Hoping to profit from a hot real estate market in the Baltimore-Washington area, MNC Financial Inc. rushed to become one of the largest lenders for commercial real estate projects in the country.
But MNC Chairman Alfred Lerner says loan officers broke the company's lending rules, taking risks based on a builder's reputation and upon promises that projects would be leased.
"We had terrific rules and then we had what we called exceptions. I think we had too many exceptions," Lerner said at a news conference yesterday.
MNC should have recognized the potential for problems, but did not, he said. While implying that most of the bad loans were made by MNC's Maryland National Bank and American Security Bank in Washington rather than by recently acquired Equitable Bancorporation, Lerner said there is plenty of blame to go around.
"No one at any of these banks wins the award for great lender," he said.
MNC's plunge into commercial real estate had been noted for some time by banking experts.
A report by Bear Stearns & Co., a New York investment-analysis firm, showed MNC with the highest proportion of construction loans among 30 regional bank-holding companies with assets of more than $5 billion.
According to MNC, commercial real estate loans accounted for 25 percent of its loan portfolio as of Dec. 31, 1989.
And the percentage may have gone higher, according to Thomson Bankwatch Inc. of New York, a bank credit-rating consulting service. Thomson estimated that 31 percent of MNC's loans were made to commercial real estate projects.
In a report earlier this year, the service ranked MNC as having the second-highest percentage of commercial real estate loans of any major bank in the country.
"Generally speaking, real estate is the biggest problem area and the higher the concentration, the greater the concern," said Gregory Root, president of Thomson.
Although real estate loans can be among the most profitable, they also can be among the most risky, experts say. As MNC poured money into land deals and construction, it didn't foresee that the market, especially in Northern Virginia, would collapse.
Weakened by cutbacks in the defense industry, the economy in Northern Virginia has sputtered during the past year. Michael Krauss, vice president of Legg Mason's research services, said tenants did not move into the gleaming new office buildings that MNC and other banks had financed.
At the end of September, office-vacancy rates in Northern Virginia were hovering around 20 percent overall and approaching 40 percent in some places. In Herndon, Va., for example, the vacancy rate is 36 percent, according to Smithy-Braedon Property Co.
The rate is much lower in the Baltimore area -- an estimated 12 to 14 percent, experts say -- but in this area, too, the commercial real estate market has softened in recent months.