Get your goggles and leather flight caps because one thing is clear, in real estate - there is no smooth sailing in the foreseeable future.
While it is now clear that anarchy is the word with residential home loans, commercial real estate has remained amazingly stable. In my recent conversation with numerous commercial lenders, I concluded that although capital remains relatively inexpensive the underwriters are more careful limiting the leverage effect for borrowers. The “squeeze” on commercial credit is on. Lenders are “lending scared” with expectations of falling values in the coming months. I expect that this credit tightening will create the loss in value that they fear is coming. A self-fulfilling prophecy.
I am regularly asked if I believe that all the new policies and programs, being either implemented or proposed, will result in an immediate fix for the current crisis. My response is that monetarily it is not enough but sometimes the perception has a bigger influence than the reality. Investments have a lot to do with psychology, so if we believe things are getting better- they just might.
The key items in the economic stimulus package just approved are the rebate of up to $1800 for families and the increase by almost $300,000 to $729,750 for conforming loan limit.
The other proposals, in my opinion, are political grandstanding like Project Lifeline. It mandates a 30 day freeze on foreclosures so the lender can try and workout a deal for a new loan or modification. I am not aware of any lender today that would not pause for 30 days to work something out with a well intentioned homeowner. Again, this all sounds good and gets lots of air time with the media in this election year. The rebate and the conforming loan increase will have a positive impact in conjunction with continued fed rate reductions. It may be the case of too little too late for many borrowers but I do believe it was a good call. According to the National Association of Realtors, pushing the limits up to only $625,000 should create 350,000 additional home sales in 2008. A higher limit would even be better and the refinancing would of course keep many in a home that they may have otherwise lost.
The main issue is still the fact that the current underwriting and guidelines are effectively locking out the “higher risk” borrowers. Their ability to repay, proof of funds, lower LTV’s, seasoning, etc. are the focus today. The trend continues to go to “full doc” only and the result is the creation of a large vacuum of borrowers who cannot qualify for the lower rate loans or any rate loan. I believe we all can agree that borrowers who cannot afford a loan should not get one, but there are situations where there is a temporary crisis or other situation that has led to the need for a loan. It may be the case that only after values fall further and affordability increases that we may actually be able to see the start of a turnaround. Current inventories are way out of line with demand and only when they come down will we be able to say the bottom has been reached.
All indications for most of the western states and eastern seaboard are we are still in a declining market. New home sales are down 40% year to year with a 5% decline in December alone. Many have said that this will be the deepest correction since World War II. The sub-prime crisis has spread into the prime loans as well with adjustable and interest only products. I for one, expect that we will be in a declining to flat market for the next 3 years. I think this summarizes the overall state of the market and the efforts underway to try and prevent a true recession and shorten the declining stage of values.
Through this period we will be committed to continue funding in both the residential and commercial arenas. We are assisting borrowers with foreclosure bailouts, probates, debt consolidation, regular purchases as well as opportunistic investments. We have also implemented a program to co-lend with other lenders who may have capital or other restrictions utilizing our flexible portfolio financing. “Funding Creativity” puts us in a position to make 1st or 2nd’s with cross collateralization on a national scope.
It is this ability to fund in days rather than months that can give our borrowers the advantage to get through these turbulent times.
We look forward to hearing from you with all your funding needs.
Gil Priel
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