Thursday, November 13, 2008

Manhattan Beach-Beach Cities: FEDS Tell Lenders... Make Loans

Interesting things coming out of Washington in the last two days. First King Hank finally found out what most consumers had suspected... buying up toxic debt instead of the good stuff didn't make much sense. Second the government figured out what my Dad always knew ... if you want money... there are rules you have to follow. In this case taking money from the FEDS means that you better start lending that money instead of using the funds to buy other banks or pay higher shareholder dividends.

It never made much sense that the FEDS were willing to bail out lenders without any strings on how the money was to be used. Now that the US taxpayer is a large shareholder in these institutions we darn well should have a say in what they do. The Administration sold the Bailout as the only way to save the economy and the country from ruin but that doesn't mean there should not be conditions.

The credit markets were quick to take the funds but have been slow to make new loans. Rates and underwriting rules are changing by the hour. Buyers who are told they qualify for $XXX on Monday suddenly find they are no longer qualified by Friday. Good faith has become an estimate not a promise when it comes to many lenders.

Sellers who think they have a solid deal can't count on anything until the deed is recorded. Buyers who believe they can qualify with 20% down often find out they will need more cash at the last minute. Appraisals are a major concern. Lenders only want recent sales as comparables ... homes sold within the last 60-90 days. They don't care what the home down the street sold for in June. As sales are down in most Beach Cities this can often be a serious problem.

So what's the answer... for starters you are going to need a lot of patience and compromise . If you are a seller you may need to be ready to adjust your price if the appraisal doesn't come in. As a buyer you need to be sure you have done your due diligence prior to making an offer. You need to be sure the lender you choose has a track record of closing loans. This is not the time to try working with your wife's second cousin who just started in the business.


Anonymous said...

In defense of the banks:

1. Banks are hoarding the bailout cash because the KNOW that there is a tidal wave of defaults headed their way. They need the cash to cover those defaults. Without that cash, they will go the way of Indymac.

2. As long as the banks that get bought with the bailout money are ones that are in trouble, I have no problem with it. This keeps the system from collapsing. No one benefits from an imploded financial system.

Kaye Thomas said...

Anonymous 10:23,
Some may be hoarding cash to cover future obligations but many are using the money to buy other banks and to pay higher dividends and larger bonus packages to employees.

As the leading indices drop the mortgage resets may not be as big a problem as rates on many of those loans will actually be neutral or drop rather then increase.

I also agree that we need to do whatever is necessary to keep the system fuctional but that doesn't mean there should not be conditions

Anonymous said...

i cover the banks companies for an investment firm based on the west coast.

let me tell you something. the reason the banks are hoarding capital is simple: they are f***g scared.

this isn't a garden variety downturn. this is the big one. global, synchronized recession combined with asset price deflation. in private, the bankers are saying that the impact on the US economy is going to be catastrophic.

the debate going on in washington and on wall street is whether the US economy is merely going to contract 5% next year, or whether it will be on the order of 10%. and no one is optimistic about 2010.

the consensus is that unemployment is heading to at least 10%. some folks think it is going to be as high as 15%.

the cost of the bailout of the US financial system will probably go up 5x from here (people think $1.5T is needed to recap the system, not $350B). a lot of folks are very concerned that this level of borrowings will cause investors to stop purchasing US treasuries. that will send US treasury rates to 6%. conforming mortgage rates in that environment will approach 9%. jumbos will reach 11%.

go read the recent goldman report about the results of the most recent treasury note auction. not encouraging. demand is already starting to waver because of the flood of supply that's coming.

in that environment, bonuses will be slashed, dividends will be eliminated and more banks will fail (citi is at the top of the list).

there are some people out there who think that paulson & bernanke aren't being forthright with the american people, that they are somehow rewarding their buddies on wall street.

part of that statement is right. they aren't being forthright. they aren't telling the american people how bad it's really going to get.

but the idea that they are 'rewarding' anyone is a joke. they are just trying to keep the global financial system from collapsing before they leave office on jan 20.

as bad as it's been so far, it's about to get a whole lot worse. everyone who is alive today in the developed world is about to get a first hand education in what debt deflation looks like.