Commercial real estate may hurt banks
Most of the banks' problems have stemmed from residential real estate. But a wave of losses from commercial real estate loans could tip more banks over the edge. Amy Scott reports.
A closed bank (iStockPhoto)
More on America's Financial Crisis
TEXT OF STORY
Kai Ryssdal: The culprit so far in the meltdown of the banking industry has been real-estate prices. Residential real estate, specifically. And the misguided belief that house prices would just keep on going up. That, it turns out, was not the only misguided belief that banks had. Analysts say a coming wave of losses from commercial real-estate loans gone bad could tip yet more banks over the edge. Marketplace's Amy Scott reports.
AMY SCOTT: The credit crisis began when homeowners couldn't pay their mortgages. But as the pain has spread, more owners of shopping malls, hotels and office buildings are defaulting on their loans. One of the casualties was Great Basin Bank, in Elko, Nev. The FDIC took over the bank last month after it suffered losses from commercial mortgages and construction loans. Janice Collett was a customer.
JANICE COLLETT: It takes us at least 3 or 4 hours to get to a major city, such as Salt Lake, Reno, or Boise. So we're kind of isolated.
Fortunately another bank bought Great Basin's assets. But it's a subsidiary of a Utah corporation. Collett says she'd prefer to do business with an Elko-based firm.
COLLETT: Because I like the idea of a local bank, that loans to local people, and keeps things kind of in the area.
Analysts expect to see more stories like this, as the commercial real-estate market deteriorates. Matthew Anderson studies the health of banks at Foresight Analytics. He says just over 3 percent of commercial mortgages were delinquent in the first three months of the year, and it's getting worse.
MATTHEW ANDERSON: So not scary levels from a historical comparison to the early 90s, when delinquency rates were in the 9 to 10 percent range. But I think we're still pretty early on in this cycle.
As delinquencies rise, Anderson predicts at least another 100 banks will fail by the end of this year. Small banks are especially vulnerable. They don't have the diverse range of products that cushion larger banks as loans go bad. Richard Bove follows the market as an analyst at Rochdale Securities. He says thanks to market pressures and consolidation, small banks were disappearing well before this recession.
RICHARD BOVE: Every week since 1985, there have been six banks in the United States that have closed down or been merged out of existence.
That means we've lost more than 7,000 institutions in those 20-plus years. As larger banks take over, critics say they're less likely to invest in local businesses and community development. But Bove says customers may ultimately get a better deal. He says larger banks tend to charge lower fees and pay higher interest on accounts.
I'm Amy Scott for Marketplace.
Comments
Comment | Refresh
From Los Angeles, CA, 05/19/2009
I'm a broker of apartment properties in the Greater LA area and I feel as though the mentality in the market, that of "i'm waiting for the bottom to drop" has a lot to do with the media. I wish that the stories which make it to air focus less on the doom and gloom, and the bottom falling out. It's not going to happen. Foreclosures in the CRE market are few and far between. Workouts are more likely to be happening between the lenders and the property owners rather than a government clearinghouse for distressed properties. Broadcast that.
From Maynard, MA, 05/19/2009
"Bove says larger banks tend to charge lower fees"
Really? That's not been the case AT ALL in the Boston area. As the various previous banks merged to form Bank of America, fees (and minimum limits to gain interest) continued to grow to the point of being multiples of the former bank fees.
Post a Comment: Please be civil, brief and relevant.
Email addresses are never displayed, but they are required to confirm your comments. All comments are moderated. Marketplace reserves the right to edit any comments on this site and to read them on the air if they are extra-interesting. Please read the Comment Guidelines before posting.
You must be 13 or over to submit information to American Public Media. The information entered into this form will not be used to send unsolicited email and will not be sold to a third party. For more information see Terms and Conditions and Privacy Policy.