As the Bubble Burst, Other Lenders Were Hit Hardest
It was a little more than a year ago when the NCUA threw its support behind an advisory that encouraged workouts on commercial real estate loans.
That policy statement was adopted over the summer and for credit unions, it meant coming up with arrangements that could potentially improve a member's prospects for paying off loans given the sluggish economy.
The directive was just one way the industry had to adjust to the CRE downturn that plagued the business sector nationwide. Many of the forecasts some economists predicted would occur within the real estate sector came to pass in 2010. The start of the year brought with it a looming foreclosure crisis among CRE loans. Nearly 3,000 community banks, which made up 40% of the banking system before a number of them collapsed, had a high level of CRE loans relative to capital, said Elizabeth Warren, the former chairman of the Congressional Oversight Panel created to keep watch on bailouts within the financial services industry.
"There will be significant bankruptcies among developers and significant failures among community banks," Warren said in February. "Every dollar they lose in commercial real estate is a dollar they can't use for small businesses."
For credit unions, the CRE blow, while a hard one, was not as strong as seen with other lenders, particularly among the larger, national banks. True to their conservative roots, for the most part, they contained their lending activity to local markets, relied on participation loans to minimize risk and kept their delinquency and charge-off rates relatively low compared to banks.
"While current consumer loan demand is weak, that will change. A business model should be in place that provides flexibility," NCUA Chairman Debbie Matz wrote in a Dec. 15 Credit Union Times Guest Opinion. "It may seem easier to make and service a business loan as opposed to 10 auto loans, but credit unions must evaluate how a specific type of lending meets the needs of the membership."
Since 2006, member business loan activity has continued to increase with more than 2,200 credit unions holding 147,400 MBLs worth $37 billion, according to NCUA data. MBL growth averaged 19% annually since 2006, outpacing overall loan growth of 4% annually over the same period. The average size of an MBL increased 18% to $249,000, from $205,400 in 2006.
Still, the aftershocks of the CRE bubble burst were felt. MBL losses increased to 0.7% from 0.1% in 2006, compared to 1.1% net charge-offs for all loans. Foreclosed and repossessed assets grew 8.3% to $1.8 billion in the third quarter, the highest growth rate of the year, according to NCUA data. As of September loan modifications accounted for nearly 2% of all loans.
While the pace of loan modifications slowed in the third quarter, growth continues as credit unions work to assist members, the agency said. Many credit unions that provided financing for out-of-state properties had to file foreclosure notices and in some cases, sue to recover funding. The attempts may drag out in court as property owners filed for bankruptcy unable to make loan payments.
"This was not a normal recession and thus will not be a normal recovery," said Dave Colby, chief economist at CUNA Mutual Group. "The economy didn't improve from a members' perspective. Leading to loan portfolio declines [were a] lack of member demand for short-term credit and credit unions reluctant to hold long-term assets at historically low rates and modest asset growth."
Colby said credit unions discouraged deposit inflows as they struggled to earn a positive spread on marginal money. With the year coming to an end, the industry may expect to see much of the same going into the new year. As a result, 2011 will be a year of managed growth, he added.
"Consumer loan demand will remain very weak and with continued low interest rates. Credit unions will not be able to grow loans through first mortgage?loans," Colby said. "Recovery looks like a lumpy 'L', with some strengthening late in the year, barring any shocks."
Analysis from the National Association of Realtors appears to back that forecast up especially within the CRE sector. The trade group sees the market flattening out with some modest improvement in 2011. Its November Society of Industrial and Office Realtors CRE index, which is a survey of more than 400 local market experts, showed vacancy rates are slowly improving, but rents continue to be soft with elevated levels of subleasing space on the market.
"The basic fundamental of rising commercial leasing demand, resulting from a steadily improving economy, means overall vacancy rates have already peaked or will soon top out," said Lawrence Yun, NAR chief economist.