25 posts categorized "Banking"

Recent past gives mixed signals for expanded mortgage lending

An improving economy and tight rental housing are leading more moderate-income renters to consider homeownership. In response, some community lenders are exploring whether to expand loan programs targeted to this market. With the housing collapse and high foreclosure rates still a fresh memory, new analysis by the Minneapolis Fed shows that the timing of home purchases can play a large role in foreclosure rates, especially when combined with credit scores.

Using data provided by Lender Processing Services (LPS) Applied Analytics, mortgages in Minnesota since 2000 were analyzed to better understand the likelihood of foreclosure. Borrowers with lower credit risk scores at loan origination had higher rates of foreclosure over this period. For example, among mortgages originated in 2003, 1.5 percent of borrowers with a 720+ credit score entered foreclosure within seven years, compared with 4.5 percent of borrowers with scores of 680 to 719 and 9.4 percent of borrowers with scores of 620 to 679 (see Chart 1).

Foreclosures Ch1 -- 10-29-13

Foreclosure rates were also strongly linked to timing. Mortgages originated in 2000 performed better than 2003 mortgages and much better 2005 mortgages with similar credit scores. For mortgages with low credit scores (620 to 679), the foreclosure rate after seven years was just 3.2 percent for mortgages originated in 2000, but reached 26.6 percent for mortgages originated in 2005.

These differences may partly reflect the boom and bust in Minnesota housing prices between 2000 and 2010. As home prices fell after 2007, homes with year 2000 mortgages were more likely to remain “above water”—that is, to have a value greater than the balance due on the mortgage—than homes with mortgages originated in 2003 or 2005. Borrowers with above-water mortgages have both stronger incentives and better options for avoiding foreclosure, such as simply selling. And many more mortgages originated in 2000 may have been refinanced early on, given that mortgage rates fell between 2000 and 2003.

High debt burdens were also linked to foreclosure (see Chart 2). For example, controlling for credit score, foreclosure rates for 2003 mortgages were about 50 percent higher for high-debt borrowers than lower-debt borrowers. For 2005 mortgages, foreclosures were considerably higher for both high- and low-debt borrowers compared with 2003 mortgages. The specific effect of debt levels was present but appears less pronounced, as foreclosures among high-debt mortgages were about 35 percent, while low-debt foreclosures reached almost 30 percent. (A comparison with 2000 mortgages was not possible due to insufficient data on debt-to-income ratios.)

If housing prices rise or at least remain stable over the coming years, the more encouraging performance of Minnesota mortgages originated in 2000 may provide useful guidelines to organizations contemplating new home lending programs. However, the weaker performance of loans from 2003 and 2005 shows the risks that could arise if housing prices or employment fall significantly again.

For related information, see the Minneapolis Federal Reserve Bank’s web page Housing Market and Mortgage Conditions in the Ninth District.

  Foreclosures Ch2 -- 10-29-13

Bakken banks growing faster than peers in shale plays elsewhere

The Bakken energy boom in western North Dakota and eastern Montana has had a catapult effect on banks in the region, helping to fuel rising deposits, fast loan growth and growing profits. But the Bakken is only one of a handful of major, active shale plays across the country. How does the performance of Bakken banks compare with banks in other shale plays?

New research by the Federal Reserve Bank of Minneapolis measured bank performance among banks located inside and outside shale plays in the Bakken, Arkansas, Louisiana, Oklahoma, Pennsylvania and Texas. It found that Bakken banks saw significantly higher growth in deposits, construction and land development loans, and commercial and industrial loans, as well as an increase in profits compared with banks in other shale plays.

“While there are some points of similarity between the relative activity of Bakken banks and banks in other shale areas, the exceptional performance of Bakken banks has generally not been replicated in other shale areas,” noted bank authors Ron Feldman, executive vice president, and Stacy Jolly, financial analyst.

Among the more notable results (see also the accompanying charts at bottom):

• Deposits in Bakken banks increased 49 percent from 2010 to 2012. The next closest shale region was Louisiana, where bank deposits (in shale counties) rose 39 percent, but over a longer period (2008 to 2012).

• Construction and land development loans originating from Bakken banks almost doubled over the previous year ending in March 2013; over the previous three years, these loans grew by 165 percent to $209 million. Commercial and industrial loans within the Bakken saw a more modest rise (29 percent since the end of fourth quarter 2011), but that rate was still much higher than elsewhere. Owing in part to the Bakken’s rural nature and lack of population, residential loans were also higher as workers flocked to the region.

• Profitability of Bakken banks, as calculated by return on average assets, has been slightly higher and more consistent than banks in other shale regions, though banks in Pennsylvania’s Marcellus shale also have seen a persistent rise in profitability since 2009.

 Bakken banking 3 charts -- 8-20-13

For an extensive set of tabbed charts outlining bank performance in shale states, go the original research published online in the fedgazette.

Driving to the bank: Auto loans rebounding in Ninth District

Maybe people like their cars more than their homes. While the housing market appears to be finally finding its legs, auto sales have been on a tear—especially in the Ninth District.

During and subsequent to the Great Recession, total auto loan debt declined precipitously to its trough around the end of 2011 (see first set of charts). Since then, however, auto loans have been squealing the tires. In the district, inflation-adjusted auto loan debt rose to 98 percent of prerecession levels, while national auto loan balances are at 88 percent, according to data from the Federal Reserve Bank of New York Credit Panel/Equifax.

Auto loan balances CH1

The lending rebound has been shared among various financing options, but banks are in the lead car, particularly in the Ninth District. Federal Reserve Bank of New York Credit Panel/Equifax data show that banks (which include credit unions and savings and loans) hold the majority of vehicle loan debt in the district, and debt balances didn’t dip as far during the recession. Debt balances have since rebounded above prerecession levels, to $9.5 billion (see charts below). At the same time, vehicle loan debt held by finance companies (dealers and auto or sales finance companies, like car makers) plunged during the recession and remains considerably below the prerecession peak.

Auto loan balances -- Banks v. Finance CH2

Nationally, the share is flipped. Finance companies still account for a majority of loans, but the margin has narrowed, in part because finance company loans saw a steeper drop through 2010 compared with banks, and their subsequent growth since 2011 has been very modest.

Performance among Ninth District states has varied—in fact, some states saw inflation-adjusted auto loan balances decline well before the recession. Northwestern Wisconsin has experienced little recovery since the end of the recession; by the end of 2012, real auto loan balances stand at only 90 percent of 2003 levels. At the other end of the spectrum, North Dakota auto loan balances are 40 percent higher over the same period. Other district states lie somewhere in the middle, though Montana did have a notable runup in debt levels prior to the onset of the recession.

Creditworthiness and delinquency also play a big role in the rebound. Vehicle loan balances generally dropped less during the recession and rose more afterward as borrower Equifax Risk Scores rose. So-called super-prime borrowers are responsible for a large percentage of vehicle debt, and they have been taking advantage of their access to credit to take out more vehicle loans given today’s low interest rates. And, again, this trend has been more prevalent in the Ninth District. Ninth District loan delinquency rates in the district also have been well above national rates before, during and after the recession.

Banks paring back their branches

It has taken some time for the ball to start rolling the other way, but banks across the country and Ninth District are slowly pulling back on branches. Call it “too small to bail.”

The total number of Ninth District bank branches rose steadily from 2001 to 2006—increasing by nearly 25 percent—before plateauing during the recession (see Chart 1). Branches saw some gains and losses over the next several years, but still rose on net from 2006 to the fourth quarter of 2009, to 3,027 branches. But since then the Ninth District has officially lost about 70 branches (more on this in a bit; the actual number is likely higher).

The Upper Peninsula of Michigan has seen the biggest loss of branches, but the trend started well before the recession. Branches there peaked in 2004 at 172 and were down to 139 by the end of 2009. By the fourth quarter of last year, the U.P. had lost another six branches. Minnesota has shed 35 bank branches, but from a much larger base of more than 1,400 branches. Other district states (including northwestern Wisconsin, the only portion technically in the Ninth District) lost only a small handful of branches—even booming North Dakota saw branches drop by a half dozen over this period.

The outlier, with caveats, is Montana, which officially saw the number of branches rise by nine, or almost 3 percent since the end of 2009 (see Chart 2). However, at least part of this bump appears to come from full-fledged banks getting converted by a parent company to branch status. Last year, for example, Glacier Bancorp, one of the largest bank holding companies in that state, consolidated 11 bank subsidiaries—five of them in Montana—into a single commercial bank, effectively converting previously independent banks into branches; nothing else changed except the regulatory designation of the building.

At the same time, Montana is still something of an outlier in terms of total “banking service locations”—in essence, the number of banks plus branches. Montana saw a net-zero change from 2009 to 2012, while every other district state saw a decline of banking locations of between six (in the U.P.) and 72 (Minnesota).

For more information on the health of Ninth District banks, see the Minneapolis Fed’s Banking Conditions website, which is updated quarterly.

Bank branches -- 4-2-13

 Economist Jason Schmidt contributed to this post.

Mortgage defaults: District fares better than nation

When times are tough, some people cannot afford to pay on their mortgage. This was especially true during the Great Recession when nearly 9 percent of mortgage loans in the United States were at least 90 days past due or in foreclosure. But today, more people are paying their mortgage, particularly in Ninth District states.

In January 2013, the mortgage delinquency rate dropped to 6.5 percent nationwide, while district states fared better—considerably so in many cases (see chart). The lowest state delinquency rate in the nation goes to booming North Dakota. The fourth lowest is South Dakota, followed by Montana (5th) and Minnesota (6th). Wisconsin is something of an outlier among district states at 27th. The highest seriously delinquent rate goes to Florida, where nearly 15 percent of loans are at least 90 days past due or in foreclosure.

Mortgage delinquencies -- 2-28-13

Beige Book, Minneapolis: Ninth District economy slowly improving

The Ninth District economy expanded modestly during late summer and early fall, according the most recent Beige Book released this week by the Federal Reserve Bank of Minneapolis.

Each of the 12 Federal Reserve district banks drafts a similar report, which in sum are a summary of regional economic conditions across the country, in preparation for the Oct. 23-24 Federal Open Market Committee meeting, where interest rates and other monetary policy issues are decided.

In the Ninth District, improved activity was seen in construction and real estate, consumer spending, tourism and professional services. Energy and mining continued to perform at high levels, while agriculture varied widely, with crop farmers generally in better condition than animal producers. On the softer side, manufacturing activity slowed in late summer, and wage increases remained subdued, although stronger increases were reported in some areas. But labor markets tightened somewhat, and price increases were generally modest.

For those interested in other regional, national or historical Beige Book reports on economic conditions, the Minneapolis Fed offers everything in one spot.

Home foreclosures: Getting better, but not good

Last year was the first year since the recession that the fever of home foreclosures finally broke, declining slightly across the nation and in most district states, according to data from CoreLogic, a financial, property and consumer data firm.

Home foreclosures started inching up in most places by 2006 and ramped up significantly every year through 2010. By then, foreclosures had at least tripled in every district state; in Minnesota and Wisconsin, foreclosures grew 11-fold or more. (See Chart 1; CoreLogic data do not cover South Dakota.)

Then last year foreclosures finally dipped in a more positive direction, except in Montana, where foreclosures rose another 13 percent. North Dakota has by far the lowest foreclosure rate in the district, even on a household basis, and it also saw the largest drop in foreclosures last year, at 38 percent.

Foreclosures -- 5-1-12

One notable data caveat: A February report sponsored by a consortium of Minnesota housing organizations, and published by HousingLink, found that the total number of foreclosures in the state in recent years was roughly 50 percent higher than CoreLogic’s figures, though the two sources follow a very similar trend line overall since 2005 (see Chart 2). The consortium’s report used county-level sheriff’s auction data, while CoreLogic has a proprietary data system, and sources there could not identify the reason for different annual totals.

Sue Speakman-Gomez, head of HousingLink, said she could not speak to CoreLogic’s methodology. “But I can say for certain there is no double-counting in our numbers. The counties know exactly what properties have gone through sheriff’s sale, and we have been working with them for several years. … We are confident that our numbers represent a 100 percent accurate count” of homes lost to foreclosure via sheriff’s sales.

Whatever the annual figures, many experts are predicting that foreclosures will remain elevated—and possibly even rise—this year. Banks repossessed fewer properties in 2011 compared with 2010, due in large part to the investigations surrounding so-called robo signings and bank foreclosure procedures, which delayed foreclosure processing for many homeowners behind on their mortgage payments, according to RealtyTrac, an online foreclosure clearinghouse. The firm has reported that the number of default notices nationwide rose during the second half of last year and remain elevated (figures in district states were not available, however).

State tax credits are heavenly to angel investors

With a strong desire to spur job growth, states are eager to nurture young, entrepreneurial firms in hopes that they will develop into booming companies. And you might say the angels have been answering.

Angel investment groups have been popping up across Minnesota and Wisconsin. These are groups of high net worth individuals who seek investment opportunities, often in local or regional businesses. While other investment markets have been fairly static since the recession—and possibly because of it—angel investment groups in Wisconsin and Minnesota have been busy.

Last year, angel investors in Wisconsin doled out $61 million to needy startup firms, and the state has seen a heady increase in total (measured) angel investment since the recession (see Chart 1). Since 2005, the state has seen angel investment groups expand from a small handful to 24 today, sprinkled across the state, including six in the fairly sparsely populated northern and northwestern part of the state located in the Ninth District.

Angel investment -- ch. 1&2 -- 3-20-12

Many attribute that growth to the presence of tax incentives. Wisconsin was an early adopter of tax credits for investors who put their money into very young companies. The state has two such programs, initiated in 2005: an angel tax credit, which allows an accredited investor to offset up to 25 percent of an investment, and a similar program for so-called early-stage seed credit, which is considered the next financial step for a firm after angel investment, but before more sizable venture capital. Investor tax credits in the state topped $9 million for the first time last year (see Chart 2).

The net benefits of such tax credit programs are less obvious than recent activity might suggest. While data imply that tax credits have generated more angel investment, it’s unknown how much angel-like investment was occurring before tax credits and formal angel organizations came around, and how it would have evolved without tax credits. And it shouldn’t be surprising that investors are taking advantage of free money to cushion their risk-taking.

Still, angel activity across the border was enough to convince Minnesota lawmakers in 2010 to create a similar angel tax credit modeled after the cheesehead version, with annual program caps of $12 million in credits. The program wasn’t launched until July of that year, yet investors claimed $7 million in tax credits, and almost $16 million last year (thanks also to $4 million of unallocated credits from the previous year that were rolled over). The state saw $63 million in angel investments in 113 companies last year, which topped Wisconsin.

Not to be outdone, Wisconsin lawmakers greatly expanded their state’s investor tax credit program, allowing the program to allocate up to $40.5 million in tax credits per year, split between angel and early-stage seed investors.

Banking conditions improve, but still spotty

Banking conditions continued to improve with the overall economy in the final quarter of 2011, as they did through much of the entire year. But like the economy, improvements were modest, and some weakness remains in the industry, according to a quarterly update of banking conditions just released by the Federal Reserve Bank of Minneapolis. The survey looks at 367 commercial banks headquartered in the Ninth District.

Overall asset quality showed strong improvement in 2011, fueled by continued improvement in commercial and other real estate loans. Profitability improved, but not to the same extent. Liquidity and capital both improved over the year, though neither has been a particular challenge for most banks, even in the depths of the recent crisis. Overall loan growth in 2011 was negative, but even here there are some positive signs; the decline was not as steep as the previous year-over-year results, and this metric improved throughout the course of 2011.

Also for the first time, the Minneapolis Fed released a banking forecast for 2012 for three basic metrics: profits, loan growth and asset quality. The forecast projects the coming year to be much like last year—continued improvement, but with geographic differences. For example, conditions are expected to strengthen in the Dakotas, where banks are already on very solid footing. The forecast for these measures at Minnesota and Montana banks is also positive, but less so, and levels are expected to remain below precrisis levels.

For a recap of 2011 banking conditions in the Minneapolis Fed's Ninth District, see the video below. Those also interested in a recap of the 2012 forecast can download a summary video here.


Flood affects business, banking in the Ninth District

Many communities in the Ninth District were hard hit by flooding this past year (see past reports in the fedgazette). But banks in district states report that, in general, the impact on local economies will be modest overall, according to a fall survey by the fedgazette.

A total of 86 banks responded to the (nonscientific) survey, including 52 from the Dakotas and Montana, which saw the worst flooding. In terms of their local economies, bankers reported that agriculture and retail sectors in general have been hit the hardest. For example, 15 of 25 Montana bankers reported adverse flood impacts on agriculture, and 44 percent of North Dakota bankers said retail has been negatively affected, along with about one-third of bankers in North and South Dakota regarding the transportation sector. Construction saw a mixed response, with roughly equal (and small) numbers of bankers stating there were negative and positive effects from flooding.

But those difficulties were not necessarily flowing through to bank business to the same degree. A large majority of respondents across district states said that loan repayments from existing clients have not been negatively affected across major portfolio areas (construction, agriculture, commercial and industrial, and commercial real estate; see Chart 1). Agriculture saw the highest reports of repayment problems (36 percent in Montana; 24 percent in North Dakota). Among the minority of banks reporting repayment issues with any loans (about one in three), many said they restructured loans or made other accommodations in loan terms.

Flood bank charts 1&2 -- 12-8-11

Maybe more importantly, bankers said they expected little change in future loan repayments (see Chart 2). Agricultural loans were again the area of biggest concern. In terms of loan demand, most banks reported no flood-related changes; in fact, slightly more banks saw an increase in loan demand related to the floods compared with those reporting a decrease.

The survey was conducted in cooperation with state banking associations, who passed the survey along to an estimated 750 members. While overall results appear modestly positive under the circumstances of widespread flooding this summer, results likely vary significantly among individual communities, given the different localized effects of flooding.