Friday, February 18, 2011

Notes on lending and banking conditions for Feb 2011

Multifamily rental housing in Colorado continues to tighten up in Colorado, as we've noted here. However, in the short term, there is little to indicate that much multifamily construction is one the way. As we've noted on this blog before, the number of new permits being pulled is at the lowest its been in more than a decade.

So what will be necessary for more construction? Industry experts tell us that multifamily owners will need to see several quarters, or even several years, of solid rent increases before financial institutions will begin to provide loans for multifamily construction. Rent growth has been weak in recent years, so multi-family owners now seem to be making up for lost time in terms of rent growth.

Another important factor is the fact that the banks remain risk averse in the face of a large number of non-performing loans. Low-interest rates also continue to encourage lending institutions to hold excess reserves.

In the charts below, we'll look at some of the indicators available to us through the FRED database at the Saint Louis Federal Reserve.

If banks continue to be reluctant to make loans on multifamily construction without evidence of solid returns on collected rents, it isn't difficult to see why.

Chart one shows the ratio of non-performing loans among larger banks in the mountain region. The ratio of non performing loans is at a new high, and has surpassed the ratio from the days of the Savings and Loan crises.

[Note: Percentage of nonperforming loans equals total nonperforming loans divided by total loans. Nonperforming loans are those loans that bank managers classify as 90-days or more past due or nonaccrual in the call report.]

The data below on non-performing loans runs through September 2010.

Graph 2 shows the same ratio, except this time it's for smaller-sized banks, also within the mountain region. We can see that the ratio has reached slightly higher than is the case with the larger banks, although the current ratio does not much exceed that reached during the S&L crisis. Not unexpectedly, the data suggests that, at least according to this measure, proportionally speaking, smaller banks have been more heavily impacted by nonperforming loans in recent years.

Graphs 1 and 2 show all loans, but Graph 3, which shows commercial loans only, shows that the overall ratio of nonperforming loans is lower for commercial loans than for all loans. This suggests that residential mortgage loans (and also consumer debt) are performing more poorly than commercial loans. This is also for the mountain region. The fact that commercial loans may be slightly more resilient than other types of loans may also lead to more willingness to make loans on multifamily construction than on single-family for-sale construction in the near term and medium term. However, while commercial loans are relatively better-performing, the non-performing loan ration does remain at unusually high rates.

Graph 4 shows the outcome of a situation in which loans on residential real estate have been performing poorly. Data for the mountain region only is not available, but this national graph shows that the amount of funds being loaned for real estate is down considerably. This can include non-residential real estate of course, but the graph does suggest that in the current environment, banks will continue to be cautious in making loans for new real estate.

Finally, in Graph 5, we note an additional consequence of a lending environment affected by low interest rates and poorly-performing loans. This is national data: