Speaking No Evil as CRE Troubles Put Nerves on Edge
The credit union industry is known for its kinship. Few dare to go on record and point fingers at their credit union peers for poor loan performance.
But behind closed doors, there are a handful of credit unions in Texas, California and Nevada that are easily on the radar when it comes to their business lending portfolio. In cases such as the conserved AEA Federal Credit Union in Yuma, Ariz., business loan red flags emerged well before its conservatorship took place in December 2010, industry watchers noticed.
Credit unions have long offered business loans, and some have expanded their portfolios through CRE loans. Industry data clearly shows growth continues and is outpacing other lending categories. According to NCUA Chairman Debbie Matz, at the end of 2010, 2,210 credit unions held 147,400 MBLs worth $37 billion. All of these numbers were up from 2006, when 1,954 credit unions held 111,000 MBLs worth $23 billion.
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. MBL loan losses increased to 0.7% from 0.1% in 2006, compared to 1.1% net charge-offs for all loans.
"These numbers tell a story of a vital and growing component of many credit unions’ balance sheets–one which requires careful supervision," Matz penned in a December 2010 Guest Opinion published in a Credit Union Times special report. "Whether or not Congress chooses to raise the cap, NCUA has already increased scrutiny of MBL programs."
Government agencies and regulators continue to pull out all the stops to stop the bleeding within the CRE sector.
The latest effort was announced Feb. 17 by the SBA, which launched a new, temporary program that will allow small businesses facing maturity of commercial mortgages or balloon payments before Dec. 31, 2012, to refinance their mortgage debt with a 504 loan.
The new refinancing loan is structured like SBA’s traditional 504, with borrowers committing at least 10% equity and working with third-party lending institutions and SBA-approved certified development companies in the standard 50%/40% split, according to the agency. A key feature of the new program is that it does not require an expansion of the business in order to qualify.
Borrowers will be able to refinance up to 90% of the current appraised property value or 100% of the outstanding mortgage, whichever is lower, plus eligible refinancing costs. Loan proceeds may not be used for other business expenses. Existing 504 projects and government-guaranteed loans are not eligible to be refinanced.
The SBA said it will begin accepting refinancing applications on Feb. 28. The program, authorized under the Small Business Jobs Act, will be in effect through Sept. 27, 2012.
Businesses with immediate need due to impending balloon payments before Dec. 31, 2012, will have first access. The SBA said it will revisit the program later and may open it to businesses with balloon payments due after that date or those that can demonstrate strong need in other ways.
Meanwhile, steam continues to build on lifting the MBL cap. As recently as January, CUNA President/CEO Bill Cheney testified before the House Committee on Financial Services urging Congress to offer relief.
"Today, many credit unions are rapidly approaching the cap while others choose not to engage in business lending because of the cap," Cheney said. "While small business lending does not make up the largest portion of credit union lending, it is the fastest growing segment by a significant margin."
In 2010, the Obama administration gave its support to legislation to increase the credit union business lending cap to 27.5% of total assets and worked with the NCUA to shape legislation, Cheney noted. If the bill became law, it was estimated that credit unions could lend an additional $10 billion to small businesses in the first year after implementation, helping them to create over 100,000 new jobs.
In late February 2010, then Senate Banking Committee Chairman Christopher Dodd (D-Conn.) called on the NCUA and other regulators to provide reports on how they are stabilizing the CRE market.
"I believe that the weakness in the CRE market requires prompt and robust responses from the regulators to guard against harmful effects on financial institutions and the economy," Dodd said. "I urge you to redouble your efforts to provide appropriate oversight of this vital component of our economy and look forward to working with you to bring much-needed stability to the CRE market."
Dodd cited a Congressional Research Service report that showed commercial mortgage delinquencies had increased from 4% at the end of the third quarter of 2009 to 6% in January.
The NCUA continues to encourage credit unions to work constructively with member-borrowers to implement prudent member business loan workouts that are in the best interest of both the credit union and the member-borrower. Last summer, it published guidance to help commercial real estate borrowers experiencing diminished operating cash flows, depreciated collateral values, or prolonged delays in selling or renting commercial properties.
Performing loans, which includes those that have been renewed or restructured on reasonable modified terms made to credit worthy borrowers, would not be adversely classified solely because the value of underlying collateral has declined, the regulator noted.
The NCUA went further, saying "prudent loan workout arrangements should improve the prospects for repayment of principal and interest and should be supported by a comprehensive analysis of the member-borrower's willingness and ability to repay the loan, an evaluation of support provided by guarantors and a current assessment of the underlying collateral."