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 [email protected] or (248)
386-9860.