California Real Estate Crunch Puts Pressure on Bank Profits

Golden State banks have a hard time making a profit because a sluggish real estate market has boosted bad loans and regulators have taken a tougher stance

By , Staff writer of The Christian Science Monitor

IN several communities from here to San Diego, retail strip developments and covered malls are stalled in mid-assembly. In downtown Los Angeles, six new skyscrapers will soon add to a commercial vacancy rate already racing toward 30 percent. In the Antelope Valley north of town, spanking new roads with shiny street lights lead to vacant houses with boards over the windows.If the real estate market doesn't move soon, say a growing number of analysts, similar boards may have to be nailed across several of the state's top banks. "It's a very serious situation," says Jim Marks, an analyst for SNL securities, a Charlottesville, Va., firm that specializes in bank analysis. "There are lots of very nervous eyes on how California banks will fare in the current [real estate] crunch. If things should stay stalled or go down, many of these banks are in serious trouble." Data released by his firm show such banks as BankAmerica, Security Pacific, Wells Fargo, First Interstate, and Union Bank registering nonperforming assets (those which generate no income) well above generally accepted safe levels. And the reserves to cover future losses have shrunk from 73 percent of nonperforming assets in 1989 statewide to 58 percent in June, according to SNL. Following a softening trend in real estate that has hit New England, Texas, and Washington, D.C. in recent months, California banks are also faced with increased loan problems in high-risk areas: construction, land, loans to third-world countries. Their earnings in the second quarter of this year (ending June 30) were half those in the same period last year, already a slow period. Last month, First Interstate announced the loss of 3,500 jobs and $200 million for the current quarter - mostly as a result of real estate losses. And the pending merger between BankAmerica and Security Pacific includes the announcement that $1 billion will be earmarked for losses on Security Pacific loans, mostly in real estate. Analysts say the true figure may be more than double that. Mike Murphy, editor of Overpriced Stock Service, says current troubles reflect a decade-long inclination for banks to seek real estate investment as a haven from heavy losses in natural resources during the 1980s. Complicating the market scene has been the greatest increase in population in the state's history (840,000 in 1989), a net influx of poorer immigrants and a net outflow of middle-income wage earners. From 1985 to 1989, real estate prices in California accelerated well beyond the national average. Residential and commercial property prices moved up faster than personal and corporate incomes. Eventually, however, overbuilding caused prices to fall. Exacerbating the situation is the 1989 thrift bailout bill, which requires banks to strengthen their financial positions. Also, since the S&L debacle, Federal Deposit Insurance Corporation (FDIC) examiners have become more vigorous in enforcing rules. "If regulators see loan problems, they are being more aggressive in saying, 'Come up with a capital plan now or we will shut you down, Mr. Murphy says. A final problem for California banks is a recent state appeals court decision - Dover Mobil Estates v. Fiberform Products. The decision says that when a developer gives a building back to a lender in default, all existing tenants - with the exception of specific bankruptcy cases - are freed from their leases. "This is a total disaster for banks," says Murphy. "Whereas before they might have been stuck with a 25 or 30 percent write-off [loss], now they can look at 75 to 80 percent." Both outgoing FDIC Chairman L. William Seidman and state Banking Supt. James Gilleran have acknowledged the "soft" real estate markets in California. But neither has predicted the full-scale debacle envisioned by some doomsayers. Even with interest rates the lowest in two decades and a steady growth of population, optimistic forecasters see a steady loss of bank income for several years. Much depends on recovery from the current recession, and its impact on the demand for housing. "To a certain extent the tide can turn when people finally decide to put aside investment concerns and decide they want a house and want it now," says Murphy. "Then they will start to buy. But until then, it doesn't happen."

Recommended: 10 best cities to buy short sale homes

Share this story:

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...