I met with my banker last week and he gave me a some good insight into what is happening in the banking industry right now. Our bank is a local bank, in solid financial condition.
The FDIC has stepped up audits of all banks. One of the key parameters is asset to loan ratios. The FDIC wants those ratios to be at certain level, if not they will take over the bank. Again, my bank is doing great.
A sub parameter is the asset to “bad loan” ratio. One type of loan that is considered a “bad loan” is an interim construction loan. To avoid FDIC takeover, all banks must reduce then number “bad loans” they have.
My banker basically said that construction lending is at a halt and will remain at or close to zero until the FDIC changes it position on this matter. Credit standing of applicant, value of project, down payment are irrelevant-interim construction lending will not happen.
I throw this out there because up until this meeting, I thought good credit could still get construction loans. It has really impacted the nature of project that I need to pursue.
We had several large remodels that would need bank financing that may or may not happen. I am keeping those close at hand, but focusing on landing cash paying customers or those who have enough equity to refi and get cash out of their house to pay for the remodel.
Much of my banker’s discussion was more sophisticated than what I presented above, but it is an accurate summary of what is currently happening.
What have you heard?
Bruce
Replies
I think you're probably right with regards to large development projects. If you need a loan right now to develop and build a subdivision you are probably outta luck. As far as I know, the local bank here is still lending on small projects. They know the market, they know the property values, etc. They are advertising in the paper the fact that money is available.
It's easy to see how much your bank has tied up in various types of loans. Go here and review their financial statement:
http://www.bankrate.com/brm/safesound/ss_home.asp
David,
That is exactly what I thought prior to this meeting. My banker was incredibly frustrated because, as you mentioned, they know the project, know the owner, know the value. FDIC could care less-they just want good ratios. Interim construction lending is one of their primary businesses-not subdivision type, but one house/one buidling type projects.
If this is not what your are seeing, that is great. It was good to hear his position, as you would never hear any of this on the news and it was somewhat eye-opening.
As you mentioned, subdivision type lending is totally dead and there are alot of projects that were killed last September.
Bruce
I may go in and talk to them. I've been debating the wisdom of borrowing to build a duplex. If I have to raise private money that changes the whole thing.
Please post what you find out.
THanks
Bruce
My bank is regional. They're in good shape and have money to lend on a $600-700,000 solar home we have in the mill...now, if only the folks who want the house could sell theirs... that's the rub here.http://www.tvwsolar.com
I went down to the lobby
To make a small call out.
A pretty dancing girl was there,
And she began to shout,
"Go on back to see the gypsy.
He can move you from the rear,
Drive you from your fear,
Bring you through the mirror.
He did it in Las Vegas,
And he can do it here."
That's good to hear. Best of Luck.
The car business is in the same boat...no loan money is available.
My Brother in Law tried to get a loan for a car. His 750 credit score wasn't enough. He's worked steady for the last 15 years. His wife is a nurse.
"Sorry, we can't get you financing."
My score is in the high 600's
Took a beating due to too high debt to income ratio when I owned two houses. Can't believe how long it takes to recover from that.
Capital One? No problem.
My own Credit Union? LOan approved in 15 minutes.
There has to be more to that story (debt to income maybe?)
Just last week i was financed for new chevy, 5% fixed, chase bank, no money down except my old truck as trade in.
(I have no other debt though)
Edited 2/9/2009 9:35 pm ET by LIVEONSAWDUST
I think it may have been as close as just last week, but my mechanic said GMAC just lowered their minumum credit score back to what it had been.
I think he said 638 ... something like that.
a week or so before ... it had been over 700.
if the BIL is still looking, I'd suggest trying again.
he might be good now.
Jeff Buck Construction
Artistry In Carpentry
Pittsburgh Pa
That's the rub... Bureaucrats will screw up a free lunch by asking for their money back. Local banks have been loaning people money to local people based on their performance and good word for a very long time. It has worked for a very long time and it will work now. Local and regional banks are solvent and vibrant but the biggies are not. So go figure.
What have you heard?
DW works for a similar bank which writes lots of construction loans to longtime, established customers. FDIC issued a cease and desist order for them to stop writing construction notes until they got back within the desired ratio. They've had few defaults, although they do have some slow pays.
So, as you laid out, there will be no more new construction loans until "X" amount of the existing ones are paid off and then there will be few until the regulations are relaxed.
http://www.quittintime.com/ View Image
The pendulum has swung the other way. I hope it gets back to the middle soon. It should be interesting to see what Treasury secretary has to say today..
Thanks for the input.
Wheres all that money they gave to the banks ?
Show on 2020 said they dont know .
Mark to Market accounting... Means assets cannot be projected mid term or even what they sold for last year.
Market dictates solvency. Dangerous business because it means the big banks need more cash poured in to keep solvent.
No uptick rule with Naked shorting and people can make money crushing banks. That's why most of them are at 1/6 their value of last year.
Put the rules back to when the market worked and the banks will thrive again.
Ban gambling from the stock market... it isn't supposed to be a casino--
It should be a place for legitimate business to connect with investors in a transparent way.
Small business financing is simple. If a business makes more money year over year it is a safe place to lend money.
How many construction guys have made more money in 08 than 07? Bad investment by bank rules.
You are right... good credit is not enough. They want to know what sector you are employed in...if that sector is likely to lay off and you have less than 20 years seniority--- sorry.
If in business for yourself they want 3 years worth of books to assure you are doing better year over year and that the sector you are in business within is not hemorrhaging.
L
GardenStructure.com~Build for the Art of it! Decks Blog
Edited 2/10/2009 10:35 am ET by Lawrence
Good points. I wouldn't lend money to myself right now!
Most guys aren't even looking to borrow... no visibility until things calm down.
I'm going ahead with new web site... but that is simply capturing more of the market while my competition is flat lining.
L
GardenStructure.com~Build for the Art of it! Decks Blog
Since I think it will be a great time to buy in the near future (1 to 2 years) I am looking for land or fixer uppers but will have a hard time buying anything without a large loan.
When the real estate market comes back prices may rise very quickly. I am considering lease options to limit the liability of further price erosion and lock in a price in case the market recovers. If the property is rentable this could be a great way to profit from this economic downturn.
OB
Good Plan-- Tangible assets will be solid in high inflation times... which is what we will be in.
LGardenStructure.com~Build for the Art of it! Decks Blog
Point well made, however, the lending is not for me. It is for clients who have great credit and solid jobs on projects where the numbers work.
I just heard on ad on the radio for a construction lending program and called the guy. That program was terminated yesterday at 4pm. This guy has been doing construction lending for 15 years and today is the first time in his career that he is totally unable to process a loan for a construction project.
Edited 2/10/2009 3:42 pm by Hiker
One of the dads on my hockey team is a banker. I had a quick chat with him. He told me straight out that perfect credit is not enough. They have to be employed in a recession proof business.
Said he tried to get a guy a refi with 800 score... has sold cars for 15 years... he heard a hiss on the other end of the phone. They asked for who...
He said GM... reticently...
OMG from the other end of the phone....
Are you nuts?!
Couldn't do it....even with equity and credit line and that is in Ontario.
L
GardenStructure.com~Build for the Art of it! Decks Blog