Small Banks, Tight Credit
Wednesday, August 27, 2008
Late loan payments and defaults by commercial and residential developers have soared to the highest levels since the early 1990s, threatening the health of some small banks, regulators said yesterday.
The delinquency rate on construction and development loans hit 8.1 percent at the end of June, the highest rate for any category of bank loans, according to new data from the Federal Deposit Insurance Corp. The rate has more than tripled from 2.4 percent at the end of June last year.
The missed payments are forcing banks to hoard money against possible losses and to tighten lending standards. Some chastened banks have even curtailed lending to new customers in order to conserve available funds for existing customers.
Small banks are hardest hit. Many concentrated in construction and development lending during the real estate boom, and they have less financial padding to absorb losses. Regulators said they had added 27 names to a list of troubled institutions in the second quarter, a 30 percent increase, largely because of problems with development loans.
Nine banks have failed this year, none in the Washington region.
Abigail Adams National Bancorp, a small lender headquartered in the District, yesterday suspended dividend payments, saying it wanted to save cash for other needs, including potential loan losses. The company already holds more capital than required by regulators.
The downturn that began with homeowner defaults has now spread through developers and their banks to reach businesses as far removed from suburban foreclosures as a shoe store in Columbia Heights.
Kassie Rempel, owner and founder of the boutique online retailer SimplySoles, went to the Bethesda-based Eagle Bank three months ago for a loan to build her first store, in Columbia Heights in Northwest Washington. Despite growing sales that topped $2 million last year, bank officials required Rempel to personally guarantee the loan. They told her that because of credit conditions, the practice has become standard across banks, she said.
"It gave me pause, but not enough to not proceed with the paperwork," said Rempel, who has been operating her online and catalogue business from her basement in Mount Pleasant.
"I'm breathing a sigh of relief that I applied and was approved three months ago, versus today, because I don't see on the immediate horizon any good news for the credit markets," she said.
A spokesman for Eagle Bank said it would not comment on specific cases.
The rise in delinquent development loans follows a spike in home foreclosures that is unprecedented since the Great Depression.