With 18 percent of its credit portfolio in energy loans, BOK Financial Corp., parent company of the Bank of Oklahoma, is seen as a bellwether for banks in the Midwest's energy dependent states.

BOK said recently that it expects to quadruple its loan loss provision for the fourth quarter to $22.5 million. “[Last] week, the Bank of Oklahoma said its earnings will be short of expectations due to some energy loans not working out,” says Channing Smith, managing director of Capital Advisors Inc., an RIA with $1.6 billion in assets under management, based in Tulsa. “The bank forecast there likely will be more pain ahead for energy companies due to prolonged oil prices.”

The sudden and persistent drop in oil prices has taken much of the country by surprise, but in energy-producing states like Oklahoma the pain has been far greater, exacerbating unemployment rates and contradicting last year's mostly positive housing foreclosure rate.

According to RealtyTrac's annual report, foreclosure filings nationwide in 2015 fell 3 percent from 2014 and a whopping 62 percent from the peak in 2010, for the lowest annual total since the global financial crisis. In sharp contrast, 16 states are moving counter to the falling trend in foreclosure starts: among the worst off Oklahoma, up 92 percent; Massachusetts, up 67 percent; and Missouri, up 28 percent, according to RealtyTrac. “I think there will be some foreclosures due to some losing jobs at oil companies, but not a catastrophe,” says Smith.

Jim Kee, president and chief economist of $2.8 billion South Texas Money Management Ltd., in San Antonio, Texas, got ready for a downward slide two years ago. “The foreclosure rise is energy-driven and was very much anticipated by us,” says Kee. “Most of our clients work in the industry or own mineral rights. About two years ago, we turned unambiguously bearish about energy.”

Bank repossessions (REOs) of homes, which generally come at the end of the foreclosure process, were down steadily over the last several years and in 2014 were 57 percent below the 2010 peak. But in 2015 they rose 38 percent, and in December they were up 65 percent. Helping depress home prices in many markets are banks' discounts on sale prices, which in 2015 were 41 percent below the median price of all homes, the biggest bank-owned discount nationwide since 2006, says RealtyTrac's vice president Daren Blomquist.

New Jersey was the state last year that saw the biggest increase in REOs, 226 percent, although it had little to do with the slump in energy prices.

New Jersey, advisors say, is looking worse than other states due to a variety of factors, including decades of ignoring mounting debts; an underfunded, ever-widening public pension gap; and bankruptcies and layoffs at casinos in Atlantic City.
 
“The chickens are coming home pretty soon,” says Andy Kapyrin, director of research for RegentAtlantic, a $3 billion RIA in Morristown.  Noting the state's unemployment rate last month was 6.5 percent, compared with 5 percent nationwide, Kapyrin cites an anti small-business culture. “Smaller businesses [the largest employers] can't compete,” he says.

The mainstays of the state's business strength have moved from insurance and auto manufacturing to pharmaceuticals, such as Merck and J&J, where head counts have been dropping. Contrary to fears of immigrants taking low-paying jobs, the state is suffering large losses of management positions at places like Mercedes Benz, in Montvale, which moved to Georgia. Office rentals are high as well as salaries, says Kapyrin. “New Jersey has to do more to retain its corporate residents.”

His clients are worrying more about their home values than their portfolios. And he blames some of the REO rise on the lack of incentive for people to make payments when home values are dropping.    

“Our credit rating is the second worst in the country after Illinois,” says Kapyrin, who would limit lending to New Jersey. “Towns and counties are fairly solid and have separate revenues.” But, “the state's trajectory is not good. The solution is simple math,” raise taxes or lower spending – most likely both. Either way, he says, “the public will be unhappy. It's politically doubtful anything will happen until [Governor Chris Christie] is not running [for president].”