NAR Economic Summit – Commercial Loans & Short Sales

Much of the afternoon was devoted to the commercial market and banks. The commercial market is a great source of concern right now. Commercial defaults could freeze the housing rebound while its impact on the credit market could drive even more banks out of business – including some that are starting to turn around today. The triple whammy of housing defaults, followed by commercial defaults, followed by credit card defaults is not a good combination for recovery – did I mention unemployment? But that’s worst case and hopes are high (if not the actual hopers) that we may be on our way out of the first and the stimulus may moderate the others.

Jerry HowardCommercial transaction are down 80% from a year ago and values have dropped 25% – 35% in some markets. This is at least partially due to significant overbuilding during the past decade. Given that commercial loans are typically in the 5-7-10 year cycles, these loans are comeing due and lenders simply aren’t extending additional credit even to loans that are performing. Commercial construction has virtually ground to a halt during the past year with only about 70 million SqFt being permitted and developed. While this may sound like a lot, compared to the billions of feet available out there, it’s a drop in the bucket.

The future of banks as we know them was also mentioned. It was posited that the recent downturn was actually more of a lending bubble rather than a housing bubble. The public was responding to the rampant availability of funds. From the EVP of Wells Fargo Mortgage, ‘Bad loans are made in the good times – it’s counter-cyclical and created this bubble.’ Banks also need to work smarter. NAR announced new regulations making short sales a priority to lenders. That system is broke all across the country – not just where you are. Partly because banks are severely overburdened right now, partly because many experienced staff have been replaced in cost reduction efforts, partly because…

tim sandosThere is a new incentive that may tip the scales for enhanced short sale procedures – allowing short sales or deed-in-lieu to proceed without requiring delinquency on the part of the owner. Aside from the unfortunate habit of dinging people’s credit for trying to do the right thing, it is also having a real impact on our soldiers. One member from Hawaii quoted the high percentage of foreclosures in Honolulu in and around Pearl Harbor. Soldiers posted there years ago purchased homes or condos anticipating a lengthy stay or a rising market. Now many of those same soldiers are being transferred and are having their credit wrecked at the same time all thanks to their employer (US Government) & the banks. Even returning  veterans, some wounded, returning from duty are transferred stateside and are forced into credit hell. That’s not right.

sheila bairIt was also pointed out that 90% of sub-prime borrowers were already homeowners – the incentive for banks was on the gamble, not the product. Banks must get back to the business of being banks – back to basics. Making fewer but higher quality loans to qualified homebuyers – without excessive and onerous over-regulation.Home buyers are also being encouraged to buy a house as a home – not as a stock certificate or an investment. Over the long term housing remains the greatest builder of wealth for the average American. The short term laughs at the long term.

We finished out the afternoon with FDIC Chair Sheila Bair. Her opening statement was “It’s been a tough 18 months but I’m definitely feeling better this year than last year”. She closed by saying that ‘Housing led us into this downturn, housing must lead us back out. But,” she noted,” it’ll be a slog, not a sprint.”

t. But,” she noted,” it’ll be a slog, not a sprint.”

NAR Economic Summit – Dr. Alan Greenspan

Unless you’ve been under a rock for the past 20+ years, you know exactly who Dr. Alan Greenspan is, or was. Among a list of accomplishments, he was Chairman of the Federal Reserve from 1987 to 2006 starting under Ronald Reagan and serving (or being served by) a succession of Presidents until his retirement as the housing market started to crash down around his ears. Like me, you’ve probably heartily agreed with him at times and vehemently disagreed with him at others. But regardless of your take on him, it’s impressive to see him in person and a tribute to NAR that he would come speak with us and field questions. At 83 he is a vibrant and dynamic speaker, possessed of both emotion & gravitas as well as a sense of humor.

greenspanDr Greenspan started his address by noting one profound truth that if we learn nothing else from this current situation it is that we are now and forever integrated into the world economy as never before. While other countries fortunes have risen and fallen on the status of the U.S. in the past, it’s very much a two way street today with segments of our economy tied irrevocably to China, the EU and middle-eastern oil interests. And while more and more nations look to us for fiscal leadership during these trying times, others are calling for expansion of the global money market to include indices other than the US dollar.

greenspanHe went on to say that recent events have also illustrated a disconnect between the stock market and the economy. Not to say the stock market isn’t tied to the economy very closely but it has become apparent that there is a much closer relationship to human psychology than previously considered. Depending on what the media tells them, their own personal circumstances or even what their neighbors think, the stock market can experience major exuberance or major depression counter intuitive to what the financial market might indicate. In the current cycle that attitude is increasingly tied to real estate with the price of homes being the key determinant in market equity. When by various estimates anywhere from 25% – 50% of US homeowners are under water, it has a serious and deleterious impact on that equity position and on the security and investment attitudes of a wider swath of the general public than can be accounted for by those personally affected. Returning people’s trust in government and their financial institutions will be paramount in stabilizing this attitudinal component of the market.

We are starting to see today a significant shift in monetary policy and a much greater availability of money. He believes we are seeing the ‘seeds of bottoming’ especially in areas like California, Arizona, Florida and Nevada. Prices haven’t bottomed out quite yet but he expects these areas that fell the farthest the fastest to show improvement before the rest of the country. That improvement will be governed not so much by monetary policy or even availability of funds at this point, but on inventory. And in that arena we still face a ‘couple bumps in the road’.

greenspanGreenspan also pointed to failures in the risk management capacity of certain industries noting that he and others mis-read the ability and/or willingness of managers to perform in their own self-interest or self-preservation when it came to application of risk portfolios and actively seeking out people to give loans to that were demonstrably unable to repay them. To that end he discussed the concept of being ‘too big to fail’ and the fallacy of that statement. He stated that both Fannie and Freddie are not inherently stable in their current form and suggested that both those organizations be split into smaller entities where the failure of one does not pressage a systemic collapse.

During the Q&A one member asked if his monetary policy of reducing the interest rate to 0% might have contributed to the ‘easy money’ problem and that the subsequent run-up to 6+% might have exacerbated the problem? He has no doubt been taken to task on this one before as he had a ready answer discussing the lag time between rate shifts and housing curves, the disconnect between interest rates and mortgage rates and the general role of the Fed. In this response I found some of his remarks to be somewhat disingenuous and, while they make be technically accurate, don’t take into account his own reference to the role psychology plays in the market. Of course he did say that the impact of consumer psychology is a more recent realization so maybe he discounted that from his thinking at the time. But from a man whose simple declaration of ‘irrational exuberance’ a few years back sent the market into a tail-spin, you’d think the psychological impact on consumers and the market would have been painfully apparent some time back. In your own experience, when consumers hear that interest rates are down, what is their first thought? That mortgages rates are also down, right? Even many Realtors and lenders don’t understand the difference.

There was also some question of the expansion of the Fed into policy making during his tenure – which he again dismissed as untrue. He said that in some cases the Fed reacts to policy while in other cases policy may in fact respond to the Fed but that it was never his intention to make the Fed a policy making arm of any Administration. Coming from the man who was arguably a major factor in policy decisions for 2 decades and 4 Presidents, that may be a bit of an understatement on his part.

Overall, he was very forthcoming, personable and energetic. While I may not always agree with his policies, I have a great respect for him as an individual and for the job he performed so admirably for this country through numerous challenges.

You can read my other posts on the recent NAR Mid-Year Conference and Real Estate Summit here:
NAR Real Estate Summit – Video Links and Personal Observations

NAR Real Estate Summit – Morning Session Remarks

NAR Real Estate Summit – Afternoon Session Remarks

American Clean Energy and Security Act of 2009 – Thanks Henry

Loony Legislation Part Two – Cash for Clunkers

Fair Use Vehicle Tax is Anything But