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Friday, March 06, 2009

Just The Fundamentals

There is another Bloomberg article covering the point of view of smaller, conservative community banks:
TCF is among more than 8,300 banks and lenders insured by the FDIC facing increased fees and a one-time “emergency” charge designed to raise $27 billion this year for the agency’s depleted coffers. Community banks may take a 10 percent to 20 percent hit to 2009 earnings even if the FDIC halves that charge, said Camden Fine, president of the Independent Community Bankers of America.
Community lenders “are feeling like they are paying for the incompetence and greed of Wall Street,” Fine said this week in an interview.
No kidding. Of course, if the emergency charge were imposed based on risk profiles, it would put some of the staggering institutions out of business. I strongly recommend reading the whole article. The sentiments of community bankers right now can not be accurately expressed in polite company.

The reason why some of these banks want to return TARP funding is that reasonable, profitable lending standards do not support deploying that money in a safely profitable way, and now their names are up in lights with the bad actors.

To get out of this crisis we must make GOOD loans, rather than perpetuating the bad loan/wrecked borrower cycle. There is no fancy, elaborate way to suddenly make things better. Some of the bad loans can be modified to become sustainable loans - but where the original loan was truly bad, that isn't possible. Ending the bleeding for the borrower and the investor is truly the best strategy there.

As a case in point, I refer you to a remarkable find by Rob of Exurban Nation regarding Port St. Lucie, Florida. Read about a politician who believes he has the solution for a wave of foreclosures sparked by bad loans, followed by a wave of property devaluation. His brilliant solution is to declare Port St. Lucie a disaster area and deploy disaster relief funds to bail them out. Read it.

Then contemplate this example from the same article:
The idea may or may not help folks like the Derek and Kellyanne Baehr. They are six months behind on their $2,160-a-month mortgage and struggling to avert foreclosure.

Derek, 40, has been unemployed for the past 10 years after being diagnosed with a rare neurological disorder that will eventually put him in a wheelchair. The couple have lived in their modest, single-story stucco home for four years, and admit they got in over their heads with the $209,000 purchase. They said the house is now worth just $135,000.

After months of trying to work with their lender, they got a slight reduction in their interest rate, but "it was like putting a Band-Aid on cancer," Derek said.

"We can't continue to go on this way," said Kellyanne, 37, who fears she could soon lose her job as an accounting clerk because another round of layoffs is coming. "I cry about every day."
I looked them up. They bought the house in 2004 for $209,000. They clearly did it as a spec, because nothing has really changed for them. A couple like this needed a $2,160 mortgage payment like a bullet in the head, but I bet they thought they were going to make a lot of money off of it, because real estate was so hot. For a while, apparently that was working for them:

However, what do they expect anyone to do for them? Buy the house for them? Do you want to buy this house for them? When they could surely rent somewhere in the area for $800-$1,000 monthly, and probably for considerably less (I just found 60 plus advertised Port St. Lucie rentals for 1K monthly or less), so what good is it to this couple to stay in this house? What good will it do them in the future? They can't afford this house. They couldn't afford it when they bought it, and they can't afford to buy it now, and unless a miracle happens, they will be even less able to afford it 5 years from now.

They've been in the house rent-free and mortgage free for months, so they've got a nice deposit, moving money and a few thou in much-needed cash tucked away. Delaying this foreclosure is only going to cost the investors more money. There is no way this loan should be modified, and there is no point at all in the government (i.e. you) paying money on the house, to the servicer, or to the investors. And an NPV analysis will undoubtedly show that keeping them theoretically staggering along will result in a greater cash flow. But it's still pointless.

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