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Risky lending practices dragged down the U.S. economy during the Great Recession, but banks back on solid financial footing more than a decade later are looking to save businesses driven to the brink of collapse by the coronavirus pandemic.
On top of Maine banks processing close to 26,000 forgivable federal loans worth $2.6 billion to local small businesses, they have been canceling fees and deferring some loan payments for those pinched for cash.
Mortgage loan payment deferrals are making an immediate difference to businesses. Tourism businesses such as hotels have emerged as big takers of deferrals helping to offset income lost from the virus-delayed start of their season. Hotels often defer mortgage payments by three months, and in most cases, that time will be added onto the end of their loan.
Experts also expect residential deferrals on all types of loans to increase in the coming weeks. Credit scores aren’t affected by deferrals. Some 3.8 million U.S. homeowners are in forbearance plans, according to the Mortgage Bankers Association in Washington, D.C.
“Most people probably made their April payment,” said Greg Dufour, president and CEO of Camden National Bank. “It’s when they make their May or June payment that the residential side will start to pick up.”
Camden National already has deferred payments on more than 1,500 loans of all types with a total outstanding balance of almost $550 million. The bank shifted nine employees with other duties onto the teams handling the large number of deferral requests.
“The majority of the deferrals are from hospitality and lodging in terms of dollars so far,” Dufour said. The bank’s total loan portfolio is $3 billion, so deferring close to 20 percent of that money is “a pretty big percentage,” he said.
Dufour expects more deferral requests as Gov. Janet Mills’ gradual economic reopening plan, which began May 1, continues. The plan would lift restrictions on restaurants and hotels from June through August, including 14-day quarantines for out-of-state visitors that have waylaid reservations in the tourism industry.
That industry is a major part of the Maine economy, contributing $8 billion last year. Dufour said there will be a ripple effect to government revenues over the next several months when businesses pay less in taxes because of curtailed activity.
Machias Savings Bank has processed more than 1,000 loan deferrals of all types, 274 of them involving residential loans, said Larry Barker, the bank’s president and CEO. He said a lot of the deferrals were for hotels and restaurants.
“I’ve been [in banking] for 30 years. We’ve never as an industry provided almost across-the-board payment deferrals headed into a recession,” Barker said. “On top of that are trillions of dollars of stimulus. But that certainly doesn’t put us in a position as a state to skip a tourist season.”
That’s all too real a possibility for Ted Hugger, owner of the Cod Cove Inn in Edgecomb and the Cedar Crest Inn in Camden. He has three-month loan deferrals for both inns.
With the protraction of COVID-19 measures into the summer, Hugger isn’t sure if he’ll have to ask for extensions on his deferrals or whether he simply won’t be able to stay in business this season.
“The question is, ‘Will the banks work with you and at what point does it become a lost effort?’” he said.
Right now, banks are willing to work with customers to keep them afloat. It’s only when the businesses go under that the banks suffer losses, said Jim Donnelly, chief commercial officer at Bangor Savings Bank, which along with Camden National is one of the state’s two largest banks.
“We do not expect real losses until late in the year or the beginning of next year,” he said. “We’re going in more ready to weather a storm than in the last recession by far. We can weather this for a long time, for years.” He said banks insured by the Federal Deposit Insurance Corporation have strong balance sheets and good income.
Camden National’s Dufour agreed, saying that how badly businesses will be hurt depends on how quickly the coronavirus can be curtailed and society gets back to normal.
That’s a far cry from where U.S. banks were during the sub-prime mortgage crisis that caused the Great Recession from December 2007 to June 2009. During that time, 168 banks went out of business, according to the Federal Deposit Insurance Corporation. There were only four closures in 2019 as banks fortified capital under stricter regulations and an 11-year economic growth wave that ended abruptly with the pandemic.
“During the Great Recession, lenders and servicers got a lot of experience working with problem loans,” said Jamie Woodwell, vice president of commercial real estate at the Mortgage Bankers Association.