I read this from a book the other night. Let’s see if anyone is familiar with it and put it into today’s context.
“Never in history has there been so great an opportunity for practical dreamers as now exists. The hardships of these recent tough and unsettled economic times have put many people back at square one. A new race is about to be run. The stakes represent huge fortunes which will be accumulated within the next few years. The rules of the race have changed becasue we now live in a CHANGED WORLD that definitely favours those who have little or no opportunity to win under the conditions existing recently, when fear often paralyzed person and economic growth and development.”
Any guess’ when this might have been writen and by who? I’ll post the answer in next weeks post.
A few posts ago I provided a summary from an economist, Benjamin Tal, who said that this is the worst economic down turn SINCE the depression. I noted at the time that he didn’t compare it to the depression, which was wise.
For those that think we’re heading down that path here are some eye-opening statistics from the time.
Unemployment was at 30%
The stock markets fell an incredible 89% before it hit bottom.
At the height of the depression, there were 4000 bank suspensions (i.e. closed temporarily or permanently) out of a total of 15000.
Large numbers of people lived in abject poverty, had no food and no shelter.
For those fear mongers out there that keep that are trying to say the current market is as bad as the existing conditions as the depression have quite a ways to go.
I also saw some intersting stats on the Canadian side. The Fed goverment has bought up $25B in mortgages from the banks in order to provide liquidity, this in stark contrast to the US and their T.A.R.P. bill where they have decided that they can’t accurately value the sub-prime market, so they are no longer buying mortgaged backed securities (MBS) and instead opting to simply inject the cash directly into the banks. This is also the route that the European governments have already begun to follow.
Everyone seems to understand that cashflow and liquidity is the number 1 issue.
Did everyone also note that president-elect Obama has asked the “Oracle from Omaha” (aka Warren Buffet) to be an advisor? That strikes me as a wise move early on.
Should be an intersting 2009.
Hope the title doesn’t come as too much of a shock for people.
I’ve received comments from MANY people asking me if it is still possible to get a mortgage. My comment to that is, when a bank stops lending money, it’s not going to be a bank for very much longer.
Banks are very good at making money. In fact they are arguably one of the most efficient businesses on the planet at doing so. Their whole goal is to increase profits and reduce expenses. They’ve been at it for hundreds of years. They’re getting pretty good at it. I’m sure if you look at the upcoming quarterly results, the banks will still have record earnings. The challenge for them today of course is to fix the leak in the boat that is draining their cash supply.
Ok, so they’re good at making money. What’s the best source for making money? Lending money. What’s the safest and largest and biggest income maker for the banks? Mortgages.
Have defaults increased? Yes. Has fraud increased exponentially in the last year? Yes.
As a result of these two negatives, are the banks going to stop lending money to people? Not on your life!
A couple of expressions come to mind… Cutting off your nose despite your face, or shooting yourself in the foot.
Cashflow is king. The largest source of incoming cashflow for any bank is mortgages. The more that comes in, the more they can lend out. In Canada, banks are “allowed” to lend out at a 10:1 ratio. For every dollar they have on account they can lend out that money 10 times. In the US, they can lend out 20:1 and at one point when things were going really well, they were lending at 40:1! This is also part of the reason why there is such a cash crunch in the credit market. Lending out 40:1 and then fully a quarter of your loans suddenly default. You survive on your cash reserves, until word gets out and people en-mass decide to withdraw their funds. Can we say recipe for disaster? That’s pretty much where the US is, excpe the US goverment has stepped in to provide cash in order for the banks to start lending it out again. Unfortunately most of them are sitting on the cash as they want to make sure the worst is over.
Bit of a catch-22, they’re waiting for the market to recover so they can start lending the way they used to, only the market wont recover until they start lending. Needless to say, it’s going to be a slow recovery.
As I have explained to many at OREIO (the real estate investing group I founded, www.oreio.org), the world of commercial lending is very much different from that of muli-family residential (4 units or less).
In recent months things have changed drastically. A year ago if you were a good covenant and you had a building that cashflowed, there were several lenders falling over themselves to get you financing. With CMHC on board they were willing to go as high as 85% of purchase price.
Today this is no longer the case, thanks mostly to the crash of the real estate market in the US. Conventional mortgages in the commercial space typically are defined as 65%. Anything above that is considered high ratio and CMHC gets involved. Compare that with 80% LTV conventional on the residential side.
Lenders are now evaluating the buildings based on, not surprisingly, the income and expenses. If after looking at the income and expenses they determine that the net income only supports a certain mortgage amount, then they will offer that amount, regardless of the purchase price. Location is also a critical element. It must be in a major urban centre.
Translation, you the purchaser must come up with the difference. If you get a VTB, great! Take it!
If you go high ratio, CMHC will also do their own cashflow analysis and provide their own estimated value based on their market data. This will likely be higher than what the lender determines, but still likely lower than your purchase price.
Yes, CMHC will still go to 85% LTV… of their estimated value based on many variables, but primarily the net income.
On the residential side, it’s business as usual. Banks still need to make money and the best way they can do that is on a mortgage (cashflow in is still king). Rates have inched up slighly, but that’s due to market pressure (over night lending rate) and little to do with the Bank of Canada prime lending rate.
The prime lending rate did drop 0.25% today for those that missed it amongst the flurry of recent annoucements. Bank prime lending rate now stands at 4%. Expect 5 year rates to drop in the coming weeks, but not significantly.
That’s my education minute for commercial lending.