I've Got a Bad Feeling About This
Cited on Sunday by Rawles and Mike Morgan, a Florida real estate and investment insider, who describes it thus:
One Picture Says It All - The following chart is from the Economic Research Department of the St. Louis Federal Reserve Bank. The chart illustrates how much money banks have borrowed from the Fed since 1910. That's all I have to say about that . . .
In the same blog entry, Morgan adds:
Let’s talk about what is happening now . . .
Depression - Totally unavoidable. Bank on it. Well . . . you won’t be able to bank on it, but you can bet on it. We are not only headed for a Depression, but a violent Depression that will be far worse than 1929. Some experts believe the United States will fall into the chaos, bedlam and anarchy that tore apart Yugoslovia. I am not going that far, but I know our morals and ethics are not the same as they were in 1929. Moreover, we are a far more violent society and totally dependent upon a well oiled system for delivery of food and basic services.
Bank Failures - I warned that Fridays would become known as F3 - FDIC Failure Fridays. And Voilá . . . two bank failures on Friday, July 25. Then another bank failure a week later, after the market closed, on August 1. Next week? Maybe none, but maybe 10 . . . or more. And here’s why.
I am on the ground, in the trenches, and behind enemy lines. To repeat for those new to my information, I own a real estate brokerage in Florida and I serve as a consultant to banks, financial institutions, mutual funds and hedge fund managers . . . as well as builders and developers. So when I talk, I talk from Behind Enemy Lines. Unfortunately for clients and readers, I can’t always share as much detail as I would like because of confidentiality concerns. My institutional clients appreciate that, because they can feel comfortable discussing their portfolios, problems and potential outs.
I can tell you this. We will see at least 100 bank failures before the end of the year. What’s important about that statement, is it is not another rear-view mirror statement from one of the financial experts on TV or some of the others that write blogs and columns . . . but never venture out into the world of reality. I will share what I am seeing on the ground and hearing from my institutional clients here and abroad.
US Banks - I work with banks on two levels. One, we offer services to banks selling foreclosed properties to consumers. Two, we offer services to banks trying to determine what they own, what it’s worth and what to do with it. The latter includes evaluating portfolios for bulk sales and trying to coordinate these transactions. Let me start with the first level of services.
Banks and lenders that are foreclosing on properties have managed to bumble the process of disposing of foreclosed properties. Then again, as I have noted many times, banks are not in the real estate business, and I warned that they would be the group to drive prices into the ground, finally collapsing the entire system. That is exactly what is happening.
The systems developed by banks and lenders are horribly convoluted or they have farmed the process out to asset managers that often are “totally” incompetent. I thought we might see this start to correct itself, but it is actually getting worse . . . and now banks and lenders are the ones throwing jet fuel on the fire. For my residential brokerage, we have reached the point where we must carefully evaluate whether we even want to take these listings. You heard it right.
Most brokers would kill for listings of foreclosed properties. These properties are often priced below the market so they can sell fast, but that is rare. Most of these properties come with a laundry list of headaches and expenses. And when they do sell, the asset managers are skimming a full third of the commission off for themselves.
Real estate agents still vie for these listings, because we have an industry that is not regulated, with a low barrier of entry, and 98% of our industry is part-time. Agents don’t understand what is involved with the sale of foreclosure properties, and lenders don’t take the time to develop procedures to avoid incompetent real estate agents . . . just as the lenders ignored the issues with mortgage brokers during the development of this crisis.
I will shed a little light on this for those not in the industry. Foreclosure listings come with a laundry list of Things To Do. This begins with occupancy reports and rekeying of the property, that can quickly escalate into initiating the eviction process if there is an owner or tenant in the property. And once you gain possession, there is the trash-out, clean-up and repairs. This process alone can take several weeks and cost the agent thousand of dollars. Listing agents must pay for all of these expenses, as well as place utilities in their own name. Even after getting over these hurdles, which on average takes a month, the property then must be priced. That process can take 2-3 weeks, and it is so riddled with inefficiencies that most properties are overpriced because of the time it takes to complete this process, and the level of competence of those providing the Broker Price Opinions.
100% Loss = Busted Banks - To get to the stage where we have a price on a listing, the lender has already spent tens of thousand of dollars. Here’s a basic example for a $400,000 mortgage. The property is most likely only worth $250,000 now. I have previously written about the process and expense involved in property disposition, so I will cut to the chase. A lender will be lucky to clear $125,000 on this property. This is not a typical example. The typical example is a $250,000 mortgage where the property is now worth less than $150,000 and by the time you carve out all the expenses . . . the bank has a zero or negative. The reason for the zero on the lower priced property, is because many of the expenses (i.e. foreclosure process) are the same for a million dollar property as they are for a $100,000 property. So here is the question for Paulson, Bernanke and Bair. How can any of our banks survive when they are taking 70% -100%+ hits on mortgages? PB&B will tell you these problem mortgages make up less than 2% of total mortgages. Huh? What? I’ve got news for them. I have no idea where they are getting their numbers, but you don’t even have to go behind enemy lines to see through the numbers they are trying to feed us. Drive around and count For Sale signs. Now multiply that by a factor of 2-10 depending upon where you live and whether signs are allowed in all neighborhoods. Now double that number for the homes that are moving into the foreclosure process, and then double it again because things are getting worse (quicker), not better.
Admitting Defeat - The lenders I speak with know they are dead. They have no problem admitting it now. They realize their jobs are over, and they are on borrowed time. They are nothing more than liquidators now, and they are doing a lousy job at it.
We built too many homes and have too many builders. The markets are correcting that. We have too many mortgages and too many mortgage brokers. The markets are correcting that. And we have too many banks. The markets are correcting that as well. Paulson’s tinkering with the ability to short his Fav19 will come back to mark him in history. It was un-American. This is not Russia or Venezuela. If the markets were not working because of naked shorting, then put the bastards in jail that were violating the rules. Unfortunately, that would mean Paulson was going to have to throw his frat boys in jail. Paulson knew what he was doing with the Fav19, just as he did with the Housing Bill. Paulson had one purpose, and one purpose only in both the Fav19 and the Housing Bill . . . to bail-out his buddies. That’s it. Full Stop.
The Housing Bill is a complete, absolute and autarchic ploy by a man that has far too much power and control. I am not going to write about the Housing Bill. I am going to save that for our August 7th Conference Call. If you are interested in the Conference Call you can purchase a dial in code - Mike@MorganFlorida.org Clients receive free access codes and will receive the replay link...
I will reserve most of this for clients, but let me share a little of what I am seeing over the last few weeks. Make that 2-3 weeks. Fear is clearly in the air, along with desperation and a huge dose of stupidity. I often use the term banks, financials and lenders interchangeably. I’m not going to apologize for it, but I will try to explain it. Some of these players are involved in all three areas. Some are hybrids. BOA (editor: Bank of America) is a bank. It is a financial. It is a lender. And I am seeing the fear at all levels.
At the street level, we see more properties coming to market. As this unravels, the process grinds itself into dysfunction. Are there any smart banks left? Easy answer, but I am going to reserve that for my clients. I will share one more point with you. The dysfunction of the disposition of the foreclosure properties is just the tip of the iceberg. It is enough to sink the banks, but you must consider what banks do. They loan money. I have news for you, they are not loaning money, so as I have said for far too long, the problems simply feed on themselves now. If you are a butcher and you are not selling meat, you are not a butcher. If you are a bank and you are not loaning money, you are not a bank. You may think you are a butcher or a bank, but you’re not...
Read the whole thing, then make sure you get to the bank on Monday if possible to have three months' expenses in cash secured at home.