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Fifth Third CEO Blame the recession
Fueled by the subprime mortgage crisis that sent the financial market into a very expensive nosedive two years ago, the resulting aftermath of the major economic calamity has altered lending conditions. The recession also has injected a heaping dose of uncertainty into the loan process, one that banks and other lending institutions have to acknowledge more often today than just a few years ago.
"I think it's not so much that requirements have changed. I think it's more that the economy has changed. Just like business owners, when they look to invest, they want certainty in terms of what that investment is going to get them. When we look to partner with a client, we're looking at the same thing: What's the outlook for that business, what's the cash flow look like? And when you're in an economic downturn, all of those things become less certain," said John Bultema, president and CEO of Fifth Third Bank.
"So it's not so much that the (lending) standards have changed; the conditions that we're in have changed — to the point where demand is less and it's just more difficult to predict what the future cash flows from an operation are going to look like," he added.
The recession, which was officially declared over by a group of economists recently, has also reduced every business's collateral value, and that has now made it more difficult for lenders to loan and offer lines-of-credit.
"There are a couple of things that are different in this economy than we've seen in past economies. One is something we're all very aware of and that is the decrease in collateral value. You know yourself your home isn't worth as much as it was a few years ago because the value has gone down. Well, businesses are the same way," said Gail Madziar, vice president of membership and communications for the Michigan Bankers Association.
"Say a business has $100,000 line-of-credit with a bank and the bank has its building as security on that line-of-credit because that building was worth $100,000, so the bank can very comfortably keep that line of credit open. Well, along comes the economy, and all of a sudden that $100,000 building is only worth $50,000. So (the bank) has no choice but to say, 'I'm sorry but I can only have your line of credit based on the amount of collateral you have available now,'" she added.
Bultema said bankers are still willing to turn a loan into a mortgage. He added, though, that making a transition like that for a client is harder to accomplish today because asset values, or what Madziar called collateral, are significantly lower today than prior to the economy's unraveling.
"When we see companies that want to term out their debt, so to speak, from a real estate perspective we have to get new appraisals. The good news is we're seeing those appraisals begin to flatten, and even in some cases we're seeing some increases on a year-over-year basis. But there was such a dramatic drop that the amount of money people could get in terming-out debt on some of those assets was limited," he said.
But if existing or new clients want to improve their cash flow, Bultema said it is in a bank's best interest to help them with that objective. "We're invested in our clients. The better they do, the better we do. We're in the business to make loans and get repaid back. If a client needs assistance with restructuring debt, terming-out some debt, doing some things that make sense so they can continue to pay us back and improve their cash flow, we absolutely want to do that for them," he said.
If a company's cash flow, however, doesn't improve or actually weakens, then Bultema said a bank has to claim the collateralized assets as repayment for a loan. "But that is by far the very last resort that we employ. We never want to take that collateral back under any circumstance because it's not good for us and it's not good for the customer," he said.
Madziar said there isn't a bank in the state that wants to foreclose on a property put up as collateral because banks don't make money by taking that action, even more so now with property values down. "They lose (money) on every single foreclosure. There is no question that they would rather have that be a successful mortgage or a successful line of credit than anything else. That's why they're in business," she said.
Both Bultema and Madziar said business borrowers shouldn't fear asking for a loan or for help if they get in a tough financial situation where they can't meet a mortgage or make a loan payment.
"I think being afraid to go talk to your banker is the worst thing someone can do. We are here to help provide solutions. The more we can talk with our clients, partner with our clients, and understand what they want, the better we are in a position to help them," said Bultema.
"Fear and not wanting to talk to a bank is absolutely the worst strategy because if we don't know what they need, and if we don't know what the challenges are that they're dealing with, we're not in a position to help and then get creative to see how we can help solve for those," he added.
Madziar said their lenders will help them as much as they can, especially if a business owner contacts a bank as soon as a financial problem or a need for a loan pops up.
"They need to call the bank right then and there," she said. "The sooner someone talks to their lender the better, because the less deep someone is in a problem, the more chances there are that there is a solution."