Year-end is always a time to reflect on business, the economy and the coming year. How are we doing? What’s next? In the Detroit market, the automobile industry drives consumer confidence, and businesses in all sectors respond to the performance of the “Big Three” General Motors, Ford and Chrysler.
“As bankers, we live in the markets we serve, so we are impacted by the positive and negative effects that occur in the economy,” says Craig Johnson, president and CEO of Franklin Bank, Southfield, Mich. “When negative events occur, we tighten our underwriting criteria.”
Smart Business asked Johnson to address banking in 2007: deposits, the mortgage environment and an economic outlook for the Detroit region.
How is the Detroit economy affecting businesses in other industries and the lending opportunities banks are willing to offer?
DaimlerChrysler’s sale of the Chrysler Group to private equity firm Cerberus Capital Management made a huge impact on the Detroit economy, as did the finalization of union contracts by General Motors and Chrysler. This is a positive for the region that gives us all momentum as we roll into 2008. There certainly will continue to be challenges, but these deals remove the air of uncertainty. Employees, suppliers and all businesses that are dependent on that industry segment can move forward. Actually, the auto industry in this area trickles down to businesses in every industry. From a banker’s perspective, having greater economic certainty allows us to look more favorably toward the future in terms of providing lending opportunities for borrowers in all sectors.
How did the deposits market fare in 2007?
We have been experiencing a flat or even inverted yield curve as it relates to deposits and loans for the past 18 months or so. Not that long ago, the prime rate was about 4 percent and 30-year fixed-rate mortgages were averaging about 6 percent. This year, prime was 8.25 percent and a 30-year fixed-rate mortgage was not much over 6 percent. This increased competition for deposit rates on the short end of the curve. That was good news for consumers because they earned higher yields than they would normally have for liquid money market accounts. But it wasn’t as positive for the long-term saver. As a result, banks tried to stay short and drive their depositors into money markets or short-term CDs. Recently, we have seen rates decrease on the short end, and banks have responded by reducing money market rates.
Can you discuss the sub-prime lending crisis and its effect on loan availability?
There are two aspects to this issue. First, there is the housing market and the impact of an oversupply in housing, not only in the Detroit area but in the country as a whole. Builders were constructing houses in hopes that the economic cycle would continue to push forward. But the housing market turned prior to this year, and it really hit a wall in 2007. As a result, there is a large amount of both used and new inventory available in the market today. People who bought at the height of the cycle may find themselves underwater today. The house they paid $200,000 for three years ago could be worth just $150,000 or less.
This is coupled with the sub-prime lending crisis and the fact that now these lending mechanisms aren’t as available to people today. So there’s excess inventory and fewer qualified buyers who can gain access to financing. As bankers, we have tightened our underwriting procedures across the board. During tough times, you do a spilled-milk analysis of what caused the problem. Then you take measures to prevent those mistakes from occurring again in the future.
How does all of this affect the business climate in Detroit?
I see continued stress in the housing sector across the country. I don’t know where the bottom is, but we are not there yet. One of the most disturbing things that we are seeing in this cycle is a change in consumer behavior. In the past, the home was generally the last thing that a consumer let go of in tough times. Today, we are seeing them protect their cars and credit cards and let the homes go back to the banks. This will certainly impact how banks look at credit going forward. However, despite all this, we see signs that the economy in Detroit is actually picking up, and I believe that the region is heading into a stronger 2008. While there are still challenges I see signs of hope as we move into the coming year.
CRAIG JOHNSON is president and CEO of Franklin Bank, Southfield, Mich. Reach him at firstname.lastname@example.org or (248) 386-9860.