The financial crisis’ effect on the community was outlined in a panel discussion Nov. 20 sponsored by the Downtown Business Association of Escondido and the Escondido Chamber of Commerce. The speakers were Jim Thill, business banking and regional manager for Union Bank in North County and the Inland Empire, and Mike Peters, president of the Bank of Escondido. Union Bank is a midsized regional bank with 322 offices in three Western states. Bank of Escondido is a local business bank. Neither has plans to accept government bailout money.
What is your perspective on the financial crisis?
Peters: We had a similar presentation about a month ago. It has all changed in the past month, mostly for the worse. Now people want to know how safe is your bank. And they hear of bank failures. Well there’s 8,000 banks in the country. There’s probably a hundred banks on the watch list so 7,900 are adequately or well capitalized. In our region we definitely have very strong banks and the money’s safe. On top of that, the FDIC recently increased deposit insurance to $250,000 per account. What is the $700 billion bailout going to do for us? Nothing. We’re not applying for that money. We didn’t make the type of loans that qualified for some of this bailout money. It was a matter of bailing out the big banks. Of $700 billion in the bailout, the first $250 billion goes to capitalize banks. It’s a loan in the form of preferred stock to the government. The biggest nine banks in the country get $125 billion of that money. The rest of the banks in the country combined share $125 billion. It is to be repaid in five years or 10 years depending on how well the banks do. But banks have to apply to the regulators for this money and be approved.
Are your banks still lending?
Peters: Community banks are making loans like we always have and there is money out there for loans. At Bank of Escondido we’re probably more selective because we make loans based on the ability to repay. So when we look at a credit, a business credit, we look at the firm’s cash flow. We’re not out to make loans to people who have negative cash flows.
Thill: Union Bank is also a well capitalized bank. We didn’t take any money from the federal government. We didn’t do any subprime loans. We’re still lending to the market as long as the applicants qualify. It’s getting more difficult for small businesses to qualify for loans right now just because of these difficult economic times. We never stopped lending.
Are there any bright spots?
Thill: There’s a lot of commercial real estate ability out there for people to go out and purchase their building and possibly cut that lease payment in half. Commercial real estate loan demand is up and there are a number of lending programs available. You also have to remember that we do go through cycles. In the ’80s, mortgage rates hit 12 percent. In 1990 we had another downturn. I don’t see an upturn now until probably 2010. But there are probably opportunities out there if you have the capital. Foreclosed homes are seeing numerous bidders. Gasoline prices are coming down so there’s going to be some discretionary income for long commuters. But everybody’s so scared that people are just holding back and not spending. They’re freezing the economy. Really, this is the worst recession we’ve had since the Depression.
What are some of the differences between small banks and larger banks? Are the lending standards the same?
Thill: We at Union Bank are involved in the community with our branch managers. We have some products available, including a credit score product up to $100,000. We’ve tightened those. We also offer an SBA express loan for $100,000, which if you don’t qualify under our guidelines has a little bit more forgiving guideline. Over $100,000 is mostly a fully analyzed package. Most of the big banks have centralized lending. We’re a little bit different at Union Bank because we have some avenues that if you get declined you can go in for what we call a reconsideration.
Peters: We have very similar criteria for approving loans. We don’t have the credit scoring system but we do have all the products. I think the difference between the big banks and little banks is that we may know our market well or our clients well. We go out and walk a property. We know our clients by visiting their shops or through community service organizations.
How do you see this financial crisis evolving in the next nine to 12 months?
Thill: Until we get people spending again and not worried about losing their job, we’re in for some tough times. What we’re seeing out of the credit reports now a lot of people are really upside down (as housing prices have dropped). Until the distressed inventory gets out of the market, the real estate market is going to be depressed.
Is it a positive or a negative for a bank to take government bailout money?
Peters: Some banks actually need it to raise capital because they’re under-capitalized from losses. The capital market has been costing 10 percent, 11 percent to get their money. This government money is 5 percent for the first five years. If you don’t need it you can get money from depositors at 1 or 2 percent so why would you want to get money at 5 percent?
Thill: It depends upon what strings come with it. If a bank doesn’t need it, I would say don’t take it. We are seeing consolidations in the banking industry. There’s always a price to pay for certain business decisions people make.
Is credit card lending about to dry up?
Peters: That’s next. You heard about the home loans going bad. You’ve heard the commercial real estate may be dropping. Credit cards haven’t been addressed yet.
Thill: After you see the layoffs, all these people entering the unemployment ranks, where do they go? They start using their credit cards to pay their living expenses and when they get so high that they can’t borrow any more, they end up filing for bankruptcy.
Should the federal government be more involved in Wall Street? How can we make sure we don’t repeat these mistakes?
Peters: We’ve been through recessions before. This is different because of the subprime, 100 percent financing. Before, banks required home loan applicants to put up cash equity and did not do stated income loans – banks required income documentation such as copies of tax returns. Those people were less likely to walk away from their house. The next time around you’re not going to see 100 percent financing. I have seen clients, I’m sure Jim has, too, where they paid $400,000 for a house and put $100,000 down. Soon the house was worth $600,000. They refinanced and pulled equity out. When the home value reached $800,000, they did it again. Well, now they’re upside down because their neighbor just sold for $400,000 and they want to walk away from their house. And, they’re mad at the banking system. I’m saying, ‘Wait a second. You took hundreds of thousands out. Where did the money go?’People did it to themselves. And now they say it’s the bank’s fault?
Thill: At Union Bank we have a mortgage portfolio of $14 billion. Only a small portion is in some type of foreclosure and most of those were normal things that happen in life – divorces, deaths, stuff like that. Seventy-five percent of our borrowers at Union Bank are our customers so they’re on automatic debits for their loan payments. We didn’t do any subprimes.
Is there anything that banks can do to educate the community and potential home buyers so we don’t go through this again?
Peters: There were a lot of mortgage brokers involved. Everybody got in the market because there was a lot of money to be made. Now it has all blown up and you don’t see any mortgage brokers. At Union Bank we didn’t use the mortgage brokers. Most of the loans came through our own branch offices. I think as we flush all these mortgage brokers out of the system, it’ll be good for the industry. I think federal regulators have put enough stopgaps in that probably we won’t have a repeat. The industry probably will be more regulated.
How do you get some of these potential foreclosures off the books when the loan has been bundled and resold and it is difficult for the troubled homeowner to arrange for a loan restructuring?
Thill: At Union Bank, we portfolio all our loans. We don’t sell our loans on the secondary market. So, yes, it’s difficult once you sell off loans to somebody.
Peters: Our bank is a $100 million bank in assets, a lot smaller than Union Bank, and we have no foreclosures. But I have had people wanting to use the bank as a consultant in that exact situation. One person, who had a loan with Bank of America, said Bank of America wouldn’t talk to them. They finally became delinquent and Bank of America would talk to them. And Bank of America ended up lowering their rate from 7.5 percent to 5 percent for the coming year. The next year it will be 5.25, the next year 5.5. They switched to a 40-year loan. So, I recommend that anybody, if you are in default on your home loan or are going to be, to contact your lender, talk to them directly. You may have to call them two and three times. Keep calling because at some point they are going to talk to you. Tell your lender your story. Some institutions have advertised they are not going to file any notices of default or foreclosure for 90 days. So you have 90 days to go talk to them about getting your loan renegotiated. But I acknowledge that two months ago people were calling the banks and getting no response.
Have the dynamics of renting versus buying changed?
Peters: Right now, especially, people can buy a home for the same amount they’re paying in rent.
Thill: Actually, I’d like to see the government offer a rent-to-own option. With all these (potential) foreclosures, let’s offer a rent-to-own product where a portion of your monthly rent payment goes toward buying a home so as to alleviate the stress on the resale market with all the foreclosures.
Aren’t the 20 percent down payments required now going to keep a lot of people out of the housing market?
Peters: You can still get in with 3 percent – FHA still has a program – or 5 percent down or 10 percent down. Do like I did. I gave my kids a lot of money to buy a house with, for a down payment.
What about lines of credit for small retail businesses? Is that kind of money still available?
Peters: That’s our major business and we do it as long as they have good cash flow and a good financial statement. We look at liquidity. Do they have a good business with profitability? Do they have IRA accounts or something to fall back on? We even do lines of credit (now) with contractors, which is tough lending but I’ve been there so long I have people we’ve banked a long time. I look at the character of the individual.
We had a small line of credit recently that was just capped by a big bank. We just got a letter from them out of the blue. We were making payments normally and everything was great. Yet, our line of credit was just reduced.
Thill: The larger banks have programs where they review credit for small businesses. If there has been a deterioration in the credit, or the amount has sat at the same level for years and years, maybe they are in the wrong product and need something else. So we review those every three months. A lot of banks are looking at the home equity loans, too. They are canceling people’s equity lines on their homes because they’re upside down. Lending is a risk-based business. No matter what bank you go to, we pretty much use the same criteria for approving credit.
Do you extend loans for business startups or just automatically send them someplace else?
Peters: We want to see cash equity. If someone is going into a business that is going to cost $100,000 to start up, we don’t want them to be borrowing $100,000. We probably want to see collateral. We’ll do those loans. But, we’re looking at your background, what kind of business you know. If you start up a 7-Eleven store, is your background in retail or were you a contractor? You have to have knowledge in your industry.
Thill: With people getting laid off, there’s a tendency for them to take their 401(k) plans and try to buy a franchise. But, if don’t have any history of running a franchise, it’s difficult for a bank to go in and lend to somebody who was in a high-tech field and now he wants to open a Subway shop.
Are banks avoiding making real estate loans because they feel too much of their portfolio is in the sector?
Peters: We’re still making loans. And I like an investment loan because the bank has collateral. A bank is better off with a real estate loan than with a business loan because of the collateral. It’s pretty much a safe loan as long as there’s cash flow to support it. So we’re not cutting back at all. In fact, we’re probably likely to increase our real estate loan portfolio.
Thill: Our bank is looking at a 9 percent growth in our assets, which is our lending for next year and a 6 percent growth in deposits so we’re looking to grow. A lot of good banks are doing business as usual. We’re a little bit more cautious in what we’ll lend to.
Peters: We pretty much make loans to our customers. If someone comes to me and they want a loan from me but they don’t want to bank with me, it doesn’t pay. My inventory is my deposit base. We look at the whole relationship. Some of your bigger banks are transactional banks. They want millions of transactions and they don’t care about your relationship. They are able to raise commercial paper or preferred stock.