South Florida Banks Eager to Lend But Decision Rests With Investors

By Jim Freer
Senior Contributor
CondoVultures.com

Abel Montuori of U.S. Century Bank in Miami doesn’t need CNBC pundits to tell him that institutional investors will play a big role in jump-starting a recovery in high-end mortgage lending.

Montuori is among South Florida bankers who are seeing first-hand how Wall Street, as he puts it, “has dried up” even for many loans where buyers meet traditional underwriting standards.

And his overview provides insight on how South Florida’s post-recovery mortgage market will look, and on how U.S. Century and some other local banks might become larger players.

“Investors are leery about the quality of paper (mortgage securities) and about the state of housing in the United States,” said Montuori, an executive vp and the senior lending officer at U.S. Century.

“Once the perception changes and the market starts picking up, investors will get more interested in those deals,” he said.

The U.S. Century deals Montuori cited are mostly jumbo loans, all to borrowers with good credit, to buy houses and condo units.

In 2006, U.S. Century set up a residential mortgage division to make those loans and sell them to J.P. Morgan Chase, Citicorp and other large packagers of mortgage securities.

Late that year, institutional buyers began buying fewer residential mortgages of all types as they started dealing with growing numbers of delinquent sub-prime mortgages in their pools.

“A lot of banks here (in South Florida) now have multitudes of loans they could make, if they could sell them,” Montuori said.

U.S. Century, with $1.3 billion in assets and 18 branches, is among many South Florida-based banks that prefer to sell their residential loans. Otherwise, they would need employees to collect and service loan payments.

U.S. Century’s mortgage borrowers include many business people who are its clients for other loans, including commercial.

Most of U.S. Century’s residential loans are larger than the $417,000 “conforming” limit for sale to government-sponsored Fannie Mae and Freddie Mac.

The conforming amount has increased temporarily in Miami-Dade County to about $456,000 and remained at $417,000 in Broward and Palm Beach counties under the Economic Stimulus
Package that was passed by Congress and signed by President Bush in February. This increased conforming limit is set to expire in 2009.

“We can underwrite many of our mortgages in two weeks,” Montuori said.

But the process for getting loans eligible for packaging into securities can take between 45 days and 90 days, he said.

Investment banks are doing more of their own review of loans and often have tighter requirements, on down payments and credit ratios, than just a few years ago.

Meanwhile, fewer hedge funds and other institutions are investing in private mortgage pools.

As investors account for recent losses, some are concerned about the quality and credit ratings of new pools, Montuori said.

Condo Vultures® is hearing similar analysis of that credit crunch from other lenders, analysts and industrywatchers.

Montuori expects it will take a series of positive economic developments and housing reports to lead investors back to the mortgage market.

The Federal Reserve’s recent cuts in interest rates and support for J.P. Morgan Chase’s purchase of battered mortgage buyer Bear Stearns provided some encouragement.

Still, some discouraging news came early in the week of March 24.

The National Association of Realtors reported that sales of existing homes rose 2.9 percent nationally in February, compared with January. But sales were spurred partly by an alarming 8.2 percent drop in median sales price, from February 2007 to February 200.

Meanwhile, the Conference Board reported that consumer confidence fell to a five-year low in March.

These developments don’t give mortgage investors cause for quick optimism about expectations for more lending and lower delinquencies.

But U.S. Century is not changing its long-range view on mortgage lending.

The bank opened in 2002 with a focus on lending to commercial developers and homebuilders, while not making loans to high-rise condo developers.

Four years later, U.S. Century began diversifying with new residential mortgage and business lending divisions.

The bank lends to individuals who are having a home built and to buyers of houses and condos that are not in high rises.

U.S. Century’s portfolio of those loans rose from $27 million at the end of 2006 to $37 million at the end of last year. Those numbers indicate how it is waiting for more investors to return to the
secondary market.

Last year, U.S. Century opened a global division that does correspondent banking for trade finance with Latin American banks.

“We have added good, long-range businesses that will help carry the bank through any period,” Montuori said.

U.S. Century would have taken those steps even if federal bank regulators in 2006 had not started to greater scrutinize banks for their construction lending and other commercial real estate lending, he said.

U.S. Century is among approximately 50 percent of South Florida-based banks that exceed a key ratio of total commercial real estate loans being equal to 300 percent more of capital.

Loans to builders of condo projects and to homebuilders are part of that ratio, but loans to buy houses and condo units are not part of it.

U.S. Century’s programs for making and monitoring commercial real estate loans meet regulators’ standards, Montuori said.

Still, the Federal Deposit Insurance Corp. keeps reminding the industry about its concerns.

On March 17, that agency sent banks a letter that re-emphasized the importance of strong capital and loan loss reserve levels and of sound risk management for banks with heavy concentrations of commercial real estate.

Historically, dollar losses have been higher on those loans than on so-called prime residential mortgages.

The FDIC is giving banks a reason to be ready to make more of those mortgages. In South Florida and other expensive markets, they continue to wait for more buyers for those loans.

Jim Freer is senior contributor to Condo Vultures.com who writes a weekly column that appears every Thursday. Freer is a veteran financial journalist in South Florida and a consultant to the financial services industry. He can be reached at JimFreer@aol.com. Be sure to check out our blog at CondoDump.com . Don't forget to sign up for our weekly Market Intelligence Report.

Copyright © 2008, Condo Vultures® LLC