I’ll begin by quoting one of my favorite truths of life.
BawldGuy Axiom: Lenders lend. The longer they go without lending the more faded the tattoo on their foreheads become. They must lend to be worthy of the title.
Twice this week while in the throes of doing business, I’ve had conversations with fellow professionals in other states. Truth be told, I’ve had more than two a day, about par for the course. These conversations were different though in one very telling sense. They both passed on the same piece of intelligence concerning banks in their areas known for lending on real estate. More in a minute.
Also, new SEC Chairman Schapiro said today she was going to have the board revisit the so-called ‘Mark to Market’ rule, which I’ve railed against since forever. Without going into mind numbing detail, Mark to Market forces banks to record a loss on a loan that’s always performed, never even had one late payment, but whose security’s value (Uh, that would be the property.) has sunk below the loan balance, due to the market’s current correction. Never mind they haven’t lost a real world penny, their ledgers must show a loss. Among other things, this messes with the bank’s ability to continue loaning money, as it negatively affects their bottom line as accounted for by government regulators. You know the ones to which I’m referring. The same ones who forced Fannie and Freddie to make textbook bad loans in the name of helping those who couldn’t buy a used Snicker’s Bar on credit.
But not only do I digress, I’m gettin’ off my high horse. Back to the lenders.
These two pros, one a mortgage broker and one a real estate agent for one of the largest companies around, told me the same thing two days apart. Seems the banks in question were being pressured from their boardroom to get significantly more real estate loans on the books, and pronto. This is where it gets really interesting, not only ‘cuz it makes sense, and it’s true, but ‘cuz the same exact reasons were given by each lender.
First, they’ve got so much money now they don’t know what to do with it. Though many will look to D.C. as the reason, I think they’d end up whispering the wrong name. The newly abundant liquidity is the direct result of what the Fed has been doing since last summer or before, seemingly (’till now at least) without even anecdotal results. Neither one of these banks has been inundated with hordes of new customers forklifting in bagfuls of cash deposits.
Second, these bank execs have told their loan guys in no uncertain terms, they want as much of the current 4 point spread as they can possibly cram into their portfolio. Historically, 2 points has been quite enough, thanks, to motivate most real estate lenders to cough up loan funds to qualified borrowers. Of course twice that spread would be too good to pass up.
When was the last time you heard or read, even third hand, of a lender pressuring their real estate dudes to book some loans now, or else? A long dang time for sure.
Combine the potential neutering of ‘Mark to Market’ with highly motivated real estate lenders lusting after historically high spreads, and you may just be seeing the light at the end of the tunnel. Not a prediction mind you, but it’s pretty dang encouraging. Add these two potential new developments to the recently increased Fannie/Freddie increase of owned investment properties earlier this month, and my post of last month, in which I called for exactly those things begins to look kinda sorta cool.
Give me a buzz, and let’s talk about you. 619 889-7100 will get us started. There’s the Contact BawldGuy button up top if you’d rather write me. Have a good one.
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Encouraging signs, indeed. Like the first tips of the crocus in Spring.
What’s the probability that nutty Mark to Market rule will be recanted, in favor of the same bottom-line reporting that real businesses use?
… Robin
The Mark to Market battle will be between those who know which way is north on the map, and congressman/senators who will not be eager to surrender their perceived power.
Money usually triumphs over politicians as whores always have their price. (Did I really just say that?)
I’d say there’s a more than likely change the rule will be modified, but who knows if it’ll be enough to inspire Wall Street and/or banks?
I called my insurance company in Arizona last week, and the pleasant young lady that answers the phone could not stop talking about the house she wants to buy. She knew all the details of the $8,000 tax credit, and she was saving up the three percent FHA down payment and expected to be buying in 60 to 90 days.
Everything that is reasonably priced in the Phoenix area is moving. Multiple offers on foreclosures in decent condition in decent neighborhoods seem to be the norm. Effectively, prices are rising because the low price inventory in the most desirable areas is gone. Folks like the young lady in the insurance office are buying their first houses out in edge communities like Queen Creek. You can afford an $80,000 home on $30,000 a year.
None of this would be happening if money was not being lent. On CNBC Monday morning, Warren Buffett said this was one one of the most profitable times to be in the banking business ever. New business would bail many of the banks out of much of the mess in his view.
Warren also said, politely, it was time for the politicians to shut up and get along. In my view, by the time the politicians and the news media (including the financial press) figure out houses are selling and prices have stabilized, the market will have largely returned to normal.
Buffett also said he would like to buy some of those distressed securities, as he saw an opportunity to make money with them. Just because you can’t set a price by looking to market transactions when the market effectively shuts down does not mean the securities are worthless. I think we will see mark to market morph into mark to market in most cases but mark to some agreed-upon and regulated model in cases where there is no effective market.
Investor — The river known as our economy is cleansing itself just fine, though it’s taken longer due to some gov’t missteps. The Fed’s been adding liquidity to the system like a dog burying his bones, and it’s beginning to show.
Time will tell. In San Diego, as in Phoenix, the REO’s are moving just fine. In fact, the last report I saw said the median sales price was 101% of list.
I love those sneering at Buffett’s recent setbacks, as he’s about to launch his company on another decades(s) long growth trend. Some things never change.
Good article. I noticed that there were hardly any homes for sale in our neighborhood and started digging as to why. Turns out, Chase is offering affordable P&I mods in our area proactively (before the loans reset). This is smart thinking. Not only will they insure a continuing cash flow but curbing the short sale inventory by modifying will keep the neighborhood values from dropping and effecting the value of their performing loans as well. What a concept! Now if we could just get the banks to do the same with commercial property.
You made a good point about the demand increasing for OO, but I’m afraid this is NOT happening with multis/commercial property.
Do you see any movement towards preventing foreclosures/short sales in the muti-unit arena and does the Mark to Market proposed changes and pressure to lend have any positive effect on the NOO market?
I am concerned with the possible escalation of the forclosues in the commercial/multi-unit market, especially in Phoenix. You made a good point that the OO market is starting to absorb but what about the commercial market. Will the Mark to Market/push to lend at the bigger spread effect a lenders modivation to modify vs short sale/foreclose?
“I love those sneering at Buffett’s recent setbacks, as he’s about to launch his company on another decades(s) long growth trend. Some things never change.” I chuckled when I read this. My thoughts exactly!! Buffet is sly like a fox and about ready to be known as the “comeback kid”.
The Phoenix commercial industrial market is grossly overbuilt, and we are just now starting to see the problems. Strip retail and neighborhood/community centers are especially overbuilt, and the breathtakingly low cap rates many of these properties were acquired on mean the income will not service the debt as rents and occupancy decline. Offices built to accommodate everyone in a real estate related business are also starting to have problems.
The lenders will take these properties back and resell them or negotiate the standard work-outs, in my opinion. They have had a lot of practice over the years and the business cycle is something they have dealt with before.
The government is much less involved in commercial lending – no Fannie or Freddie to drive the market. There isn’t the political pressure to modify that there is for housing, and the RTC model is not one that anyone wants to apply again.
These foreclosures and work-outs will stretch out over time, and many may not happen until we get past the peak of the housing mess. However, if things start rapidly spiraling out of control, then we will likely see some governmental intervention. If a number of banks have to be shut down over commercial industrial loan losses, we could possibly see a smaller version of the RTC for the orderly liquidation of government-acquired assets.
Investor — I think the RTC solution would work well with one major change. No grouping of properties allowed, which shut out the smaller buyers back then who would of no doubt paid more than the price paid for individual props imprisoned in large packages.
Small residential income props, 2-4 units, may hit the radar sooner rather than later, as they’re also big with Fannie/Freddie. The larger complexes and retail/office/industrial will likely follow the timing you suggest.
Lurking on the back burner is ‘lender denial’ resulting in the hope a bailout will make everything all better. As this fails to materialize, you’ll begin to see them become openly proactive as many are now in Phoenix, San Diego, and elsewhere.