Let’s Talk Banking — Real Estate Lending — Fundamentals

No big deal, just wanted to throw out a few thoughts I’ve been having lately on the ‘sick’ banking industry. You know, the one whose giants have already offered to pay back government money received recently. Those sick banks. What goes largely undiscussed in most places I rely upon for informed opinions is what these banks have been doing for quite awhile now.

But first a quick trip down memory lane.

Back in the ’80′s and ’90′s as a way of giving back, I taught house agents wanting to understand the investment side of real estate some basic analysis. Of course there’s really no way to be basic when it comes to analysis. Once ya leave the realm of arithmetic and begin throwing around 50¢ phrases like ‘before tax’, ‘after tax’, or even worse, ‘internal rate of return’ — things would spin far out of the gravitational pull of Planet Basic.

The old joke was having them try to compute a return on an existing bank’s new loan, based upon their given cost of funds. It’s a sucker bet. Once a bank is mature, they’re lending depositor’s money, not their own. Duh. The depositor these days is costing the bank give or take 2% or so. If the money comes from the window at The Fed, the cost is most likely 0%. So, it’s not their money in the first place, and they’re paying 0-2% for it, while lending it out at 5-6%, you do the math. They all wanted to be bankers at that point.

My point is this: The biggest 10-12 banks have been rackin’ up profits based upon these 4 point spreads for some time now. Many have offered, though rebuffed, to pay back government bailout dough. They’re much healthier than they’re reported to be, even factoring in the commercial real estate storm chuggin’ our way. (That’s a stand alone conversation for another time.)

Surely prudent investors must pick and choose um, prudently when opting to invest these days. Lenders and the investors buying their loans are doing the same. They’re picking regions that make bottom line sense in both the macro comparative sense, and the micro ‘real estate is nothing if not local’ sense. I now have a portfolio lender making very affordable loans on investment properties in one of those killer regions, Texas, and another lender who’s making Fannie Mae loans to those acquiring properties 5-10 — a previously shunned class of loan lately.

Why are these lenders performing? Simple question — even simpler answer.

BawldGuy Axiom: Lenders lend. If they don’t, pretty soon the stamp on their forehead tends to fade away. That frightens them. If they’re not lending, they’re not lenders. See their dilemma?

Even credit unions are now seeing the opportunity for profit making judicious loans via shrewd and sensible underwriting on well located investment real estate. But notice they’re not doing it in places like San Diego, Las Vegas, Palo Alto or the like — and they won’t soon either. Remember, credit unions aren’t generally known for lending to real estate investors. They love car and boat loans, or purchase loans for owner occupied homes — to their members. They’re making investor loans to non-members now. Go figure.

It’s all about the fundamentals, which has always been the case — at least for those paying attention. Those in Texas making loans to well qualified investors on properties found in premium locations, aren’t stoopid. On the contrary, they’re doing exactly what they’re in existence to do — lend. The only difference is they’re now doing it the way Grandpa used to. That is, with an underwriting IQ over 100.

And it’s working just fine, thank you.

Sticking around in poorly performing regions is the punch line to the old joke. ‘How do ya make a small fortune?’ ‘I dunno, tell me.’ ‘Ya start out with a large fortune and keep your real estate investment equity/capital in loser regions.’

‘Nuff said.

Oh, I forgot. Speakin’ of fundamentals, It’s Thursday and Josh, his sister and I had lunch with Mom. Meatloaf was incredible — and seriously, what’s more fundamental than Mom’s meatloaf?

I’d love to have an in depth conversation with you. You’ll reach me at 619 889-7100. Let’s talk fundamentals, OK? Have a good one.

Related posts:

1. Attention San Diego Real Estate Investors — We Need To Talk
2. Walking the Talk: BawldGuy Gets You Outa Dodge With Minimum $10,000 Discount
3. Let’s Talk Analysis — Before Starting, What’s Your Agenda? It Matters
4. The Coming New World Of Lending — Back To The Future
5. Let’s Talk About Real Estate Investment Clubs — Go Ahead, Make My Day