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housing.prices

Could Looser Lending Standards Boost Phoenix Market?

Will banks start to drop their standards and let people with slightly lower credit scores and much lower down payments buy homes? That’s the big question, after the Federal Deposit Insurance Corporation (FDIC) and other agencies voted to approve new, looser lending rules this week. A well-known expert from the W. P. Carey School of Business at Arizona State University says if the change happens, and the adjustments are reasonable, then it could be good for the Phoenix-area housing market, stimulating growth.

Here are the highlights of the school’s monthly housing-market report on Maricopa and Pinal counties, as of August:

• The median single-family-home sales price went up 11 percent from last August, but that’s largely just due to having fewer sales clustered at the bottom end of the market.
• Both supply and demand in the market remain relatively low.
• Lenders have been reluctant to expand the number of people eligible for home loans, which is helping to stunt market growth.

After the housing crash, the Phoenix area had a fast boost in home prices from September 2011 to last summer. This year, prices leveled off and then rose somewhat. The median single-family-home price went up 11 percent – from $192,000 to $213,500 — from last August to this August. The average price per square foot jumped 7 percent. The median townhouse/condominium price went up 10 percent. However, the report’s author explains the median gains are not reflective of higher home values across the board.

“The median went up largely just because we saw a big drop in sales clustered at the low end of the market,” explains Mike Orr, director of the Center for Real Estate Theory and Practice at the W. P. Carey School of Business. “The average price per square foot actually dropped last month. I expect prices to move sideways to slightly down over the next few months until supply and demand get back into balance.”

Both supply and demand are relatively low in the Phoenix-area housing market right now. Single-family-home sales activity dropped 15 percent from last August to this August. Investor interest, in particular, has dramatically fallen over the last year. The percentage of homes bought by investors in August was 14.4 percent, way down from the peak of 39.7 percent in July 2012. There aren’t a lot of cheap “distressed” homes to buy, with completed Phoenix-area foreclosures down 43 percent from last August to this August.

“Better bargains for investors can be found in other parts of the country,” says Orr. “Over the last three months, the percentages of homes bought by investors have been lower than we have seen for many years, confirming investors are no longer driving the market the way they did between early 2009 and mid-2013.”

Rental homes remain popular for those who don’t want to buy a house or who can’t qualify for a home loan. Fast turnover and low vacancy rates have already pushed rents up 5.8 percent over the last year in the Phoenix area.

Meantime, we’re seeing a lot of speculation about whether banks will lower their standards and start letting people with good – but not great – credit scores qualify for home loans. Also, conventional loan down payments could be dropped from 10 percent to as little as 3 percent. The chairman of the Federal Housing Finance Agency spoke in Las Vegas this week and indicated that Fannie Mae and Freddie Mac would likely still purchase and retain those loans, if the banks make them.

“Right now, funds are flowing only to a small proportion of potential buyers, who have excellent credit, which is contributing to weaker-than-normal demand for homes to purchase,” explains Orr. “Lenders are reluctant to take any unusual risks in an environment when Fannie Mae and Freddie Mac might take negative, profit-damaging action against the banks on loans sold to them. It appears it will take a major move by Fannie and Freddie to limit those risks before mortgage availability can get back to a normal level and support the next stage in the housing recovery.”

Orr adds, “Banks have to walk the line on their lending standards. They went from the porridge being too hot (standards too lax) to the porridge being too cold (standards too tight). It’s still a while until we get to ‘just right,’ but striking the right balance could move the Phoenix-area housing market toward more sales and more demand.”

Those wanting more Phoenix-area housing data can subscribe to Orr’s monthly reports at www.wpcarey.asu.edu/realtyreports. The premium site includes statistics, charts, graphs and the ability to focus in on specific aspects of the market. More analysis is also available at the W. P. Carey School of Business “Research and Ideas” website at http://research.wpcarey.asu.edu.

A Guide to Applying for a Bank Loan

Are Arizona banks lending?

Are they or aren’t they?

Banks can only stay in business by making loans, not turning away customers who want to borrow money. So why does the public believe that banks aren’t lending?

“The truth of the matter is that when things were really bad a few years ago, banks weren’t lending,” said Robert Sarver, CEO of Western Alliance Bancorporation. “The banking business, not unlike other businesses, tend to react and overreact and sometime we react too much when times are good and we lend too much money on too liberal terms, and when times are tough, we don’t lend enough money and are too conservative.”

Banks are a business — a unique kind of business — that is under significant pressure to make a profit like any other like any other business. A typical bank, in healthy years, should earn a return on assets (ROA) of 1.1 percent to 1.5 percent. That translates into an return on equity (ROE), because of leverage, of anywhere between 8 percent and 18 percent, similar to most other businesses.

A bank makes its money by investing deposits into either securities or loans, both of which earn a return. Typically, loans earn more than securities and both earn more than what banks pay out to depositors. Although loans earn more, they come with a credit loss rate that a securities portfolio generally does not have. In 2009, in the depths of the economic crisis, a typical bank had a loan loss rate of 1.73 percent on its loan portfolio, which ate into the profitability of the bank. So what does a bank to do when it incurs such high loss rates in its loan portfolio? It invests in fewer loans.

But that is changing. Banks have increased their lending for four of the last five quarters, but Federal Deposit Insurance Corporation (FDIC) acting chairman Martin Gruenberg, is still taking a ”wait and see if the trend toward increased lending can be sustained” approach.

“Banks are lending today, and most banks have excess liquidity that they would prefer to put out in loans,” said Keith Maio, president and Chief Executive Officer of National Bank of Arizona. “Those that feel that banks aren’t lending are likely those who have had their credit compromised in recent years. Loan demand is down from consumers and businesses particularly, since the recession. The recession has caused many personal borrowers to be more conservative in their approach to leverage. Businesses tend to increase borrowing when their revenues are increasing and they need to finance that growth.”

Sarver said that banks do want to lend, “but unfortunately there is a lot of regulation in our industry, which to a certain degree has stifled long-term growth because our capital requirements have almost doubled over the last five years, so that’s been another barrier to banks lending money.”

As an outgrowth of those regulatory changes, lending standards have tightened in certain consumer loan categories like mortgages, experts said. But while mortgage rules have changed, lending standards for business haven’t seen dramatic shifts.

“Commercial lending standards for owner-occupied real estate and commercial and industrial loans have not changed much,” said Kevin Sellers, executive vice president with First Fidelity Bank in Arizona. “For investment property loans, banks are requiring owners to maintain more equity capital in the properties and higher net operating income relative to the property debt service.”

According to Adam White, senior vice president of credit administration at Biltmore Bank of Arizona, bankers have always used the “Five C’s of Credit” to determine if a business is credit worthy.  Those included:
1. Cash flow – history of positive cash flows and probability of recurring
2. Collateral – adequate collateral support
3. Capital – adequate capital to support normal business operations
4. Conditions – what’s affecting the business
5. Character – who are the people behind the business

“In today’s environment, banks emphasize ALL five elements,” White said, “whereas in the past too much reliance may have been placed upon appreciating collateral values under unsustainable market conditions.”

Kevin Halloran, Arizona state president of Mutual of Omaha Bank, said that while there have been shifts in the requirements banks are setting for lending, he sees the industry taking steps toward normalcy.

“I believe lending standards have returned to the original norm,” he said. “In the early to mid-2000s, the banking industry required only limited borrower documentation relating to income and other basic information for residential loans. Now, the industry is requesting proper information to make sound decisions.”

On the business lending side of the equation, “lending standards over the past 10 months have loosened in both pricing and structure for both large and small companies,” Halloran said.

And while some banks have pulled back lending activity, it’s definitely not the case at many Arizona banks.

“Loans at our company have grown 8 percent this year and in discussions with my colleagues at other financial institutions in the Valley, they are experiencing similar results,” said Dave Ralston, chairman and CEO of Bank of Arizona. “Loans are the lifeblood of a bank and at Bank of Arizona. loan growth is our number one priority.  We are seeing increasing demand from credit-worthy consumers and businesses in the Valley.”

Halloran echoed Ralston’s observations.

“Over the past three years, we have completed more than $500 million in new loans in Arizona,” Halloran said. “That includes commercial loans and commercial real estate financing across multiple industries, as well as private banking loans and residential mortgages. Our local commercial banking group has provided local businesses with working capital, revolving lines of credit, equipment loans, owner-occupied loans and merger and acquisition loans. Our commercial real estate group has provided loans in industrial, multi-family, senior and student housing, charter schools and multiple other real estate segments. So we have been – and will continue to be – a very active lender.”

A positive result in the changes in lending banks have been forced to examine in the wake of the Recession is that bank have learned lessons that will create a stronger business model for the industry.

“Banks need to consistently monitor their concentrations in all lending sectors and understand they can only provide so much capital to any one industry,” Halloran said. “Arizona’s population grew so much over the past decade that it resulted in a substantial need for real estate lending. The concentration Arizona banks had in real estate negatively affected all Arizona banks.  In the future, I believe all banks will be better at managing their overall balance sheet risk as a percentage of capital.”

Law Firms Report Stability In Financial Industry

Law Firms, Lawyers See Stability in Financial Industry

As Arizona struggles to recover from a struggling economy, law firms are seeing a rise in the number of complaints filed in relation to banks and loans.

Arizona lawyers have specifically seen an increasing number of claims involving commercial real estate and foreclosures.

This indicates to lawyers that banks are stable and will maintain stability if they continue to stay on top of these loans and claims.

Brad Vynalek, partner at Quarles & Brady, says that banking cases are trending upward in number, and have become extremely common in most practices.

If law firms didn’t have financial loan departments in the past, they do now. Small and mid-size firms are expanding to include departments to handle loans.

Vynalek routinely deals with financial cases, and represents banks in various aspects of the litigation process, either as the defendant or plaintiff. He has represented banks in enforcement actions against borrowers and guarantors, lender liability defense, fair market value hearings and trustee’s sales.

About 50 percent of the cases Quarles & Brady takes on involve financial institutions in some way.

“It’s purely a function and a reflection of the market,” Vynalek says. “We’ve seen more cases involving banks than we have over the last five years and will continue to see an increase.”

Some of the most common banking cases that are popping up are cases involving loans against borrowers on large commercial properties.

Often, the people and companies who have defaulted just don’t have the resources to pay the loans back. For commercial properties that had many tenants and now have very few, it can be difficult to come up with the money to pay the lender back.

Law firms are also seeing a growth in the number of counterclaims that borrowers are filing. The counterclaims are usually geared towards dragging out litigations.

Banks are stable because they are staying firm on settling loan delinquencies. Banks want to be able to give out loans to help stimulate the economy, but in order to do that they have to follow up with the loans in default.

“Consumers should know that banks are committed to trying to make this a better economic climate,” Vynalek says. “Banks have to enforce the loans in their books, and banks will do better as the economy does better.”

Banks will continue to play a key role in the economy as they begin to sell the commercial real estate they have obtained through foreclosures.

“I think that there are a lot of banks with significant portfolios of foreclosed properties that haven’t even hit the real estate market yet,” Vynalek says. “They’ve got to sell the inventory of foreclosed homes and commercial real estate properties.”

Jennifer Dioguardi, partner at Snell & Wilmer, has also seen a significant increase in banking cases involving commercial properties.

“A lot of commercial real estate properties are under water,” Dioguardi says. “They have a high vacancy rate, which means they’re not generating enough cash flow to pay the note.”

In cases involving commercial real estate and delinquent loans, lawyers work to help the bank achieve an agreement, either by pursuing payments or working out other options with the borrowers behind closed doors.

Dioguardi regularly handles litigation involving the representation of national and local banks, mortgage lenders, and credit card issuers. She has an emphasis on banking, commercial, financial services and securities litigation.

Specifically, Snell & Wilmer has seen an increase in litigation matters brought against mortgage lenders and services by homeowners.

In these cases, the homeowners file documents to challenge the various aspect of loans or the foreclosure process in order to have their homes avoid being foreclosed upon.

Many of the documents being filed by homeowners are loan modifications or restraining orders to stop trustee’s sales, and oftentimes the allegations in the complaint do not have legal value; however, when loan modifications are appropriate, banks are taking care of them.

According to Dioguardi, it has become common for homeowners to go online, gather information and represent themselves. Many of the arguments posed online don’t have any actual legal merit, so homeowners fail to stop the foreclosures.

Banks are forced to follow up on loans in default to ensure the industry stay stable. If banks don’t take ownership of their finances, the result of many delinquent loans can be detrimental to the bank itself.

If banks aren’t making money or receiving money back from loans, they can fail and be closed by the Federal Deposit Insurance Corporation (FDIC).

Arizona had 11 failed banks from 2009 to 2011, according to the FDIC failed bank list.
Dioguardi isn’t expecting that number to skyrocket over the next year.

“We can anticipate some additional bank failures in the next year or so, but I think the vast majority will weather the crisis,” Dioguardi says. “There will always be a need for banking services.”

Despite increasing regulation, banks have continued to remain a working part of the economy, and are focused on helping borrowers to their fullest extent.

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For more information about the law firms mentioned in this story, visit:

quarles.com
swlaw.com

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Arizona Business Magazine November/December 2011