As financial institutions across the country continue to report mortgage losses in the billions of dollars, it’s tough to be a banker during these economically anxious times. Although some banks have suffered more than others, clearly none have yawned their way through the subprime meltdown that is still rippling through the economy. “It’s the most interesting and challenging time in banking in my 35 years. It’s amazing,” said Jackie Delaney, president and CEO of Sun West Bank in Las Vegas.
With the ugly “R” word (recession) being whispered over power lunches in some circles, it may be useful to recall that the U.S. has survived a number of financial crises, beginning with the panic of 1797, which was a three-year economic disruption caused by the deflation of the Bank of England. More recent problem periods include the Great Depression from 1929 to 1939, when stock markets and banks collapsed all over the world; the Recession of 1953, characterized by inflation following the Korean War; the 1973 oil crisis, created by the quadrupling of oil prices; and a recession in 2000 following the bursting of the dot-com bubble.
Resulting from a variety of conditions and events, not all financial crises are the same. A recession, for example, is defined as a decline in the gross domestic product (GDP) for two or more consecutive quarters, while a depression is characterized as a severe economic downturn that lasts at least several years. Many financial movers and shakers say the current slowdown is a natural economic correction to rapidly rising real estate prices and lax lending practices. “This is a credit crunch, not a crisis,” explained Bill Oakley, regional vice president/Southern Nevada for First National Bank. “It’s important that we realize it’s not a recession,” said Reno-based Jack Prescott, senior vice president and market president for Irwin Union Bank.
As they wrestle to preserve business in today’s challenging market, bankers look back over the past several years to understand the causes of the slowdown. “Certainly we were overbuilt. There was a lot of irrational lending,” Prescott said. In a roaring housing market with steadily rising prices or more than five years, many buyers scrambled to get in on the boom. “There were more buyers than product and a lot of speculative investors,” said John Guedry, executive vice president and Nevada division manager for City National Bank in Las Vegas. As lenders jumped on the bandwagon with ever more creative financing options, many buyers overextended themselves and were able to buy properties they could not afford. Zero-down and interest-only loans opened the doors of new homes to many people who would not have qualified previously. “The fundamental principles were ignored. You don’t lend 100 percent or to people who can’t pay,” said Bill Martin, vice chairman and CEO of Service1st Bank in Las Vegas. Speculative buyers, who comprised a large part of the market in Las Vegas, erroneously assumed a continuing boom would allow them to flip properties and realize large profits.
While each mortgage failure has its own story and cast of characters, the following conditions were found to be causes in many cases, according to Martin:
• Buyers were lied to by lenders and/or sales persons.
• Buyers applied for a 30-year fixed mortgage, but unknowingly got something else.
• Buyers were presented with false papers.
• Buyers knew exactly what they were doing, but got caught in a market downturn.
Regardless of the causes, Nevada continues to lead the nation in the rate of home foreclosures with a rate of one in 165 households as compared to the national average of one in 557, according to recent figures from RealtyTrac Inc. Nevada’s foreclosures for February were 6,167, which represented an increase of 68 percent over February 2007. With statewide figures heavily weighted towards Las Vegas, Northern Nevada can take some comfort in rates that are only about one-third of those in the South. As foreclosures flood the market, the median price of housing has dipped, down from around $350,000 a year ago to about $270,000 now in Las Vegas. With fewer potential buyers, first move-up homes have suffered from 30 to 40 percent drops in their appraised values. The tightening of the housing market continues to roll all the way through the economy from the construction industry to credit agencies and retail establishments. Because consumers are unable to borrow against homes that have dropped in value, they are forced to curtail spending. “Retailers are feeling the pinch. It affects any spending decision that you think twice about,” Guedry said.
How Banks Have Responded
Surviving these challenging economic conditions has caused bankers to fall back and regroup in a variety of ways. “It’s a battening down the hatches time; 2008 started out a little tougher than 2007 finished,” Guedry said. Some who suffered losses in their mortgage departments have had to curtail their services. “Mortgage issues led us to completely close down our mortgage operations last year,” Oakley said. Everyone who is still in the lending business has become acutely aware of the risk factors and the importance of due diligence before okaying a loan of any kind. “Banks have to stick with traditional underwriting criteria and not relax standards,” Prescott said. Loan applicants are scrutinized more carefully as to their future ability to pay and are required to put money down in order to qualify for home mortgages. Commercial loans are evaluated very carefully. “We’ve gotten a little more conservative with impacted industries. We don’t want to put somebody in a position where they will fail,” Guedry explained.
Bankers also emphasize how important the various regulator agencies are in helping to stabilize what is still considered to be a rocky lending industry. “Regulator oversight needs to make sure banks are sticking to their standards,” Prescott said. Along those lines, federal regulatory agencies issued a Statement on Subprime Mortgage Lending to address issues related to adjustable-rate mortgages (ARMs) that were sold to subprime borrowers. Although the statement focuses on subprime mortgages, the risk management practices that are included provide general guidance to real estate lending. It encourages financial institutions “to evaluate the borrower’s repayment capacity and ability to repay the loan by the final maturity at the fully indexed rate, assuming a fully amortizing repayment schedule.” It also stresses the importance of not only verifying the borrower’s income, but also adequately documenting it in order to assess the ability to repay the loan. In addition the statement outlines acceptable consumer disclosure practices along with unacceptable predatory lending considerations.
Faced with falling stocks and earnings along with a slowdown in growth, bankers are intensely examining their businesses for ways to improve. “Banks have had to look at the expense side of the income statement,” Oakley said. Delaney projects growth of around five to 10 percent (down from around 20 in prior years) with an increase in assets between $40 and $50 million for 2008. “We can really look at the business model and see where we want to fine tune it. Now we have a little bit of a breather on the growth side,” she said. She sees the breather as an opportunity to completely revamp the internal communications system of the bank which will better position it strategically to take advantage of future growth. “It will create tremendous efficiency,” she emphasized.
Although some banks have had to cut staff and eliminate branches, others are seeing the economic slowdown as an opportunity to find highly qualified employees. Despite the fact that his bank’s stock fell to around $51 from a peak of $76, Guedry said he has had no layoffs and is actually recruiting workers from those who’ve been let go at other banks. “It’s a great time to hire,” he said.
As one of the new kids on the block with just over a year in business, Service1st is in an enviable position to take advantage of whatever opportunities might come along, according to Martin. “It’s a tough time to open a new bank, but we haven’t been around to participate in the real estate loans. It’s only because of timing, not brilliance,” he explained. Capitalized with about $50 million to start, Martin optimistically expects the bank to grow by about 50 percent this year. “We really find ourselves in a market of opportunity,” he said. He expects his bank to be competitive because small banks will be able to take business away from the larger ones.
Other bankers, such as Guedry, emphasize relationship banking. “Our objective is to look for opportunities that benefit our shareholders and understand the needs of our clients,” he said. “We spend a lot of time proactively contacting our clients to help them,” he explained. At a time when the personal touch seems to be lacking in many businesses, bankers seem to realize that reaching out to clients in personal ways can pay off for their businesses in the long run. Offering a wider variety of services in more convenient ways makes good marketing sense.
Irwin Union which delivers virtual banking has been dubbed Bank of the Future, according to Prescott. Since its founding in 1871, the bank has been committed to helping people with solutions as well as products. By offering financial advice along with loans, insurance and a host of financial products, it seeks to be a one-stop shop for its customers, many of whom bank almost totally via the Internet. “We only have one branch in a market because we take banking to clients because of technology. There is no reason for a business owner to have to come to the bank,” Prescott explained.
Even though lending practices have become more restrictive, most bankers say they are working even harder to make sure they take care of their long-term loyal customers. “We have a responsibility to really figure out a way to provide capital to our clients, but still maintain the integrity of the standards,” Prescott said. “We have a responsibility to help grow the economy.”
The Light at the End of the Tunnel
When asked when economic conditions can be expected to improve, bankers agree it’s on the horizon, but not until more pain has been felt in the housing industry. With more foreclosures and lower prices still predicted, many financial experts believe the market will slowly begin to normalize this year. “It’s going to be a slow and steady rebound. The latter half of this year and the first quarter of next year, we’ll see a rebound,” Delaney said. After more foreclosures this year, Oakley looks to 2009 for the turnaround and for expansion in the third quarter. “In ’09 the housing market will be more in balance,” he said.
To Guedry it’s not just a simple rebound, with business back to usual. Because of the severity of the mortgage meltdown, he expresses concern about what the lending industry will be like when the dust finally settles. “What is the mortgage industry going to look like when it turns the other direction?” he asked. To be responsive in future markets, he said it might be necessary to fine tune the process so it is neither too strict nor too lax. He also worries that in spite of falling housing prices, many people will still not be able to afford to buy homes because wages have remained stagnant. The old rule of thumb dictated that the price of an affordable home was four times the family’s annual gross income. With today’s median family income in Clark County around $60,000, the traditional rule would cap the value at about $240,000, which is still somewhat below the median price of homes on the market. Because of a gap between wages and housing prices, there is concern about the ability of workers to qualify, such as those employees that will be added to the labor force by the mega projects, CityCenter and Echelon Place.
Although it would be easy to wallow in the doom and gloom of the economic downturn, in characteristic entrepreneurial style, bankers consistently point out the silver lining to the layers of gray. “I’d rather be in this market because we have an upscale coming,” Guedry said. Bankers believe the Silver State is much better positioned to recover faster and stronger than many other areas of the country. “Las Vegas and the Southwest will bounce back quicker. More people want to live here. There’s an amazing amount of dollars going into casino projects and a large number of international visitors coming here,” Oakley pointed out. Nevada remains an exciting market with its tourism and entertainment impacted less than other industries, according to Delaney. “We’ll still have growth in Nevada, but not as much,” she said.
The bright spots along the road to recovery in Nevada include its continued growth, along with a variety of industries that still prosper in spite of the downturn. A laundry list of positive factors includes:
• $30 billion in new construction along the Strip.
• 6,000 new residents arriving each month to Las Vegas.
• Thousands of jobs created by new developments in Southern Nevada.
• Decreasing inventory of homes which will eventually help sales.
• McCarran International Airport which provides easy access to cities around the world.
• Healthcare, mining and international trade performing well.
One of the most promising industries for Nevada’s future is renewable energy. With its enormous potential for solar, wind and steam power, the state is expected to become a major producer and exporter of green energy in the coming years. As housing and dot-com companies attracted large numbers of investors in recent years, clean energy could do the same in the next decade, according to Prescott.
Delaney also points to the overall strength of the banking system as an important factor in the economic recovery of the country. Banks are better positioned to handle the downturn and can handle losses because their capital is a buffer, according to her. “It’s different this time than when they had the savings and loan crisis,” she said. Also, many commercial banks are stronger because they experienced good growth in recent years.
As they tighten their belts for the months ahead, bankers remain bullish on the economic future of Nevada and their businesses. They point to the resilience and creativity business has exhibited during past booms and busts. With faith in the ability of Nevadans to weather the down times, they strategically plan for the opportunities yet to come. “I’m not a doom and gloom sort of person. There’s always an opportunity,” Delaney said.
Banking Veteran Bets on Nevada
Peter Thomas, a native Las Vegan, is no stranger to Nevada’s commercial real estate and banking sector. He serves on the board of directors of City National Corporation and is managing partner of the Thomas & Mack Co., a commercial real estate development company. Thomas was past president of Valley Bank and Bank of America, as well as board member of Nevada Commission on Economic Development. He is the only Nevadan to serve as a board member for the Los Angeles Branch of the Federal Reserve Bank of San Francisco, the 12th Federal Reserve District which includes nine western states – Alaska, Arizona, California, Hawaii, Idaho, Nevada, Oregon, Utah and Washington. Thomas is currently serving his second three-year term as board member for the Los Angeles Branch.
As a board member, Thomas oversees the operations of the branch which includes such functions as distributing cash to all fed member banks and the process of clearing checks. His role in monetary policy is to submit reports on Nevada’s economy looking at such factors as employment, inflation, and credit availability. The reports, which focus on the nine states the branch governs, are then discussed among board members and monetary policy recommendations are made, voted on and sent to Washington D.C. where they are used as input by the board of governors.
There are many factors that contribute to a healthy or unhealthy economy – one being the extent to which people spend money. People view a recession in different ways. “If people start thinking and living like we are in a recession, we are likely to have one,” said Thomas. When people spend money, the economy spirals upward. When people stop spending money, the economy turns negative. According to Thomas, Nevada has one of the worst economies in terms of foreclosure rates, but a better economy for commercial activity, due to Strip construction projects.
Although the current economy is slow, many experts see opportunity and growth in the near future. Southern Nevada has a two-sided development economy, according to Thomas. There is residential and commercial – one in a downward slump and the other still expanding. When all the Strip projects are complete, there will be an increasing demand by people who want to buy houses in Las Vegas. “The rate of housing being sold will start to increase within the next year and a half,” said Thomas. The housing market trickles down to the commercial market. If there is no activity from architects, engineers and title companies, companies start downsizing resulting in less commercial development. The continuous construction on the Strip keeps the commercial market from sinking further and will help the local economy heal faster than the rest of the nation.