Banks close weekly while others continue to reduce lending
Last week, the grim reaper regulators shut down two banking units of Irwin Financial, Irwin Union Bank FSB and Irwin Union Bank and Trust. The prior week, the regulators closed two banks, including Chicago-based Corus Bank, perhaps one of the most aggressive lenders of construction financing in the past eight years.
The statistics for bank closings are bleak. A total of 94 have closed this year, compared to 15 in 2008 and a mere three in 2007. This year, there have been more bank failures than in the last 15 years combined, and industry leaders expect at least two dozen additional fatalities before the end of the year.
The number of “problem” banks, described by the FDIC as “institutions with financial, operational, or managerial weaknesses that threaten their continued financial viability,” or in layman’s terms, potential bank failures, has risen from 50 in 2006 to 416 this year through June 30.
Even though the Federal Reserve’s Beige Book reports economic stabilization, the outlook continues to be bleak. Last week, the 12 Federal Reserve districts reported that economic activity began to stabilize in July and August. The Fed reports for the New York district indicated that economic activity is stable and is showing signs of stabilization. Unfortunately, bank credit continues to contract. As reported in Mozztrader, during the second week of September, U.S. commercial banks cut back on their commercial and industrial loans by $10.3 billion, while their real estate credit fell by a significant $15.3 billion and their lines of credit to consumers fell by $6.4 billion. Overall, more than $32 billion in banking sector lending evaporated during the week, bringing the total contraction to over $200 billon since the end of July. This is a decline of over 12 percent per year on a 13-week basis.
Most of the large commercial banks who claim to provide loans for commercial real estate continue to limit the amount of available financing. The regional real estate executive for one of the largest commercial banks in the country said, “My telephone has not been ringing. No one is calling my office asking for a loan.”
According to a source, JPMorgan Chase might enter the market to only a limited group of elite customers in 2010, which include the prominent real estate families and REITs.
Securitization of commercial mortgages is expected to return in October to well-established real estate investment trusts. All we can hope for is that the banks once again open the tap to funding for commercial and industrial loans as well as other financing for commercial real estate. Unfortunately, when the Friday evening news provides the notice of another bank failure, on the following Monday morning many of the nation’s lenders decide to wait for the market to get better. Perhaps it is like waiting for Godot to arrive.
Michael Stoler is a columnist for The Real Deal and host of real estate programs “The Stoler Report” and “Building New York” on CUNY TV and on WEGTV in East Hampton. His radio show, “The Michael Stoler Real Estate Report,” airs on 1010 WINS on Saturdays and Sundays. Stoler is a director at Madison Realty Capital as well as an adjunct professor at NYU Real Estate Institute, and a former contributing editor and columnist for the New York Sun.