Utah banks enter 2010 in better shape

Utah banks enter 2010 in better shape
Recession » State supervisor says it's too soon to tell if the industry has touched bottom.

By Paul Beebe, Salt Lake Tribune
Updated:04/10/2010 06:45:27 PM MDT


Several community banks in Utah struggling with bad loans tied to real estate appeared to turn a corner for the better at the end of 2009.

But with two failures already this year and other banks still carrying overdue or defaulted real estate loans on their books, it's hard to know with certainty that lenders are firmly in recovery mode.

Lenders say their banks have raised new capital, written off toxic real estate loans and boosted reserves for future loan losses. And despite ongoing weakness at many banks, depositors' money -- insured up to $250,000 per account by the Federal Deposit Insurance Corp. -- isn't at risk, they say.

Still, many admit the danger isn't over. While a slow recovery is taking hold, they think home prices will continue to sink this year, leaving banks with little margin for error.

Meanwhile, bank lending remains weak, threatening the ability of businesses to finance expansion and new hiring that could drive Utah's 7.1 percent unemployment rate down from its highest level since 1984.

"We believe that we won't make a lot of progress in the economy until the last quarter, and then in the last quarter things hopefully will start to rebuild," said Paul Mathews, president of Holladay Bank and Trust.

"If I were guessing, we are probably at least a year away from the bottom," said Ron Spratling, the bank's chairman.

Holladay was one of an assortment of community banks with precarious levels of real estate loans to enter 2010 in better shape than just three months earlier.

Prime Alliance Bank of Woods Cross, SunFirst Bank and Village Bank in St. George, Capital Community Bank of Provo and First Utah Bank in Salt Lake City also stabilized or reduced the proportion of their troubled loans to their capital and loss reserves.

The six lenders also fattened their capital cushions to levels exceeding the FDIC's standards for well-capitalized banks. Shareholders of First Utah Bank, for example, added $1.5 million in December, President David Brown said.

And while First Utah's "troubled asset ratio" of capital to bad loans still exceeded 100 percent at the end of the fourth quarter, much of the real estate it took back when borrowers didn't repay the bank is under contract to be sold, Brown said.

"Things are perhaps better than you see," he said.

Community banks are probably holding their own, said Tom Bay, supervisor of banks for the Utah Department of Financial Institutions. But, he went on to say, it's too soon to tell if the banking industry has touched bottom and is recovering.

"They are tied to the economy like everyone else. They are just hoping, like everyone else is, that things will start to fall into place, as far as the economy is concerned," Bay said.

Some lenders weren't able to weather the Great Recession. In January, Bay's department seized Barnes Bank after its troubled asset ratio to capital climbed to 320 percent, bringing the Kaysville bank to its knees. Rumors the bank was in trouble caused a huge run on its deposits, depleting its capital.

Last month, the department closed Ogden's Centennial Bank. Its ratio had ballooned to 829 percent. Both banks had lent heavily to land developers who defaulted when real estate values plunged.

Two banks heavy into real estate lending -- Gunnison Valley Bank in Gunnison and Orem's Western Community Bank -- saw their troubled loan ratios climb during the final three months of 2009. Neither has failed, but both face different futures.

Western has reached a deal to sell 51 percent of the bank to a Utah County group calling itself Rock Canyon in Organization. The investors intend to expand into retail, manufacturing and agricultural lending.

Gunnison, in Sanpete County, is profitable, and President Paul Andersen believes the bank "is looking a lot better."

Gunnison has lined up $4 million in new capital. It has stopped making real estate construction loans and is focusing instead on agriculture and consumer lending. And the bank has cut the value of most of its real estate loans because they are no longer worth the amount shown on its books.

"Things have stabilized. We've still got some [real estate loans] out there, but they've been written down. So our losses are going to be nowhere near what they were," Andersen said.

In February, the FDIC ordered Village Bank in St. George to develop a plan within 60 days for boosting its already hefty capital reserves. The agency also told Village Bank to purge its worst loans within 10 days.

President Douglas Bringhurst said Village Bank has raised additional capital and is foreclosing and writing off loans in order to bring the size of its portfolio into line with its capital.

But while Bringhurst says the bank is doing better, he won't say it's healthy.

"I don't have an answer to that," he said. "We have signed an agreement with the FDIC to work through the problems they have identified, and we are in the process of fulfilling their wishes and doing what they want us to do."

Some bankers think regulators are too pushy. Howard Headlee, who directs the Utah Bankers Association, said Bringhurst may have been unwilling to make a stronger case for Village Bank because of his contact with FDIC examiners.

"I know he's tired," Headlee said. "Dealing with the regulators is an exhausting process. But when you take a step back and take a look at their numbers, [Village Bank] has a lot to be proud of.

"They are a long way from what most people would consider an unhealthy bank," Headlee said.

Spratling, chairman of Holladay Bank, said Barnes and Centennial banks could have survived if the FDIC had given them more time to work out their problems.

That view is gaining some traction in Congress. Two weeks ago, Rep. Walt Minnick, D-Idaho, and Rep. Barney Frank, D-Mass., asked the Government Accounting Office to assess whether federal and state banking regulators are being unreasonable in their examinations of community banks.

Overzealous field examiners are also provoking banks to curtail their lending, which exacerbates the economic downturn, Minnick and Frank said last month in a letter to the acting comptroller general, whose agency supervises national banks.

Deal to save Centennial Bank didn't go through

Deal to save bank didn't go through
Banking » Merger was designed to infuse Ogden lender Centennial with capital before seizure.

By Paul Beebe
Salt Lake Tribune

A deal to rescue Centennial Bank apparently fell through shortly before Utah regulators closed the Ogden lender last week.

Centennial announced in September that Orem-based Vision Bankcard had agreed to acquire controlling interest and infuse new capital into the bank, which was collapsing under a mountain of overdue or defaulted real estate loans.

"Efforts by the investors weren't successful," Paul Allred, deputy commissioner of the Utah Department of Financial Institutions, said Monday.

Allred refused to elaborate. Attempts to contact Vision Bankcard, a card processor, were unsuccessful.

The merger apparently was still alive a few weeks ago. Mildred Bruce, one of Centennial's 3,000 depositors, said she received a letter with her February bank statement saying the bank was waiting for regulators to approve the deal.

But Bruce, 87, of South Ogden, did not realize Centennial was in trouble until she opened her newspaper Saturday morning.

"It was a shock," said Bruce, who along with the other depositors were sent checks for their insured deposits Saturday.

"Of course, it was a shock when they closed Barnes Bank. My son had his account at Barnes Bank. My goodness, what's happening?"

Allred's department closed Kaysville-based Barnes in January, and like Centennial, appointed the Federal Deposit Insurance Corp. as the receiver. Also like Centennial, regulators were unable to find another financial institution to take over Barnes' deposits and operations.

Both banks failed because of bets on construction and land development loans, which are considered to be riskier than home mortgages.

Centennial "is just an example of the economic situation that the customers were in and the bank was in," Allred said.

With real estate values off as much as 50 percent in some areas, Centennial and Barnes aren't the only lenders that have struggled with sour loans during the recession. Federal regulators closed Salt Lake City-based Magnet Bank in January 2009. The state Department of Financial Institutions shut America West Bank in Layton in May. Cache Valley Bank of Logan took over its deposits.

HeritageWest Federal Credit Union in Tooele was liquidated two months ago by the National Credit Union Administration. Its assets were bought by Virginia-based Chartway Federal Credit Union, which has said it hopes to buy other distressed Utah credit unions.

Numerous other Utah financial institutions are struggling with real estate loans.

On Saturday, Ed Leary, commissioner of the state Department of Financial Institutions Department, acknowledged other lenders might fail in the future.

Centennial was in particularly bad shape. It's Tier 1 leverage capital had plunged to zero, as of Dec. 31, compared with a healthy 10 percent a year earlier. Tier 1 capital is a core measure of a bank's health from a regulator's point of view. It consists of core capital -- common stock and other reserves.

Loans as a percentage of Centennial's capital totaled nearly 377,000 percent, according to the FDIC.

"Needless to say, that's not good," Allred said.

Almost 30 percent of its deposits were brokered, or raised by a third party. An unknown percentage were deposits Centennial solicited through the Internet.

Both deposit types are considered to be relatively risky, because they belong to people in other parts of the country who aren't necessarily loyal customers.

Centennial used brokered and Internet deposits to make loans. Together, they amounted to a dangerously high percentage of total deposits, but FDIC ombudsman Richard Schmalzer couldn't be specific.

"Let's just say it was a substantial amount," Schmalzer said outside Centennial's main office Monday, where FDIC officials and bank employees were winding down the lender's affairs.

pbeebe@sltrib.com

Feds work to insure Centennial customers

Feds work to insure Centennial customers
Economy » Ogden-based bank held too many bad loans.

By Cathy McKitrick and Bob Mims
Salt Lake Tribune
Updated:03/06/2010 06:56:00 PM MST

Ogden » Centennial Bank's parking lot was full Saturday. Not with customers, but with employees and federal regulators working through the weekend to cut insurance checks to depositors in the wake of the bank's failure.

Those checks should be in the mail Monday, said Richard Schmalzer, regional ombudsman with the Federal Deposit Insurance Corp., who directed Saturday's operation.

Centennial was closed Friday afternoon by state regulators and handed over to FDIC officials. Schmalzer and other banking experts blamed the bank's demise primarily on bad loans made during a more-than-2-year-old slide in the real estate market.

"The bank incurred significant losses in ADC loans" -- acquisition, development and construction, Schmalzer said. "Centennial Bank was identified [by FDIC] as a problem bank for more than a year."

While most of the failed bank's accounts are insured, up to $1.8 million in deposits might not be, Schmalzer said. Those accounts would exceed the $250,000 limit guaranteed by the federal agency.

The bank, with branches in Ogden, Layton, Clinton, South Jordan and Orem, had about 3,000 depositors, a large number of them either brokered or Internet accounts, he said. The final total of uninsured deposits could be lower as regulators continue digging into the details of Centennial's accounts.

"We're in the process of fully identifying which accounts may be uninsured," Schmalzer said. "The ones we need more information on, we'll be in touch with those depositors.

"Our role is to wind down the affairs of the institution," he said. "This is not a functioning bank any more."

Centennial has about 70 employees.

Utah Department of Financial Institutions Commissioner Ed Leary, whose agency declared the bank insolvent Friday afternoon to pave the way for the FDIC's takeover, acknowledged Centennial's failure -- the second of a Utah community bank this year -- might not be the last in the foreseeable future.

"Given the state of our economy now, the banks' conditions [leading to failure] were not unexpected," he said Saturday. "It is evident to most of the world that we are in a bad economy. [These failures] are just more examples of that."

Centennial was one of nine community banks recently identified by the FDIC as having asset issues, primarily due to overdue and defaulted real estate development and construction loans. Barnes Bank of Kaysville went under in January. In all, four banks and one credit union in Utah have failed since January 2008.

In all those cases, the financial institutions had gambled on speculative real estate construction and land loans, records show.

With Centennial now in FDIC receivership, eight Utah banks remain in peril, according to FDIC data compiled by the American University School of Communications Investigative Reporting Workshop: First Utah, of Salt Lake City; Holladay Bank and Trust, Holladay; SunFirst, St. George; Village Bank, St. George; Gunnison Valley, Gunnison; Western Community, Orem; Capital Community, Provo; and Prime Alliance, Woods Cross.

Efforts to reach Larry Grant, a senior lending officer with Centennial's Ogden branch, were unsuccessful Saturday.

However, Grant recently told The Tribune that the bank's fortunes had begun to decline in September 2007 when the bottom fell out of the state's real estate market.

Nonetheless, Centennial's investors had taken hope in a turnaround when, in September, Vision Bankcard of Orem announced yet-to-be-finalized plans to take a controlling interest and bring in new capital.

Howard Headlee, president of the Utah Bankers Association, said he had hoped Centennial's fortunes could be salvaged.

"It's sad that it turned out this way," he said.

Headlee praised the FDIC system for working flawlessly through the recent recession and said depositors have no reason to panic.

"The Utah banking industry is working in a joint effort to help Centennial customers transition to other FDIC-insured institutions," Headlee said. "The next few days will be centered on helping them -- and evaluating what could have been done differently with Centennial."

Zions Bank has agreed to accept Centennial's direct deposits from the federal government, including Social Security and veterans' payments. Zions served a similar role when Barnes Bank of Kaysville closed in January.

Both Schmalzer and Headlee urged people to use the Electronic Deposit Insurance Estimator on the FDIC Web site at www.fdic.gov/deposit/deposits/index.html to determine if their accounts are structured to be well-protected.

Utah regulators close Centennial Bank

Utah regulators close Centennial Bank
Main office in Ogden; branches in Layton, Clinton, South Jordan, Orem

Deseret News and wire reports
Published: Friday, March 5, 2010 9:40 p.m. MST

OGDEN — State regulators closed Centennial Bank on Friday, with the Federal Deposit Insurance Corp. taking control.

The bank, which had $215.2 million in assets and $205.1 million in deposits, was closed by the Utah Department of Financial Institutions. The FDIC was named receiver.

The FDIC was unable to find a buyer for Centennial Bank, and it approved the payout of the institution's insured deposits. As a result, checks to the retail depositors for their insured funds will be mailed on Monday.

Salt Lake-based Zions First National Bank agreed to accept the failed bank's direct deposits from the federal government, including Social Security and veterans' payments.

Centennial was established in 1997 and was owned and controlled by local investors. The company's Web site said its original primary mission was to supply construction and real estate loans throughout the state.

In addition to the main office in Ogden, Centennial had branches in Layton, Clinton, South Jordan and Orem, according to Centennial's Web site.

Depositors' money — insured up to $250,000 per account — is not at risk, with the FDIC backed by the government. Apart from the fund, the FDIC has about $66 billion in cash and securities available in reserve to cover losses at failed banks.

Centennial is the second Utah bank to fail this year. Barnes Banking Co., based in Kaysville, was closed Jan. 15.

At the time of closing, Centennial had an estimated $1.8 million in uninsured funds. "This amount is an estimate that is likely to change once the FDIC obtains additional information from these customers," the FDIC said Friday.

Customers with questions about the closing can call the FDIC toll-free at 1-800-889-4976. Customers with accounts in excess of $250,000 also should contact the toll-free number to set up an appointment to discuss their deposits, the FDIC said. The phone number will be operational from 9 a.m. to 6 p.m. today; from noon to 6 p.m. Sunday; and from 8 a.m. to 8 p.m. thereafter.

Details also are available at www.fdic.gov/bank/individual/failed/centennial-ut.html.

Beginning Monday, Centennial customers with deposits exceeding $250,000 at the bank may visit the FDIC's Web page "Is My Account Fully Insured?" at www2.fdic.gov/drrip/afi/index.asp.

The closure was one of several Friday in four states, boosting to 26 the number of bank failures in the U.S. so far this year following the 140 brought down in 2009 by mounting loan defaults and the recession.

The FDIC took over Sun American Bank, based in Boca Raton, Fla., with $535.7 million in assets and $443.5 million in deposits. Also seized were Bank of Illinois of Normal, Ill., with $211.7 million in assets and $198.5 million in deposits; and Waterfield Bank in Germantown, Md., with $155.6 million in assets and $156.4 million in deposits.

The pace of bank seizures this year is likely to accelerate in coming months, FDIC officials have said.

As the economy has weakened, with unemployment rising, home prices tumbling and loan defaults soaring, bank failures have mounted, sapping billions of dollars out of the deposit insurance fund. It fell into the red last year, hitting a $20.9 billion deficit as of Dec. 31.

Banks, meanwhile, have tightened their lending standards. U.S. bank lending last year posted its steepest drop since World War II as the volume of loans fell $587.3 billion, or 7.5 percent, from 2008, the FDIC reported recently.

President Barack Obama recently promoted a $30 billion plan to provide money to community banks if they boost lending to small businesses. The program, which must be approved by Congress, would use money repaid by banks to the $700 billion federal bailout fund.

But many lawmakers want the $30 billion sent directly to the federal Small Business Administration. It would then decide which businesses should get loans.

The number of banks on the FDIC's confidential "problem" list jumped to 702 in the fourth quarter from 552 three months earlier, even as the industry squeezed out a small profit. Banks earned $914 million, compared with a $37.8 billion loss in the fourth quarter of 2008, at the height of the financial crisis. Still, nearly one in every three banks reported a net loss for the latest quarter.

The 140 bank failures last year were the highest annual tally since 1992, at the height of the savings and loan crisis. They cost the insurance fund more than $30 billion. There were 25 bank failures in 2008 and just three in 2007.

The FDIC expects the cost of resolving failed banks to grow to about $100 billion over the next four years.

The agency mandated last year that banks prepay about $45 billion in premiums, for 2010 through 2012, to replenish the insurance fund.

© 2010 Deseret News Publishing Company | All rights reserved

Barnes Bank's end leaves trail of victims

Community bank's end leaves trail of victims
Shareholders, executives blame one another for the demise of venerable Kaysville lender.

By Paul Beebe
The Salt Lake Tribune

The first inkling of trouble came in a letter to Barnes Bank shareholders on June 1, 2008.

Signed by chairman, president and CEO Curtis Harris, the letter said the board of directors had approved a dividend of 45 cents per share for the first six months of the year.

The news sent shivers through many of the Kaysville community bank's 400-plus shareholders. Previous payments in June and November 2007 amounted to $3.56 per share -- the biggest annual dividend ever paid by the bank, then in its 117th year. Barnes, Harris said at the time, had a very good year.

This time, though, the ground was shifting, and Harris was not so pleased. Late in 2007, the real estate bubble that had lifted Barnes to record profits had started to sag.

The 45 cent dividend was to be the last payment shareholders would ever receive from Kaysville's biggest employer. A string of profitable years making loans to land developers and builders had ground to a halt. Barnes was entering a nightmare period of losses and crumbling capital reserves that Harris and his subordinates would prove powerless to stop.

The ordeal would continue for 19 months until regulators, certain there was no hope for the dying bank, confiscated Barnes on Jan. 15, wiping out shareholders and staining the reputations of Harris and other top executives. The closure also set off a surge of accusations and recriminations among an inner circle of influential shareholders and bank managers that continues unabated today.

"Five years ago, Barnes Bank was one of the best banks in the country. It had a great franchise. But somewhere in the last five years, the board of directors started making very risky decisions," said Stephan Peers, an investment banker and Barnes family member who joined the eight-member board in September.

Judy Jenson doesn't know why the bank died or who is responsible, but the 62-year-old widow feels suddenly vulnerable. The financial cushion bequeathed to her by her late husband is gone.

"All I know is the bank has squandered my inheritance, which was what I considered to be my future security and get me over the rough edges of retirement," she said.

"The economy is an easy out," wrote blogger Greg Christensen, whose great-great-great grandfather, John Barnes, founded the bank in 1891.

"I believe it was mismanagement, exuberance, nepotism and opaque communications from the board of directors. Our family lost a lot of money. But the wrenching part is feeling we lost a legacy."

--

CFO assigns blame » Like Peers, Christensen blames bank managers for thinking too narrowly. Instead of building a portfolio with a mix of loans, they focused on home building and land development. Such loans are profitable but can be risky because they are tied to the vagaries of the economy.

Harris declined requests for comment. But Chief Financial Officer Douglas Stanger defended the bank.

He repeated an oft-cited claim that credit unions have exploited a federal income tax advantage to pull consumer lending away from banks, forcing them to shift more to business loans.

"And a big business in this state was development and construction," Stanger said.

Moreover, based on history, real estate loans didn't seem particularly hazardous. As recently as 2007, losses on real estate-secured loans amounted to less than 1 percent of the bank's loan portfolio, he said.

"I don't think there was ever any decision made at the time that seemed like it was high-risk or the wrong decision," Stanger said.

Instead, he assigned much of the blame for Barnes' collapse to Peers, whose deceased wife was a member of the Barnes family, and Susan Barnes, another descendant of founder John Barnes. Both, he said, engaged in inflammatory actions that scared shareholders, frightened depositors and touched off a $100 million run on deposits that probably forced regulators to close the bank before Harris and others could save it.

"I don't really think Stephan or Susan really understood the impact of what they were doing," Stanger said, adding the media should share the blame for reports that fueled the bank run.

In a letter dated Dec. 2, Peers told shareholders of his effort to gain a seat on the board earlier in 2009 after learning of the bank's dire condition. Peers said he was opposed by every board member with the exception David Barnes, also part of the extended Barnes family, until finally being seated in September.

Peers urged shareholders to attend a special meeting with Barnes management Dec. 18. In the letter, he mentioned an agreement reached with the Federal Reserve in May. The legal document was a formal acknowledgement that Barnes was in trouble. It commanded Barnes to increase its capital reserves, which had been decimated by stacks of construction and land development loans that had gone bad during the previous two years.

The situation was dangerous, but Stanger wasn't alarmed. The bank had racked up $22 million in loan losses during 2008, but had set aside more than $50 million to cover them, he said. Barnes had been working to comply with corrective measures suggested unofficially by regulators during previous meetings.

So Stanger was surprised when the Fed issued the written agreement May 13, formally instructing Barnes to present an acceptable plan to increase its capital within 60 days. The Fed didn't say what might happen if Barnes failed to comply. But the message was clear: Regulators were worried.

"I thought we were doing what was requested and I thought we were following good procedure," Stanger said. "I didn't feel like the bank was under more stress than other banks that were in the same markets as we were."

What Stanger didn't know until informed by a reporter this month was that another federal agency, the Federal Deposit Insurance Corp., had secretly put Barnes on its closely watched "problems list" a month earlier. The list contained the names of more than 300 lenders, its highest level since 1994, testifying to the gravity of the U.S. financial crisis.

"That's not something they communicated to the bank," Stanger said.

--

'Time is short' » Turmoil inside Barnes mounted over the spring and summer. By Sept. 30, as loans continued to sour, the lender had lost $210 million.

Shareholders were becoming uneasy. Barnes had not paid them a dividend for more than a year. Then came Peers' Dec. 2 letter. In it, he said the Fed was likely to issue a "prompt corrective action" letter at any time.

"Letters of this type," Peers wrote, "are written to banks that have engaged in such egregious practices for so long that the regulators deem the [FDIC] insurance fund better protected from losses than by a continuation of the same management and director team."

Peers also said he believed regulators would not give Barnes much more time to turn the bank around because of "management's continued lack of response over the past year and a half."

The FDIC letter arrived two weeks later and said Barnes was "critically undercapitalized." It ordered Barnes to find a suitable buyer or raise enough capital by Jan. 15. Although it didn't spell out the consequences, the implication was clear: Failure would mean the end of the bank.

Susan Barnes wrote shareholders on Dec. 26, urging them to assist efforts to change the board at an expedited annual shareholders meeting she hoped would occur before the regulators' deadline.

"Time is short," said Barnes, a librarian living in Seattle. She prodded shareholders to remember the Fed's Jan. 15 deadline. And she reminded them the bank's managers had told them at the emotional meeting Dec. 18 their shares had plunged from $125 a share in February 2009 to less than $3.

"They made it clear that they do not accept any responsibility for this decline," Barnes wrote.

CEO Harris immediately fired off a letter to Barnes. He said the media had caught wind of Peers' letter, and a run on the bank's deposits had ensued because of the resulting publicity. He said her letter would likely generate another harmful response by the public and depositors.

The shareholders meeting took place Jan. 14. Susan Barnes held proxies for more than 40 percent of 800,000 voting shares. Others at the meeting had not authorized Barnes to vote their shares for a proposal to change the bylaws to allow for the immediate election of directors, but promised their support, she said.

The vote was inconclusive. Three directors received less than 50 percent of the votes cast and were expected by Barnes and Peers to step down. But a day later, the Utah Department of Financial Institutions stepped in and closed the bank.

In a recent e-mail to The Salt Lake Tribune , Barnes said, "I felt that it was my responsibility as a shareholder to speak up, and I would do the same again."

CFO Stanger said the bank would have needed at least $30 million in new capital to stave off regulators. It could have used as much as $80 million. But raising any capital in such a heated environment was nearly impossible. Between mid-December and mid-January, depositors withdrew $100 million from the bank, he said.

Stanger had worked 30 years at Barnes. Its death was "devastating," he said in a recent interview. Because he was not on the board, he disavows direct culpability for its decision to focus too much on construction and development loans. Nor does he fault Harris or the board for their choices.

Stanger also does not criticize regulators. They closed Barnes because of the run on deposits. If the run hadn't happened, regulators probably wouldn't have felt the need to close the bank in January, he said.

"There is the likelihood that the bank could have found an investor or a group of investors to raise the capital to continue the bank as it was," Stanger said.

Board member Peers said bank executives have no one to blame but themselves. Instead of blaming him and Susan Barnes for writing to shareholders, executives should acknowledge three key mistakes which ultimately doomed the bank.

» Instead of diversifying its loans, Barnes focused on construction and land development, Peers said.

» It also expanded into fast-growing Utah and Washington counties, making loans to builders and developers it barely knew.

» Finally, it relied too much on brokered deposits -- funds raised by brokers from people in other parts of the country chasing high interest rates -- instead of on local depositors who would be more loyal to Barnes.

"Any blip will sink [such] a bank faster than a comparable community bank because they just have a much higher-risk profile," Peers said.

Mezz Market Heats Up in First Quarter

Mezz Market Heats Up in First Quarter

By: Jerry Ascierto
Multifamily Executive/Apartment Finance Today

The mezzanine financing market is heating up in the first quarter of 2010, with all-in rates dropping and more lenders re-emerging from the shadows. And while the rates and terms being offered today aren’t exactly aggressive, they are starting to come back down to earth and resemble historical norms.

“The market is loosening up incredibly in the last 60 days; it’s really taken a 180,” says Gary Mozer, managing director of Los Angeles-based George Smith Partners. “People are trying to put money out now, which is a big difference from last year. We’re seeing a lot of money getting a lot cheaper and more flexible.”

For the most part, mezzanine debt is being priced in the 12 percent to 16 percent range, down from 14 percent to 18 percent a year ago. The cream of the crop can access rates near 10 percent these days, while riskier transitional assets may get up to 18 percent. Still, the long-term average for mezz loans is around 12.5 percent, so the prices are a bit high by historical standards.

RCG Longview, one of the multifamily industry’s most prolific mezz lenders, remains active. And there are a handful of large mezzanine providers that have grown more active recently, including mortgage REITs Starwood Capital Group, Ladder Capital, and Colony Capital. For the most part, these mezz providers are offering 1.05x debt service coverage ratio (DSCR) requirements, though given today’s fundamentals, few deals make it that far.

New Era
Still, it’s a turnaround from last year. Throughout 2009, the market for mezz debt was effectively stalled. Lenders began focusing more on the losses racking up in their existing portfolios, and uncertainty over the depth of the recession muted activity. Plus, the fact that Fannie Mae, Freddie Mac, and the Federal Housing Administration were offering leverage levels around 75 percent lessened the need for mezz financing.

“People are becoming a little bit more comfortable that, no matter where the bottom is, it’s not going to be too far from here,” says Dave Valger, director of New York-based RCG Longview. “And both Fannie Mae and Freddie Mac have pulled back to where you’re seeing average loans in the 65 percent range. Underwriting, performance, and values are all reducing senior loan proceeds and creating a larger void for us to fill.”

Last year, RCG Longview closed a $600 million debt fund to originate bridge and mezz loans. The company invested about 30 percent so far but still has about $500 million in capacity. When the fund was closed, the company saw a lot of opportunity in lending to owners with significant amounts of deferred maintenance. But in a sign of the times, RCG is also targeting the program more to lenders who find themselves unwitting owners and struggling to deal with REO.

Indeed, most of the demand for mezz is on the defensive side: to recapitalize an asset through a discounted payoff, for instance, or to fill the gaps on a refinance. The focus for RCG this year is cash-in refinancings, where a borrower with a maturing construction loan or other short-term loan seeks to refinance.

Taking Charge
The issue of maturing loans hangs like a dark grey cloud over the multifamily industry. But Freddie Mac, for one, is taking the problem into it’s own hands. The government-sponsored enterprise (GSE) recently announced it would soon partner with a handful of mezz providers to help refinance over-leveraged properties.

The program was still being ironed out as of late February so much remains to be seen. But the intent is that partnering a senior loan with a mezz piece will allow owners to borrow up to 85 percent of the property’s value when refinancing.

The GSE said that the program isn’t intended to rescue deeply troubled properties, where values have fallen so far that there’s no equity left in the deal. Instead, the company will target good owners stuck in bad markets, cash-flowing properties of experienced borrowers victimized by declining values.

“This would be a solution for the refinancing of over-leveraged properties,” says Mike May, senior vice president at McLean, Va.-based Freddie Mac. “The mezz would be provided by a third party and we would work with several mezz providers for the program.”

Utah's commercial real estate market still struggling

Utah's commercial real estate market still struggling
Jasen Lee, Deseret News
Published: Tuesday, Feb. 23, 2010 2:01 p.m. MST

SALT LAKE CITY — The economic meltdown has hit Utah pretty hard, particularly in the real estate realm. And while the residential market is may be on the verge of a turnaround, the commercial market has yet to hit bottom, according to a local analysts.

Speaking to an audience of real estate professionals Tuesday at the Marriott City Center, Ron Schulthies, executive vice president and chief lending officer for the Bank of Utah, said the commercial sector continues to struggle.

"There are leaders and laggers in this economy, and commercial real estate is a lagger," he said.

Schulthies added that while the industry is still in an economic funk, the stage is set for a comeback, with lenders poised to support quality development projects.

"(Banks) have excess funds. … There is a lack of demand, and we would love to put money to work," he told the audience of about 50 industry insiders.

He said banks have a "tremendous incentive to make loans" because doing so would yield a much higher rate of return on investment than the institutions are currently getting with their funds essentially sitting idle.

Despite the hardships experienced in the commercial sector over the past couple of years, John Taylor, investment specialist with Commerce Real Estate Solutions, said the Wasatch Front "is doing better than most markets."

"We're stabilizing. The fundamentals (of our real estate) are still pretty good," he told the Deseret News.

Taylor said that since the downturn, prices in the commercial real estate market have dropped significantly, which has altered the landscape in a profound way.

"There was too much money chasing real estate," he said. "Now there is a lot of money chasing real estate … but it's smart money."

Potential investors "are not going to make dumb decisions," Taylor added. "They are going to make sure the property can pay back the debt and pay them the return that they need."

He said that for the foreseeable future, the local commercial market will continue to adjust and correct itself back to a point of lower, more reasonable prices and eventually equilibrium.

He said projects like the LDS Church-owned City Creek development and the recently completed 222 South Main office building will be positive influences on the long-term viability of the downtown business district and the local commercial real estate sector, especially compared to the outlook for hard-hit neighboring states like Nevada and Idaho.

"The fundamentals of (the economy) are much stronger here," Taylor said. "If we looked at a 15- or 20-year trend, we're doing really well right now."

e-mail: jlee@desnews.com
© 2010 Deseret News Publishing Company | All rights reserved

Home Savings Bank ordered to boost capital and liquidity

Home Savings Bank ordered to boost capital and liquidity
Regulators order it to increase its capital

By Lois M. Collins
Deseret News
Published: Friday, Jan. 29, 2010 9:18 p.m. MST

SALT LAKE CITY — Home Savings Bank's board of directors has entered into an agreement with federal and state regulators to boost the bank's capital and liquidity.

The "stipulation to issuance of a consent order" does not admit or deny any unsound banking practices, according to the consent order released Friday by the Federal Deposit Insurance Corp.

John Sorensen, president of Home Savings, said the agreement is a response to existing trying economic conditions and the FDIC's stated resolve that all financial institutions increase their capital and cut back losses.

"I think our bank took action and, as a result, our bank's capital has increased." He said the bank's nonperforming loans and concentration of real estate loans have both decreased, and the bank has been "very successful" at raising capital.

The consent order says the bank will make sure its managers are qualified for their duties and any plans to hire senior executives or add new board members will be done only after getting approval from the FDIC's regional director.

The FDIC also told the bank's board to "increase its participation in the affairs of the bank, assuming full responsibility for the approval of sound policies and objectives and for the supervision of all the bank's activities." The board is to meet at least monthly.

On the money side, Home Savings was ordered to increase its capital to at least 11 percent of the bank's total assets. That capital is in addition to the fully funded allowance for loan and lease losses. The bank can do so, the FDIC said, by selling various types of stock; gathering cash contributions from the bank's board, shareholders or parent company; or other means that are approved by the regional director.

The bank also has to either charge off or collect various assets considered a "loss" as of June 15, 2009, and in phases reduce the percentage of its assets that are classified as "substandard."

Home Savings Bank has one branch each in Salt Lake City, Draper and Park City. Next year, it will be 50 years old.

e-mail: lois@desnews.com
© 2010 Deseret News Publishing Company | All rights reserved

9 banks teetering after bad land bets

9 banks teetering after bad land bets
Utah » Lenders hold more in sour loans than they have money to cover losses.

By Paul Beebe, The Salt Lake Tribune
01/24/2010 05:08:12 PM MST

After betting heavily on real estate lending, about a third of Utah's smaller community banks are teetering between collapse and survival after the worst land-value crash in memory.

Nine banks are struggling to collect on development and construction loans representing 36 percent of their combined portfolios. Many loans are overdue to the point of default and are in danger of being written off as total losses.

If the past year is a guide, some of these banks may fail. Since January 2008, federal regulators have seized three banks and one credit union, including Barnes Bank just 10 days ago. All had gambled on speculative real estate construction and land loans.

The seizure of even one more bank could further deprive cash-hungry businesses of money, potentially amplifying the credit crunch and retarding Utah's economic recovery. Community banks focus much of their lending on small businesses, which generate most jobs. Already the nine troubled banks have cut their loan volumes by an average of 16 percent, according to figures from the Federal Deposit Insurance Corp.

The banks operate in the formerly sizzling real estate markets along the Wasatch Front and in St. George. Until real estate began to slide in 2007, they were profitable; the loans produced rivers of cash. At times, construction and development loans constituted more than 70 percent of some portfolios.

They "were caught up in the land-rush mentality," said Brighton Bank President Howard Holt, whose Salt Lake City institution remained above the fray as a frenzy of imprudence and greed swept through the real estate and financial markets.

"Contractors were out there furiously buying up tracts of land, which just kept driving prices higher and higher. Some financial institutions, including their presidents and their boards, felt that, 'If we want to grow, now is the time. We need to ride the crest of this wave.' "

--

Mark of turmoil » Today, with real estate values off as much as 50 percent in some areas, the nine banks -- two in St. George (SunFirst and Village Bank) and one each in Gunnison (Gunnison Valley), Ogden (Centennial), Orem (Western Community), Provo (Capital Community), Salt Lake City (First Utah), Holladay (Holladay Bank) and Woods Cross (Prime Alliance) -- are floundering. As of Sept. 30, all had lost money, and all had "troubled asset ratios" that exceeded 100 percent, meaning they had more sour loans than money put aside to cover possible losses, according to American University in Washington, D.C., which analyzed the nation's banks using FDIC data.

The troubled asset ratio isn't a definitive predictor of failure, but it is a mark of turmoil, said Wendell Cochran, senior editor at the university's Investigative Reporting Workshop.

"Of the 140 banks that failed [in the U.S.] last year, 125 had ratios of over 100. It's a pretty decent indicator of stress," Cochran said.

To be sure, most community banks are not in trouble. Many have troubled asset ratios closer to the national median of 14 percent. Cache Valley Bank in Logan had a 4.2 percent ratio of troubled assets to capital and reserves. Provo's Bonneville Bank had a ratio of 4.1 on Sept. 30.

Other factors led the nine Utah banks to the brink, from heavy reliance on so-called brokered deposits to hubris by inexperienced bank managers to regulators who pushed banks to forecast future loan losses based on past losses. Because real estate loans had always performed well, some bankers believed they would need virtually no reserves in real estate.

"We've lent millions to contractors and individuals to put families in homes. We had a total loss of less than $20,000 since 1993," said Harley Jacobs, president of Provo's Capital Community Bank, one of a handful of executives from the troubled banks who would speak on the record. One-fourth of the lender's real estate, construction and land-development loans were in danger of being written off as of Sept. 30.

"If we had been able to turn the clock back and repeat what we did through 2007, I don't think we would have done anything different. And we still feel we [did] things right," said Jacobs, who thinks his bank will survive.

Douglas Christensen, president of Bonneville Bank, which has weathered the bank crisis well, said inexperience was also a factor. He is 60. Like him, anyone running a bank in the 1970s and 1980s, when stagflation gripped the economy and the savings and loan industry imploded, looked on the real estate bubble with caution.

"We were a little leery of why the market was so high and what was driving it," Christensen said. "It felt like the market was dependent on easy money. It was getting away from the loans we like to do."

--

Throwing caution aside » With 90 percent of its loans in real estate, Barnes Bank had been in danger of collapse for months before its recent seizure. The Kaysville-based bank survived two world wars, the Great Depression and numerous recessions in its 119-year history. But on Sept. 30, with more than a third of its loans past due, its troubled asset ratio stood at 278 percent, 20 times the U.S. median.

Earlier this month, the Federal Reserve gave Barnes five days to increase its capital reserves or find a buyer. When it couldn't, the plug was pulled by the FDIC, which insures deposits up to $250,000.

Barnes officials haven't explained why they threw caution aside. But, according to the FDIC, the bank doubled its exposure to real estate between 2003 and 2007, from $303 million to $705 million.

That wouldn't have been a problem if borrowers could have repaid their loans. Instead, as land and home prices plummeted, unemployment increased, Utah's economy sank into its worst recession since the 1930s and defaults shot up. Forty-six percent of Barnes' construction and land-development loans were delinquent, according to FDIC figures.

"For at least five years, that was the most sought-after product by customers, and obviously the most profitable. When things are good, everybody expects things to stay good," said Larry Grant, senior lending officer at Ogden's Centennial Bank, one of Utah's troubled nine.

But in September 2007 -- Grant said that was the turning point for the bank -- the bottom fell out of the real estate market, and it hasn't recovered. As of Sept. 30, Centennial's troubled asset ratio had soared to 338 --- worst of all Utah banks.

"We've not had just a recession. We've had a huge downturn that extended outward for an extended period of time, longer than anyone anticipated," he said.

Centennial could be one of the fortunate banks, despite its distress. In September, the bank announced Orem-based Vision Bankcard would acquire controlling interest and infuse new capital, though the deal hasn't closed. The acquisition was revealed three months after the FDIC ordered Centennial to make changes, when regulators said Centennial had too many poor-quality loans and was operating "with inadequate provisions for liquidity."

Liquidity is a bank's ability to convert assets to cash to meet large volumes of unexpected withdrawals by depositors without causing damage to its finances that is impossible to repair.

In hindsight, the risk to Centennial from its ballooning exposure to real estate loans should have been obvious, Grant said. But as the bank looked at the marketplace and what its peers were doing, it was hard to pass up a good thing.

--

'Hot money' » Banks took enormous risks during the real estate boom, often granting loans without demanding proof of income. Others used brokered deposits to fund loans to home builders and developers.

Brokered deposits are raised by brokers who earn fees by selling certificates of deposit that pay high rates of interest to investors, often via the Internet. Amounts raised from each investor are usually slightly below $100,000 so that all interest and principal are covered by FDIC insurance. The funds are often used to make risky real estate loans.

Bankers sometimes call brokered deposits "hot money." Because the deposits aren't raised locally, they aren't loyal to banks that have them. As soon as a bank has a problem or can't match a higher rate, the deposit goes away, leaving the lender holding loans that aren't backed by sufficient capital. In a sense, the bank is upside-down.

Most of Utah's nine most troubled banks used brokered deposits in varying degrees, according to the FDIC. Tiny Gunnison Valley leaned on them enough to catch regulators' attention. In September, the FDIC ordered the Sanpete County bank to stop the practice.

"When the bottom fell out, people just walked away from their houses because they weren't worth what they were costing them," bank President Paul Andersen said, declining further comment.

Virtually all of the deposits of MagnetBank were brokered just four months before the FDIC closed the Salt Lake City lender last January. The bank had amassed $282.2 million in brokered deposits; its total deposits were $282.6 million.

Most were used to make real estate loans. It had $234.8 million in loans on its books. Eighty percent were in construction and land development.

In retrospect, MagnetBank's portfolio of loans looks like a prescription for disaster. Even so, the Utah Department of Financial Institutions allowed MagnetBank in 2007 to convert its operations to commercial lending and continue to fund itself with brokered deposits. At the time, MagnetBank had shown it was able to manage brokered funding appropriately, Tom Bay, supervisor of banks for the department, told the financial services newspaper American Banker .

Today, Bay declines to second-guess the department's decision to allow Magnet Bank to convert. He said the bank failed because of bad loans, not because its deposits were brokered.

Darryle Rude, supervisor of industrial banks at the department, is more philosophical. "In retrospect, would we approve that type of business plan today? Well, obviously in today's environment that would be a poor decision. But at the time it appeared to be a good plan."

--

Time to reflect » Some bankers appear chastened by their behavior. Others, such as Capital Community's Jacobs, wonder how real estate lending spun so far out of control.

"A lot of what this bank's focus was, and many of the community banks share this same position in the market, is we have been relegated to a construction lending platform. We have lost our competitiveness in many of the consumer areas we don't enjoy and others do," Jacobs said, referring to credit unions, which use their federal tax exemption to offer higher interest rates.

Credit union officials counter that they provide competition that helps drive bank rates and fees lower. Unlike banks, they also have severe restrictions on raising capital to fund their growth.

Grant, the senior lending officer at Centennial, said his bank has learned it can't just make real estate loans. It also must investigate applicants more wisely.

"We have learned to diversify. We have learned to look beyond the value of collateral and to focus on the ability of borrowers to support their debt even in bad times."

pbeebe@sltrib.com

Nine banks with asset issues
First Utah, Salt Lake City
Holladay Bank and Trust, Holladay
SunFirst , St. George
Village Bank, St, George
Gunnison Valley, Gunnison
Centennial, Ogden
Western Community, Orem
Capital Community, Provo
Prime Alliance, Woods Cross

Source: American University School of Communication Investigative Reporting Workshop, FDIC data

Loan Demand Raises Worry

Loan Demand Raises Worry

The Wall Street Journal
Jan 22, 2010
By MATTHIAS RIEKER

Banks keep giving evidence that losses from bad loans will abate soon. But in a worrisome sign for the economy, demand from consumers and commercial borrowers remains tepid—offering little opportunity for growth at the banks.

"Loan growth is going to be tough" this year, BB&T Corp. Chairman and Chief Executive Kelly King told investors during a conference call, a statement echoed by SunTrust Banks Inc. Chairman and Chief Executive Jim Wells and by many other bankers this week as they reported earnings.

While bankers say they there isn't appetite for loans, borrowers say banks just aren't lending—or are setting terms for loans that are too difficult.

That trend of slow loan growth, or even shrinking loan portfolios, will likely translate into a tough—albeit most likely profitable—2010.

Losses from borrowers who cannot pay back their loans may not rise much more, and banks will need to set aside less money to offset such losses. The number of borrowers falling behind on their payments has already eased.

For lenders like SunTrust, which has struggled with losses, earnings growth will come from lower credit costs rather than loan growth.

SunTrust said its fourth-quarter interest income, the revenue from lending, fell 2% from the third quarter and 18% from a year earlier, to $1.6 billion; though profits from lending increased because SunTrust, like most banks, has to pay less interest on deposits.

The Atlanta bank set aside $974 million for current and future loan losses, 14% less than in the third quarter.

SunTrust reported a quarterly loss of $248 million, compared with a $348 million loss a year earlier. The company's loans fell 10.5%, to $114 billion.

BB&T, a stronger bank, had fewer loan losses, so its earnings will get less of a lift from falling credit costs, said Kevin Fitzsimmons, an analyst with Sandler O'Neill & Partners LP.

BB&T's profit fell 36%, to $194 million. Its interest income rose 5%, to $1.5 billion, because it bought failed Colonial Bank last fall.

BB&T's loan book rose 7%, to $109.7 billion, but without the acquisition the portfolio would have shrunk, Mr. King said. The bank's loan-loss provision rose 37% to $725 million.

"I don't feel necessarily that you need to keep building" the loan-loss provision "at this point in the cycle," Mr. King said during a conference call.

Though higher profits are of course welcome to investors, it's better to have profits from core revenue growth than from lower loan-loss provisions.

Some banks, such as Huntington Bancshares Inc., which reported a fourth-quarter loss of $370 million, compared with a $417 million loss a year earlier, might grow by buying failed banks, which requires little capital, said Tony Davis, an analyst with Stifel Nicolaus.

"We would opportunistically look at acquiring with assisted transactions," Huntington Chairman and CEO Stephen Steinour said. But "our primary focus is getting to profitability, driving the core" earnings, he said

Write to Matthias Rieker at matthias.rieker@dowjones.com

Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit

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Barnes Bank customers clean out accounts

Barnes Bank customers clean out accounts
KSL.com
January 19, 2010

KAYSVILLE -- Tuesday was the first business day following Utah's biggest bank failure in many years, and a steady stream of customers cleaned out their accounts.

Barnes Bank is headquartered in Kaysville, but the emergency seizure by regulators affects all ten Barnes locations up and down the Wasatch Front. The shutdown is permanent and it will have big economic consequences.

The bank outlasted many economic storms, "since 1891" as the sign says. But the current recession was too much.

"It's a sad day when a good bank like Barnes, it can happen to it," said Brenda Watanuki, who was a customer of the bank.

Former customers of Barnes Bank visited the bank Tuesday to withdraw their money

Regulators seized the bank Friday night. On Tuesday, longtime customers came to remove their savings.

"It's a tough thing. I feel bad for the employees," former customer Bob Watanuki said.

Regulators say the bank ran into trouble because it lent too much money for construction and real estate development.

"We had that real estate bubble, so the value in real estate loans went down," said Michael Jones, chief examiner with the Utah Department of Financial Institutions.

As loans went sour, capital reserves deteriorated. Regulators seized the bank to protect depositors. Paying back depositors will drain about $270 million from the federal insurance fund.

"So, this is a large one. Being as old as the bank was, it hurts," Jones said.

Usually, they find another bank to buy the one that failed. In this case, there was not a single bidder. So, the FDIC set up its own temporary bank to return money to depositors.

"Between now and February 12, it allows people to come in, close out their checking and savings accounts and remove the contents from the safe deposit boxes," said Linda Beavers, regional ombudsman with the FDIC.

Virtually everyone's money is safe; it's federally insured. The only exceptions might be extremely high-end depositors -- $250,000 or more -- who haven't structured their accounts properly.

"I know that the Barnes people made a strong effort to make sure everybody was covered," Beavers said.

"But I suspect there are going to be some who put their faith in the bank and were over the $250,000," Jones said. "It's always tragic, whenever we close a bank, for there to be uninsured depositors."

The FDIC website has tips for structuring big deposits to make sure they're insured.

If you thought this amounts to a taxpayer bailout, it's not. The insurance fund comes from the banks themselves. They're assessed quarterly payments to make sure most deposits are insured.

E-mail: jhollenhorst@ksl.com

Barnes Bancorp closed by federal regulators

Barnes Bancorp closed by federal regulators
Deseret News
Friday, Jan. 15, 2010 11:20 p.m. MST

SALT LAKE CITY — Kaysville-based Barnes Bancorp Inc. was closed Friday by the Utah Department of Financial Institutions after several troubled months and a formal investigation by federal regulators.

Barnes Bank is the first Utah financial institution to have failed in 2010. The last local bank to fail was Layton's America West Bank, which went under in May of last year.

An agency has been created to handle the assets and accounts of Barnes Bank. Managed by Zions Bank, the Deposit Insurance National Bank of Kaysville will mail checks to holders of Barnes CDs and IRAs on Tuesday, according to a news release from the Federal Deposit Insurance Corporation.

The Barnes Bank Web site refers customers to the FDIC for information. Deposits and some special accounts are insured up to $250,000, according to federal law. Other accounts are fully insured.

Checks written through Barnes Bank will be honored until Feb. 12, according to the FDIC, and ATMs will be open until Jan. 29. Customers with loans financed by Barnes Bank are encouraged to continue making regular payments.

Barnes Bank has nine locations along the Wasatch Front and one in St. George. They will be open from 9 a.m. to 1 p.m. Saturday under management of Zions Bank and will reopen Tuesday for an interim transition period.

"We're really here to help. Barnes Bank has a legacy of providing quality service to families and businesses in the community since 1891, so we want to help their former clients through this transition," said Scott Anderson, president and chief executive officer of Zions Bank. "This is an extremely difficult situation for everyone, but we are prepared to answer questions, provide support and comfort, and assist former Barnes Bank clients into new banking relationships."

In May, Barnes Bank officials met with the FDIC over problems with board oversight and credit risk-management practices, among other issues. The bank also struggled with maintaining sufficient capital, employees said at the time.

Late Friday, the Utah Highway Patrol was at the bank's headquarters to provide security for FDIC auditors.

The closure of the Utah bank will cost the FDIC's deposit insurance fund an estimated $271.3 million.

As of last September, Barnes had $827.8 million in total assets and $786.5 million in total deposits. When it closed Friday, there were approximately $100,000 in deposit funds that potentially exceeded the insurance limits.

For more information, visit fdic.gov. Customers who may have uninsured accounts should call 1-800-528-4893 to set up an appointment.

e-mail: rpalmer@desnews.com
© 2010 Deseret News Publishing Company | All rights reserved

CRE Financing Update - Ray Walker

I organized a Utah County commercial real estate forum for the Utah County Assoc. of Realtors that was held yesterday. We had excellent presentations by Stan Craft, commercial appraiser with Free & Associates, and Ray Walker with CBRE Debt & Equity Finance. Here is Ray's contact information:

Ray Walker, Senior Vice President
CBRE Debt & Equity Finance
222 So. Main St, 4th floor
Salt Lake City, UT 84101
O: 801-869-8050
F: 801-947-3954
C: 801-918-4599
ray.walker [at] cbre.com


Following are my notes from Ray's presentation.

CBRE represents life companies, local and national banks, direct lender for Freddie/Fannie/HUD for MF and healthcare

Market downcycle in late 80’s/early 90’s was very bad

Credit is frozen to a certain extent, there is plenty of money available at the right price

Land loans are now dead on arrival, must have a defined and strong exit plan
• Banks that are now in trouble are loaded up with land

Utah market hasn’t dropped in Utah nearly as much as some other places
• Approximately 20% drop in values in Utah, 30-40% in other markets
• Utah Co. will likely come out very well in the next upswing

Utah traditionally lags the country, doesn’t go as high or as low

Lenders looking heavily at debt coverage, how are they going to get paid
• Scrutinize tenants on subject property and other properties the borrower owns
• Want global cash flow statement showing all properties owned by borrower

On a purchase, the lender is a partner – on a refinance, the lender is the enemy

Commercial banks hold 45% of commercial mortgage debt
Thrifts hold 6%
CMBS – 21%
Life companies – 9% (most are lending today, 65-70% LTV)

Mortgage debt as a percentage of GDP got above mean, now deleveraging to get back to the mean

On refi’s the lenders are sometimes willing to take a haircut but also want some cash in from the borrower, both share in the pain

Lots of vultures sitting on the sidelines waiting for distressed properties, not real active yet, probably come in small waves
• Private equity groups are paying cash for distressed assets

Life companies – working with borrowers on refi’s so don’t have to foreclose if can avoid

Client getting a 3-1-1 ARM

Thinks it will be 3-5 yrs before finance world is back to normal

MF is a profit-center for Freddie/Fannie, they’ve begun to securitize their portfolio and selling it off, able to shrink their portfolio without reducing lending

Conduits starting to come back (70% LTV, 7-7.25% rate)

Financing on mixed-use buildings – lenders hate mixed-use buildings, the retail/office use always struggles
• Don’t want more than 10% of revenue to come from secondary use

221.d.4 – closed $3b in 2008, have $18b in process, very long process to close (12+ months)
• HUD is saying no more in SLCo except for CDB area
• Utah County will likely have more money available (having to convince HUD that Utah County is worthy of the investment)
o Need more data for Utah County MF market, will help convince HUD

Rates will edge up, not sure what inflation will do

AA corporate bonds are a good benchmark for commercial RE rates, life companies weigh

One in four Utah banks under federal orders to shape up

One in four Utah banks under federal orders to shape up
Finance » Regulators move against lenders holding soured real-estate loans.

By Paul Beebe
December 18, 2009
The Salt Lake Tribune

Federal regulators, who have drawn criticism for not doing more to arrest the nation's financial crisis, have clamped down hard on Utah banks this year.

They have ordered at least 18 lenders to clean up their books, and more enforcement actions may be on the way. Given that Utah has only 71 banks, the number of lenders with problems dire enough to warrant federal intervention raises questions about the stability of some and the willingness of others to extend credit as the state tries to restart its economy.

Bankers say the intense scrutiny by the Federal Deposit Insurance Corp. and the Federal Reserve is galling and unwelcome, but not surprising. Utah banks focused heavily on real-estate lending during boom times earlier this decade. Many of those loans went bad when the state entered its worst recession in 80 years and real estate collapsed.

The actions do not threaten deposits at any of the banks. The FDIC insures bank accounts for up to $250,000.

"When you look at the involvement that the banks have had in the real-estate market and the dramatic change in values, it's created a lot of pressure" on banks, said David Brown, president of First Utah Bank.

The Salt Lake City-based lender reached an agreement with the Fed in September to strengthen board oversight of management, shore up credit risk-management practices and charge off or foreclose on loans that weren't collectible.

"It's really a loan-quality issue," said Howard Holt, president of Brighton Bank, which is not under any enforcement action.

Earlier this year, the FDIC seized two Utah banks -- America West Bank of Layton in May and MagnetBank of Salt Lake City in January. They were among 130 banks closed nationwide by the agency so far this year.

Drawing less attention, though, were actions taken by the FDIC and the Fed against 11 Utah-chartered banks, four industrial banks and one out-of-state bank with a state charter -- America West -- which later was closed.

The FDIC issued 13 cease-and-desist orders to 12 banks, demanding measures ranging from boosting capital reserves to cleaning up bad-loan portfolios. Similar directives called written agreements went to three banks from the Fed. Two banks received orders from both agencies.

By contrast, the FDIC sent six formal orders to Utah banks last year. One went to the defunct MagnetBank. The Fed issued none.

The orders from the FDIC also called on banks to improve lending and collection practices, and to increase reserves for future loan losses. Bank directors were instructed to improve their weak oversight of management. Managers were told to fix policies and practices that put deposits in jeopardy.

Industrial banks, which are state-chartered financial companies that lend money, were instructed, variously, to shore up their capital or extend credit to their parent companies, some of which have filed for bankruptcy.

It isn't clear exactly how worried the Fed, the FDIC and their state partner, the Department of Financial Institutions, are about the wobbly banks. None would elaborate on their orders, preferring to let the documents speak for themselves. The paperwork provides tantalizing clues, but the language is generalized. The orders are broad statements written mainly to confirm the banks' problems and the corrective actions lenders must take or face sanctions, ranging from fines to being seized.

"We don't want to get misconstrued in what we are saying. We hope that what is in the cease-and-desist order is clear enough," said Paul Allred, deputy commissioner of the Department of Financial Institutions.

Howard Headlee, president of the Utah Bankers Association, said orders from the Fed and the FDIC are "tools to improve the situation" and that "regulators are like a doctor. They've come in and identified an issue or issues, and [orders are] a prescription for health. In the vast majority of cases, that is what they lead to."

Banks, he said, are a business, "and as we know, businesses throughout our economy are under tremendous stress in this recession. And that's where you find out where the weaknesses are. The enforcement actions just help to address those weaknesses."

Additional financial institutions may be struggling, too. John Allen, president of SunFirst Bank in St. George, recently estimated that "about half of the banks" in the state are under some sort of formal or informal order to improve their operations.

"The economy caught everybody," said Allen, whose bank received a cease-and-desist order.

Randy Hoyt, president of Western Community Bank in Orem, said what hasn't been made public by the FDIC or the Fed are numerous nonpublic "MOUs" -- memorandums of understanding -- that banks and regulators have agreed to this year.

"Every bank in the state of Utah is most likely dealing with some type of formal or informal action to improve or strengthen their foundations," said Hoyt, whose bank received a cease-and-desist order. "This is a time when regulators and banks working together certainly requires patience on both sides as financial institutions work through this uncertain economy."

Banks aren't the only lenders struggling. Holt of Brighton Bank said credit unions with big bets on real estate are in trouble, too.

"I don't know of any traditional Utah banks or credit unions that were involved in real-estate lending that have not experienced at least some loan problems. It just goes with the territory," Holt said.

Brighton Bank wasn't placed under a cease-and-desist order, but it has at the FDIC's request consented to increase its reserves for loan losses, he said.

"I think a number of the banks that they visit, they are recommending increasing their allowance for loan loss, and I think this is wise. This is a prudent move," Holt said.

At the same time, banks have cut lending and stiffened credit standards, which means they aren't supporting Utah's recovery with loans to start or expand businesses as they otherwise might.

"If you were to go to a gas station and they rationed the gas that you can have, it's going to limit how much you can drive," said Kendall Phillips, president of Liberty Bank of Utah in Salt Lake City.

"When you have lending that is curtailed, it slows down everything."

Utah community banks loaded up on real-estate loans in the years leading up to the recession because of inroads credit unions have made into areas such as car loans and consumer loans, said Headlee of the bankers association.

"In many cases it wasn't a choice. The encroaching of credit unions into many of the areas traditionally served by banks has forced us to focus our resources on a smaller and smaller segment of the economy, real estate being the primary segment."

Ezra Harris, a credit risk-management consultant in Kaysville, traces banks' real-estate loan woes to legislation Congress passed in 1977 that required them to lend in low-income neighborhoods where they take deposits. The Community Redevelopment Act forced banks to make loans they would otherwise would reject as unsound, he said.

"Then [Congress] went further and pressured Fannie Mae and Freddie Mac to be the ultimate financing sources of these loans. So here you have an unqualified borrower come into the bank. The bank says we've got to make our quota of CRA loans. Here's one. We'll make it and we'll sell it to Freddie Mac," Harris said.

Harris said former Fed Chairman Alan Greenspan's low-interest rate policy after the 2001 recession also stoked the subprime financial crisis. Cheap loans drew millions of people into the housing market, setting off an unsustainable bubble.

But he also blames the greed of boards and obliging management of some banks. Many community banks are closely held institutions, owned by a small number of shareholders. Their ambitions are to grow their banks' profitability in order to sell them or to increase the value of their shares.

"Can they dominate management? You'd better believe it," said Harris, a former president of New England Savings Bank in New London, Conn.

One way investors can boost a bank's value is to push managers to make riskier high-return loans that carry high fees and interest rates.

"But the offsetting factor is the probability that a higher percentage of high-risk loans are going to get in trouble, especially if there is a concentration of real-estate loans and the real-estate market goes into the tank," Harris said.

The upshot of so much regulatory and market turmoil has gone to the bottom line of many lenders. They are diverting profits into building reserves against the possibility of more loan losses, said Hoyt of Western Community Bank.

pbeebe@sltrib.com


Utah banks under fire from federal regulators this year:

Advanta Bank, Draper, two cease-and-desist orders from the Federal Deposit Insurance Corp., June 24

American Express Centurion Bank, Salt Lake City, cease-and-desist, FDIC, June 5

America West Bank Members, Layton, written agreement, Federal Reserve, Jan. 22; closed by FDIC and Utah Department of Financial Institutions, May 1

Barnes Bancorp and Barnes Banking Co., Kaysvillle, written agreement, Federal Reserve, May 13

Capital Community Bank, Provo, cease-and-desist, FDIC, May 18

Capmark Bank, cease-and-desist, FDIC, Oct. 1

Centennial Bank, Ogden, cease-and-desist, FDIC, June 25 (Vision Bancorp has agreed to buy controlling interest in Centennial)

CIT Bank, Salt Lake City, cease-and-desist, FDIC, July 16

First Utah Bank, Salt Lake City, written agreement, Federal Reserve, Sept. 22

Gunnison Valley Bank, Gunnison, cease-and-desist, FDIC, Sept. 23

Liberty Bank, Salt Lake City, cease-and-desist, FDIC, May 21

MagnetBank, closed by the Utah Department of Financial Institutions and the FDIC, Jan. 30

Prime Alliance Bank, Woods Cross, cease-and-desist, FDIC, June 22

SunFirst Bank, St. George, cease-and-desist, FDIC, Oct. 7

Utah Community Bank, Sandy, cease-and-desist, FDIC, July 15

Western Community Bank, Orem, cease-and-desist, FDIC, Aug. 20

Woodlands Commercial Bank, written agreement, Salt Lake City, Federal Reserve, Feb. 4
Deposits insured

The Federal Deposit Insurance Corp. insures bank accounts and other deposits up to $250,000.

CMBS Delinquencies Spike

Economic Update - CMBS Delinquencies Spike
Jul 14, 2009
By: Dees Stribling, Contributing Editor, Commercial Property News

U.S. Commercial mortgage-backed securities delinquencies grew in June by a record $2.2 billion, according to Fitch Ratings. Last month there was a 2.6 percent delinquency rate among U.S. CMBS, up 48 basis points from the previous month. In June, at least, problems in retail properties and the hospitality industry inspired much of the upward bounce in delinquencies. But there's more to come, especially in the beleaguered hotel sector.

Fitch said that two loans associated with mall properties owned by bankrupt REIT General Growth Properties Inc. defaulted: a $207.2 million loan tied to Woodbridge Center, and the $164.5 million Jordan Creek loan. As for the ailing hotel business, some 13 hotel loans totaling $596 million defaulted in June, according to Fitch.
"The newly defaulted hotels and the two new GGP loans which are not paying amortization represented almost half of the increase in the index,” Susan Merrick, managing director, Fitch Ratings, told CPN.

The struggling hotel sector looks especially worrisome. "Hotels represented 27 percent of the newly defaulted loans in June," Merrick continued. "This same is expected for July as over $600 million of hotel loans are already 30 days delinquent.”

CMBS problems are hardly confined to the United States, either. Fitch Ratings also said on Monday that 53 percent of loans underlying Japanese CMBS are in default. Japanese commercial real estate is facing a similar set of problems as American CRE: a trickle of financing and a weak economy all around.

Bloomberg, citing filings with the Security and Exchange Commission, has reported that Apollo Global Management L.L.C. plans to raise $600 million in a public offering of shares in its commercial property investment fund, Apollo Commercial Real Estate Finance Inc. The fund will be in the market for the sort of properties that owners really need to sell. That is, properties that can't be refinanced, and out of the $1 trillion-plus in commercial real estate loans maturing in the next three years, there are bound to be some of those.

The National Retail Federation lashed out at Wal-Mart on Monday for the retail giant's recent call for employer-mandated health insurance. (Wal-Mart is not a member of the organization.) Essentially, the NRF said, retailers can't afford it without shedding a lot of jobs.

"Employer mandates of any kind amount to a tax on jobs," Steve Pfister, NRF senior vice president for government relations, said in a statement. "We cannot afford to have new and existing jobs priced out of our collective reach because of mandated health coverage."

Apparently, the telegenic analyst Meredith Whitney helped move Wall Street in a positive direction on Monday with a "buy" recommendation for Goldman Sachs. Its shares and other financial stocks moved upward, helping push the Dow Jones Industrial Average up 185.16 points, or 2.27 percent. The S&P 500 rose 2.49 percent and the Nasdaq gained 2.12 percent.

New Firm to Help Clients Capitalize on Self-Storage Distress and Then Some

New Firm to Help Clients Capitalize on Self-Storage Distress and Then Some
Jul 07, 2009
By: Barbra Murray, Contributing Editor, Commercial Property News

Two real estate industry finance veterans have come together to create Davies Ingersoll Capital Partners, a firm offering debt and equity solutions, as well as investment opportunities to clients across the country, with a particular focus on the self-storage sector.

Jim Davies, a former senior vice president and shareholder of Buchanan Street Partners, as well as was a co-founder and principal of leading storage finance concern Buchanan Storage Capital, is the firm's president, while Peter Ingersoll, managing director of real estate services firm Sperry Van Ness/Davies Ingersoll, is on board as CEO. Newport Beach, Calif.-based Davies Ingersoll provides a series of services that includes debt, equity and note purchase financing, in addition to the arranging of equity and structured financing. "We are a client-centered firm so obviously, we're going to be meeting our clients' needs in the capital markets arena, including debt and equity, while also actively helping them source compelling investment opportunities," Davies told CPN. "Within this historical window, there should be some good opportunities for those groups that have ready capital and who are willing to be patient."

While Davies Ingersoll is involved in various sectors of commercial real estate, its targeting of the self-storage sector, which is performing better than many others, makes it unique among the new firms that are popping up to capitalize on distress in the real estate market. Self-storage has not been immune to the ramifications of the turbulent economic environment, but it is, by nature, better positioned to weather the storm. "I don't want to minimize the serious challenges many of our owner clients are facing both at the property level and with upcoming debt maturity issues," said Davies. "However, generally speaking, self-storage as a sector has held up better during past recessions and economic downturns than other commercial real estate product types, so most industry experts look for this to be the case again, even in this historically challenging period." The sector certainly has its advantages, but it is not fail-safe. "In the past some people have made the claim that self-storage is recession proof--that is just incorrect, however, there are some recession resistant elements of the property type."

Regardless, investors remain keen on the sector. "Interest in this asset class, particularly from private equity firms, continues to increase because of steady cash flows, high returns and low loss ratios," R. Christian Sonne, managing director of real estate services firm Cushman & Wakefield Inc.'s self storage industry group, wrote in an article for the Korpacz Real Estate Investor Survey for the second quarter of 2009. The article also noted that investors are drawn to the fact that there are no tenant improvement costs or leasing commissions, and limited large capital expenditures.

Investors eyeing real estate sectors such as office and hotel are eagerly awaiting the plummeting of price tags on properties, and those perusing the self-storage sector are not too different. "Our most experienced buyer clients have been talking about the gap between buyers and sellers for a couple of years now; however, prices are coming down and corresponding cap rates are increasing such that some buyers believe they will soon begin to see opportunities that will make sense," Davies noted. "This is the most distress, within this historic downturn, that the self-storage industry has faced."

While there is distress in the self-storage market, and therefore, opportunity for favorable deals, investors will not have as abundant a stock of properties to choose from as, say, office buyers will, particularly since overbuilding is not as big a factor. "Year-over-year construction starts have declined for the last several years; the amount of product being developed has decreased significantly and is almost at a standstill today," Davies said. "The supply of available properties for purchase has been relatively low. However, that supply appears to be increasing, in part because equity investors or lenders are now driving the decision to sell."

Apartments lead the U.S. property default parade

Apartments lead the U.S. property default parade

By Ilaina Jonas - Analysis
Wed Jun 17, 2009 3:53pm EDT

NEW YORK (Reuters) - The multifamily sector is leading all other types of U.S. commercial real estate in having the highest loan default rate but the others are likely to follow, experts say.

Defaulted apartment loans that back commercial mortgage backed securities (CMBS) in May surpassed 5 percent, while retail and lodging broke the 3 percent level and overall delinquencies were 2.77 percent, according to Trepp, which tracks CMBS issues.

Bank loans for apartment buildings defaulted at a rate of 2.45 percent in the second quarter, while those of all other commercial real estate mortgages held by depository institutions reached 2.25 percent, according to research firm Real Estate Econometrics.

Apartment building prices peaked in the fourth quarter 2006, according to research firm Real Capital Analytics. Peak prices for other classes of real estate followed -- hotels in the first quarter 2007, offices and retail in the second quarter 2007, and warehouses in the third quarter 2007.

"Because it peaked first, some of the deterioration has come on a little earlier," said Sam Chandan, Real Estate Econometrics president and chief economist said.

"You've got these waves of issues that are driving defaults for commercial," Chandan said."

Overly generous and plentiful loans pervaded across the U.S. commercial real estate sectors 2004 through 2007 and pushed up values. Getting a loan today is tough. Falling rents and occupancies along with fewer available and lower loans have pushed down values 35 percent to 40 percent. That has resulted in higher defaults.

The apartment sector usually is early to feel economic changes because of its short one-year leases. The default rate among hotels, which have one-night leases, is lower, but likely to surpass apartments soon, Chandan said.

Yet other factors have humbled the apartment sector.

In some markets, prices of many apartment buildings were driven up by investors planning to convert them into condominiums during the housing boom, which ended abruptly in 2006. When the housing market collapsed, condominiums for rent drove down market rents.

In other areas, some of the biggest deals involved pricing based on turning rent stabilized apartments into market rate apartments. That proved more difficult and sent some deals, such as the Riverton, a 12-building apartment complex in New York City's Harlem, into default.

The weak U.S. economy zapped job growth, the key driver of demand for apartments. The U.S. unemployment rate in May reached 9.5 percent. Among 18 to 24 year olds it was 15 percent. About 70 percent are apartment renters who are now doubling up or moving in with their parents.

Higher-end apartments no longer command top prices simply because of amenities.

"Most renters are paying for value, in absolute dollars," said Mike Kelly, president and co-founder of Caldera Asset Management. "They're not going to pay an extra 50 bucks because you have a cabinet in granite."

Caldera helps multifamily lenders maintain the value of properties in pre-foreclosure or throughout foreclosure.

Buyers of lower-end "C" low-rise apartment complexes were not professional real estate investors and were unable to navigate the economic downturn.

"They were thinking they could hire a management company and run a 'C' multi," said Michael Katz, a CMBS veteran and current director of Clark Street Capital, which helps link loan buyers and sellers via an online marketplace. "A 'C' multi is very much like a hotel. You have to know how to handle your clients. There's a lower level of consumer who really doesn't mind being late on their rent."

A large majority of the bank loans financed construction of new apartments and were issued to professional merchant builders, with track records of building new apartments and selling them to investors. Although their default rate is high, many of those floating-rate loans are still performing because they are based on LIBOR, which has tumbled.

"They've been able to offset the poor economics and poor property performance by not paying as much interest," Kelly said.

(Reporting by Ilaina Jonas)

© Thomson Reuters 2009. All rights reserved.

Economic Update – CRE Defaults Head for High Ground

Economic Update – CRE Defaults Head for High Ground

June 10, 2009
By: Dees Stribling, Contributing Correspondent, Commercial Property News

A new report by Real Estate Econometrics, based on FDIC data, puts the commercial real estate loan default rate at its highest level in more than a decade and a half, at least those loans held by regulated deposit-taking institutions—banks and thrifts, for the most part. The default rate soared from 1.62 percent in the last quarter of 2008 to 2.25 percent in the first quarter of 2009. That rate doesn’t include defaults on loans associated with multi-family rental properties, which Real Estate Econometrics put at 2.45 percent in the first quarter of 2009, up 68 basis points from the previous quarter.

The jump brings the commercial real estate default rate to its highest level since 1994, when the industry was last emerging from a severe downturn. There’s no indication this time around, however, that the industry is coming out of its troubles anytime soon. In fact, Real Estate Econometrics forecasts defaults to reach 5.2 percent by the end of 2010.

Currently banks and thrifts hold about half of all commercial real estate debt, representing about $1.6 trillion worth of outstanding loans. A major component of that total, roughly a quarter, is in the form of CMBS. A large share of the most troublesome loans—those at highest risk of default—were originated in 2006 and the first half of 2007, now known to be the most distended period of the real estate bubble, but back then still considered “let the good times roll.” Like so many Vegas McMansions, many of these commercial properties were valued far too highly in those days, and are now underwater.

“Increasingly, a challenge in refinancing these mortgages is that some lenders are seeking to diversify away from commercial real estate,” said the Real Estate Econometrics report. That, and the properties are underwater.

Big banks are lined up at the door of TARP, waiting to get out, according to the U.S. Treasury Department on Tuesday. Ten specific big banks, that is, and while the government did not say which ones they were, Chicago-based Northern Trust said it was one of them, and others likely include the biggest TARP recipients: JP Morgan Chase, Goldman Sachs, Morgan Stanley and that ilk.

If all the banks on the government’s short list were allowed to return their TARP funds, that would represent an influx of about $68 billion to the treasury (fully $25 billion of that would be from JP Morgan Chase, if indeed it’s on the list). So far a number of banks have been allowed to return TARP funds by the Treasury Department, but only relatively small community banks.

American retailers aren’t the only ones suffering from the worldwide economic downturn. German retail owner Arcandor, which owns the Karstadt chain of department stores in that country (as well as a controlling interest in Thomas Cook), has filed for bankruptcy after two requests for aid were turned down by the BRD government. The company had said that it needed help in the form of government guaranteed loans by Wednesday to renew credit lines totaling €710 million ($999 million), which would have kept it going for the next six months. Nein, said the government.

Wall Street turned in mixed results on Tuesday. The Dow Jones Industrial Average ended down 1.43 points, or 0.02 percent, while the S&P 500 was up 0.35 percent, and the Nasdaq gained 0.96 percent.

CRE Mortgage Starts Plummeted in '08: MBA

CRE Mortgage Starts Plummeted in '08: MBA

June 5, 2009
By: Tonie Auer, Contributing Correspondent, Commercial Property News

After seeing phenomenal commercial mortgage originations in 2006 and 2007, figures from 2008 show a 65 percent decrease in volume, according to the Mortgage Bankers Association's 2008 commercial real estate/multi-family finance report.

“This is an important sign of the capital availability,” Jamie Woodwell, MBA's vice president of commercial real estate research, told CPN. “While in 2006 and 2007, there were lots of loans being done very quickly, what this is showing is that there are fewer loans that are also probably taking longer to do.”

If someone is looking to go into the market to borrow, it is important to get with their mortgage banker or originator and work with them to understand what the market is like right now, Woodwell said. They should make sure their expectations and those of the market are in line, he added.

With the volume decrease, mortgage bankers closed $181.4 billion in commercial and multi-family loans. Decreases were seen across all property types and most investor groups, and were led by decreases in loans intended for commercial mortgage-backed security (CMBS), collateralized debt obligations (CDO) and other asset-backed security (ABS) conduits. Intermediated loan volume decreased 68 percent between 2007 and 2008, Woodwell said.

Originations were dominated by multi-family loans - representing $64.6 billion, or 36 percent of the lending total. Among major investor groups, CMBS, CDO and other ABS conduits saw the greatest percentage decrease in volume between 2007 and 2008, followed by real estate investment trusts (REITs); special finance companies; and life insurance companies, the summation showed.

“Last year’s multi-family loans totaled 23 percent,” Woodwell said. “What we have seen is the big impact of Fannie Mae and Freddie Mac doing extraordinary volume in 2008 while a number of other investor sources were pulling back.”

In 2008, the impact of the depths of the credit crunch is evidence, he said. The 2008 snapshot also includes the period where the capital markets were at their toughest when commercial mortgage-backed securities (CMBS) and the market really pulled back, Woodwell said.

“These results are showing us what was going on in 2008, study of mortgage community,” he said. “What it shows is that big drop. In the extraordinary volume years of 2006 and 2007 we saw record origination volumes. This (summation) gives us the juxtaposition of that with the impact of the credit crunch.”

On June 2, the Mortgage Bankers Association stated the weakening economy and continued credit crunch led to increases in commercial/multifamily mortgage delinquencies during the first quarter of 2009 in its Commercial/Multifamily Delinquency Report.

“Commercial and multi-family mortgage delinquency rates continued to rise in the first quarter,” Woodwell said. “Delinquency rates on commercial and multifamily mortgages held by banks and thrifts, by Fannie Mae and in CMBS are all now at levels higher than those seen following the 2001 recession.”

First quarter delinquency rates on commercial mortgages held by life insurance companies remained below the 2001 recession levels, according to the report. Between the fourth quarter of 2008 and first quarter of 2009, the 30+ day delinquency rate on loans held in commercial mortgage-backed securities (CMBS) rose 0.68 percentage points to 1.85 percent. The 60+ day delinquency rate on loans held in life insurance company portfolios rose 0.05 percentage points to 0.12 percent.

The 60+ day delinquency rate on multifamily loans held or insured by Fannie Mae rose 0.04 percentage points to 0.34 percent. The 90+ day delinquency rate on multifamily loans held or insured by Freddie Mac rose 0.08 percentage points to 0.09 percent.

Capital Markets’ Distress Mingles with Hints of Improvement

Capital Markets’ Distress Mingles with Hints of Improvement

June 1, 2009
By: Paul Rosta, Senior Associate Editor, Commercial Property News

Signs of growth in distressed properties are mixing with evidence that the U.S. and global real estate markets are starting to stabilize, according to a recent analysis by Jones Lang LaSalle Inc.

The issue of distressed assets in the United States presents a contradictory picture. Loan defaults are at an 11-year high, and lenders and borrowers face the daunting prospect of refinancing commercial real estate loans valued at $1.3 trillion over the next four years. By April, the unpaid balance of CMBS loans in special servicing hit $24.5 billion, a total 10 times as high as it was in March 2007.

Yet commercial real estate foreclosures totaled a surprisingly low $65 million in April--the latest indication that the level of distressed asset sales is much less than predicted by many experts. Jones Lang LaSalle’ analysts suggest that programs like the federal government’ s Term Asset-Backed Securities Loan Facility are encouraging private investors to buy bank whole loans and securities. That, in turn, is giving banks reason to move more on forced sales and foreclosures. Meanwhile, the decision to expand TALF to include new CMBS issues has helped to tighten spreads on AAA-rated CMBS to the 700 basis-point range.

Other trends also suggest that the real estate capital markets are getting on more solid ground. In early May, the Libor-OIS spread dropped to 75 basis points, a nine-month low. The spread between what the U.S. Treasury pays for three-month borrowing and what banks pay reached 77 basis points last month. As recently as last October, the TED spread was 464 basis points.

While some benchmark spreads continue to shrink, the value of REITs is increasing. Since the end of February, REIT market values have gained 60 percent, bouncing back from a dismal six-month stretch during which values slid 80 percent. Rising investor confidence has helped REITs jump $10.6 billion in the public market so far in 2009, a total that already approaches last year’s.

In markets outside the U.S., transaction activity remains relatively low, but Jones Lang LaSalle offers some deals and trends to watch. “All eyes are on Aviva Investors’ proposed sale of an £800 million diversified portfolio of 47 U.K. properties,” the report notes. “It could provide a good indication of the strength of domestic and foreign buyers’ interest in the market as well as a pricing barometer.”

Forced asset sales by private equity funds are increasing transaction volume in Asia. Nippon Life Insurance Co. is under contract for the $1.2 billion acquisition of American International Group Inc.’s Japanese headquarters. And in China, economic stimulus policies appear to be boosting the number of deals. By the end of April, the amount of space trading hands reached 176 million square meters, a 17.5 percent increase compared to the same period of 2008.