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…
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.
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?
“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…
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.
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.
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.
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.
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 🙂
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.