Update On The Banking Crisis

By Doug Marshall
Market Assessment

I am often asked, “Why are commercial mortgage rates so high if Treasury yields are at historic lows? Shouldn’t the all-end mortgage rate reflect the lower treasury rate?”

It’s a good question, but like other answers to life’s most pressing problems it is simplistic and doesn’t reflect reality.

Here’s why: BECAUSE THEY CAN! The few that are lending can charge whatever they want because their competition has been decimated and borrowers are just grateful they can still get financing.

In all fairness to the few banks that are lending, they’re running scared and probably deserve the fatter spreads they’re getting right now.

Most of the Wall Street lenders (conduits), which had the most competitive pricing and terms, have gone the way of all flesh, never to be seen from again. When their mortgage pools could no longer be sold to investors because of the impact of the subprime debacle their fate was sealed.

Instead of taking the opportunity to increase market share, the life companies, the next tier below the conduits, have chosen as an alternative to buy loan portfolios from the few lenders that are still lending.

So the bloated premiums over their cost of funds make it more profitable for the life companies to buy loans rather than go through the process of originating loans themselves. Many life companies have axed the vast majority of their commercial real estate loan departments to streamline costs.

This leaves the regional and local banks to fill the lending void. They, unfortunately, are saddled with non-performing assets – typically residential land loans, condominium projects or single family construction loans that were adversely impacted when the housing market went bust.

So the next logical question is this: “How about the TARP (Troubled Asset Relief Program) funds? Aren’t they supposed to bring liquidity back into the credit market?”

That was the plan, but reality is a different matter. Close to $1 trillion has been given to the lending institutions for this purpose.

From my viewpoint, as one lowly commercial mortgage broker, the TARP funds have had no measurable impact on the lending crisis.

Rather, banks have used the TARP funds to acquire their less fortunate brethren, or to shore up their own liquidity, or to strengthen their loan loss reserves.

Twenty months into this liquidity crisis and six months since the first TARP funds became available, no real attempt has been made by the banks to use this money for its intended purpose: lending it to those in need.

Another question I often get asked, “Are you seeing an improvement in the lending situation?” The answer is an emphatic “heck, no!” The lending environment is getting worse, not better.

Most of my lending sources are on the sidelines, either temporarily or permanently, and I am losing my lending sources at a faster rate than I was six months ago.

I would have hoped by now that the lending crisis would have bottomed out and we would have begun to see lenders coming back into the market. That has not happened.

But I know this for sure: Until banks start lending again the economy will continue to go downhill. It is apparent that bank lending is not going to happen without another round of capital infusion by the federal government.

As appalling as it is to think that we need another round of taxpayer’s money to bail out the banks, there is really no other alternative. To let some of the major banks fail would be catastrophic.

Stay tuned for TARP 3 or something similar. It’s going to happen – it has to.