September 14, 2009
The growth of troubled loans to the elderly is turning bankers' hair gray.
At least two regional banking companies - BB&T Corp. and M&T Bank Corp. - are seeing more older Americans struggle to repay their loans as the recession scrambles once-optimistic plans for retirement. Senior citizens are finding it difficult to pay off the debt on their retirement properties because it is taking them longer than expected to sell their primary homes.
"Real estate has remained under pressure. Do these borrowers ultimately sell their house and move to the mountains of North Carolina? Maybe. Maybe not," said Jeff Davis, an analyst at First Horizon National Corp.'s FTN Equity Capital markets. "There are a lot of latent real estate issues out there that aren't going away."
So far, the losses on loans tied to retirees - particularly at BB&T and M&T - have been relatively modest. But they could deepen if the downturn prompts waves of older people to delay their moving plans until home prices recover or to scrap them altogether. More importantly, industry watchers say, the trend is troubling because it indicates that the housing industry's problems are
deepening.
Albert Savastano, an analyst at Fox-Pitt Kelton Cochran Caronia Waller USA LLC, said the housing markets in popular retirement destinations like Florida and Arizona have been punished for more than a year due to an overstock of vacant second homes. But now the trend is extending itself to less high-profile retirement spots like the Carolinas, upstate New York and Georgia.
"The second-home markets have had this issue. It is now spreading into second-tier markets," he said. "It's not a shock, given where the economy is and the job losses."
BB&T was among the first to bring the issue to light, announcing in the second quarter that it had charged off $77 million of loans in a $1.9 billion portfolio tied to residential lots. This caught some industry watchers by surprise, as the company had previously released scant details on its lots portfolio.
Kelly King, the Winston-Salem, N.C., company's chief executive, said the bulk of the problems in the portfolio involved New England and Midwestern residents who could not sell their homes in order to retire in the South.
"People are handicapped because they can't sell their houses," Mr. King said during a conference call to discuss second-quarter earnings. "The lot values have gone down, so some people are balking at continuing their payments."
BB&T has been "aggressively" dealing with the issue, he said, by renewing lot loans with "a longer-term amortization schedule because they still plan to come here and retire."
The trend has hurt M&T but in a slightly different way. The Buffalo company's nonaccrual commercial loans rose 25% from the prior quarter to $294 million as of June 30, largely due to a $74 million delinquent loan to an operator of retirement communities. Rene Jones, M&T's executive vice president and chief financial officer, said borrowers in its retirement practice have been hurt because clients cannot move into their new homes while still burdened with their old ones.
"We've gotten to the point where the economy just stinks," Mr. Jones said. "This is just one group of our population that is being affected."
Adam Barkstrom, a banking analyst at Sterne Agee & Leach Inc., said it's unlikely loans to retirees will becomea problem. For one thing, he said, it has not been a huge business for banks; BB&T's nearly $2 billion lots portfolio is less than 2% of its total loans. Also, retirees tend to be more reliable than the subprime borrowers and speculators that helped crash the market, he said.
"I think you have a much better shot of working with these types of borrowers," he said. "I don't think the lion's share of these types of lots were bought on speculation."
Still, Mr. Barkstrom said, retirees could be a growing issue for companies that do a lot of real estate-related lending in retirement areas of the Southeast.
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