Capital Sources Lenders spend more time reviewing loans - Daily Business Review

 

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Many South Florida lenders are spending more time and money this year on real estate loan reviews checking for deteriorating credit quality, notably from declines in the value of collateral.
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"Everybody is paying more attention to the collateral," said Claudine Claus Wheeler, co-owner of Miami-based Home Financing Center, a state-licensed mortgage lender.
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Home Financing and other mortgage lenders that avoided making subprime loans remain wary of their overall impact on real estate values.
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"Unfortunately, what really happened with the subprime market is these speculators were the ones that really drove prices up," Wheeler said.
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With falling prices, many banks are scrutinizing loans secured by real estate on an accelerated schedule by ordering reappraisals on collateral properties on a more regular basis.
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"The idea of getting more updated appraisals is happening more and more, given the deterioration of the market," said Frank Gonzalez, partner in the accounting firm of Morrison Brown Argiz & Farra in Miami.
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"A lot of banks were trying to generate as much business as they could, and now they realize that the way the market is you have to hunker down and make sure what you have is quality," he said.
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Loan reviews have revealed some prime mortgage lenders allowed borrowers to provide full documentation for their loans after the closing. But "you don't see that anymore," Gonzalez said. Now lenders "won't finish originating or funding a loan until they get all the proper documentation."
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"Some banks are moving to a more frequent loan review," said Alexander Sueiro, partner in the accounting firm of Perez-Abreu Aguerreberre Sueiro & Torres in Coral Gables. "At a minimum, you'll see it on an annual basis. Some are going to semiannual, and some are doing it every quarter, and at some of the larger banks you'll see it every month."
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His loan reviews for bank clients focus on delinquent debt, but increasingly they have extended to analyses of loans that are current but were used to finance construction, land purchases, condo conversions and other real estate activity.
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"Everything to do with construction and real estate, we started taking a look at those loans, especially if they had a funding date … in the last 24 to 36 months," said Sueiro, a vice president of the South Florida Banking Institute. He did not name any of his banking clients.
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Loan reviews often determine whether a lender will make a bigger or smaller quarterly allowance for bad loans.
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BankAtlantic, BankUnited and Wachovia each made bigger allowances for possible loan losses in the six months ended June 30 than they did during the same period last year.
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But not all banks in South Florida have done the same.
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Call reports and other financial disclosures by 10 banks in the region show that half of them added nothing to their loan-loss reserves in the first half of the year or made smaller additions to their reserves than during the same period last year.
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City National Bank of Florida, for example, added nothing to its loan-loss reserve in the first half compared with $1.35 million during the same period last year. Its loan charge-offs in the first half fell to $24,000 from $113,000 in the same period last year, and its loan-loss reserve totaled $23.8 million, or 1.47 percent of loans outstanding June 30.
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A history of heavy additions to loan-loss reserves may explain some banks' puny additions this year, Sueiro said.
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"To a large extent, many of the banks have been overfunded on their allowance for loan losses" since 2003 before major jumps in real estate values, he said. "Even in the good years, they continued to grow their loan-loss reserves."
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Now that real estate values are sagging, many banks are likely to keep adding to their loan-loss reserves as a hedge against collateral depreciation and greater delinquency.
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"Now is not the time to stop funding the loan loss reserve," Sueiro said. "Clearly, most banks today do expect to see some softening of the market. They do see the leaking of loans from being current to past due by 30 days."
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BankAtlantic had no loans related to high-rise condo development or subprime mortgage borrowers as of June 30. But the Fort Lauderdale-based bank has not stopped adding to its loan-loss reserves, raising it by $12.4 million in the first half of the year versus $143,000 in the same period last year.
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Two land acquisition and development loans made up the bulk of the bank's $15 million in nonaccruing loans June 30, and BankAtlantic expected to foreclose on both borrowers in the third quarter. According to banking regulators' guidelines, a loan with principal and interest unpaid for at least 90 days is considered a nonaccrual loan, unless the lender has adequate collateral.
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"We have a very proud history of conservative underwriting at BankAtlantic," Alan Levan, the bank holding company's chairman and chief executive officer, said on its last quarterly earnings conference call.
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But if the market for Florida real estate "lags for three, four years, then my guess is more of these loans ultimately will go delinquent," Levan said on the July 25 call. "If it turns sometime in the next year, year and a half, then maybe we won't see any additional nonaccrual."
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While BankAtlantic and other banks can fund their loans with deposits, other mortgage lenders rely on sales of loans they originate to generate funds for additional lending.
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Home Financing, for example, sells virtually all its loans to Fannie Mae, the government-created buyer of mortgages that now operates as a publicly traded corporation listed on the New York Stock Exchange. Fannie Mae last year bought about $150 million of loans originated by Home Financing.
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Some nondepository lenders have failed as secondary-market buyers became scarcer. At least 110 mortgage companies have halted loans, closed or sold themselves nationally since the start of 2006, including 90 this year, Bloomberg News reported.
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"They don't have direct access to Fannie Mae. They have go-between correspondents, and then as the go-betweens disappear they are losing that access to funds and money to lend," Wheeler said.
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The closure of mortgage offices has put a large number of loan officers out of work, and "it's a good opportunity for us to pick up some good talent in the industry," she said. "We've never had so many job applicants here in 20-some years."

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