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Are Local Banks the Answer?

by Chicago Agent

Is George Bailey from "It's a Wonderful Life" the answer to residential housing's blues? Though the idea sounds practical, trouble may arise from an ironic source: commercial properties.

Local banks, the small-scale, community-based financial institutions that seemingly avoided the financial crisis, could be the answer to the current housing blues, according to National Association of Realtors President Ron Phipps – though there may be some caveats that limit, if not entirely dilute, local banks impact on residential properties.

“Buyers may be able to find more favorable credit terms with community and small regional banks,” Phipps said. “And Realtors can often give buyers advice to help them overcome some of the financing obstacles.”

How to make that transition, though, remains the big question, along with how effective such a policy would be. The nation’s top five banks, which include such behemoths as JP Morgan Chase, Citigroup and Bank of America, do 60 percent of the mortgage lending in America.

One suggestion for a transition has been community action. Some pundits and journalists, most notably online journalism guru Arianna Huffington, have argued that consumers should move their money to smaller banks and conduct business with them exclusively (there is, admittedly, considerable political overtones to the campaign).

It’s not like local banks are waiting for community action, though; in fact, if such action were to ever get off the ground, it may boost funds for a similarly-troubled sector of banking.

Commercial real estate, like its residential brethren, has fallen on hard times, particularly for loans held in commercial mortgage backed securities, which reached delinquencies of 9.43 percent this month – and the principal holders of those loans, as CNN points out, are small community banks, which wrote out more than $200 billion in commercial loans during the boom years…and are now stuck holding the loans.

“Commercial real estate is a common thread among the more recent bank failures,” said David Barr, spokesman for the FDIC. “When the [financial] crisis started in 2008, most banks got into trouble because of residential mortgages, but in 2009 we started to see that slowly transition over to commercial real estate.”

What does this mean for the community banking industry? Time will tell, especially considering what is in store for commercial properties in the next five years. Shahien Nasiripour of the Huffington Post has reported that over that span, $1.4 trillion in commercial property loans will require new financing; of those, nearly half are underwater, and for commercial properties on a whole, values are down 40 percent.

We generally do not cover commercial real estate here at Chicago Agent, but it would appear that the industry will impact the potential value of community banks on the residential markets.

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