Problems with a Reactive Versus a Proactive Housing Market

Isabel Velasquez — Mon, 07 Dec 2009 22:49:58 +0000

How the Home Buying Process Works

The home buying process seems like a fairly straightforward idea. The sellers and their agent reach an agreement with the buyers and their agent. Since agents study the local real estate market, it is assumed that the asking/selling price is on target. The bank then comes in via the appraiser to make sure the value of the home is sufficient to off-set the bank’s risk of the buyers defaulting. If all adds up, the deal is done. Every party has a vested interest in making the deal work because no deal equals no money for anyone. For many years appraisers were under pressure to find enough value to justify approving the loan. This added to inflated home prices over the last 20 years. To deepen the problem, easy credit allowed more people to enter the market driving up demand and sending home prices soaring. Appraisers had to find more and more value to make the deals work. Everything seemed fine as long as everyone agreed on the value and kept paying for it.

A Self-Defeating Prophecy

For many years, the role of the appraiser was just assumed in the home buying process. There seemed to be so much value in homes that the appraiser’s only job was rubber stamp the deal that was already done. What many failed to realize was that banks and their appraisers created that perceived value; that is until the market collapsed. With all of those ill-equipped new homeowners defaulting on their mortgages left and right, home values plummeted. The house of perception the banks and their appraisers built came crashing down. To make matters worse, an economic downturn drove people from their jobs and, consequently, out of their homes. Lower home values also meant little or no equity. When it came time for all the marginal homeowners to refinance to cover their balloon style mortgages, the cupboard was bare. They defaulted, too.

Those Who Study History…

The immediate reaction by mortgage companies to the housing market collapse was to tighten credit. They pulled in the reins so much that almost no one who needed money could get it. This seemed like a justified reaction given the magnitude of the financial earthquake shaking the nation. One problem with looking back too long is that the economy doesn’t move forward.

A Self-Defeating Prophecy, Part II

The role of appraisers now has become one of defender of the bank. They seem to have swung too far the other direction and are being reactive to the crisis the same way they were reactive to the greed that caused it. The truth remains that no deals equal no money for anyone. The appraisers are so consumed by protecting the bank against defaults that they are missing the fact that this tight fisted approach is hindering any recovery effort in the housing market. Nobody qualifying for a home loan is just as damaging as everyone qualifying.

Money—More of a Concept than You Might Realize

Thomas Kazee — Tue, 03 Nov 2009 15:52:55 +0000

When Banks Fail

Bank closings are slowing, despite the fact that more banks are in trouble than ever. The FDIC hopes to instill consumers with confidence. (Photo: flickr.com)

According to the FDIC and other sources, the number of bank failures now exceeds 100. The latest closures included four small- and medium-sized banks in Florida and Georgia: Partners Bank and Hillcrest Bank, both of Naples, FL; Flagship National Bank, Bradenton, FL; and American United Bank, Lawrenceville, GA. When banks fail, the federal government, in the form of the FDIC, steps in to protect the consumer. They do this usually on a Friday afternoon, seizing bank assets to pay for outstanding liabilities. The chief of these are the customers’ deposits. Whatever the assets can’t cover, FDIC insurance does.

When Trouble isn’t Trouble

The highest number of banks ever seized in one year was 120 in 1992. There are currently 416 banks “flagged” by the FDIC as being in trouble as of June 2009. This is up sharply from 305 on the list in March of this year. However, the pace of bank closings is actually slowing down. The FDIC seized 24 banks in July, 11 in September, and eight in October, which has only one week left as of this writing. This seems contradictory on the surface. The number of banks in trouble is going up, but the pace of closings is slowing. How can this be?

It’s All Relative

This is an excellent example and proof that money is really just a concept and not a concrete noun. Most of us think of money as the crisp dollar bills that we get in our paychecks and then put in the bank. But money is really a much more fluid and relative concept. To illustrate, look at the criteria for bank closings. You would think that there is an accounting formula or other federal regulation that determines what constitutes “trouble” in the banking industry. After all, the banking industry is one of the most regulated industries in existence. However, the banks that were recently closed are no more or less in trouble than the other 400 or so banks on the list. Further, if we were not in a serious recession, normal criteria would place the number of banks in “trouble” in the thousands. The definition of trouble changes with the times. What is trouble in normal times becomes acceptable in tough times. So if concrete numbers aren’t determining who survives and who closes, what is making the determination?

Just Act Like We’re All Okay

The key determining factor, according to the FDIC, is consumer confidence in the banking industry. In other words, how the American people think and feel about banks determines whether or not they stay open. Remember at the beginning of this article the number one concern when a bank was seized was protecting consumer deposits. That is true, but not for the reason that most of us would have assumed. Deposits are not protected for the actual dollars in the accounts, but for how secure the owners of the accounts feel about the industry as a whole and how likely they are to re-deposit their funds in another bank. The force keeping the banking industry afloat is not money, but the relative and fluid concept of confidence. How deep does that confidence need to be? Who really knows? Maybe, that is why the FDIC won’t say how deep their insurance reserves are.

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