The current depression is over as soon as the financial institutions decide it's over. In a credit based economy where banks decide how many employees a business has, how much our homes are worth, how much inventory a business can stock, whether one can buy a car, attend college, open a business, create IPOs, complete mergers and acquisitions, the current misery is over when those lending institutions say it is.
If a bank owns 8% of the homes on a street, holds the mortgage on another 12% of the mortgages, maintains the deposits of 15% of those homeowners and is one of the few options that an interested purchaser has to buy a home currently for sale on that street, what decision are the citizens really making? If that bank is willing to loan $300k to the prospective buyer to purchase a home, than the value of their bank owned homes are $300k and the "home-owners" with mortgages with that bank may be offered an equity line on that home if they owe less than $300k. If one of those "home owners" owed $150k, they could take a loan against their home for $150k and start a business, invest in stocks or purchase goods, services or additional assets.
Until the stumbling incoherence financial institutions consider to be reliable computer based risk models are scrapped for the favor of common sense and rational human judgement, these banks will continue to wound themselves and have the citizens as a whole suffer. If any intelligent person owned a home and was in the business of loaning money, that person would loan as much as a willing and credit worthy buyer could reasonably afford to pay. Loan to value would be without regard, as payment to income would be the "trump card." This would certainly be the case if that same person had more homes for sale and currently had balances owed to them against homes purchased from them as the values of those assets would appreciate. In essence, a home's value is substantiated by the incomes of the people who wish to purchase them.
Sound simple? Well it's not for massively inefficient corporations, or as I like to call them governments of shareholders. Common sense and rational judgement are just the types of intangible variables that will get a person fired. Follow the model is the cry of executives, upper middle management, middle management, branch managers and credit analysts (glorified bank tellers) alike. After all, the model is quantifiable and predictable. Follow the model or find new employment. Never mind that the model rewards loaning as values appreciate creating inflated valuations that will invariably correct in a massive fashion every one to two decades when lending institutions decide that they no longer wish to outrun losses. Never mind that the model shall exacerbate the correction by magnifying price declines as the model reduces loan to value requirements in a race against price declines creating a fury of crashing prices. Never mind that this article is exactly on point and almost all loan officers and credit analysts could not refute it with candor.
Follow the model, follow the model- least we be without the ability to make a decision or decide on what criteria to lend. Thank goodness that when these banking models fail again, and they will, we will have the only organization less efficient than large corporations, the Federal Government, to rebuild them and remind them through massive tax payer waste and societal loss of wealth that they are the sole solution to their self created problem.
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David...I love these blogs when they are short like this one. That last sentence had a bit of sarcasm in it. But it is "Spot On!" Love ya brother! Brent Abdulla
ReplyDeleteHmmm. Let's see, lending on the value of chattel or real estate, has been going on, since, let's see....the beginning of time? Not only does lending versus value, in addition to affordability, make sense, it is a time honored and tested method. With this method, through actuarial and statistical evalutaions, an entity should be able to accurately predict losses, and therefore profits. In order to properly price the lender's assets, one must project future values and costs.
ReplyDeleteThe writer suggests that only payment to income is important to the lending equation by stating: Loan to value would be without regard, as payment to income would be the "trump card." Does his theory hold water? Let's find out by having a lender solely lending on payment to income, with no regard for collateral value. Let's say I would like to purchase a pristine 1972 AMC Gremlin. Given my income, let's say I qualify for a $25,000 loan. Given David's methods, the lender will loan me the money. However, in the deal, I make the dealer throw in a very nice 2009 Honda Civic EX, but only have one loan on the Gremlin. The dealer says ok, and off I go with 2 cars. As such, let's say something bad happens to me, and I can no longer afford the $25000 loan. I must give the lovely Gremlin back to the bank, file bankruptcy and be absolved of my debt. Now the lender will take nearly a total loss on the loan. I, however, still have a very nice Honda Civic. Now let's say, everyone who goes to get a loan through that bank does the same thing.
Would you invest your hard earned money in that bank? I hope David wouldn't.
Your favorite responder. JN