Last week we promised a closer look at multi-family (5 or more) residential real estate. To that end, the 50 banks with the most exposure to multi family home loans (as a percent of total loans) can be found on page 7. The cracks we are expecting to find there, however, have not yet materialized.
Loans in deferral or that have been reworked due to the pandemic are not reported as such, as long as they are in compliance with the new terms. A preliminary look at the June 30th Call Report for 2-Star OneUnited Bank, Boston, MA (the first bank on the list) indicates the cracks will not show up with second quarter data either.
In addition to large investments in multi-family housing, OneUnited Bank and JRN listee 5-Star Broadway Federal Bank, FSB, Los Angeles (#4 on page 7) have something else in common. They are both black-owned, minority depository institutions (MDIs). You may recall, we wrote about Black or African-American Owned Banks in an article entitled From Freedman’s to Liberty, a Lesson in Community, (JRN 37:12) on March 23, 2020, just as we were getting into this COVID-19 mess.
As we reported then, “There is no mistaking the benefits that Minority Depository Institutions (MDIs) can, and do, provide to their communities.” In fact, when Broadway Federal was first chartered in 1946, its organizers “observed that minority consumers were being ignored by the then existing financial institutions, and loans, if available at all, carried high interest rates”. It’s shameful, but it’s a fact.
It wasn’t until 1977, when Congress passed the Community Reinvestment Act (CRA), that any meaningful attempt was made to prevent discrimination. But the fact remains, were it not for these MDIs, many people in low-income areas would still not have access to a real bank.
When Jelena McWilliams became chairman of the FDIC in 2018, she made the promotion and preservation of MDIs a priority. Following through on her promises, last October, the MDI Subcommittee was created to provide a platform for MDIs to voice their specific concerns and challenges. But, much remains to be done, especially for Black MDIs.
Last summer, the FDIC reported that between 2001 and 2018, the number of Asian American, Hispanic American and Native American MDIs all increased. Black or African American MDIs not only declined, they declined by more than 50%.
What’s more, according to The Brookings Institute, Businesses owned by women and minorities have grown. Will COVID-19 undo that? (April 2020), “Nationally, people of color represent about 40% of the population, but only 20% of the nation’s 5.6 million business owners with employees.”
MDIs are helping to change that, but COVID-19 is certainly not helping. In fact, the report states, “After a decade of business ownership gains, the COVID-19 recession has the potential to be disproportionately devastating to MWBEs (Minority or Women owned Business Enterprises).”
The pandemic is putting food services, retail and accommodation industries at immediate risk. According to the Brookings essay, that puts 20% of Asian American and Black American owned businesses at immediate risk. The report is limited in that it only looks at ownership. The unemployment rates in these industries adds a whole other dimension. Both could have severely adverse affects on delinquencies and repossessions.
The report wasn’t all bad, though. It also observed that during the recession of 2008-2010, while “MWBEs were more likely to shutter during the Great Recession, they helped stabilize the economy during the recovery period. Nationally, MWBEs added 1.8 million jobs from 2007 to 2012, while firms owned by white males lost 800,000 jobs; firms equally owned by white men and women lost another 1.6 million jobs.”
So, there is hope. The banks listed on page 7 of this week’s issue and last week’s issue have extensive CRE exposure. We expect to see lower capital ratios and smaller interest margins. However, with proper management (i.e. re-writing loans or forbearance), most should have enough of a capital cushion to get through themselves and continue to be a source of strength for their communities.