OK, there were a couple of questions/comments addressed to me above, so I’ll try to address them below:
HereWeGo – “Who are the good customers?” The short answer is that most customers are good. A better way of answering your question would be to explain what we are avoiding, which are as follows:
– Construction loans of greater than 8 units at greater than 70% LTV with no personal guarantee from the borrower
– Commercial real estate loans at cap rates below 7%, debt coverage above 1.25x, at interest rates below 8%
– SFR loans above 75% LTV with FICOs below 700
– C&I loans without personal guarantees and a first lien on the collateral
Unfortunately, once you eliminate the above groups you find yourself with a pretty small group of potential borrowers. But if you’re a small bank, that’s o.k. If you’re a large bank you simply can’t grow with the above restrictions. My banks are small so we can be very selective about the credits we underwrite. The trick is not to get caught up in a race for growth. Sometimes you just don’t grow. Nothing wrong with that.
An important thing to remember is that even in a severe recession, 95% of all commercial and related loans will still pay off. If you go back to the early-90s the problems were in SFR loans and CRE in certain locations. The vast majority of the banks nationwide had very few asset quality problems. The coming recession will be no different. The vast majority of banks will make money in ’08 and ’09 despite a slowdown as the vast majority of their customers will continue to pay. But some banks will crater and these will be in the headlines. The problems will be concentrated in the large banks with MBS and subprime SFR exposure (Citigroup, Wells, Wachovia, WAMU, etc.), thrifts like Downey, and small banks with a lot of construction exposure in CERTAIN areas like CA, FL, NV and AZ. But, again, the vast majority of banks will be just fine. The trick is to avoid the implosions.
4plex – Regarding whether the banking industry is outraged or rejoicing regarding the “bailouts” (really so far all we’ve seen is pseudo-bailouts – with moral suasion and lower rates, as opposed to real taxpayer dollars at work) I’ll paraphrase: “Where you stand depends upon where you sit.” If you’re managing a bank with a lot of construction or SFR exposure (or a lot of exotic mortgage-related instruments on your balance sheet), you support any kind of bailout. If you’ve avoided these things and been a fairly prudent lender over the last few years you probably don’t really care one way or the other. I will say that I haven’t run across anyone in the industry thus far that thinks the current Paulson-led proposals are anything other than disasters in the making at worst or completely ineffective at best.
TheBreeze – Exactly. One of the main problems with the MBS out there that are rotting in valuation hell is that a lack of information regarding the actual borrowers (no doc, etc.) leads to a lack of transparency regarding the entire security. This lack of transparency is (obviously) an additional source of considerable risk. The greater the risk the lower the price, all else being equal. It ain’t rocket surgery.
