Planning Decisions, Inc.

THE BOTTOM LINE FROM CHUCK LAWTON

Maine and the Credit Crunch

Published Saturday June 7, 2008

The greatest problem arising from the continuing saga of the credit crunch is not the amount of money that has been lost on mortgage loans that should never have been made, although that certainly is a significant problem. It is, rather, the fact that no one seems to know how much money is actually involved … or when the revelations of new losses will stop coming. It’s one thing for a bank to know that a given borrower has fallen behind on his obligations. It’s quite another for the entire financial system not to know which loans are good or bad or even who owns them. In an environment of such uncertainty, lenders tighten their grips on the purse strings, and all credit worthy borrowers suffer. This, of course, dampens the prospects for accelerating economic growth.

In Maine, however, there are signs that we have escaped the worst of this crisis of confidence. According to data from the Federal Deposit Insurance Corporation (FDIC), loans made by the more than 7,000 nationally chartered commercial banks in the U.S. that were 30 days or more past due amounted to approximately $65 billion as of September 30, 2007. This amounted to just over 1.0 percent of all loans. By December 31, the total of non-current loans had risen to $86 billion—about 1.3 percent of all loans. And by March 31, 2008, these figures had risen to $106 billion in non-current loans, totaling 1.6 percent of all loans. Clearly, at the national level, the fallout from the credit crunch has not fully cleared. 1

In Maine, on the other hand, the data are not so discouraging. For Maine’s federally chartered commercial banks, non-current loans did jump from $292 million as of last September to $303 million at the end of 2007. As a share of all loans, however, Maine banks fared better than the nation as a whole. Our share of non-current loans rose only slightly from 0.83 percent to 0.86 percent, well below both the national average share of all loans and the national average growth in late loans.

Perhaps even more significantly, Maine banks appeared to turn the corner in the first quarter of 2008. While the national share of non-current loans climbed from 1.3 to 1.6 percent over the most recent quarter, Maine’s share actually fell from 0.86 percent to 0.79 percent, not a big drop, but certainly a turn for the better, particularly in a national environment where surprises seem still to be the norm. And the absolute level of Maine’s late loans actually declined from $303 million at the end of 2007 to $287 million at the end of the first quarter of 2008.

Interpreting these data presents a typical “glass half full or half empty” dilemma. On the one hand, the data might simply demonstrate that Maine banks were more cautious over the past year than their national counterparts—choosing not to throw money at more and more speculative housing or to sample the more exotic slicings and dicings of the national mortgage market that became available over the past several years. Failing to fall from national peaks of risk they never climbed really says nothing about Maine banks’ willingness to lend to those consumers and businesses whose investments we need to lead us to higher levels of growth in the future.

On the other hand, the data do show that Maine lenders should not be as paralyzed by uncertainty as their national colleagues. This, in itself, bodes well for the availability of capital in the near future. The fact still remains, however, that it takes two to tango. Will a greater capacity to loan actually translate into more productive loans? It is interesting to note in this regard that the recently released figures on Gross State Product show that the rate of growth in durable goods manufacturing in Maine nearly doubled over the past year, rising from 2.4 percent in 2006 to 4.8 percent in 2007. Clearly, the falling value of the dollar has not been lost on Maine’s metals, machinery and electronics producers. Hopefully their potential for growth will be accompanied by equivalent increases in the supply of skilled labor and investment capital.

1 FDIC

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