[davelj]

I’d say we’re somewhere between denial and fear at this point.

Seeing the “Temporary set back” line reminds me of a Wall Street joke:

What’s the definition of a long-term investment? A short-term speculation gone wrong.

[davelj]

I’d say we’re somewhere between denial and fear at this point.

Seeing the “Temporary set back” line reminds me of a Wall Street joke:

What’s the definition of a long-term investment? A short-term speculation gone wrong.

[davelj]

I’d say we’re somewhere between denial and fear at this point.

Seeing the “Temporary set back” line reminds me of a Wall Street joke:

What’s the definition of a long-term investment? A short-term speculation gone wrong.

[davelj]

I’d say we’re somewhere between denial and fear at this point.

Seeing the “Temporary set back” line reminds me of a Wall Street joke:

What’s the definition of a long-term investment? A short-term speculation gone wrong.

[davelj]

Josh,

Yes, I think a lot of banks loosened standards to compete over the last several years (all banks’ money is equally green the last time I checked) but such loosening has been – as it generally is – largely product dependent. For example, just about any S&L in the country has had to loosen standards to get business. Also, just about any construction lender in the boom-time states – CA, AZ, NV, FL, etc. – also loosened standards. In addition, large commercial real estate loans – that is, $5 million-plus – in the major metroplexes have also been underpriced and undertermed for several years. So, yes, there has been a race to the bottom, but it’s been far more pronounced in certain product classes and geographies than others.

BUT, there are plenty of banks who chose to shrink (in these competitive product markets) or who don’t compete in the hypercompetitive geographies. Not every banker will take undue risk for growth. Plenty of them saw all of this coming in some way, shape or form.

The two banks I’m directly involved with have the luxury of being private banks with a small number of shareholders. We do what we think is prudent. Period. We’re not trying to talk up a stock price or impress our shareholders with “false” growth. These banks are run to make money for the long term. No short cuts. And there are lots of other banks like ours out there. But they tend not to make the headlines and seem woefully behind the times when things are booming. But we (and they) will all experience bumps in the road over the next few years as things slow down – a recession is not all fun and games even if you’re doing everything the “right” way. That’s the nature of the business.

Over the next two years I think we’ll see some recapitalizations of high profile large banks, small banks and several outright failures as well, particularly in the glamour states of CA, AZ, NV, FL, etc. I’m starting to see mid-sized recapitalization proposals ($25-$75 million) cross my desk as I write this. The next few years will provide plenty of opportunities for those with dry powder.

Yes, most real estate assets will have valuation issues. (And some more than others, obviously.) But this isn’t the end of the world. An example. Let’s say we make a $2 million loan on a small commercial property worth $3 million. The interest coverage is 1.3x and the cap rate is 7%. Now let’s say a tenant or two goes BK and the re-rental rate is lower and the interest coverage declines to 1.1x. And the cap rate increases to 9% from 7%. So maybe the value declines such that now we have an 85%-90% LTV loan. Is that a big deal? No. Are we happy about it? No. But as long as the borrower can keep paying and the decline in value is still below 100% LTV it’s not a big deal. You have to assume that this sort of stuff will happen every few years. It’s the nature of the business. But it’s not the end of the world. Frankly, we WANT other banks to tighten their lending standards because we want higher rates and better terms and conditions for our loans.

[davelj]

Josh,

Yes, I think a lot of banks loosened standards to compete over the last several years (all banks’ money is equally green the last time I checked) but such loosening has been – as it generally is – largely product dependent. For example, just about any S&L in the country has had to loosen standards to get business. Also, just about any construction lender in the boom-time states – CA, AZ, NV, FL, etc. – also loosened standards. In addition, large commercial real estate loans – that is, $5 million-plus – in the major metroplexes have also been underpriced and undertermed for several years. So, yes, there has been a race to the bottom, but it’s been far more pronounced in certain product classes and geographies than others.

BUT, there are plenty of banks who chose to shrink (in these competitive product markets) or who don’t compete in the hypercompetitive geographies. Not every banker will take undue risk for growth. Plenty of them saw all of this coming in some way, shape or form.

The two banks I’m directly involved with have the luxury of being private banks with a small number of shareholders. We do what we think is prudent. Period. We’re not trying to talk up a stock price or impress our shareholders with “false” growth. These banks are run to make money for the long term. No short cuts. And there are lots of other banks like ours out there. But they tend not to make the headlines and seem woefully behind the times when things are booming. But we (and they) will all experience bumps in the road over the next few years as things slow down – a recession is not all fun and games even if you’re doing everything the “right” way. That’s the nature of the business.

Over the next two years I think we’ll see some recapitalizations of high profile large banks, small banks and several outright failures as well, particularly in the glamour states of CA, AZ, NV, FL, etc. I’m starting to see mid-sized recapitalization proposals ($25-$75 million) cross my desk as I write this. The next few years will provide plenty of opportunities for those with dry powder.

Yes, most real estate assets will have valuation issues. (And some more than others, obviously.) But this isn’t the end of the world. An example. Let’s say we make a $2 million loan on a small commercial property worth $3 million. The interest coverage is 1.3x and the cap rate is 7%. Now let’s say a tenant or two goes BK and the re-rental rate is lower and the interest coverage declines to 1.1x. And the cap rate increases to 9% from 7%. So maybe the value declines such that now we have an 85%-90% LTV loan. Is that a big deal? No. Are we happy about it? No. But as long as the borrower can keep paying and the decline in value is still below 100% LTV it’s not a big deal. You have to assume that this sort of stuff will happen every few years. It’s the nature of the business. But it’s not the end of the world. Frankly, we WANT other banks to tighten their lending standards because we want higher rates and better terms and conditions for our loans.

[davelj]

Josh,

Yes, I think a lot of banks loosened standards to compete over the last several years (all banks’ money is equally green the last time I checked) but such loosening has been – as it generally is – largely product dependent. For example, just about any S&L in the country has had to loosen standards to get business. Also, just about any construction lender in the boom-time states – CA, AZ, NV, FL, etc. – also loosened standards. In addition, large commercial real estate loans – that is, $5 million-plus – in the major metroplexes have also been underpriced and undertermed for several years. So, yes, there has been a race to the bottom, but it’s been far more pronounced in certain product classes and geographies than others.

BUT, there are plenty of banks who chose to shrink (in these competitive product markets) or who don’t compete in the hypercompetitive geographies. Not every banker will take undue risk for growth. Plenty of them saw all of this coming in some way, shape or form.

The two banks I’m directly involved with have the luxury of being private banks with a small number of shareholders. We do what we think is prudent. Period. We’re not trying to talk up a stock price or impress our shareholders with “false” growth. These banks are run to make money for the long term. No short cuts. And there are lots of other banks like ours out there. But they tend not to make the headlines and seem woefully behind the times when things are booming. But we (and they) will all experience bumps in the road over the next few years as things slow down – a recession is not all fun and games even if you’re doing everything the “right” way. That’s the nature of the business.

Over the next two years I think we’ll see some recapitalizations of high profile large banks, small banks and several outright failures as well, particularly in the glamour states of CA, AZ, NV, FL, etc. I’m starting to see mid-sized recapitalization proposals ($25-$75 million) cross my desk as I write this. The next few years will provide plenty of opportunities for those with dry powder.

Yes, most real estate assets will have valuation issues. (And some more than others, obviously.) But this isn’t the end of the world. An example. Let’s say we make a $2 million loan on a small commercial property worth $3 million. The interest coverage is 1.3x and the cap rate is 7%. Now let’s say a tenant or two goes BK and the re-rental rate is lower and the interest coverage declines to 1.1x. And the cap rate increases to 9% from 7%. So maybe the value declines such that now we have an 85%-90% LTV loan. Is that a big deal? No. Are we happy about it? No. But as long as the borrower can keep paying and the decline in value is still below 100% LTV it’s not a big deal. You have to assume that this sort of stuff will happen every few years. It’s the nature of the business. But it’s not the end of the world. Frankly, we WANT other banks to tighten their lending standards because we want higher rates and better terms and conditions for our loans.

[davelj]

Josh,

Yes, I think a lot of banks loosened standards to compete over the last several years (all banks’ money is equally green the last time I checked) but such loosening has been – as it generally is – largely product dependent. For example, just about any S&L in the country has had to loosen standards to get business. Also, just about any construction lender in the boom-time states – CA, AZ, NV, FL, etc. – also loosened standards. In addition, large commercial real estate loans – that is, $5 million-plus – in the major metroplexes have also been underpriced and undertermed for several years. So, yes, there has been a race to the bottom, but it’s been far more pronounced in certain product classes and geographies than others.

BUT, there are plenty of banks who chose to shrink (in these competitive product markets) or who don’t compete in the hypercompetitive geographies. Not every banker will take undue risk for growth. Plenty of them saw all of this coming in some way, shape or form.

The two banks I’m directly involved with have the luxury of being private banks with a small number of shareholders. We do what we think is prudent. Period. We’re not trying to talk up a stock price or impress our shareholders with “false” growth. These banks are run to make money for the long term. No short cuts. And there are lots of other banks like ours out there. But they tend not to make the headlines and seem woefully behind the times when things are booming. But we (and they) will all experience bumps in the road over the next few years as things slow down – a recession is not all fun and games even if you’re doing everything the “right” way. That’s the nature of the business.

Over the next two years I think we’ll see some recapitalizations of high profile large banks, small banks and several outright failures as well, particularly in the glamour states of CA, AZ, NV, FL, etc. I’m starting to see mid-sized recapitalization proposals ($25-$75 million) cross my desk as I write this. The next few years will provide plenty of opportunities for those with dry powder.

Yes, most real estate assets will have valuation issues. (And some more than others, obviously.) But this isn’t the end of the world. An example. Let’s say we make a $2 million loan on a small commercial property worth $3 million. The interest coverage is 1.3x and the cap rate is 7%. Now let’s say a tenant or two goes BK and the re-rental rate is lower and the interest coverage declines to 1.1x. And the cap rate increases to 9% from 7%. So maybe the value declines such that now we have an 85%-90% LTV loan. Is that a big deal? No. Are we happy about it? No. But as long as the borrower can keep paying and the decline in value is still below 100% LTV it’s not a big deal. You have to assume that this sort of stuff will happen every few years. It’s the nature of the business. But it’s not the end of the world. Frankly, we WANT other banks to tighten their lending standards because we want higher rates and better terms and conditions for our loans.

[davelj]

Josh,

Yes, I think a lot of banks loosened standards to compete over the last several years (all banks’ money is equally green the last time I checked) but such loosening has been – as it generally is – largely product dependent. For example, just about any S&L in the country has had to loosen standards to get business. Also, just about any construction lender in the boom-time states – CA, AZ, NV, FL, etc. – also loosened standards. In addition, large commercial real estate loans – that is, $5 million-plus – in the major metroplexes have also been underpriced and undertermed for several years. So, yes, there has been a race to the bottom, but it’s been far more pronounced in certain product classes and geographies than others.

BUT, there are plenty of banks who chose to shrink (in these competitive product markets) or who don’t compete in the hypercompetitive geographies. Not every banker will take undue risk for growth. Plenty of them saw all of this coming in some way, shape or form.

The two banks I’m directly involved with have the luxury of being private banks with a small number of shareholders. We do what we think is prudent. Period. We’re not trying to talk up a stock price or impress our shareholders with “false” growth. These banks are run to make money for the long term. No short cuts. And there are lots of other banks like ours out there. But they tend not to make the headlines and seem woefully behind the times when things are booming. But we (and they) will all experience bumps in the road over the next few years as things slow down – a recession is not all fun and games even if you’re doing everything the “right” way. That’s the nature of the business.

Over the next two years I think we’ll see some recapitalizations of high profile large banks, small banks and several outright failures as well, particularly in the glamour states of CA, AZ, NV, FL, etc. I’m starting to see mid-sized recapitalization proposals ($25-$75 million) cross my desk as I write this. The next few years will provide plenty of opportunities for those with dry powder.

Yes, most real estate assets will have valuation issues. (And some more than others, obviously.) But this isn’t the end of the world. An example. Let’s say we make a $2 million loan on a small commercial property worth $3 million. The interest coverage is 1.3x and the cap rate is 7%. Now let’s say a tenant or two goes BK and the re-rental rate is lower and the interest coverage declines to 1.1x. And the cap rate increases to 9% from 7%. So maybe the value declines such that now we have an 85%-90% LTV loan. Is that a big deal? No. Are we happy about it? No. But as long as the borrower can keep paying and the decline in value is still below 100% LTV it’s not a big deal. You have to assume that this sort of stuff will happen every few years. It’s the nature of the business. But it’s not the end of the world. Frankly, we WANT other banks to tighten their lending standards because we want higher rates and better terms and conditions for our loans.

[davelj]

Is there a “mattress” option?

[davelj]

Is there a “mattress” option?

[davelj]

Is there a “mattress” option?

[davelj]

Is there a “mattress” option?

[davelj]

Is there a “mattress” option?

[davelj]

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.

[Author]

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