Study Disputes Risk Mortgages Pose to State’s Lenders : Banking: California regulators say real estate conditions aren’t as potentially troublesome as portrayed in a recent federal report.
State banking regulators, seeking to calm jitters about the quality of real estate loans at California banks, will publish a study today contending that real estate conditions here are not as potentially troublesome as portrayed by federal regulators.
The unusual action comes two weeks after Federal Deposit Insurance Corp. Chairman L. William Seidman sent a big jolt through California’s banking industry when he released a study listing six California areas--Los Angeles, San Jose, Sacramento, San Diego, San Francisco and Orange County--among 40 areas nationwide where potential commercial real estate loan problems could be lurking. Factors cited included heavy office construction, slowdown in job growth and rapid growth in the real estate market.
If nothing else, the controversy shows how heavily real estate issues hang over California’s banking industry. Real estate debacles in New England, Arizona, Florida and the Northeast over the past few months are prompting speculation that California and its banks will be the next dominoes to fall, something bankers and real estate executives here strongly dispute.
In the state study, state banking analysts P. K. Prakash and Mary Ann Havens note several faults with the FDIC study, including a failure to include population growth and economic diversity as a factor. They also argue that FDIC officials relied too much on growth in the real estate market and soaring real estate prices overall as a reason for their concern.
Prakash and Havens conclude that although real estate lending is of concern to regulators across the country, “California state-chartered banks have not experienced the problems or overextended growth seen in the Southwest or Northeast.” Many of the real estate loan problems in areas such as Massachusetts, Texas and Arizona have been attributed to overbuilding of office buildings, hotels, shopping centers, houses and condominiums. They note that vacancy rates for office buildings in California are in line with the national average and the ratio of problem real estate loans to total loans remains low in the state.
Still, the report says real estate lending is being monitored more closely by state authorities. The report says state bank examiners “have been instructed to test each bank’s real estate loan portfolio to assure that appropriate underwriting, appraisal and documentation standards are being observed.”
The study was limited to state-chartered banks. As a result, it does not include three of the state’s four largest banks--Bank of America, Security Pacific and Wells Fargo--because they are national banks. Wells Fargo in particular is a big real estate lender.
But James E. Gilleran, the state’s superintendent of banks, said in an interview that he believes that the conclusions would be the same even if the those three large banks were included. He also sought to downplay any dispute with FDIC over the studies, saying regulators have the obligation to raise “red flags.” But, he added, “the sky is not falling.”
David S. Holland, financial analyst for the FDIC’s division of research and statistics and an author of the agency’s report, said it was not meant to judge specific markets, but instead was more of an “early warning system” to indicate where problems might develop. He said the FDIC, the federal agency that oversees federal insurance of bank and thrift accounts, has seen too many cases where lenders relaxed their standards to take advantage of hot markets.
“Our position simply is that above-average growth is often followed by declines. We saw it in Texas, Arizona and New England,” Holland said.
Banks nationwide in recent years have bet more heavily on real estate loans--both commercial and residential. Total U.S. bank assets from 1986 to 1989 grew 12% to $3.3 trillion, while real estate loans soared 48% to $761.6 billion, according to FDIC.
Banks in New England have posted huge losses in the past six months as regulators from the Office of the Comptroller of the Currency, which regulates national banks, cracked down on lenders with troubled real estate portfolios, forcing them to devalue the bad loans on their books. That has led to allegations that Comptroller Robert L. Clarke and his staff are intimidating lenders, who in turn are choking off credit as a result. Clarke and his staff argue that the standards are no tougher now than in the past.
The comptroller’s office has some concerns about the vulnerability of banks should the Southern California real estate market deteriorate significantly.
J. Michael Shepherd, senior deputy comptroller, confirmed in an interview that the office ran a computer “screen” in March identifying Los Angeles, Atlanta and Miami as areas where banks would be especially vulnerable to a real estate downturn. Some 14 variables were fed into the computer, Shepherd said, including such statistics as office vacancy levels and the absorption rate, which is the net gain or loss on office occupancy rates.
Shepherd cautioned that the results from the computer model should not be interpreted as a sign that examiners have found problems in portfolios in California, nor does it mean examiners are on the verge of cracking down on lenders here. Rather, he said, examiners probably will spend more time reviewing real estate lending than they normally would.
“I don’t want anyone to think we have made a determination about any particular market,” Shepherd said. “Real estate is a problem in a lot of areas of the country, and in the course of doing our job in California we have to examine real estate conditions there.”
Pessimists on California real estate point to stubbornly high vacancy rates in key areas, such as Orange County’s 20% office space vacancy rate, that could cause problems for lenders. Bankers and real estate brokers argue that California’s economy is diverse, and that overbuilding has not occurred as it did in New England.
Others say California real estate lending is far less risky than the billions of dollars in Third World loans that banks nationwide have made. Wells Fargo Chairman Carl E. Reichardt said as much in a speech this week to business journalists in San Francisco when he said “a vacant office building in Orange County still looks better to me than a loan to the sovereign government of Bolivia or any other number of the Latin American basket cases.”
DELINQUENT REAL ESTATE LOANS
Percent Amount Rank State non-performing (in millions) 1 Arizona 11.8 % $7,466 2 Texas 10.3 29,954 3 Massachusetts 6.9 31,305 4 Connecticut 6.1 15,347 5 Alaska 5.3 647 9 New York 4.1 103,872 31 California 1.7 104,778
Source: FDIC Quarterly Banking Profile, fourth quarter, 1989
