Thursday, April 14, 2011

Update on lending and banking conditions for Q42010 and March 2011

Multifamily industry professionals expect more rent growth and, as a result, more lender investment in multifamily construction. As we've noted here, however, significant rent growth has not yet shown up on a region-wide level, and here we can see that permit activity in February hit a new low.

What about lending activity reported by banks?

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. We last examined these variable in February. Q42010 data is now available for the regional data, as is February data for the nationwide data.

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. Conditions have changed little since last time.

Chart one shows the ratio of non-performing loans among larger banks in the mountain region. The ratio of non performing loans has come down slightly from the Q3 high, but it remains above the ratios 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 December 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 higher than is the case with the larger banks, and during 2010's 4th quarter, the ratio hit a new high and is now well above the peak 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. 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 ratio 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 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. This data includes information reported through February.

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

Excess reserves increased considerably during January and February, posting month-over-month increases of more than 14 percent in each month.