dit markets, Lehman declares bankruptcy- another blow, Merril Lynch sold, AIG being supported by the US Government, Taxpayers pick up the tab on a $700B rescue plan- blow after blow, how much longer can our fighter keep standing???Top financial leaders, including Greenspan, have called this crisis “a once in a century event.” This has not been limited to our shores, as the Global markets have also absorbed serious punishment. Most countries are struggling to “liquify” their credit markets as lenders are holding on to every cent they have available.
The immediate impact to lenders has been that even traditional delinquencies for “lower risk” borrowers are on a steep increase. This is the case as so many fall behind on their mortgage obligations. For the higher-risk borrowers, the story gets worse. There is no capital available to keep them in their homes and avoid foreclosure. The FHA alternative has strict guidelines that are prohibitive to most borrowers. The problems will continue to increase as property values are driven down by the inability to obtain any financing alternatives. This, in my opinion, is the reason that we are likely to be in a declining lending environment for several years to come. Only the reduction of inventory, the stabilization of values and credit being released will eventually lead us out of the crisis. 2010 is my estimation for reaching a stabilization point.
Stabilization will be greatly affected by the regulations being proposed by government, thus making it tougher on lenders. The stricter guidelines will only exasperate the decline in property values and increase foreclosures. The borrowers who truly need the most help are locked out.
I would like to share something with you that is really at the root of the problems we are all facing today. We recently received a submission for a short-term loan on an investor owned home. The loan request was in line with our guidelines and at a very low LTV. We received a complete credit package including an appraisal just completed by a licensed appraiser.
We were prepared to fund the loan and, as a standard precaution, we sent our analyst to perform a property inspection. The appraisal was a complete fraud, showing multiple shots of the interior and exterior of the property and provided documentation of the home being in average condition. The house was a disaster beyond description. The reason I bring this up is that it is exactly the problem that led to the inflated real estate values we witnessed over the last few years. Many appraisers were asking- “What value do you need?” This complete breakdown has to stop and there must be strict legal action implemented. We are pursuing every avenue against the appraiser and broker.
As lenders, we have very little confidence in what we receive. This makes us pull back from lending, increases our costs and ultimately hurts the borrowers who need our funds. I hope everyone does their part to stop the widespread fraud in the current lending environment. Without gaining the confidence of lenders, credit availability will continue to be scarce. If I sound angry it is because I am. I only hope that you all get angry as well and help put a stop to such activities.
All the unprecedented actions taken by the government are geared to one thing: find the bottom and begin to re-build confidence. Our fighter needs to get off the mat.
The mindset of people needs to change before that can happen. Cheap, easy money was available to everyone to spend on luxuries, college, home improvements and vacations. Institutions also used the cheap money to expand their operations and banks were happy to lend as the capital kept flowing in. This is no longer the case and this reality needs to filter through and establish new spending habits. If there is nobody left to finance the previous lifestyles it will probably be “Big Brother- the Government” that will need to keep pumping money in to avoid a complete collapse. All the success that was built on cheap money will lead to further declines in other industries and this will unfortunately be Round 2 of our fight.
I believe the next 6-12 months will be the key in trying to predict what the future will be. The questions to be answered are: If some of the bad debt is pulled out of the banks and other institutions will they suddenly be willing to loosen the grip on credit flow? If housing stabilizes, will lenders jump back in and lend on higher LTV’s? One thing is certain, if that fails to happen we are looking forward to a prolonged recessionary period.
That is the most difficult projection to make. At Peak Capital Group, we have been actively pursuing some of the distressed assets held by Banks. We are buyers of REO’s as well as Non-performing notes, both commercial and residential. Our analysis remains very conservative with an eye toward further declines. We are also lending to opportunistic borrowers who need quick access to cash or property owners trying to salvage their deals. We are clearly one of those lenders that remain very well capitalized but holding back to a degree, primarily due to a market confidence lapse. Although we have reduced our loan production, we are still active and will remain so in our market.
I do look forward to being the creative solution for borrowers as well as sellers of properties and debt instruments. I also look forward to our fighter getting up and landing a strategic blow to the negativity that currently prevails.
Gil Priel
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