Colorado banks have concentrated more of their assets in real estate loans and securities during the past five years, leaving them vulnerable if rising interest rates kick the legs out from under the market.
Since 2001, Colorado banks have seen their real estate holdings as a percentage of total assets increase from 48.8 percent to 59 percent, according to a Denver Post analysis of Federal Deposit Insurance Corp. reports.
It’s a similar trend nationwide. U.S. banks have increased their real estate assets as a percentage of total assets from 33.7 percent in 2001 to 40.9 percent today.
“It’s probably the highest that I’ve seen,” said Richard Fulkerson, the commissioner of Colorado’s Division of Banking. “I can certainly appreciate the concerns in (too much) real estate concentration.”
Nonetheless, Colorado banks posted solid earnings in the first quarter, and loan quality has continued to improve, the FDIC noted in its Colorado state profile.
But the FDIC, which guarantees bank deposits, calls consumer finances a concern – particularly the state’s housing market, which has depended more heavily than other states on riskier interest-only and payment-option mortgages and on speculative purchases by investors.
Foreclosures in Colorado have tripled since 2000, and three out of 10 homeowners have home equity of 5 percent or less, leaving them vulnerable to foreclosure if prices fall, the FDIC reports.
Fulkerson said that “it is not alarming” that banks hold so much in real estate. But if real estate prices stagnate or decline and more homes enter foreclosure, “institutions with a heavy concentration of real estate will see the value of their collateral shrink.”
Financial experts credit several factors for the surge in bank ownership of real estate assets.
The dot-com collapse prompted many investors to withdraw money from the stock market and park it in real estate.
Loose lending practices, coupled with historically low interest rates, also spurred some Americans to purchase second homes or investment properties. That, in turn, caused the number of mortgage loans to swell.
Finally, the recent popularity of mortgage-backed securities – mortgages pooled by quasi-government agencies such as Freddie Mac and Fannie Mae and repackaged for sale – provided banks a relatively low-risk investment with, in most cases, a fatter yield than U.S. Treasury notes.
The state’s banks also have loaded up on land and construction loans, which are dependent on construction activity. That category has jumped from 10.5 percent of all loans in 2001 to 23.7 percent today.
Nationwide, those loans increased from 4.6 percent of all loans in 2001 to 7.8 percent now.
Sturm Financial Group, the Cherry Creek-based parent of American National Bank, has 41.8 percent of its loans in land and construction.
“We are relatively comfortable with that percentage,” said Jim Gustad, chief credit officer at Sturm Financial. “We are not just in the Denver market.”
Land development loans tend to be more common in fast growing areas like the West and Southwest, he said.
Banking commissioner Fulkerson said banks could merit scrutiny if more than 25 percent of their total loan portfolios are tied up in land or construction loans, considered susceptible to default if new home construction slows significantly.
Homebuilders in Colorado aren’t buying as much land as in the past because demand for new homes has softened. In addition, a record 31,900 existing homes were on the market in the Denver metro area in June.
“That means homebuilders will need less raw land,” said Wesley Brown of St. Charles Capital, a Denver-based investment bank. “They (banks) are holding an asset that could string out over a long time.”
David Prokupek, chief executive of Denver-based Geronimo Financial, said a decline in real estate could cause some banks’ earnings to slump.
Prokupek added that if the U.S. economy enters recession and unemployment rises, foreclosures could spike. That would cause banks to tighten lending, making capital harder to come by and putting another damper on economic growth.
Staff writer Will Shanley can be reached at 303-820-1260 or wshanley@denverpost.com.
