Let's Talk Loans - Vol. 48

We made it a full year! Happy Birthday Let's Talk Loans! Welcome back to the 1 year celebration of this news letter covering timely topics in whole loan trading, banking and lending. Talking points surround lending products: commercial real estate, residential real estate, and consumer lending (auto, unsecured, cards, solar, home improvement). Also, some of the challenges that banks, credit unions and lenders are facing when looking at the balance sheet. Presently liquidity is the main hurdle for many of our clients but credit is also start to poke it's head up. We tackle all of those discussions and more on these pages. If you enjoy the content, please like, share it or subscribe to it!

First, are you looking for a new podcast? Give Inside Economics a shot. Found at: Spotify . Google . Apple . Really enjoyed my conversation with Mark Zandi, Cris deRitis and Marisa DiNatale from 穆迪分析 this week as we talked about the regional and community banking sector. It's an hour long discussion ranging from the Bank Term Funding Program, liquidity challenges with depositories, the SVB crisis, credit conversations on commercial real estate, credit cards, auto loans - we even get into in a little Memphis Grizzlies and Philadelphia 76ers basketball. Go Grizz!

Coming off a great week in Atlanta, Raymond James hosted our Annual conference at the Loews Hotels & Co Atlanta property. Great venue, good conversations. Hat tips to our panelists Frazer Gieselmann , Owen LaFave , Victor Calanog PhD CRE FRICS , Thomas LaSalvia PhD and James Armstrong . While Victor was a late scratch (he's very in demand these days), Tom was gracious to step in and provide some great content to the panel.

Tom cleared the air on the misconception as to the significance of the size of the market and the concentration many of you hold. It was widely reported small banks have 70%-80% of this risk on balance sheet. Tom was quick to point out - fake news. That's not to say that banks do not hold a significant (40%) portion of CRE credit.

All of the panelists agreed that valuations and cap rates were difficult to peg in this market. The absence of sales and information has made valuing CRE near impossible. Owen had the quote of the session.

"Only trophies and trash are trading"

James Armstrong pointed out that cash flows are the most important point of data in the moment and LTVs are nearly irrelevant. All agreed that while the below graph may point to multifamily having an ultra low cap rate on paper, in reality, it is significantly higher today when bringing a new loan to market. No one should assume a below 5% cap rate on any sector at this time, nor should they be seen as declining.

Office, all agreed, was the ugly duckling of the sector. Vacancies are starting to rise, absorption is struggling. Though the sector is benefiting from longer leases, those are starting to come due and DQs and charge offs will soon follow.

Lastly on CRE, on Bloomberg this morning, I contributed the following quote to the article.

"John Toohig, managing director and head of whole loan trading at Raymond James Financial Inc., heard a similar story when he informally surveyed about 200 regional banks. He found that about one-quarter toughened lending standards after the SVB collapse caused a swift pullback from some regional banks. Most of our customers are worried about funding and deposit pressure right now," said Toohig. "They're worried about liquidity."

The article speaks of rising delinquencies for small businesses and the hesitation lenders have in the market today. Some reference with a "credit crunch" as lenders tighten standard standards, start to hoard cash or increase provisions.

Some troubling news on the liquidity side. We had seen several weeks of declines in balances on the new BTFP program. This week showed a modest uptick from $139.5bn last week to $143.9bn this Thursday. While the rate of acceleration seems to have slowed, I think we all would like to see this cool off further before calling it "mission accomplished".

A combined post from a recent WSJ and Bloomberg article. I mentioned in my post earlier in the week, not sure I would call the FHLB "little known". Right now they are a vital lifeline for liquidity with our clients. Usage is up (as is the above chart on BTFP or the discount window) and usage is approaching great financial crisis levels. While there has been recent scrutiny of the San Fran FHLB office due to their participation in SVB and Silvergate collapse, the idea of scrapping or limiting bank access to them, particularly now, would be lunacy.

"Critics say they can encourage risky behavior by financial firms"

"The FHLBs were created to boost mortgage lending during the Great Depression. Much of their current lending, however, is to banks that need cash to shore up their balance sheets, including to large Wall Street institutions like Citigroup Inc. and Wells Fargo & Co"

A quote I would not agree with from the article is below. Instead of trying to make a mortgage company a bank by adding regulation, stop threatening to fine the banks and invite them back into the mortgage sector. Many lenders fled the heavy fines levied on them coming out of the mortgage crisis and have yet to fully return to the FHA, lower credit and first time homeowner sectors. Which candidly, they are better suited to develop banking relationships with those borrowers long term to help improve their access to credit.

In their Tuesday report, Parrott and Zandi suggested that nonbank mortgage lenders and real estate investment trusts could be granted access the FHLBs. These firms, which handle the bulk of new mortgages, would need to submit to a regulator, among other measures, to get access to FHLB membership, according to the report.

As to credit, the big banks are on the loss provision build train again. Write offs spiked, though we continue to hear "the consumer is OK" comments. Until they aren't...

The four biggest US lenders wrote off a combined $3.4 billion in bad consumer loans in the first three months of 2023, a 73% increase from a year earlier. That, combined with additional reserves, boosted provisions at all four institutions to levels not seen since the earliest days of the Covid-19 pandemic.?

Last bullet point here. Next week we are hosting a webinar on CECL. Many of you still have questions surrounding the new FASB. We will be joined by a host of talent on the call. Those with questions surrounding investor reporting / account, model validation and economic forecasts should tune in. We welcome RJ clients and those outside the RJ customer network to join for some live Q&A. Contact your Raymond James sales rep for access to the webinar.

Have a great weekend! #LinkedInFinance

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