I convinced a banker friend to submit to an anonymous interview with me.  I agreed to keep the dialogue in the interview completely confidential and anonymous.  For this reason, he was able to admit some pretty shocking things to me. Things that bankers just can’t talk about or admit, without the risk of losing their jobs or worse, getting cut off from the precious TARP money from the government.

Before you read the interview, I am encouraging all of you to contribute your comments below, at the end of this interview.  I expect that most of you won’t be surprised by any of the answers to the questions below, in fact, most of you will think to yourselves, ‘Doesn’t everyone already know this?’

However, the majority of people out there really don’t know what’s happening in banks and lending.  A program that was intended to pull banks, and thus our economy out of this crisis, has only invited more abuse and greed in the banking world, and further delayed inevitable bankruptcy.

• How long have you been with this particular bank?

15 years

• Is this a community bank, a regional bank, or national?

It is a community bank that focuses on commercial loans.

• What is your title at the bank?

I was a commercial loan officer for 10 years. I am now Vice President of the commercial division of our bank.

• Tell me a bit more about how lending has changed over the last few years at your bank? For example, number of loans your bank was making then, versus now, the requirements then versus now, etc.

In 2006 we were making 125 commercial loans per year.  In 2009, we made 36 commercial loans.  In 2006, we lent based on appraised value, up to 85% of appraised value.  We also did not require borrowers to have a depository relationship with us in 2006.  Now, we lend primarily based on the DSCR, and up to 75% of value or the purchase price.  However, our average loan to value is actually only 70%.  We also require borrowers to establish a depository relationship with us. Typically 20% of the loan amount.

• So let me clarify what you’re saying. If a borrower comes to you with a commercial building that he or she can buy for fifty cents on the dollar, you are still requiring a 30% down payment based on the purchase price plus an additional cash deposit of 20%?

Correct. Even if the building is worth much more than our customer is buying it for, we are still only lending 70% of the actual purchase price.

• O.k., let’s use an example then, just to illustrate the numbers here. Let’s say I’m able to buy a building that’s worth $2 MM for $1 MM.  I’m coming to your bank for a loan of $1 MM to buy this building.  In this case, I’ll need to bring in a $300,000 down payment in cash as well as a $140,000 cash deposit.  This is a total of $440,000 in cash that I need to put up for a loan of $700,000?

That is correct.

• Wow. Unbelievable.

Yes, that is the reality I’m afraid.  If we give you a loan at all.

• So based on what you told me about only issuing 36 commercial loans total last year, you aren’t really lending right now are you?

Frankly, no.

• Do you think your bank will stay afloat and outlast this crisis?

Yes, I think we will.  The only reason we’re still operating is due to the conservative stance our President took at the end of 2006.  After 2006 we began to curtail our lending a bit because our President could see the bubble about to burst.  During that time, there was a lot of pressure on us to compete with other banks. The lending environment was very competitive, and frankly, it was out of control.  Some of our competitors were making 48 hour closings on commercial loans. In order to compete for the business, we were being pushed to do the same. Looking back, this was ridiculous, but at the time, it was just, well, business as usual.  Unfortunately, our competitors that were putting pressure on us at that time to keep up, well, they’re all out of business.

• That’s sad.  I guess the writing was on the wall though. Your bank’s President sounds like a smart guy.

Yes. He was, and is. Too bad our Board of Directors forced him to resign shortly after the bubble burst.

• What has happened to your bank since the bubble burst?

Well, we bought a larger, regional bank that was going out of business.  The problem is, they only had to disclose their “bad loans” at the time of the purchase. They did not have to disclose those loans that they knew were about to become “bad loans.”  So, shortly after the purchase was complete, we found out about a lot of problematic, or soon to be bad loans in their portfolio.  And, just as we feared, many of these “problematic” loans started to go into default, soon after the purchase.

• So what now?

Unfortunately, we must set aside a large sum of capital in reserves to cover these bad loans, 80% of the loan amount, for each loan that is in default.  This has eaten up all of our capital, which we could be using to make new commercial loans.  This is the primary reason we are unable to lend right now.  We are not lending because we are short on capital.

• But what about the TARP money from the government? Didn’t your bank receive any of this?

Yes, we’ve received over $50 MM.

• Wasn’t this government money meant to keep banks like yours lending? $50 MM is a lot of money to make loans with.

Yes, technically it was meant for that purpose. But I think most banks like ours are using their TARP money to cover bad loans on their books.

• Ugh. That’s the ugly truth.  So, that $50 MM dollars, that was lent to you by the U.S. government to keep lending, and indirectly to keep the wheels of our economy turning. You are using that to cover your bad loans and not to make new ones? And there’s no accountability, no regulations on this?

Correct to the first question. And, no, not really, to the second question. There are no regulations. It’s a pretty screwed up system. I can say that because I’m on the inside. I know first hand how it ticks. And this is exactly why I’m not supposed to say that we are not lending. If anyone caught wind that we are “not lending,” we’d be in a lot of trouble and those government loans would be called in immediately, if we weren’t shut down altogether.

• So what about your commercial borrowers? The ones that have a long-term relationship with your bank? Are you renewing their loans?

No. Unfortunately these are the customers that are getting hurt the worst in this whole thing.

• Why?

Well most of them have just completed their Phase I financing and are coming back to us for perm.  Some of these customers have been banking with us for over 20 years. We know their first names and we’ve seen their kids grow up etc.  When they come to us for this perm financing or after a 3 to 5 year call to refinance, we have to tell them to pay us off and go to another bank.

• What happens to them?

Most of them are so strong that we are hoping that they will be able to obtain a loan elsewhere.

• This seems backwards. Aren’t you trying to obtain more deposits? These customers are taking their deposits and walking.

Well, right now we need to raise capital through stock issue.  Investors won’t look at our stock unless no more than 20% of our portfolio is secured by commercial real estate.  This means we have to get this ratio down to attract investors to purchase our stock.  This is why we are not issuing new commercial loans. I think a lot of banks are in this same position.

This concludes the end of the interview with a banker. This story is not the same for all banks.  Some banks are stronger than others and have sufficient capital to continue making news loans.  However, the truth is that many banks are actually turning away long-term customers that have never made a late payment on their commercial loans. Customers with which they have built long-term relationships for 20 years or more.  These are the people who are truly getting hurt in all of this.

The more grim outcome of banks not lending, even though they have been lent millions by the U.S. government in order to keep doing so, is that the mere action of lending to businesses is what fuels our economy. This action creates jobs, and inventories of stuff that people buy, or services that people buy and sell, and profits which allow loans to get paid back, and then the cycle repeats itself over, and over, and over again.  Lending is the impetus behind this precious cycle.

Please leave your comments, good or bad, negative or positive. I’d love to hear from you on this controversial topic. Or, share your own story or a story of your clients. Please share.

Posted by Corey Curwick on March 21, 2010

The article that Elaine posted from the Washington Examiner is titled, “Second Wave of Real Estate Crisis to Hit Commercial Property Market.”

The author, William Flook, seems to have no idea about what’s happening in real estate. The article asserts that the ‘second wave’ of real estate crisis is ‘about to hit.’ This is like saying social media is ‘about to hit.’

The author of the article pins plummeting commercial values and the absence of financing options as the key catalysts for a “second real estate crisis.” Although the author is correct about the catalysts, I think it’s just been one big real estate crisis, and not a crisis number 1 and a crisis number 2. Would anyone else agree, disagree on this assertion?

One interesting thing to note from the article, was the premise behind it. The tax man is finally starting to feel the pain of declining commercial real estate values. This was pointed out by another LinkedIn member who commented on this article, Todd Phillips, Managing Director at Halcyon Equities.

Investors, private lenders, and hard money lenders have all been conservative about their investments in the commercial sector for quite some time. Demanding lower and lower loan to value ratios and highly favorable positions of leverage on some of the choicest properties; this has been the norm with most of my private and hard money lenders for the past year.

More and more commercial property owners, seeking to refinance their commercial loans, are having to seek out a hard money loan instead of a conventional loan.  Many of them have multiple commercial properties and an extremely high net worth.  With the ever-shrinking number of loan products and lenders, a hard money loan can be the only option for even the biggest commercial players right now.

Any further comments on the “second wave of real estate crisis,” the topic of this article?

Posted by Corey Curwick of Private Money Utah on July 29, 2009 – Leader of LinkedIn Group: Private Money Network

To access previous discussions: http://www.PrivateMoneyUtah.com

These requirements sound pretty
harsh but they are what they are I suppose. Does anyone else have a
source for construction financing they can share?

What is Crittenden? Crittenden National is a meet up of a bunch of different entities within the world of private money.  Hosted this year in Las Vegas by private money players Western Capital Partners, this was my first introduction to the 2009 Conference.  Because the Crittenden Event is so small, only 250 attendees, its easier to network as compared with a large trade show of say thousands of attendees.

The Conference is not just an opportunity for networking with industry profs.  The meat of it is actually comprised of 6 hours of educational sessions where industry executives are panelists that discuss relevant topics and trends in private and commercial lending.  In these sessions, attendees are able to ask questions to panelists and get insight and feedback.  These sessions are a good opportunity to see what challenges others are facing in the industry and creative ways they are overcoming such challenges.

Some of the attendees and panelists included: Western Capital Partners, NonBankLender, LBG Realty Advisors, North Hill Capital Management, Northwestern Mortgage, and of course Corey Curwick from Private Money Utah!

What a great time. I recommend this event for anyone who wants to know what’s happening in the world of private money.

Posted by Corey Curwick on May 12, 2009

Some of the facts in this post I found to be a tad bit shocking but unfortunately very believable.  One of these facts was that 40% of foreclosures are investment properties.  Not a surprise.

Another fact for buyers that I found interesting was that there are 71% fewer mortgages available than a year ago.

Something I wanted to add to this was that, for the mortgages that are available, fewer and fewer people can qualify for the lower rates that are being advertised.  And, mortgage companies are having to get really creative in assisting their borrowers to get into the loan programs that are still available.  Processing loans takes 3+ times longer than it did a year ago because of this.

The question is, how will investors, home buyers, and banks survive the ‘New World of Lending?’

Any further thoughts on the future of lending the U.S. and/or Internationally? How will changes in lending practices in the U.S. affect lending on a global scale? Please share your insights.

A banker friend of mine shared an interesting fact about her bank’s portfolio of stated income loans. Less than 1% of this said portfolio is currently in default! This fact is amazing because it says a lot about how this particular bank has underwritten its stated income loans.  It also says a lot about the ability of the majority of these stated income borrowers to cover their debt service.

Of all of the requests for loans, the most frequent request is for a Stated Income loan.    The common assumption, that its a sub-prime borrower who is requesting the stated income loan, is actually wrong.  Its actually the qualified self-employed, entrepreneur, investor, or other business owner who is requesting the stated income loan.  And these people are coming in droves!

This represents a potential loan niche due to both the high demand from borrowers and their unique financial strength and good track records.

Let’s start from the borrower’s perspective. What is the rate of interest that the qualified, stated income borrowers typically seek? The majority of qualified stated income borrowers that I know are looking for a rate in the sevens, however, many of them are willing to sit down for as high as nine percent!

Now let’s go back to the other side of the table to where the investor sits. What would be the real rate of return on this type of investment should a group of investors decide to take advantage of this niche?  With rates as high as say nine percent, along with fees and points, would it make sense as an investment in the current market?

Another consideration here is the loan to value.  With real estate prices still dropping, is 75% enough to recoup your investment should a borrower default?  But how likely is it that the borrowers would default if the loan is underwritten properly?

If you had access to capital right now, would you invest in a stated income borrower? What are the pros and cons and what is the real rate of return for this investment?

Posted by Corey Curwick on February 12, 2009

How long will it last? Who knows but some mortgage experts are predicting that rates will go up after the first of the year. Any thoughts on this?

Posted by Blake Reese on December 2, 2008