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Credit woes cut across industry

Lower interest rates approved by the Federal Reserve Bank (FRB) could negatively impact the net interest margin of most Mississippi banks, says James H. Clayton, president and CEO of Planters Bank, Indianola and chairman of the Mississippi Bankers Association.

“Funding costs for all banks have remained fairly high due to the national subprime crisis and the need for liquidity,” Clayton said. “The demand for deposits has been increasing, which has caused deposit rates to be higher relative to the Treasury curve. A sharp drop in short-term rates on the asset side will naturally put pressure on the net interest margin.”

Clayton said lower rates will cause increased refinancing activity, and that has begun already. It will especially impact refinancing of home mortgages.

“There could be some increased loan activity due to lower rates, but the economy has to improve to make a large impact,” Clayton said. “In (the Delta), historically high commodity prices should encourage more loan activity during the next couple of years. Profitability should be good in agriculture in 2008-2009 which will encourage more loan activity.”

Due to the threat of inflation, the current decline in rates may be followed shortly (by late 2008/early 2009) by the Fed tightening and increasing rates. “That always presents problems for banks,” Clayton said.

BancorpSouth is expecting that lower interest rates will have somewhat of a positive effect on the inclination of customers to borrow and/or refinance.

“However, put in the context of a possibly weakening economy, the possibilities of a recession and tightened underwriting standards by lenders, loan demand could be expected to be relatively weak for the next year, if the Fed acts to lower interest rates in the near term,” said Randy Burchfield, senior vice president and director of marketing for BancorpSouth. “Banks possibly could see pressure on net interest margin and profits in this environment if lower rates begin to have more of an impact on the cost of deposits. Higher loan loss provisions as a result of possible continued deterioration in credit quality could have a negative effect on bank profits in the future. However, this is based on prior results and is no indication of what is going to happen in the future.”

Hancock Bank CEO Carl J. Chaney said lower rates will result in banks lowering the rates paid on deposits. However, he said there comes a point where banks can’t reduce deposit rates to the full extent the Fed reduces rates. Thus, it begins to cut into the banks’ margins.

Although rates have dropped significantly since mid-June, they have not reached a point where customers with longer maturities are refinancing. “This is because most of those customers took advantage of refinancing when rates dropped during the last cycle,” Cheney said.

Better rate?

Mississippi Banking Commissioner John S. Allison said there doesn’t appear to have been a lot of refinancing in Mississippi as a result of rate cuts.

“However, it is certainly suspected in rest of this quarter and the next quarter that a lot of loans with teaser rates will be re-pricing,” Allison said. “This would certainly be a good time for people to move into a lower fixed-rate loan. If they have had a track record of some payments, they will have a good chance of getting a pretty decent rate.”

It may be more difficult to get a loan these days even for qualified buyers. But considering how much harm it has caused the economy for so many loans being made during the real estate boom to people without adequate income, tightening up of lending standards makes good sense.

“Mortgage companies have gone back to a tradition of making sure there is some real value there, some down payment and proof of income,” Allison said. “There are not going to be any of these 100% financing mortgages or no verification of income. I think if someone does have a down payment, has a good job with verified income, there are still mortgages out there to be had. I do know there has been a slowdown in activity because of a lot of the publicity out there.”

While he wouldn’t use the word “crisis,” Allison said there is no doubt there has been some downturn in the housing market, and it is going to take a little while to get out of it.

“Some institutions have curtailed development loans, even to good customers,” Allison said. “The bank has encouraged them to cut back a little because there is a large amount of housing inventory that is out there. That is conservatism at its best. More conservative lender are dotting every ‘i’ and crossing every ‘t’. We are back to traditional type questions and verifications.”

Allison said there are loans available for people who qualify. He doesn’t think everyone has been totally scared off from applying for a mortgage. But he suspects a lot of people are waiting to see what is going to happen in the housing market because there is larger-than-normal inventory of houses and prices are declining still in some areas of the country.

“So people are not jumping on the first thing,” Allison said.

Perception and reality

Dan Zoble, senior vice president and manager of the Hancock Bank Mortgage Division, said the market perception of the Fed’s action is a better indicator of long-term mortgage rates, rather than the Fed’s actual increase or decrease of short-term rates.

“In essence, there is a very tenuous relationship, at best, between the direction and magnitude of Fed changes in short-term borrowing rates and that of long-term mortgage rates,” Zoble said. “Sometimes, the long-term rates move in the opposite direction of the Fed moves. If the market believes that inflation is under control, generally, long-term rates will remain relatively low.

“If the perception is that inflation troubles loom ahead, then the long-term rates will usually go up. In each case, there are primary drivers, specific to the present economic conditions, to be considered. In this case, the consensus is that the economy is slowing and may very well be headed for recession. It is possible that there may not be any significant change in long-term mortgage rates, as long as the magnitude of the Fed move agrees with the market’s expectation, because the market has already anticipated the move.”

Zoble said another possibility is that the Fed move is less than the market expects, in which case, it is more likely that long-term rates will go down because there are still concerns that the Fed didn’t do enough to fuel the economy. If so, he expects to see movement out of the stock market into the bond market.

“This move tends to bid bond prices up and, therefore, push rates down,” Zoble said. “If a Fed move down was considered excessive by the market, the market may perceive that as inflationary; and the long-term rates could move up. The market is a very fickle creature.”

Lower long-term rates coupled with lower priced homes seem to be a good combination. But, Zoble said as the economy continues to slow, job loss or the fear of losing one’s job will put a damper on the desire to enter into a large long-term commitment like a house.

Chevis Swetman, president and CEO of The People’s Bank, Biloxi, said new mortgage applications have slowed down on the Coast and it is more difficult than in the past to get the loans approved.

“What we are seeing is there is not that much in the pipeline,” Swetman said. “We have big overhang issues, insurance being one of them. Now what we are seeing locally and nationally is that the processing of loans is being slowed down by appraisal issues. They are saying that they want current appraisals within three or six months, and not appraisals going back a year a two. They want comparables to the same area. If you go over to Hancock County, there are not that many comparables to the same area. So we are seeing a slowdown there.”

Another issue of concern is that the bank’s mortgage department is finding mortgage brokers aren’t interested in taking up jumbo mortgages (mortgages over $417,000).

“So we feel like we have to come up with some products to step in,” Swetman said. “Some of these jumbo quotes were 2% to 2-1/4% higher than the conforming quotes. I think this is just a reflection of the overall credit capability of these major mortgage company subsidiaries.”

While home sales on the Coast are slow at present, things are expected to take off during “the annual spring thaw.”

Swetman thinks the Fed has been too conservative with its policies so far, and that it should have cut rates deeper in 2007.

“The Fed needed to start adding liquidity to the economy back in April or June of last year,” Swetman said. “But if you remember, all of these Fed statements, back in April through August of 2007, were concerned about inflation risk. That’s why they didn’t cut interest rates faster. I heard of a good analogy of this. Assume you are going into an emergency room in the hospital. You have a deep gash in your leg, and the emergency room doctor says, ‘You look like you need 50 stitches in that leg. But we’re going to see if 25 stitches will do.” Well, that is how the Fed has been operating. The Fed has been doing this little bit of incremenalism, and as a result hundreds of billions of dollars have been lost due to the Fed mismanaging the economy. The Federal Reserve should have been acting nearly a year ago to take care of these problems. Instead, they have dragged their feet.”

In addition, Swetman says a lot of the current economic woes can be blamed on “greedy bankers who have been involved in this subprime fiasco.”

“I’m not talking about community banks that do the right underwriting and are in there for the long haul,” Swetman said.

Swetman said it is important that people on the Gulf Coast have financing available for homes and for rebuilding commercial buildings to replace what was lost in Hurricane Katrina. But since it takes 180 days for what the Federal Reserve does to get through the economy, the Gulf Coast rebuild could be stymied.

“I’m optimistic down here we aren’t going to be tarred too bad by this subprime brush,” Swetman said. “But it is going to make credit availability harder and we have a lot of rebuilding we need to do in our area.”

Contact MBJ contributing writer Becky Gillette at 4becky@cox.net.

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