Oct
31
October 31, 2011 | Leave a Comment
The Bank of Last Resort
Lance and I were talking the other day about the current plight of the real estate investor. It seemed as if every way we turned the “perfect storm” blocked our path. Even a seasoned investor has trouble purchasing property to resell. The bank’s decision-maker, who is hermetically sealed in an office tower somewhere far away, is lying in the corner; quivering in a fetal position and begins to squeal before the loan request question is even asked. And even if you managed to endure the invasive process that only a proctologist could relate to and squeak a loan through, there are no buyers. Why?
The other storm front. Even though loan rates are so cheap that mortgage payments would be cheaper than renting, and even though property values are so low that they cannot possibly pose a devastating risk for a bank that follows a reasonable lending practice, the road to qualifying a buyer winds down to a deeper and darker place than the aforementioned medical practitioners would ever dare to go.
The Third Storm Front:
Appraisals. Investors cannot sell anything because they are competing with the bank’s foreclosed valuations. Homeowners cannot sell anything for the same reason. I understand the rationale, at least on the surface, that when all the sales in the neighborhood are foreclosures, then those become your comparables. But a surface analysis is all the scrutiny that this logic can withstand. From the market standpoint, the banks are in a position that even Walmart would envy. They have enough cash to sell any foreclosed property for any amount they wish regardless of the size of the loss. The Smith household cannot do that. No matter how badly they need to sell, they simply cannot take a 40% loss. So even if they bother to put their house on the market, it just sits there while all foreclosures around it are selling. And, you guessed it, the valuation of their home drops every month.
But the virtual concept of a” home” implies a long-term hold. Even the banks base their formulas on a seven year or more statistic. Eventually someone will do the right thing and jobs will return to this country. If they don’t, then this argument, and all others regarding saving this country, will be moot. For the moment, let’s pretend sanity will prevail and continue the story.
Here goes. Foreclosures will drop back to the occasional sad story. Banks will no longer be the primary seller of neighborhoods (market maker). Property values will begin to increase to at least replacement value less depreciation. Increase by leaps and bounds? No, probably not. Besides, that’s an inflation related thing anyway. Conclusion: lenders should go back to the concept of a “home mortgage”. Stop using short-term data such as foreclosures as comps. If nature had been allowed to take its course, most of these things would be flushed out of the system by now anyway. I really should continue to beef up my justification for this point. And I can. But for the sake of time let’s move on to the true purpose of this article; the solution to this mess.
Lance said “the Fed should be the bank of last resort”. You remember Lance. Well here’s how it played out. Back when I wrote my piece against the bailout, I had suggested that a better alternative would be to let them fail and throw government-backed support to the more worthy banks. The idea was to encourage them to make every prudent loan possible (home, car, student, etc) on the pretext that Fannie, Freddie and family would promptly buy them to replenish their capital and keep the system in motion. Rinse and repeat. Yes, of course some of the loans would go bad. Big deal. Where is all that money they just poured on top of the banks responsible for this mess and expected it to trickle out the bottom. The Feds need to notify the Department of Plumbing because there is a serious clog in the pipes somewhere.
Well maybe it’s time for the “bank of last resort” to spring into action in a more sensible way. And before I even start, I do want to hear your whining about interfering with free commerce. We do it all the time. Every time we offer huge tax breaks and other bonuses to bring a particular company to town we’ve done it. You want to reward companies for adding jobs? Then don’t discriminate. Don’t put your eggs all in one basket. Provide the same per job incentive to every existing business in town. The banks had their chance. We are at war. Desperate situations require desperate actions.
Here’s the plan.
Uncle Sam rents some space in the dying strip malls across the country and sets up “the Direct Federal Lending Store” (DFLS) (the government can’t do anything without an acronym. Some things never change.). No, you don’t need a bank bunker style building because they don’t deal in cash anyway. Frugal, no giant columns, no marble stairways, no multimillion dollar salaries to be paid. Hey, they spend a great deal of time legislating how you can run a business so maybe it’s time they learn themselves. Anyway, here’s how it would go: The loans are at a rate of 4%. If you are current on your mortgage payment and would like to reduce your rate to have more expendable income or to simply stop circling the drain, you are eligible. If you are behind on your payments and can prove that a more affordable payment would stop your demise, you qualify. Rock bottom closing cost and payments in arrears would be added to the end of the mortgage. End of application.
Dear Bank of America,
Please feel free to join in at any time. Uncle Sam would like to do the right thing for a change and get out of this business as soon as possible. After all, we’re only doing this because the country is on life support. We gave you the money to do it for us but you forgot to disburse it. We understand that mistakes happen but unfortunately we have no more time for you to correct it. So, we have decided to take our next trillion dollars and disburse it directly to the taxpayers where it belonged in the first place. We have no hard feelings and are anxious for you to buy us out of the marketplace.
Sincerely,
Uncle Sam
CC: The Taxpayer
Will some of these loans go bad? Yep. How many? Well, if the offices are run by government officials as opposed to hiring unemployed members of the financial services community, all of them. Will it be as bad as the decision to dump all that money on the undeserving banks? No chance. At least we are loaning the money directly back to the taxpayer with no middlemen to siphon it off. Should the government be in this business? Hell no. Add it to the list. Will we hear from the banks lobbyist? Oh yeah. Will the banks cut back on political donations? That would be nice. Here’s a refreshing thought. How about politicians getting elected because the people support them rather than business?
Robert Clifton,
VP, PTREIA
North Star Properties of NC, Inc
Notice: I am Robert Clifton. And with great sadness I approve this political message.
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