the tenant in any kind of judicial eviction procedure. If you are paying your rent on time, and if you contact the new owner and send them rent as well, they would find it extremely difficult to evict you. Of course, they could tell you that they are “terminating your lease”, but they would have no legal right to do that, unless the lease agreement gives them that right. As long as you stand your ground, tough beans for them.
“New data released from the FDIC shows that the same banks have concentration of real estate-related loans that are well above that of previous boom years. More than half, or 56 percent of community banks in Florida had an exposure of construction and development loans that were 100 percent or more of capital. In contrast, just 22 percent of banks had such exposure during 1987, the last boom period.”
When the buildup of systemic and correlated risk which fuels the boom unwinds, the feedback effect will make this crash much worse than the any others of at least the last 60 years. Too many individual decision makers have tacitly colluded to make the same collectively foolish mistakes, failing to notice that rather than excercising independent prudence, they were running with the lemmings herd to the edge of the cliff. This characterization applies in equal measure to recent homebuyers who used suicide financing to stretch their home purchase budgets, consumers who lived the life of Ryan through cashout-ATM financing, bankers whose loan portfolios are are topheavy with RE construction loans, mortgage lenders who took the low level of defaults during an unprecedented runup in home prices as evidence that subprime lending risk was no longer a concern, and investors who bought on to the new dogma that real estate is a superior asset class to equities or savings because real estate prices only go up. This multilayered and mutually-supporting web of stupidity will impose a high level of collateral damage beyond those who are directly responsible, as our national economy has turned into a giant addict to the heroin of runaway real estate price inflation.
That about sums it up very nicely. We have turned into a massive consumer nation where you are mainly valued by what you have. Look at all the depressed people in the usa. This bubble has created a lot more problems than merely financial.
Starts at the top…Polorized society…
Yes, GetStucco! Well put. Things are different now. I have a bumper sticker affixed to a file cabinet circa 1983 “No Trillion Dollar Debt”. Wish it was only a Trillion today.
wow, this thing really could get out of hand, and quick.
nicely said… that is it. shout it from the mountain tops! Why do they call it common sense when it isn’t that common?
Specially amongst fuds…
I would think that any contract that the bank had, in this case the loan holder, supercedes you interests. Having said that, you being a good renter would probably be able to stay while any new negotiations are going on…and this could take months….By all means rent the place and then keep us posted on your trials and tribulations so we can learn too.
the lending system could be vulnerable to stuff like this:
Saudis worry that oil demand could outstrip vast resources
http://seattletimes.nwsource.com/html/businesstechnology/2002908715_saudioil04.html
By the seat of the pants, it feels like this could and should be worse than other market downturns (in terms of after effects). While I still beleive that, there is some fudge factor involved, mainly becouse of the mortage back bond market moving risk around from banks to bond holders. That changes the game a bit, but still, someone is going to feel the pain, if this gets as ugly as many of us think it will.
BubbleTrack.blogspot.com
Too bad there is considerable evidence those MBS are piling up into the “conservative” tranches of corporate pension funds. It is bad enough that US workers are fantasizing about phantom pensions that will buoy their finances through their retirement years, without the added concern that pension managers may have collectively drunk the MBS koolaid. This will make it very hard for all the supposedly rich retirees to support the lofty prices of luxury condos and McMansions over the next thirty years.
http://tinyurl.com/hwwde
yeah, I don’t see how this ends well. the housing bubble looks like it’s going to take out the banks, the overleveraged homeowners, the MBS’ and then stocks. all this is going to hit hard the portfolios of pension funds and the average joes meager 401k. trouble is, 401k people don’t have a whole lot of money. a lot of people are betting(literally) on their high-leveraged RE investments for their retirement.
I forgot to add, the only bright side to the pension world is that they are increasingly pouring money into commodities and they are invested overseas, in part/
The Joe 6Packs of the world who still have private pensions are a natural bagholder of last resort for toxic MBS. Pension fund managers have no reason to stear clear of this bad gamble, as the fact that all their peers are doing the same provides great CYA insurance.
“Insanity is the rare exception in individuals; but in groups, parties, nations and epochs, it is the rule.”
Friedrich Nietzsche
What rich retirees? 40% of those over 55 only have $25,000 saved for retirement.
LOL I heard that on NPR today, too. Yet about two thirds of the respondents also thought they would have a comfortable retirement. Maybe they think retirement means another job.
Mortgage backed securities indeed move the risk around but the risk remains in place whereever it lands. The risk is simple. Will the borrowers pay their mortgages? If they don’t, the holders of MBS are hit. Some may be able to call upon the banks that originated the loans but the banks may not be able to honor their obligations.
That is why so many holders of MBS are selling them and getting out of that activity.
Actually, the risk is slightly more complex; as those holders of MBS sell them and get out, the risk premium rises, the price falls, and whoever still holds them loses money. All it takes for prices to fall is the perception that risk is higher than previously believed.
OT
I have been listening to the talking heads on CNBC today, and a lot of of segements on the RE market, bubbles, and so on.
Kind of reminds just before NASDAQ crashed with all this RE talk.
IMO: I think certain areas, have and will bubble while others wont. I live in Portland Oregon and people are still buying like there is no housing bubble. I cant understand it , but it is a fact. Then I hear mixed opinions about the bubble and the banking industry. Do we have anything substantial that can say what direction for the most part the market is heading?
accroyer;;; Just stayed tuned right here for the answer….
Sweet.
grab some popcorn and enjoy the horror show.
I’m interested in the Portland Or market as hopefully I’m moving there next month from…… San Deigo… (It’s OK I’m Irish not Kalifornian).
My plan was to rent for a year at least and get a feel for the city and the districts before even thinking of buying - the Portland market looks overpiced when I ran the numbers - and I suspect it’ll tumble shortly after So Cal self destructs with the banks cranking lending standards tighter.
The market is way overpriced, thats what I dont understand how the f*** do people have money to still buy? This is mind boggling.
Stupidity, lax lending standards and the ability to get into something while only paying the interest (or less!) on the loan.
Once reality and fully amortizing payements and rising rates come home to roost look out below - I figure Portland is about 30% overpriced which compared to San Diego looks downright reasonable
I’m going to hold off for a year or two and explore the city a bit and see what areas I like best and wait on this thing to implode - it’ll happen a lot faster than previous busts I think - in the mean time I’ll be renting a nice place and saving as much cash as I can.
“Innovative mortgages and investors may be buoying California housing demand. Interest-only and negative amortization loans accounted for 69 percent of non-prime mortgage originations in California in the first 11 months of 2005.”
86 % of all SANTA BARBARA HOMES have been purchased on A.R.M.’s. Since we are rated as the # 1 OVERPRICED town on a recent CNN Money report- I am VERY INTRIGUED with how the next year or two is going to play out.
Just heard from someone in Seattle… they said they had heard a lot of PRESS about CALIFORNIA being in a BUBBLE. yeah, you bet I agreed with the press up there.
PNC Perfidy (April 2) Pittsburgh Tribunre-Review
Hold up, they are getting excited when a bank that earned $1.2 billion last year is building a $170 million tower for speculative real estate construction? Yeah that $170 tower is really going to break the bank if downtown real estate crashes. The Rigg’s bank tower in DC is probably worth more than that and you don’t see them using 25% of its square footage.
From the :
Many lenders larger than First Federal offer option ARMs, including rival thrifts like Oakland’s Golden West Financial Corp., parent of World Savings, and Downey Financial Corp. in Newport Beach. Seattle-based Washington Mutual Inc., the largest S&L by far, and Calabasas-based Countrywide Financial Corp., the nation’s largest mortgage lender, have helped to popularize option ARMs across the country.
But First Federal has taken to them like few others. Of all the home loans that Washington Mutual held at the end of 2005, 52% were option ARMs, the company said in its annual report to the Securities and Exchange Commission. Golden West and Downey said more than 90% of their loans were option ARMs. At First Federal, 100% of residential mortgages were option ARMs.
How bad is it?
Here is what the Mogambo Guru has to say in yesterday’s The Daily Reckoning:
“…loans/leases at the banks increasing
to a record $5,569 billion, and savings deposits are also soaring to a
record of $5,238 billion, yet required reserves in the banks fell to a
microscopic $40 billion. Hahaha! The record low was in 2001, when required reserves sank to $38 billion, which was the “insurance” against losses in their much, much, much smaller books of loans/leases and deposits. You wanted fractional-reserve banking carried to ludicrous extremes? Well, brother, you’ve got it now!”
The question remains, “Who will be the ultimate bag holder for all of these overvalued properties?” Will there be an S&L type bailout at taxpayer expense or will true free markets reign with the dissolution of institutions that participated in this real estate malinvestment?
My thoughts are that it will be a combination of both, with the little guys (under 1 billion in real estated debt “assets”) being wiped out while the “too big to fail” institutions paper over this debacle with help from Helicopter Ben.
My thoughts are that it will be a combination of both, with the little guys (under 1 billion in real estated debt “assets”) being wiped out while the “too big to fail” institutions paper over this debacle with help from Helicopter Ben.
Government just had to raise the debt ceiling to $9 trillion.
They are dead azz broke.
The demographics have changed since the last bust in ‘90/’91.
Baby boomers are now gettin’ ready to collect off the senior citizen entitlement wagon. Bazillions there.
Plus there’s war against terror goin’ on. More bazillions.
Millions of mfg. jobs have been offshored. No bazillion in tax revenue here.
They bail-and your dollar will be f*ckin’ worthless.
It’ really is different this time.
The FDIC had a lot of experience in the 80’s and 90’s closing banks.
In some states the housing losses from the mid 80’s are just being recouped, people holding for 15 years or so to get what they paid.
In some areas whole banks went down with the builders who could not sell or finish the huge tracts of mushrooming houses.
Is a Bush boy in banking this time around?
bluto - Maybe it’s just the fact that they are technically following the spirit of the rules, contrary to what the Comptroller says. Also, how often do major construction projects (esp those govt subsidized) come in under the projected cost?