Hooray, the recession is over (isn’t it?)
Glenwood Springs, CO Colorado
Well, victory has been declared in the war against recession. Everybody is back at work. Wall Street banks are booking seven-figure quarterly profits, and their executives, who have had to survive for a couple of years on measly bonuses of just a quarter of a million or so, are back in the stratospheric tax brackets where they breathe different air than we common mortals.
What? You say the recession isn’t over as far as you’re concerned? You’re not making as much as you were two years ago? You don’t even have a job right now? Well, obviously, you’re not paying attention. Go over to the other side of the room (if you can find a seat). We’ll deal with you later.
Now that we’ve got that out of the way, we can move on. (Don’t you just hate it when somebody tries to inject reality into a nice theoretical discussion?)
What’s happening with lending, especially real estate finance, right here in River City?
There continues to be money available for residential real estate because one of the cornerstones of the national recovery effort is to bolster housing. It’s business as usual for Fannie Mae and Freddie Mac, at least business as usual circa 1995. They’re buying mortgages on owner occupied homes pretty much as they always did, up to the early ’10s, when, to compete, they got into the sub-prime business. Now, of course, borrowers have to show that they can repay the loan, not exactly a new idea.
But Fannie and Freddie don’t buy the bigger loans, and that has an effect on a market like the Roaring Fork Valley, which still has higher real estate prices than most of the rest of the country. Presently, there aren’t many sources for the so-called jumbo loans.
Three or four years ago, you could, say, buy a house for $800,000, put little or no money down, and barely have to qualify. So what if you couldn’t afford the payment over the long haul. Just keep current for a year, and then sell the property for 20 percent more than you paid for it. Beautiful arithmetic, and what could be simpler?
Now, a buyer would have to put $350,000 or more down on that $800,000 sales price, which means that the price isn’t going to be 800 grand, but something considerably less.
Banks are still struggling with their real estate lending portfolios and foreclosed real estate. Although residential real estate, nationwide, is beginning its northward trek to better times, commercial real estate continues to go south and may not stop until it reaches the equator. Consequently, new commercial real estate borrowing will remain tight, or unavailable. It’s anybody’s guess when commercial vacancies will start to decrease, especially as relates to office space. There’s an intriguing theory out there that office rentals may never rebound to former levels because a lot of people, especially small businesses in the service sector, are realizing that they really don’t need offices any more. Regional real estate markets in western Colorado continue to be flat. Some, such as Telluride, are frozen in time. There’s been virtually no activity there for a couple of years, and everybody’s thinking is in sync with when the clock stopped. Prices haven’t dropped, because nothing has sold. Comparables are years old, and thus worthless.
Hard money is hard to get. The knee cappers were collateral-based lenders, which meant that they made high rate, low loan to value ratio mortgages on real estate with high values. When values plummeted, they found themselves in the same boat as the banks. Indeed, many of them borrowed from banks to fund their lending and got rich on the spread. When the collateral’s value went into free fall, the hapless banks got another unpleasant shock.
FHA has just raised the minimum net worth for HUD approved lenders to $1,000,000, up from $250,000. Although this isn’t that critical to the Roaring Fork Valley, which traditionally hasn’t seen a lot of FHA lending, it is another nail in the coffin of the mortgage brokerage business. In one sense, though, it’s almost a non-event because, with Fannie and Freddie supplying almost all of the mortgage money, the mortgage broker count is down close to a Mormon’s blood alcohol content. The good news is that some banks are recovering with different degrees of alacrity, which means that lending capital will start to trickle, then, hopefully, flow. For example, Alpine Bank recently sold some problem loans that were in litigation with the borrowers. Rather than spending money, and, more important, valuable management time in court, they sold the loans and took a big step in getting the lending machine cranking again. Alpine can do this because they’re blessed with a very strong capital base.
We’ve said it before in this column, but it bears repeating, since, obviously, a few of you folks don’t pay strict attention.
There are two natural laws in dealing with problem assets: Law number one is that your first loss is your least loss. Law number two is that everybody forgets the first law.
And now for you people who don’t know that the recession is over. Let me read an article to you from this morning’s Wall Street Journal. …
Pat Dalrymple is a valley native. He’s been in the mortgage and banking business since 1961. He’ll be happy to answer your questions or hear your comments. His e-mail is email@example.com.
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