Bankers don’t steeple their fingers in glee each time they deny a loan.
In fact, bankers are frustrated that they can’t make the loans they want to, said First Commercial Bank Colorado Springs Market President Jack Kerr.
“Banks in El Paso County and Colorado as a whole will be predicated on resolving problem loans and selling or liquidating foreclosed or repossessed assets — most of which will be sold at values that are less than the banks have on their books,” Kerr said. “But banks need to sell those assets to replenish capital.”
This is a different market than in the ‘90s when the Federal Deposit Insurance Corp. and resolution trust corporation assets were being sold at auction or in bulk sales packages — investors were actually buying those assets.
Today there aren’t financing sources, especially not for non-owner occupied real estate, such as retail centers, office buildings, subdivision developments or a piece of raw ground, he said.
Most banks are already too heavily leveraged on non-owner occupied assets, which are considered riskier than owner-occupied.
Ironically, in some cases, owner-occupied real estate is arguably more risky than non-owner occupied.
For instance, compare two similar 10,000-square-foot buildings, one owner-occupied and the other leased by four tenants. If the owner goes out of business, it’s more difficult to lease 10,000 square feet than 2,500 if one tenant goes out of business.
“Colorado Springs lives and dies by commercial real estate,” Kerr said. “But you have to look at the uniqueness of Colorado Springs — not as a comparison to Phoenix, south Florida or Las Vegas.
“Bankers need to finance those buildings, or more owners will go out of business and banks will have even more assets coming back in on nonaccrual (principal and interest unpaid for at least 90 days) loans. Without interest they’ll need more capital going forward.
“From 1995 to 2007, it was impossible to make a bad loan,” Kerr said. “Anybody could make a loan on anything — the value of the collateral always went up. But the chairs started getting pulled out slowly in the spring and summer of 2007, and got worse at the end of 2007 and beginning of 2008. My expectation is that we’re still 18 months out until we can absorb all the assets that are being taken back by banks, investors and hard money lenders.
“It will once again be survival of the fittest and survival of prudent bankers — those who mitigated risk (to begin with),” he said.
Because of regulatory guidelines and the 300 percent of capital threshold for non-owner occupied real estate, banks sometimes have to forego the opportunity to make loans to well-collateralized borrowers with good credit history and net worth.
“For seasoned bankers, this is the worst scenario — because we know we could make money for ourselves and our investors and the loan would be solid and performing,” Kerr said. Not to mention a banking relationship established today converts to additional loans, referrals, sources and other future relationships.
“Most of the deals I’m seeing are investors from out of state,” he said. Local developers are “upside down” in projects, and there is much less liquidity on the hard money side.
Guidelines will likely tighten going forward, but the economy will eventually recover.
Meanwhile, banking is still about relationships, having contacts in the community and knowing more about a project and a developer than merely what’s on paper.
“You can hire all the techno-wonks you want to do the research to supplement a credit request,” Kerr said. “But it still comes down to a lender knowing the project and the person — whether they have the tenacity to stay on the project for the long haul and adapt to a changing environment.”
And, whatever a banker does, he or she shouldn’t lend to sectors that are “plateaued or sunset-phasing.” Although Mark Twain said to “buy land, they’re not making it anymore,” Kerr adds a caveat — “you’d better know where that land is.
“Know your borrower — but know your property as well.”
Rebecca Tonn covers banking and finance for the Colorado Springs Business Journal.