Since the September 2007 closure of NetBank in Alpharetta, Ga., there have been 41 bank closures ranging in size from the $19 million Hume Bank in Rich Hill, Mo., to the historic $307 billion collapse of Washington Mutual. When will it end? Not any time soon, forecasters say.
Largely driven by high exposure to single-family subprime and construction lending gone sour, the failures have exacerbated an economy in free fall by further constricting any realistic availability of debt during the credit crisis. And despite recent financial stability efforts and foreclosure protections announced by the federal government, things are probably going to get worse before they get better.
That's the bottom line, according to "Loan Distress and Bank Failures: Recent History, Current Conditions and Near-term Outlook," a report released at the end of February by Oakland, Calif.-based Foresight Analytics, which projects larger and more frequent bank failures through the balance of this year.
"Our outlook is for a further acceleration in the pace of bank failures resulting in an additional 81 failures through the third quarter of 2009," says the study, authored by Foresight partners Matthew Anderson and Susan Persin. "This would bring the year-to-date total to 95 closures and the total number in the current cycle to 122."
Multifamily real estate, which was largely supported by conduit and GSE financing over the past decade, is somewhat insulated from the bank failure crisis. Nevertheless, the industry will face indirect impacts in the form of job losses and a dearth of refinance opportunities, as some $210 million in sector mortgages mature over the next 24 months.
"Not withstanding those five- to 10-unit properties where a lot of local banks might have taken on deals, the vast majority of multifamily over the past 10 years has been financed through the agencies or through Wall Street," says Matt McManus, chairman of NAI BlueStone Real Estate Capital, a Philadelphia-based commercial real estate investment banking and advisory firm that secures debt, mezzanine, equity, and sponsor equity financing for investors, operators, owners, and developers
"I don't think that there is enough exposure to banks that the number of banks that are failing are going to really have any impact to the multifamily industry," McManus continues. "But indirectly, whatever bank goes under, there are a few less dollars that can be loaned out to job-creating vehicles."
Regional unemployment figures catalyzed by bank failure are certain to hit multifamily operators already struggling with tough property fundamentals. "The broader impact is being felt very clearly in higher vacancy rates and falling rents," says report author Anderson. "But the other 800-pound gorilla is what happens with commercial [and multifamily] real estate. So far, multifamily delinquencies and defaults have not been that bad, but they have spiked significantly upward. By our calculations, there is $210 million in multifamily mortgages coming due between now and 2011. Quite a bit of that will face some difficulty in getting funded, despite the activity of the GSEs."
Indeed, McManus reports a wide disparity between Freddie Mac re-financing terms and what is readily available in the market for a Class A stabilized apartment property in Philadelphia. "We can't find a bank that is within 80 percent of Freddie Mac's proceeds," McManus says. "That's how conservative banks are being today. They underwrite to shorter amortizations, higher debt service ratios, and sometimes artificially high constants to make a 60 percent LTV-type loan versus a 75 percent or 80 percent LTV."
Andersen says that the Federal Deposit Insurance Corp. (FDIC) has shown itself to be adept in handling the failures thus far but warns that trouble could loom if the current pace of bank closures continues or even accelerates into 2010.
"The FDIC seems to think they can handle it and have raised assessment rates on deposits to replenish the fund?and that will help," he says. "If our expectation of 100 or more failures this year materializes, the deposit insurance fund will be pressured but should be able to dig out. If 2010 is worse than 2009, it'll be back to the drawing board in terms of figuring out how we are going to pay for it."