The Housing Chronicles Blog: Housing woes now impacting community banks

Tuesday, June 17, 2008

Housing woes now impacting community banks

Local community banks have long been an important source of financing for various homebuilders from those building custom homes to subdivisions. And, although these banks shied away from the sub-prime mortgages that have been decimating large, national banks, the housing slowdown is increasingly impacting community banks as builders short on cash are defaulting on construction loans. From the L.A. Times:

Home-mortgage specialists may have been the first lenders to suffer for their roles in financing the housing bubble. But, as foreclosures rise and home prices fall, many smaller banks and thrifts that backed residential developers and home builders are watching black ink turn red and are spending uncomfortable amounts of time with regulators. The financial institutions also are enduring jabs from critics who say they tossed lending standards out the window...

Residential construction loans, which generate big fees, were especially profitable for smaller banks -- until housing collapsed in places like the Inland Empire, where prices are down more than 30% from their highs, and the Central Valley, where some former boom markets are off more than 40%. Raw land on which Ontario-based Empire Land installed roads, sewers and utilities, expecting to then sell it to builders, has declined even more.

"In the Inland Empire, we're hearing land is going for 20 or 30 cents on the dollar" of its appraised value when the loans were made, said RBC Capital Markets analyst Joe Morford.

According to data tracker Foresight Analytics of Oakland, 15.8% of single-family home construction loans were at least 30 days delinquent in Riverside and San Bernardino counties last quarter, up from just 1.7% a year earlier. The delinquency rate was 14.7% in Los Angeles County, 14.9% in Orange County and 15.4% in Ventura County. It was 30.4% in Merced County, near Sacramento...

Regulators are now aggressively requiring banks to write down the value of questionable loans and to raise more capital to make up for those write-offs. That creates a pinch for banks, one that is apparent in their regulatory filings.

Security Pacific Bancorp of West L.A. -- which resembles in name only the former L.A.-based banking giant acquired in 1992 by what is now Bank of America Corp. -- has written off millions in dud Inland Empire housing loans. In a recent order, the Federal Deposit Insurance Corp. and state regulators required Security Pacific, with $585 million in assets, to diversify its operations, cut off deadbeat clients and "determine that the lending staff has the expertise necessary to properly supervise construction loans."

Other Inland Empire-based construction loan specialists also are feeling the pain.

Corona-based Vineyard National Bancorp, with $2.3 billion in assets, lost $70 million in its last two quarters, and its stock is down 82% from a year ago. It has blamed inland housing loans, though it also specializes in another tricky business, financing builders of expensive custom homes in West L.A., the South Bay and coastal Orange County. Its executives declined to be interviewed...

Home builder troubles haunted even City National Corp. of Beverly Hills, the Southland's largest commercial bank with more than $15 billion in assets. City National avoided the riskier segments of home-mortgage lending and suffered none of the losses on mortgages and bonds backed by home loans that have plagued larger competitors.

But City National's clients have always included home builders, and the bank paid the price as losses on builder loans contributed to a 22% drop in first-quarter earnings. That was despite the fact that such loans made up only 5% of the company's $11.8-billion loan portfolio, and few of them were made in the Inland Empire or Central Valley, CEO Russell Goldsmith said.

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