Rough Banking Seas Ahead?

[Joe Flacco]

I don't eat out a lot anymore ever since the pandemic. There was this thing happening around here where the restaurants were charging a 20% service charge and then expecting that you tip another 20% on top of that. I think most stopped doing that by now but I still don't eat out often anymore.

 

[OSU Beavers]

 

[Terrel L. Shields]

I've never seen so much badly over-priced property. I have a property in transition that I appraised the back side of it back in 2008 or so, for $7000 an acre to be taken as native bluestem prairie to add to another prairie property that the state Heritage commission owned. It is listed for $35k per acre - with old barns and a house that is unlivable. Been on the market for a year, an estate, and I've been asked to value it because the CPA wants a current value. The property next door is listed for $33k per acre and has been on the market on and off for over 10 years. The owner died and his heir jacked the price up again. On the market with current agent for more than 650 days. In 2021 a 100-acre parcel south of my subject sold for $8,500 an acre and is currently listed for $45,000/acre. It's on the end of an airport - not an idea location. Top that off the water lines are two towns meeting, and the lines are not big lines - you cannot build a subdivision with a 2" water line.

 

[Terrel L. Shields]

 

[Mark K]

The balloons are the problem, since the CRE mortgages usually require periodic refinancing. Higher rates, and in the case of offices, structural declines would push a lot of loans that were previously "OK" into the high-risk category.

I agree but when push comes to shove, my bet is that the lenders will renegotiate the loans rather than take the property back. They may decide that its better to take a haircut than get scalped.

 

[Joe Flacco]

For the biggests banks CRE exposure is like 5-15% of total loans and leases, and insignificant compared to total assets. If problems are mostly limited to office and they had to write down 50% of the CRE loans, that is not huge relative to total assets. If the issues in commercial real estate spills over into the overall economy then that would cause more pain. But their loan loss reserves are also significant so big banks are in good shape.

 

[Joe Flacco]

It's all these small banks that are potentially in trouble.

 

[Non Sequitur]

I agree but when push comes to shove, my bet is that the lenders will renegotiate the loans rather than take the property back. They may decide that its better to take a haircut than get scalped.

It's what they would want to do if the borrower can afford it. But the real issue us how many haircuts can any smaller community bank take before they bleed out and the feds finally pull the plug?

The issue many see is that close to $2T is coming up for renewal in 2025-26, and like residential loans most were booked at historic lows. So, the trouble is what will the cost of money be at the time of renewal? Even if rates fall, they aren't going down to prior historic lows and most commercial/portfolio loans are booked at 1.5-2.0% above the cost of money. Add to that the wild card is the election, what will be the sentiment coming out of DC regulators? Right now, from what I've been told, the regulators are allowing mass extensions, basically kicking the can down the road to after the election. And that's a big reason a crap ton of community banks are overextended with CRE loans, extending pandemic terms using today's cost of money is at best break even.

 

[Mark K]

It's what they would want to do if the borrower can afford it. But the real issue us how many haircuts can any smaller community bank take before they bleed out and the feds finally pull the plug?

We should find out in the next couple of years.

I don't believe its as doom and gloomy as some would make it out to be, like those prognosticators that were predicting a recession this year. My guess is that it will be rough sailing for a small % of the regional banks but overall they've had plenty of advance notice to put themselves in a financially tenable position.

IMO, the debt level of the typical American and the effects of inflation, including the high interest rates, will be a drag on the economy sooner rather than later. From what I've seen of the real estate market in this area, things are quickly slowing. Even starter homes that were selling in 2 days with multiple offers are sitting for weeks and months with more price reductions than have been seen since pre chinese flu days.

 

[TerryRohrer]

I'm guessing the regulators are allowing great leniency in reporting expected losses in public statements to avoid the circumstances that arose last spring when investors accurately guessed the health of the banks that failed. The following graph is likely understated:

LESS: Allowance for Loan and Lease Losses, All Commercial Banks

Graph and download economic data for LESS: Allowance for Loan and Lease Losses, All Commercial Banks (ALLACBW027SBOG) from 2009-07-01 to 2024-07-17 about ALLL, leases, loans, banks, depository institutions, and USA.

fred.stlouisfed.org