Lending Or Not That Is The Question?

Granted this is bad Shakespeare paraphrasing but it raise the point of what is happening in lending today. In a Reuter's article "Bernanke says spurring credit key to rebound" the Fed Chairman makes the point that credit needs to be extended. However, he also indicates that at this time banks are not lending. No segment of the lending world appears to be allowing people or companies to borrow money. Clearly the Federal Reserve wants banks to provide access to capital or credit to companies and individual, however, as far as I can tell this is not happening. A month ago, Wells Fargo announced that it was closing 638 branches and terminating 3800 loan officers New York Times article "Wells Fargo & Company". Most financial institutions are making qualifying for any type of credit very difficult. Currently banks prefer to borrow money from the Federal Reserve at close to 0% and buy treasuries returning between 3% and 4%.

Based on historical evidence we can make the argument that banks and institutions have problems understanding long term risks and how to price them. Clearly the difficult situation we are in today is a direct result of not estimating and pricing properly the risks that lenders were taking. More to the point, if lenders do not start to lend soon, then they will increase the risks that the economy is not going to recover and potentially increase their losses. As businesses need credit and cannot get it, they are not able to meet their debt obligations and start to default. The lack of actions by financial institutions and the continued tightening of lending requirements increase the problems that the economy is facing. Thus not lending can become more dangerous than extending new credit.

All lenders should be encouraged to make new loans and new credit should be extended. There are some glimmers of hope, but it is too soon to see if there is a beginning of a change in credit policies. In residential real estate, some jumbo programs are starting to surface. At the same time there is an increase in default in higher priced residential real estate. In commercial real estate, well the picture continues to be gloomy at best. Most financing appears to come from the following sources, the Small Business Administration through their SBA loan programs, Fannie Mae and their multi units' apartment building programs, insurance companies and local and regional banks that were able to make appropriate lending decisions when their competitors were too aggressive.

While some credits are extended in specific areas and to specific borrowers, it is not enough. As mentioned in previous posts some foreign banks, mainly Chinese ones are coming into the US lending market as they believe that there are lending opportunities. The longer the lack of credit is continuing, the longer it will take for the economy to recover. To obtain credit today borrowers need to work with professional who understand the challenges to getting approved. Loan officers cannot just collect paperwork, they need to understand how to prepare a credit file for review and write a credit memo, or they need to work with people that can do it for them. Working with borrowers, I have seen credit approval successes when both credit professional and borrowers were working closely together.

The bottom line in credit today is that there is a lot of confusion and that it may be this way for times to come.

A Year Of Opportunities

Well the numbers are in for the first 6 months of 2010 and it does not look great. After improving the employment numbers are starting to falter, consumer spending is not great and business and economic trends are not looking good for the next six months. Residential real estate after seeing some upward trends is now faltering as the government is removing incentives and tax credit. The number of 1 to 4 units residential properties owned by banks and financial institution after going down will go back up. In a Wall Street Journal blog post "More Bank-Owned Homes Likely to Hit the Market" the writer use two sources to assess the size of the issue, is appaears that between 530 thousand and 570 thousand homes are owned by banks and financial institutions. Using the same source 7.3 million household are 30 days late, implying that more REOs are on the way. We have two good news interest rates are low and should stay in low for the next 6 months or even a year and some banks have re-started lending beyond government sponsored loans. They are now started to keep some loans in their portfolios.

On the commercial real estate front the issues are there to stay and we are going to start seeing additional problems caused by a lack of economic growth. As discussed in previous posts, banks who own commercial real estate are in trouble and since there is no economic recovery, more investors who have tried to kip properties are going to start to default. In addition, numerous property owners are starting to see that their notes are due and they have nowhere to go to get refinance, forcing banks to foreclose. Until the economy start to improve significantly and until banks clean their books the commercial real estate market is going to continue to experience major difficulties.

Even with all these bad news it is a time of opportunities because when there are problems, there are also opportunities to fix them. In residential real estate numerous small investors have been buying properties for the past year from banks, cleaning them up, improving them and re-selling them. The most active market segment appears to be for properties below $400,000.00. While the residential real estate market could go down, most likely it will stay depress and in some very specific areas markets may go up. Investors that are, recognizing these trends, who are willing to take the risk to buy properties at auctions, from banks etc… and can find ways to turns them at profit are going to continue to make money.

On the commercial side opportunities are also going to create themselves, investors are starting to recognize that while the market is down and depress investment opportunities exist with limited risks. In another Wall Street Journal article "Fortress Is Buying While Real Estate Is Down" the private equity firm is acquiring companies related to commercial real estate in order to have access to assets at depressed prices. The ICBC or Industrial & Commercial Bank of China is moving into commercial lending in the United States for loan $100 M and above. They recognize that they can lend at low valuations and that there is limited or no competition.

As describes above opportunities already exists for investors in both residential and commercial real estate. I believe that while we are in a difficult economic situation investors are going to be able to see significant returns over the next few years on their real estate investments, either by directly investing or by investing through funds and other conduit. As you see these opportunities develop and encounter success stories, let me know I will post them here, email me.