Commercial real estate may hurt banks
TEXT OF STORY
Kai Ryssdal: The culprit so far in the meltdown of the banking industry has been real-estate prices. Residential real estate, specifically. And the misguided belief that house prices would just keep on going up. That, it turns out, was not the only misguided belief that banks had. Analysts say a coming wave of losses from commercial real-estate loans gone bad could tip yet more banks over the edge. Marketplace’s Amy Scott reports.
AMY SCOTT: The credit crisis began when homeowners couldn’t pay their mortgages. But as the pain has spread, more owners of shopping malls, hotels and office buildings are defaulting on their loans. One of the casualties was Great Basin Bank, in Elko, Nev. The FDIC took over the bank last month after it suffered losses from commercial mortgages and construction loans. Janice Collett was a customer.
JANICE COLLETT: It takes us at least 3 or 4 hours to get to a major city, such as Salt Lake, Reno, or Boise. So we’re kind of isolated.
Fortunately another bank bought Great Basin’s assets. But it’s a subsidiary of a Utah corporation. Collett says she’d prefer to do business with an Elko-based firm.
COLLETT: Because I like the idea of a local bank, that loans to local people, and keeps things kind of in the area.
Analysts expect to see more stories like this, as the commercial real-estate market deteriorates. Matthew Anderson studies the health of banks at Foresight Analytics. He says just over 3 percent of commercial mortgages were delinquent in the first three months of the year, and it’s getting worse.
MATTHEW ANDERSON: So not scary levels from a historical comparison to the early 90s, when delinquency rates were in the 9 to 10 percent range. But I think we’re still pretty early on in this cycle.
As delinquencies rise, Anderson predicts at least another 100 banks will fail by the end of this year. Small banks are especially vulnerable. They don’t have the diverse range of products that cushion larger banks as loans go bad. Richard Bove follows the market as an analyst at Rochdale Securities. He says thanks to market pressures and consolidation, small banks were disappearing well before this recession.
RICHARD BOVE: Every week since 1985, there have been six banks in the United States that have closed down or been merged out of existence.
That means we’ve lost more than 7,000 institutions in those 20-plus years. As larger banks take over, critics say they’re less likely to invest in local businesses and community development. But Bove says customers may ultimately get a better deal. He says larger banks tend to charge lower fees and pay higher interest on accounts.
I’m Amy Scott for Marketplace.
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