Banking Experts See Danger in Real Estate Prices, Overbuilding

Ten years ago, Orange County land prices started to soar, and both speculators and lenders began to bank on the idea that real estate prices had nowhere to go but up. They were wrong, at least for several years.

The overheated economy with its double-digit inflation and 20% interest rates collapsed, and, in the 1980s, many banks and S&Ls; succumbed as the real estate loans--those made to speculators in the early part of the decade--went sour.

Today, sky-high inflation and interest rates are being held in check. But financial consultants and some local bankers fear that history could repeat itself in Orange County as real estate prices continue to increase and signs of overbuilding begin to emerge.

“We’re telling bankers to look at what happened before,” said Gerry Findley, a Brea-based bank consultant. “We had a lot of banks hung out on speculative real estate loans in ‘80, ’81 and ‘82, and we’ve got a lot of them doing the same thing right now.”

He and others question such practices as making loans equal to the full value of properties, lending on or investing in commercial and residential projects that stand little chance of succeeding soon, and failing to take into account the characters of borrowers.

“We’ve seen banks do some aggressive rewriting of loans to avoid listing them as bad loans,” said Santa Ana consultant Edward Carpenter.

If the past is prologue, Findley warns, banking and S&L; executives had better take heed and tighten their lending procedures. The 1990s, he said, could be a repeat of the 1980s, a decade that badly damaged the banking industry and destroyed the S&L; industry.

Findley’s concerns are mirrored in reports put out by Alex Sheshunoff & Co., a consulting firm based in Austin, Tex. For more than a year, Sheshunoff has been warning that the percentage of slow-paying loans to assets at banks in Orange County and throughout the nation is rising, prompting doubts about the continued health of many institutions.

Bad lending habits could hardly come at a worse time. They may well exacerbate a difficult situation for local banks and S&Ls; next year and throughout much of the 1990s, as they attempt to increase their capital bases.

Next year, Orange County should start to experience slower economic growth as fewer new jobs are created, housing sales and price appreciation flatten and defense cutbacks cause a loss of 2,300 jobs, according to projections by economists at Chapman College. With inflation, housing prices may even drop.

“In the higher-cost housing areas, a decline of 10% to 20% in prices would hurt lenders,” Findley said. “That’s what happened in ‘82, and that’s what’s worrying us.”

Bankers such as Wayne F. Miller at Orange National Bank in Orange are nervous about the overbuilding they see in commercial and residential real estate markets. “Next year is a year to be cautious,” he said.