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Saturday, February 04, 2012
Feature: September 2008
Creditors Beware
More banks tighten the lending belt
Story by Chris Birk
It took Jerry Kinlock 22 years to register his first real estate loss. Now in his second decade at the helm of Sacramento Credit Union, the veteran lending executive completed his first home foreclosure this year. Only a credit crisis like this could end a streak like that.
“We’ve had some losses — very tolerable but unprecedented,” says Kinlock, the credit union’s president and CEO. “We’re seeing the least bit of hardship — divorce, lost job, any kind of setback — and people are upside down on their homes.”
Lending institutions in the Capital Region, like their counterparts nationwide, are trying to stay right side up by ratcheting down. In an increasingly brutal credit climate, banks are bailing on the eased underwriting standards that had marked the past four years, according to the latest annual survey by the federal Office of the Comptroller of the Currency.
More than half the banks surveyed tightened their underwriting standards in the past year, citing rising risk, the weakening economy and the one-two punch of surging energy costs and a spiraling housing market.
Banks and borrowers alike in the region continue to feel the impact. Many local lenders have put a renewed focus on a return to the basics — stressing liquidity and predictability — while searching for ways to keep struggling consumers afloat.
That return to the past might well represent the foreseeable future for most borrowers, experts say. “We’re kind of digging into our borrowers’ financial condition a lot heavier these days, only because we’re flying into some head wind here,” says Pat McHone, chief credit officer at River City Bank. “Going forward, banks will certainly be tougher on their underwriting requirements.”
The OCC seconded that notion in its annual survey, noting it “expects that the lessons learned from the recent market turbulence will lead to more prudent underwriting standards for both commercial and retail credit exposures.”
In all, 52 percent of the nation’s 62 largest lenders reported tightening standards, more than triple the number in 2007, according to the survey, which covered a 12-month period ending March 31. And the worst may still lie ahead.
The OCC, which charters and oversees the nation’s banks, predicts continued losses and increased credit risk during the next 12-month cycle. “It’s a tough time, honestly,” McHone says. “We are being conservative in our approach to lending to businesses and individuals. We’re looking for more liquidity in our borrowers, for strong and identifiable cash flow.”
Lenders are encouraging potential borrowers to ensure they can afford monthly payments on new debt. Consumers with credit problems could find it especially difficult to secure financing in the coming months.
At the same time, obtaining a mortgage is again becoming a more rigorous and involved process, with an emphasis on verification, Kinlock says. “Back in the day, you could have these things funded within a couple weeks,” he says. “Brokers, buyers are going back to the way it was usually done.”
Entrepreneurs are also encountering a difficult lending environment. Small-business owners typically rely on home equity for cash infusions, a difficult proposition when some housing markets are in tatters, says Jim O’Neal, director of the U.S. Small Business Administration’s Sacramento district.
Lenders, meanwhile, are feeling greater pressure to identify sound investment opportunities as the pool of viable options continues to shrink. “You can’t just stop — you’ve got to continue to grow your business model,” says Greg Patton, chief executive officer of Sierra Vista Bank. “Right now, that’s a harder proposition than it was 12 to 24 months ago.”
Yet, the current climate represents an opportunity for some banks with healthy balance sheets. Most community lenders stayed away from the type of subprime mortgages that contributed to the current collapse. As a result, this may represent the optimal time for those coursing with capital and itching to expand.
Count River City Bank among those exploring a newfound position, McHone says. “We think this may be a great opportunity for us going forward in terms of looking at a bank or two to buy down the road,” he says.
Other lenders and financial institutions have created programs or services for clients clinging to the edges. The Golden 1 Credit Union rolled out two separate programs in the past year aimed at helping mortgage holders in need. Homeowners who have gone through a foreclosure in the past six to 18 months because of the subprime meltdown are eligible for the “mortgage repair loan,” says Donna Bland, senior vice president and chief financial officer of Golden 1.
The repair loan helps those charged with substantial prepayment penalties that prevent refinancing. Its complement, the “mortgage rescue loan,” is intended for homeowners on the brink of foreclosure. The program requires the primary lender to actively work with Golden 1 and agree to short selling the mortgage. “It’s a win-win for the consumer and borrower,” Bland says. “It requires that we all work together.”
Meanwhile, local Small Business Administration officials recently built a new program to help revive struggling businesses. Unveiled in June, the business turnaround program matches a team of credit score counselors and other SBA personnel with a distressed business.
The team of experts assesses a business’s operational conditions and offers a few low- or no-cost measures to immediately strengthen the company’s bottom line before crafting a long-term recovery plan. “We have always offered counseling, but this we have looked at because of the current economic conditions,” says O’Neal of the SBA.
Sacramento Credit Union has a similar task force that provides individualized assistance to consumers in trouble. The group of five meets every Friday to review assigned cases and make phone calls on clients’ behalf, often to primary mortgage holders, Kinlock says.
“One product doesn’t fix everything,” says Kinlock, adding that the credit union has reduced payments for six months or amortized mortgages over 30 years for some customers. “We have different customized [services] depending on what the borrower needs. It’s really a three- to five-year kind of workout plan.”
Often, just spreading the word about ways lenders can help proves a tall order. “I still believe there’s a lot of consumers out there who aren’t aware of their options,” Bland says. “A lot of people think once they go into foreclosure that they’re out of the market.”
Small-business owners, meanwhile, tend to struggle to tear themselves away from the storefront, O’Neal says. “What they need to realize is there’s assistance there,” he says. “They’ve got to reach out for that.”
Conservative underwriting standards are likely to linger well beyond the downturn. Trends both positive and negative may follow borrowers heading forward.
Reacting to the hollowing housing market, a spate of developers in Northern California are moving toward building more affordable housing, says Patton, the CEO at Sierra Vista Bank. That, in turn, could attract an entire new generation of homebuyers and entrepreneurs. “It brings people, they consume stuff, more jobs come out of that — you’re improving the human capital of the region,” he says. “We were having a tough time developing and building affordable housing in this region.”
But Kinlock, the Sacramento Credit Union chief, sees a worrisome trend on the horizon: Consumers are borrowing more and more against 401(k) retirement plans. “American consumers’ appetite for debt is unprecedented,” Kinlock says. “It’s a tough line to walk. Being in the lending business, you want to make sure people are doing it for all the right reasons.”
If anything, the current credit climate may spur a renewed bond between banker and borrower. In fact, many lenders believe that rapport is a major key to surviving the turmoil still ahead. “We’ve got to get through this,” Patton says. “The relationship is extremely valuable right now. It always is, but it’s especially important right now.”
