Residential lending woes beginning to take toll on commercial projects
By Lou Ortiz
Banks have tightened lending to commercial developers and are monitoring existing commercial real estate accounts as a result of the sub-prime residential mortgage crisis, bankers say.
Although commercial institutions in the United States in the latest report to the Federal Deposit Insurance Corporation indicated that bad loans — or charge-offs — amounted to 0.39% of assets totaling more than $10 trillion, lenders are intent on taking a more cautious approach until the sub-prime crisis is resolved.
The residential crisis grew from the housing boom from 2001 to 2005. Some buyers borrowed beyond their means, and others bought homes despite unworthy or shaky credit histories.
Lenders sought to cash-in on the boom and offered products that later backfired, such as interest-only loans, 100% financing and adjustable rate mortgages that some homeowners would later be unable to afford.
The casualties read like a who's who in banking: Citigroup, Merrill Lynch, Barclays Capital, HSBC, Wells Fargo and Freddie Mac, among others, with losses totaling more than $37 billion.
"Commercial real estate is becoming a casualty by association [to residential] but not by real fundamentals," said Manuel Lasaga, an economic and finance consultant with Stratinfo, a Miami-based consulting firm.
While lenders have become more stringent in making loans, Florida commercial banks, with assets totaling more than $112 billion, remain fairly strong.
Bad loans by state banks totaled 0.34% of $112 billion in assets, lower than the national average, according to the FDIC report by 278 banks for the first nine months of the year.
Nationally bad loans totaled 0.41% of $10.8 trillion in assets, with 7,303 banks reporting, during the nine-month period ending in September.
The FDIC, created in 1933 in response to bank failures, insures deposits of $100,000 and monitors and addresses risks to insurance funds by limiting the affects on the economy and financial system.
In Miami-Dade County improved commercial-industrial property values have also kept rising, topping $53 billion in the 2007 tax year, according to statistics from the Property Appraiser's Office.
For 2006 the values totaled $46.4 billion, and $39.2 billion in 2005, statistics show.
Commercial lending plays a major role and experienced developers "have been getting funding for their projects," said Daisy Ramos, vice president of commercial and business banking at Republic Federal Bank.
"They still need to purchase warehouses, lawyers and CPAs need offices, and small business owners are still drivers of the economy," she said.
But the bank, with assets of $700 million, and others "are reining in their loans," Ms. Ramos said.
During the boom years, Republic Federal stayed away from 100% financing, no income verification loans, stated income loans, and speculators, she said.
The bank doesn't lend to developers with little or no experience in the commercial market, those who have lost money or didn't finish projects, she said.
But Ms. Ramos added: "We need to be careful not to be unresponsive to the good ones."
Commercial real estate has been driven by the capacity to pay, said Mr. Lasaga.
He said an asset to Miami-Dade is the South and Central American import markets, warehousing, and the growth of office space for international business.
In addition, the boom commodity prices in agricultural and processed mineral goods from such countries as Brazil, Chile and Venezuela have also helped the area, he said.
Still, commercial bankers are "laying low and being conservative, until it's less risky to expand credit," he said.
Commercial "lending, in the majority of credit decisions, is based on earnings and credit capacity," Mr. Lasaga said. "The glut of supply is in residential.
"In commercial, it is not apparent that that's happening."
The market in general has slowed down, said Joy Venero, executive vice president and chief lending officer at Premier American Bank.
"There's not a whole lot of lending going on," she said. "But we have not closed our door to lending."
Ms. Venero, whose bank has assets totaling $416 million, said Premier has stepped up its monitoring of commercial loans.
"Our monitoring has doubled," she said. "Anything that potentially can be a problem. Any weaknesses.
"It's important for banks to see what is in their portfolios."
What effect, if any, the residential market has had on improved commercial-industrial property values in Miami-Dade over the past year will be known in January, when the appraiser's office conducts its analysis for the 2008 tax year.
The analysis takes into account such factors as sales information, market income data (or lease rates) and cost of construction.
"It's hard to say if the [upward] trend will continue, and what they will be in 2008," said Assistant County Property Appraiser Lazaro Solis. "We take into account all market conditions in 2007."