« 402 Washington Avenue Getting an Upgrade Abort Mission at 393 Lefferts Avenue! »

January 2, 2009

Optimistic Prediction for the New Year

Prediction: In January, the banks will realize that they cannot avoid lending forever. The Federal Reserve will financially punish any bank that refuses to lend by manipulating interest rates so that banks that hoard cash lose money. From the industry ashes a banking prophet will emerge who will preach the gospel of positive net interest spread through responsible lending. — Mark Sunshine of First Capital




Posted by Brownstoner at 10:41 AM | Comments (18)
Categories: Market

Trackback Pings

TrackBack URL for this entry:
http://www.brownstoner.com/mte/mt-tb.cgi/7800

Comments

I'm no financial expert but this prediction seems patently ludicrous. How exactly will the Fed manipulate interest rates? The Fed's impact on rates has already proven to be weak. And I don't see how they can realistically force banks to lend.

Rates will come down if the lending climate improves, but not because the Fed will "financially punish" (whatever that means) banks that don't lend.

Posted by: FatLenny at January 2, 2009 11:12 AM

I too had questions about that quote. Being no financial genius myself, I have to ask all you gurus out there, how does manipulating interest rates force banks to lend? Also, how does a bank profit from "hoarding" cash? I'm not attacking the quote itself, this is a serious question and if anyone can give me an answer I'd appreciate it :)

Posted by: InsertSnappyNameHere at January 2, 2009 11:38 AM

Banks can not be forced to lend to unqualified borrowers. That is what got us into this mess. The lender's requirements are going back to 2002 and back which required an applicant to have 20% down payment, a job which can be verified with proof of income, a good credit score above 680, 6-12 months reserves in a bank account(somewhat new requirement, do to declining market conditions)and not overwhelmed with debt which will require the applicant debt to income ratio to be 20-25%. Pretty tough requirements for many people in today's environment.

Posted by: commonsense at January 2, 2009 11:59 AM

The idea is that banks will earn little to no interest on money stored in treasuries. If the interest earned is less than inflation, then they are "losing" money.

Theoretically, this will make the banks seek out greater return on their investment by loaning the money to individuals and businesses.

The problem is, if they loan the money to me at 6% to buy a house and I default on the loan, they lose more money than if they just had it nibbled away by inflation.

So, before the bank lends money to me, the bank actually wants to make sure I am willing and able to pay it back, which means the cost of the house I want to buy has to be reasonable considering my income.

Which is why so many people believe that the only answer to the credit crisis is for real estate prices to fall further so more people can actually afford to buy properties that they really want to live in for 10-30 years.

Posted by: northsloperenter at January 2, 2009 12:00 PM

Banks will lend as soon as they see that the price of homes comes down to sustainable levels. For example if someone wants to buy a 4 family brownstone for a million dollars, I know that is cheap according to out Carroll Gardeners, but lets just imagine. Your net yearly income at 2500 month per floor would give toy an annual income 120,000 dollars gross correct? Now why would a bank lend 1 million dollars in a falling house market to risk getting 120, thousand dollars a year and have to wait almost 10 years to get its initial investment back, when it can borrow 1 million dollars and only pay .25%. The banks will only start to lend out when they know forclosing on a home will give them a profit. There are lower those values on those million dollar brownstones. The sooner you do the quicker we get out of this mess.

Posted by: hannible at January 2, 2009 12:07 PM

Banks aren't lending because they're borderline insolvent. It has nothing (or relatively little) to do with the fed rate or even credit risk. They have to meet capital requirements to stay in business. And they've lost so much money on CDO's that they can only meet those requirements by being recapitalized by the Fed. TARP 1 was never going to to work because the true cause of the banking crisis was insolvency, not liquidity. If the fed bought their bad assets at a reasonable market price, the banks would still be insolvent and there would still be no available credit. Selling the government shares for cash was the only solution. It remains to be seen just how much they'll need.

I still have no idea what M. Sunshine is talking about.

Posted by: FatLenny at January 2, 2009 12:21 PM

"The idea is that banks will earn little to no interest on money stored in treasuries. If the interest earned is less than inflation, then they are "losing" money."

Nope! The reason banks are not loaning money to dumbasses is because interest rates are too low (that's right, too low)! We had thing biggest blow off in history and the Government is trying to flood the world with dollars. No one want to 1. loan money and 2. borrow money.

The Bond Market determines interest rates not the Fed! When people get tired of earning 6 basis points on a 13 week T-Bill, there will be a market dislocation and higher rates and maybe we can get a return on our savings.

The What

Someday this war is gonna end...

Posted by: Return of The What at January 2, 2009 12:22 PM

Thank you all for your answers. I kinda get it now. So then, my next question is this (and please tell me if I am making an incorrect assumption here) ... From what I've been hearing, even those with good credit and reasonable debt to credit ratios are having a hard time securing loans. Should'nt it be easy (ok, well, not easy but easier) for these 'qualified buyers' to get financing? Is it because of what Hannible said (re: waiting 10+ yrs to recoup the investment on the loan) ? If that is the case, I'm not sure I understand it. With any loan you are waiting to recoup your investment. Am I wrong?

Posted by: InsertSnappyNameHere at January 2, 2009 12:24 PM

Qualified borrowers have never had a hard time getting a loan. It may not be the rate you want but if you meet the qualifications, you'll get your loan.

Posted by: FatLenny at January 2, 2009 12:32 PM

". From what I've been hearing, even those with good credit and reasonable debt to credit ratios are having a hard time securing loans."

Ding ding ding!!!

" Should'nt it be easy (ok, well, not easy but easier) for these 'qualified buyers' to get financing?"

Hell naw!!!

The What

Someday this war is gonna end...

Posted by: Return of The What at January 2, 2009 12:33 PM

Hmmmm,
An optimistic forecast from a guy from (drum roll, please...) FIRST CAPITAL!

And in other earth shatteringly shocking news, THE SUN ROSE TODAY!

What do you expect? A guy from First Capital saying something -pessimistic- about the future of the industry that is his career, future and his entire identity?


Posted by: Prodigal_Son at January 2, 2009 12:39 PM

FWIW - we had no trouble getting a loan in September and were told by our bank today that we would have no trouble refinancing. We meet all the guidelines though. My sense is that banks ARE lending to qualified borrowers.

Posted by: WTbound at January 2, 2009 1:25 PM

Mark SUNSHINE? Creative. Just like the prediction.

Nice, brownie.

***Bid half off peak comps***

Posted by: Brownstones Half Off at January 2, 2009 1:58 PM

Having spoke with someone I know who is a straight forward individual in the mortgage business stated the lenders are willing to lend up to 45% of ones debt to income ratio. My previous post was debt to income ratio was specific (but not noted) to what a mortgage payment debt to income ratio should be. My understanding is the lenders are at 28-36% for mortgage debt(principal & taxes) to income and a total of 45% for ones entire debt to income ratio to be eligible for a mortgage.

Posted by: commonsense at January 2, 2009 2:29 PM

No one can deny the market is in turmoil, but as history shows, even during the Great Depression when there was no Fed to back things up, the economy eventually turned around and people became wealthy. Patience is a virtue and I believe the prediction above is a combination of facts, opinion, precedent and gut instinct. Either way you can certainly argue both positive and negative views of the market, but I prefer to stay optimistic. Being pessimistic will only depress a person, won't help the situation, lower consumer confidence(this is certainly no way of fixing an economy), etc. Everyone's priority is different and although no one knows how to time the bottom, if you look over the past year bargains are definitely available, mortgage rates are at their all time lows and there are an abundance of tax benefits. Even if the market goes down further, you're not looking to sell it in a year or two, so it really doesn't matter.

First-time home buyers surely don't have the luxury of gambling on the market bottom. Once the market starts to turn around, existing home buyers who wanted to move years ago will quickly sell their current home to buy a step-up home. When that happens the first-time home buyers will be out of luck.

I found this prediction very intriguing and enjoyed some of the other predictions from the article that I blogged it on my blog site as well.

www.SIRealEstateNews.com

Posted by: SIRealEstateNews at January 2, 2009 8:48 PM

Mark Sunshine here.

While I appreciate the "shout out" on this blog a couple of clarifying thoughts might be helpful.

First, my real name is Mark Sunshine. No joke.

Second, who ever thought that I am an "optomist" because my future depends on it should either check out my blog and/or google me.

Third, the Fed is manipulating interest rates by purchasing securities in the open market.

Fourth, what I wrote may make more sense in the context of another blog post relating to money supply and Fed Policy. The link is http://www.firstcapital.com/blogs/mark_sunshine/?p=220.

Thanks again.

Mark Sunshine

Posted by: Mark Sunshine at January 2, 2009 10:11 PM

Well whatever you do do not pay attention to what real estate brokers say. Their sweet talking and pumping up of home prices is what got us here in the first place. Real estate brokers are now heavily invested in local homes so you will never hear them say prices are going down. It is like watching a stock broker on TV saying a stock is "HOT" but that is only because he wants others to buy it at higher prices so he can dump it and make a profit. There are no more fools.

Posted by: hannible at January 3, 2009 8:50 AM

Good of you to weigh in, Mark. I read your blog entry. The Fed strategy may have some impact on banks that have the money to lend, but it doesn't address banks' solvency issue. Banks are still writing down the value of their mortgage related assets and I'm sure many institutions aren't marking them properly/realistically. The TED spread is still historically astronomical precisely because of this. Not all the dead bodies have been found.

With the access banks have to cheap money and the spreads that currently exist in the lending market, it wouldn't be hard for a bank to make a lot of money by lending if they could be sure of the credit worthiness of their counterparties. They're not lending because they aren't sure and/or they're on the brink of solvency already and don't have the cash to lend. The Fed buying securities and thereby driving down yields may have a slight effect on the former issue, but it has no effect on the latter. Financials are still in deep doo doo.

Posted by: FatLenny at January 3, 2009 3:24 PM

Post a comment

Please be patient while your comment is published. It may take a moment.

Latest Restaurant Additions