Impact of Bailout on taxpayers and commercial lendersIt seems that everyone has thoughts on the current proposed bailout.Before drawing an opinion it is critical that the American public understands the true cost of such a proposal.The last bailout of this magnitude was in August of 1989 with the creation of the resolution trust corporation (RTC).The RTC’s mission was to manager and resolve failed thrift institutions.Regulation was supposed to be put in place during this time to prevent future collapses (just today Washington Mutual, the largest failure in banking history http://www.bloomberg.com/apps/news?pid=20601087&sid=ao0E1sRCSORQ&refer=home ).When the RTC was formed they were responsible for resolving 747 thrifts with total assets of approximately 402.6 billion.The final cost to taxpayers for that cleanup activity is estimated to be $87.5 billion. The scope and magnitude of such a cleanup effort was unprecedented, yet essentiallywas completed in just six and one-half years. On December 31, 1995, the RTCwas shut down, and its remaining work was transferred back to the FDIC. (source: http://www.fdic.gov/bank/historical/managing/history1-04.pdf )
If the RTC is an indicator of the government’s success and the proposed bailout of 700 Billion is passed, the cost to taxpayers would be approximately 152 B. Are taxpayers ready to foot a 152 Billion dollar bailout to Wall Street? This loss is a best case scenario. The last proposal floated yesterday would have the treasury purchase the securities at “long term market value” as opposed to today’s market value. Purchasing securities at inflated values would likely add more losses to taxpayers. Along with actual monetary losses, I have yet to hear any commentators talk about the interest cost as a result of this bailout. Since the government would have to borrower this money (deficit spending), the taxpayers would have to pay the folks that purchase the governments debts (the majority are foreign governments/entities). The 10 year treasury was at 3.81 percent today (www.bloomberg.com). Just to finance our debt annually would cost the taxpayer ~ 27 trillion dollars a year. Assume the 700 billion is out for 10 years (the last word from the treasury is that it would take ~ 10 years to recoup the taxpayers money). The real loss to the taxpayer would be ~ 400 Trillion over the life of the program. That is assuming best case. As we are all aware, the government is not known for its efficiency and business acumen so the loss is likely to be much greater.
What does this loss mean for American taxpayers? With higher debt comes higher taxes (to pay the interest carry) and a deflated dollar which in turn leads to higher prices (a weak dollar will purchase less imports; think oil and all the items bought from China). The combination of higher debt and higher prices puts the economy in a precarious situation. Bottom line is why should responsible lenders like Fairview (www.Fairviewlending.com) be forced to pay for the excesses of other companies. During the boom days many lenders like us stuck to their lending principals and did not partake in the craziness of the market. Profits were sacrificed during that time but in the end Fairview like many other conservative commercial lenders is not in the precarious state as most other lenders (think WAMU, Lehman, etc…). With this in mind and a likely 400B loss to taxpayers, myself along with most economists feel the bailout is ill conceived in its present form and should not pass. According to many economists the government program assessment of the economy is ” more hype than real risk,” said James K. Galbraith, a University of Texas economist and son of the late economic historian John Kenneth Galbraith. “A nasty recession is possible, but the bailout will not cure that. So it’s mainly relevant to the financial industry.” (http://www.miamiherald.com/news/politics/AP/story/701956.html )
Many people are wondering what impact the bankruptcy filing by Lehman brothers has on commercial lending. Lehman Brothers was a large player in commercial real estate lending. Up to about 12 months ago their small balance commercial lending program was probably one of the largest in the country behind Interbay Funding.
Lehman got caught up not only in the residential sub-prime debacle but also in the stated commercial lending mess. The root cause in the commercial arena is that loans were made to people with good credit who were unable to prove their income. This model works when applied correctly. Unfortunately Lehman brothers along with a number of other small balance lenders did not apply the model correctly. Lehman relied on outside appraiser opinion of value and loaned sometimes 80-90% on the appraised value. As hopefully everyone knows by now, relying on third party appraisal is not the way to best establish value.
To prevent the problems in valuation, many firms (that are still around), underwrote the value of the real estate in house and also required an appraisal by a firm selected by the lender. Sadly most lenders, like Lehman, did not do the same amount of due diligence. To be fair, the small balance program is not what brought Lehman to its knees, but it does serve as a lesson to other lenders about what should or should not be done in the future.
Every time I pick up a newspaper it seems yet another lender is about to go under or has somehow gotten into legal trouble. The most recent victims appear to have been swindled by WexTrust Capital. From the complaint filed by the SEC and local law enforcement agencies (http://www.wextrustreceiver.com/) , it appears that WexTrust had established a ponzi scheme where funds from new investors are used to pay off prior investors. In this scheme there is not substantial collateral from the present loan pool. Money is moved (like a shell game) between various entities to conceal losses. The Wall Street Journal (www.wsj.com) broke the story 8/15/08.
As a result of this scheme investors and borrowers have likely lost over $200 million (according to the various complaints filed by the SEC and local law enforcement. WexTrust is just one of many hard money lenders accused of fraud (see my last blog entry on this topic: http://fairviewlending.com/blog/?p=6#more-6 ). With all the fraud out there how do borrowers, brokers and investors protect themselves?
There are multiple ways to protect yourself from fraud as a result of hard money lenders. Below is a list of tips and links to other resources.
1. Ensure you know the lender with whom you are working. Google the company to see what other folks have said about the company and if there are any pending lawsuits.
2. Contact the BBB (www.bbb.org) to see if there are any complaints against the company
3. Be wary of anyone requesting funds prior to issuing a commitment. On a similar note, never send funds to a PO Box or location out of the country (you would be amazed at how many folks still fall for this scam everyday)
4. Before proceeding with a loan, make sure you understand the loan structure. The following are two good resources:
a. Hard Money Frequently Asked Questions: http://fairviewlending.com/faq.htm
b. Understanding the total cost of a loan: http://www.fairviewlending.com/resources_prepayment.htm
5. Finally, utilize your common sense: If it looks too good to be true, it likely is. Always err on the side of caution when approaching any financial transaction.
It appears that anyone that is asked has an opinion on whether we should drill off the coasts of California and Florida. The current administration feels that it would reduce the price of oil in the near term. Unfortunately this is not necessarily a true statement. Each location would take at a minimum 10 years to develop before the first drop of oil ever comes out of the ground. The price of gas might be reduced a very nominal amount if at all.
Regardless of one’s opinion on whether we should drill for oil offshore, it is important to look at the impacts to the communities near where the drilling would take place. For this analysis, I am going to strictly focus on Florida. According to the various sources, including recent articles in the Houston Chronicle and the Denver Post small oil spill have been relatively common in the last 30 years.
Before delving into the risks of a 1031 exchange, it is important to define at a very high level what a 1031 is. A 1031 exchange allows individuals who sell an investment property to use the proceeds from the sale to invest in another “like” property. The 1031 exchange allows property owners to defer their capital gains tax liability. The purchase of a like kind property must occur within 180 days.
Although the definition above sounds simple there are a number of considerations to keep in mind before engaging in a 1031 transaction. Ensure that you fully understand the rules associated with this type of exchange. Details can be found at www.irs.gov. One requirement of all 1031 exchanges is that an intermediary be used. Once a property is sold, money is placed with this intermediary until a like kind property can be located and closed on. Intermediaries are unregulated and the funds held by them are not FDIC insured like a traditional deposit at a bank. As a result a number of bad apples have crept into the intermediary business. A Denver Post article reports that in the past year “Three hundred and thirty investors nationwide including 80 in Colorado, lost 132 million when qualified intermediaries absconded with their money.”
As I’ve mentioned in several articles on our Hard Money Commercial Lending Resources Page, there are a number of items that brokers/borrowers need to be mindful of before engaging in a commercial lending transaction. The number one tip is: Be wary of large upfront fees. A recent article in the Wall Street Journal further highlighted this advice. The article titled: U.S., States probe real estate loan broker (www.wsj.com 6/25/08 p:A3) discusses how “the advance fee plan has cost borrowers millions”. This article highlights an all too common problem within the commercial lending arena.
Two firms are being probed by the FBI and SEC (Bluestone Capital and Remington Financial Group). The California department of corporations is also investigating Landbridge equity. These firms are accused of taking large upfront fees with the intention of “not seriously pursuing financing”. Unfortunately a substantial number of borrowers have likely lost millions as a result of the “advance fee” plan that these three companies have utilized.
I’m often asked how commercial real estate has been impacted by the recent spike in oil prices. With the recent rises in gas, ripple effects can be felt throughout the commercial property sector. For this blog, I will focus on one group that has been impacted: the retail strip mall. During the last five years a plethora of small/midsize strip malls were constructed. Many of these strip malls were finance or purchased based on a very low cap rate (5-7%) and very high $/ft rental rates.
As gas prices have increased many of the smaller tenants are struggling and unable to afford the high initial rents. As a result many are moving to lower rent centers or renegotiating their current rents. This trend has accelerated as gas prices have continued to rise.
I am frequently asked if the residential mortgage crisis has impacted commercial lending. Unfortunately the resounding answer is yes. Small Balance commercial lenders and hard money commercial lenders have been tremendously impacted by the credit crisis. In this blog I will discuss one impact of the current credit crisis. Future blogs will delve into further impacts that have occurred/are occurring.
As a result of the crisis, underwriting standards have changed substantially for both small balance lenders and hard money lenders. Many of the players in this arena are no longer in business. If the lenders are still in business the parameters for writing loans has changed drastically
My name is Glen Weinberg. I am one of the founders of Fairview Commercial Lending. I graduated from IU with a triple major in finance, operations management, and finance information systems. I have worked for 3 fortune 100 companies in various roles from operations finance, mergers and acquisitions, and finance information systems. I also assisted in the CH11 reorganization of a small high tech company. I have been published in The Scotsman’s Guide, The Mortgage Press, The Niche Report, and the Colorado Real Estate Journal. I have also trained brokers in hard money lending at the Mortgage brokers forum in Las Vegas, and will be speaking in Orlando 3/25 on hard money lending at and NAMB training session for mortgage brokers on hard money lending. I have been investing in real estate since the early 90s as well as extending private notes on real estate.
For many years various partners and I were extending private loans to individuals throughout the southeast secured by commercial real estate. A need was recognized that there was a void in private lending nationwide. There were folks with stated/light doc programs (Interbay, SilverHill, Lehman Brothers, Metwest, etc…) and then there were very expensive hard money commercial lenders. The stated programs had minimum credit scores in the mid/high 600s. The expensive hard money lenders had large upfront fees (many times >10k) and commonly practiced the art of bait and switch to collect these large upfront fees.