Sorry, Condos: Lenders Are Cracking Down on Loan Limits
- Mar 03, 2008
Remember that list Wells Fargo was reportedly passing around–mentioned in Thursday’s blog last week–of new area-specific lending limits? It seems some banks are taking the restrictions to a new level.
According to CNNMoney.com, some lenders are trying a new method to protect themselves against the subprime fallout: And it’s bad news for residents in high-risk areas like South Florida and Las Vegas.
BankUnited–a unit of BankUnited Financial Corp.–and Vertice, a wholesale lending unit of Wachovia Corp., are among the lenders CNN.com reports are electing to not lend to certain areas, a decision that is forcing prices down even further in those regions.
Last week, Dow Jones reported that Countrywide also issued a memo saying it would cease giving high-rise condo buyers its Fast & Easy and Alt-A mortgages–which require no proof of income and are given to borrowers with good credit but little documentation, respectively. (However, the company allegedly said the next day that it would approve such loans.)
Why is the practice of issuing loans in certain high-risk areas so scary to lenders? Looking at Florida and Nevada, their fear becomes a bit more understandable:
- Florida fell hard once supply surpassed demand. Back in July, some sources were forecasting the high-rise condo market might fall victim to oversupply if sales slowed (condo sales dropped nearly 50 percent in May 2007, according to the Florida Association of Realtors) and building continued–Bloomberg reported it could cause prices to fall 30 percent.
- Las Vegas experienced a similar situation. When the market was good, it was great: Sin City experienced the most consecutive quarters in the nation of 40 and 50 percent appreciation in 2004; in 2005, it saw a 20 percent increase, which leveled off to 4 percent in 2006, according to the Las Vegas Review Journal. And then the foreclosures began. As a result of its meteoric rise, one county alone in Nevada houses the top seven zip codes with the biggest amount of foreclosed properties in the U.S., the Review Journal says.
In general, things are not looking good for the high-rise market–but not everyone thinks it’s over.
Robert Glickman, CEO of Corus Bankshares–the sixth-largest Illinois bank–has given out $7.6 billion worth of commercial real estate loans for condo developments in places like Florida, California and Vegas; the investment paid off during the boom. However, during the bust, weak condo sales have dragged the company’s profit further south than any of its Floridian condo investments.
Yet, even with a fourth quarter profit of just $1.9 million–a whopping 96 percent decline from a year ago–Corus is expected to lend up to $1 billion in the first quarter of 2008 to the condo market, which is half of the new loans the bank made last year, BusinessWeek said.
OK. It makes some sense. High-rise condos in retirement- and vacation-friendly areas like Vegas and South Florida are likely to pick up when the market does because, property values aside, they’ve retained their original market appeal. Even as the economy slumped in 2007, cutting into consumers’ vacation budgets, more people visited Vegas than any other year in history, according to In Business Las Vegas.
Which makes you wonder: Is Glickman making a risky move, or is investing in the troubled high-rise condo industry a calculated way of playing the market?