Garnet Capital Advisors Blog

The gradual improvement of the economy makes it somewhat surprising that levels of bad loans remain above where they were before the Great Recession. And the rock-bottom interest rates that allowed bankers to keep carrying these loans funded with low-cost capital are about to end.

Mountain of bad debt still on the books
In June 2006, before the financial crisis, total bad loans stood at $56 billion. Of course those figures skyrocketed during the panic. But new numbers from the Federal Deposit Insurance Corp., quoted in American Banker, show that problematic loans still stand at a surprising $162 billion.

Looked at from the peak of soured debt in 2010, which was above $400 billion, the second quarter FDIC numbers do show improvement. Compared with the first three months of 2015, noncurrent loans and leases more than 90 days past due fell by $8.3 billion. Diving into individual loan categories, problematic residential mortgage loans decreased by $6.4 billion while two other categories saw increases in noncurrent loans. The amount of noncurrent commercial and industrial loans rose by $1.5 billion while, in the much-watched auto loan sector, bad debts ticked up by $40 million.

Energy loan jitters
While the residential mortgage market generates lots of headlines, some commercial loans are also faltering, especially in the energy sector. That's largely because the price of oil continues to plumb depths unseen for years. To take the example of just one big energy-dependent lender, Dallas' Comerica: It reported that nonperforming assets hit $370 million at the end of June. That's up nearly a quarter on a year-over-year basis. With signs pointing to the era of $40 a barrel oil not being over soon, it's a sector worth watching for nonperforming loan sales. 

American Banker points out that all this leaves a large market for distressed assets even with the financial crisis so many years behind. Indeed, major holders of such loans, such as the Department of Housing and Urban Development, have sales scheduled. HUD's next one is in November, for instance. On the auction block will be a number of loan pools, including ones with even longer periods of delinquency than previously marketed by the agency.

The end of ZIRP could mean banks must take action
As the whole world knows, it's only a matter of time before the Federal Reserve finally moves off it's Zero Interest Rate Policy, which it has maintained for nearly seven years. Central bankers left benchmark rates at zero to 0.25 percent when they met in September. But whether the rate increases begin in the Federal Open Market Committee's late-October meeting or hold until the group's mid-December confab, the end is near.

The most recent clear evidence of this came as Fed Chair Janet Yellen spoke at Massachusetts' flagship state university, UMass Amherst.

"It will likely be appropriate to raise the target range of the federal-funds rate sometime later this year," Yellen said, "and to continue boosting short-term rates at a gradual pace thereafter as the labor market improves further and inflation moves back to our 2 percent objective."

Time to act?
That means many bankers will finally feel pressure to do something about sour assets they've had little incentive to address.

"The rates have been so low," President of DD&F Consulting Randy Dennis told American Banker, "so it costs basically nothing to carry nonperforming assets. We are behind in working through these. We will find ourselves in trouble if we don't have some progress before rates go up."

If the interest rate hikes are finally spurring your bank to take action on a loan portfolio, any questions or concerns can be discussed with loan sale advisory firm Garnet Capital Advisors.