Wearing a black suit and his best smile, MidSouth Bank President Rusty Cloutier told the crowd at a town hall meeting last month at the Corporate Boulevard branch that his institution has money to lend.
His message is the same for all 16 of the bank’s meetings in Louisiana and Texas. Despite what is being reported in the national news, Cloutier says Louisiana’s capital-healthy lenders are making loans.
MidSouth Bank is particularly flush with cash, having leveraged $20 million from the U.S. Treasury’s Troubled Assets Relief Program into about $200 million of loans. What’s in short supply are credit-worthy borrowers.
“It’s probably the most serious recession we’ve seen since the Great Depression,” Cloutier says. “But we think the economy is pretty solid in Louisiana.”
When MidSouth’s loan volume fell 20% in three months, Cloutier decided it was more important to educate the public than worry about tough questions regarding TARP.
Residential loans were down in November and December, but MidSouth’s auto loans improved slightly to $1.2 million in January. Cloutier says auto dealers are reporting good sales with expected improvement in February and March as consumer fears ease over financially troubled Chrysler and GM.
“It’s tough times for banks. We’re hunting loans like crazy now and really trying to make them,” he says. “We find that people are very unwilling to buy stock or take risk. We’re doing all we can to lend money, but we’re not being bombarded with people who want to borrow.”
Regions also has TARP capital to lend, some $3.5 billion, but it’s also going to extra lengths to compete with a smaller pool of borrowers.
After a significant drop in loan applications in the second half of 2008, lower interest rates have boosted business in refinancing, house purchases and borrowers pulling equity from their house. The bank is averaging $14 million a month in new mortgages, but the area’s economic indicators—housing, tax collections, auto sales and retail sales—are slowing down.
“Consumer confidence is just shot,” says Danny Montelaro, Regions’ South Louisiana Group president. “The biggest obstacle with a consumer or business in borrowing today is being able to see into the future. It makes it challenging for those borrowers to step out there and risk their capital or business to do that expansion or buy that new equipment or second home.”
According to Montelaro, the bank’s 2009 economic outlook doesn’t have what he calls “extremely bright spots.”
Despite projected flat to modest growth in loan volume this year, Montelaro says Regions isn’t bending its credit standards, and the days of walking in and getting 100% financing on a property are over. An applicant with marginal credit, no down payment and no ability to repay a loan won’t get a mortgage.
“We’re not immune, [we’re] isolated to a certain degree, but we’re all impacted,” he says. “The question is to what degree.”
While that might be true, Mike Anderson, president of Essential Mortgage and chair of the Louisiana Mortgage Lenders Association, blames the borrower shortage on Fannie Mae and Freddie Mac’s rising fees on loans.
Anderson maintains three out of 10 people applying for a loan are being rejected.
“It’s prohibiting many buyers from buying a home and refinancing,” he says. “There is no question whatsoever that it has impacted real estate sales nationwide. You’ve got consumers out there who don’t think they can buy to begin with because they’re under this perception they’ve got to be Donald Trump and have a perfect credit score.”
A borrower with a 663 credit score and a 20% down payment who wants to buy a $167,000 condominium could end up paying another $16,500 in delivery fees to Fannie Mae for a loan.
“Guess who’s the predatory lender now?” Anderson says. “Fannie and Freddie are owned by our government.”
The higher fees reflect the rising risk of lending, but he says that’s a penalty in a state that didn’t get into the subprime mess.
Anderson says he’s got the support of U.S. Sens. David Vitter and Mary Landrieu of Louisiana as well as the National Association of Mortgage Brokers and the Real Estate Settlement Providers Organization toward eliminating the fees.
“I’m not a one-man show anymore,” he says. “Our No. 1 goal is to eliminate Freddie and Fannie fees.”
But Fidelity Homestead Association President and CEO Boyd Boudreaux agrees with Fannie Mae’s risk-based pricing on residential loans being linked to a borrower’s credit score. A 620 credit score is the benchmark.
“What got us into this problem was loose lending,” he says. “The rate is much lower to people with higher scores.”
With $887 million in assets, Fidelity passed on TARP capital and loan volume is expected to match last year’s volume.
“We’re just not seeing a whole lot of purchase activity at this time,” Boudreaux says. “We have the money to lend and the rates are getting very attractive, so now is the time to buy a house.”
Woody Briggs, managing director of New Orleans-based Chaffe & Associates, says the economy and bad consumer confidence are scaring prospective borrowers. But, he adds, there’s more to it.
“It’s not just a crisis of confidence, but one of capability,” Briggs says. “They’re in debt up to their eyeballs.”
Marginal borrowers who can borrow are getting squeezed with higher interest rates or refused for a loan in today’s tighter credit market. Some borrowers have had loans frozen or called.
Briggs proposes a two-part solution. “Clean up this mess and get some fiscal stimulus,” he says. “Without intervention, we face inflation and recession.”