Browse Tag: Commercial mortgage

Embattled Wells Fargo: What’s The Commercial Lending Impact?

A mini Wells Fargo bank branch inside of a Pav...

Funding commercial mortgages with customer deposits is a central purpose for any huge bank. But when a big bank plays fast and loose with its reputation to the degree Wells Fargo has, it creates a special risk to the entire commercial lending ecosystem that should be understood.

Wells Fargo’s recent scandal is the living definition of “fast and loose”. The bank was outed as an identity thief and slapped with a $185 million fine for the fraud of signing up millions of its customers for programs without their knowledge or consent. But that’s a mere traffic ticket compared to what may be coming from market recrimination.

A recent study by consulting firm CG42 spoke to 1,000 of Wells Fargo’s customers and found, unsurprisingly, that people don’t like doing business with a bank they can’t trust. The study identified a potential loss of deposits totaling $99 billion as customers head for the door.  From the CG42 study:

Our findings show significant damage has already been inflicted on the bank’s reputation. Over 85% of consumers surveyed are aware of the scandal, and positive perceptions of the brand sunk from 60% before the scandal to 24% post-scandal. More tellingly, negative perceptions of the brand increased from 15% before the scandal to 52% post-scandal. This blow to Wells Fargo’s reputation will hamstring the bank’s ability to retain customers and attract new ones, as our study reveals.

While only 3% of Wells Fargo’s customers report being affected by the scandal, a full 30% claim they are actively exploring alternatives and 14% have already made the decision to switch banks as a result of the scandal. This represents $212B of deposits and $8B of revenues at risk. Our projections indicate Wells Fargo will lose $99B in deposits and $4B in revenues over the next 12-18 months as a direct result of the scandal, dealing a hard blow to the bank’s finances.

Consistent with findings from our past Retail Banking Vulnerability Studies, community and regional banks stand to gain the most from the fallout of the scandal, with a projected $38.7B in gained deposits and $1.6B in gained revenues over the next 12-18 months. Chase and Bank of America will also profit from the fallout, largely due to their national presence which makes them a viable alternative for customers who seek the convenience of a bank with branches across the U.S.

The chain of cause and effect goes like this: $99 billion of deposits walk out the door, depriving Wells of its least expensive capital, leading to higher capital costs for its borrowers financing new commercial mortgages.  Add to this the (unknown at press time) potential for angry commercial borrowers currently financed through the bank to re-finance and take their business elsewhere.

Is there a mass exodus of commercial customers through refinance in the cards for Wells Fargo?  Some believe not, with one Wall Street analyst referring to Wells’ customer base as “incredibly sticky”, meaning the overhead cost of changing lenders is too steep for customers.

But that perspective may fade as the scandal continues to expand from the retail side and into the commercial side of the bank’s business. Coming to light now are tales of Wells’ shabby treatment of its business customers.  In other words, Wells appears to have been just as abusive in the cultural and economic space where commercial financing lives. From Reuters:

Reuters also spoke to a former Wells employee, and a lawyer representing former employees and a former and current Wells customer, who described abusive sales practices with multiple business accounts. Jose Maldonado, a restaurant owner in Southern California who banked with Wells Fargo for 15 years, said he discovered seven accounts after enlisting the help of his accountant. He initially closed extraneous ones, and ultimately moved his remaining business to Bank of America Corp and JPMorgan Chase & Co.

“I don’t like Wells Fargo anymore. I don’t feel comfortable,” Maldonado said in an interview. “In the past, there were sometimes crazy accounts without my permission.”

Langan declined to comment on Maldonado’s accounts.

An ex-Wells Fargo business banker, who declined to be identified, said employees at his former branch were required to sell products to small business customers such as hair-salon owners and carpet cleaners in packages of three – regardless of whether they needed them.

Those typically included accounts for checking, credit card processing and payroll, and were often linked to additional savings accounts, said the former Wells banker. Bankers also tacked on business credit cards and were pressured to call a Wells insurance unit, with the customer present, to push business liability policies. 

News of Wells Fargo’s business practices isn’t done doing damage. The question is: will the commercial mortgage finance marketplace hold Wells alone responsible, or will all too-big-to-fail banks be looked at skeptically in the future?

With the expected flight to community banking, and with so many alternative financing options arriving every quarter, it wouldn’t be a surprise.

(Photo credit: Wikipedia)

Fed: Foreign Lending For Commercial Real Estate Highest since 2010

English: Globe icon.

It’s an old argument, and it goes something like this: the newest federal regulations on commercial real estate lending standards in the wake of the 2008 financial crisis are too onerous for US banks to adapt to. Sarbanes-Oxley and Dodd-Frank regulatory packages taken together, the line of thinking goes, are strangling US banking and threatening efficient capital allocation by introducing piles of red tape. Too many commercial deals slow down and die waiting for capital, and it’s all thanks to these regulations, say many.

An equally old argument is its opposite:  that the culture of banking, from too-big-to-fail banks down to community banks, is terrible at self-regulation. That systemic risk in lending and repackaging is a real thing that came astonishingly close to burning down the world eight years ago. That evidence is plentiful for this side — from Wells Fargo’s recent sham-account fraud and criminality to the total fines levied on big banks breaking the $200B mark.

No matter what side you find yourself on, a fact remains: to get commercial real estate deals financed, an increasing number of players are looking beyond the regulatory footprint of the US. The winners this are foreign lenders, who are enjoying eye-popping growth over the past six years of commercial mortgage lending.

Foreign Lenders Growth in CRE Outstrips CRE Growth Rates US-Chartered Banks 

The Federal Reserve’s Financial Accounts of the United States includes a subsection called “L.220 Commercial Mortgages”.  And on line 13 of the table that illustrates that since 2010, foreign lenders have increased their amount of money lent to commercial mortgages by a little over 80%. Second quarter 2016 has this number at $55.8 billion.

Screenshot of FRB commercial mortgage numbers

Meanwhile, US-chartered institutions increased their business in commercial mortgages by 15% on a portfolio of over $1.4 trillion.  Note the two lines highlighted next to each other in the table above (click to expand).

So while the US banks lead foreign lenders by more than 30-1, the steepest commercial mortgage business growth volume by far is non-US lenders.

The Why And The What

While there’s no Fed data that puts the cause of the sharply increased foreign lending at the feet of recent regulatory attempts, that won’t stop market-ideologues from claiming that regulation is the reason.

But when they do, we have to remember that on a volume basis, under current regulation, the growth increase alone in commercial mortgage lending by US banks absolutely dwarfs the entire total foreign lending commercial mortgage market by almost 4-1.

So recent regulation is by no means fatal to commercial mortgage lending in the US. Even if we assume regulation explains the sharp rise in foreign lending, the period in question has merely eroded the huge lead US lenders have, by moving the ratio of foreign commercial mortgage lending vs US commercial mortgage lending from its 2010 level near 50-1 favoring US lenders vs. a 30-1 ratio today.

When capital markets change, it’s certainly something to keep an eye on. But rushes to judgement about cause and effect just aren’t in the Fed’s own numbers about commercial mortgage lending.

Commercial Loans Up, Hotel Market Trending in Right Direction

W Hotel Times Square lobby
Image by marcus_jb1973 via Flickr

The latest bit of good news: according to data gathered from the Federal Reserve, the amount of commercial real estate loans ticked up in April 2011.

Even better, the number of delinquent commercial RE loans has gone down in the hotels and lodging sector.  The data comes from Trepp, LLC, a leading provider of CMBS and commercial mortgage information, analytics and technology to the global securities and investment management industries.   The decrease in delinquent loans found across the country came in at a whopping 52 basis points bringing it down to 15.45%.   You can find more evidence of this positive movement from Crain’s Chicago Business.

Also on the sunny side: Colliers International says industrial real estate is poised for a rebound.  The brokerage believes manufacturing is coming back with a vengeance in several primary markets such as Chicago, Dallas, New Jersey and a few more.

What are some strategies for brokers?  While we are waiting for many of these sectors to recover, we still have the lowest interest rates in history, so brokers should recognize it’s an ideal time for those businesses with solid cash flow and a great credit rating to take advantage of the market.  Since there are only a finite number of these type of clients, many commercial brokers have gotten creative and have taken to listing and leasing more properties than they have done in the past.  These type of deals are smaller in transaction number, but are more plentiful in today’s market.  Yes, it’s a lot more work for less money, but it’s a great way to push the market until things improve.  It’s also a great way to build relationships with those business owners who don’t have stellar credit, but do have a great product and decent cash flow,  who could turn into a loyal client because you were willing to work with them when they needed you the most.

Consider specialization – many brokers are now specializing in green buildings or industrial make-overs in up and coming areas in order to carve a niche out for themselves, too.   This is the type of market where there are opportunities to be had and relationships are waiting to be built to take you into the improving market conditions.