Commerical Banking Expert, Marilyn Barnewall, Lays It on the Line : Real Estate and the Economy

The economy is not going to turn around until a firm floor is put under the residential real estate market.        

It can be done – but elected officials and bureaucrats must understand how commercial banks work.   And, they do not.

Most secured loans utilize as collateral a second trust deed on the borrower’s residence. I’m not just talking about mortgage loans; I’m talking about home improvement loans or vacation loans or college (non-federal student) loans, etc. In the early 1990s and while Alan Greenspan was Federal Reserve Chairman, the Fed kept lowering the cost of funds. It encouraged people to re-finance their mortgages. The first time you ever heard of a personal line of credit called a residential credit line was in the early 1990s. People were encouraged to take out a residential credit line, which placed a second trust deed on their primary residence as collateral. In fact, the only way to get this personal line of credit was by putting a lien on the property – usually a second mortgage behind the first lien holder.

Until recently – just before the Lehman Brothers bankruptcy, coincidentally – when you bought a home, you had to put 20 percent down. Lehman was keeping its head above water by using liar loans from mortgage companies it owned – lenders that specialized in making them. It did that so it could create mortgage-backed derivatives. It – along with Goldman Sachs, J.P. Morgan Chase, Morgan Stanley and others – almost bankrupted the world. In fact, the jury is still out on whether they succeeded.

Get ready, because here comes some banker lingo… it can’t be said any other way. When we used to buy a home and made a 20 percent down payment, it resulted in an 80 percent collateral margin on the loan. In other words, the collateral value of the home plus the down payment gave the bank a 100 percent collateral position. Here are some numbers that may help:

Home purchase price: $200,000
Down payment, 20%: 40,000
Balance/Mortgage: 160,000 — 80% of home value, 1996

Bank regulations used to require an 80 percent margin be maintained on home loans – whether it is evaluated against a first or second trust deed. Today, that regulation is used selectively.

In 2007, the housing market began its steady decline. By 2010, the above home was re-appraised at $150,000. OMG! You are out of margin! When the FDIC or Comptroller of the Currency auditors come to your bank, your loan will be graded, even though you haven’t missed or been late with a single payment! Regardless of your faithfulness in making payments, the collateral is out of margin. It is an unsafe loan. This is a legitimate claim, by the way.

Chances are, your bank has a large number of such loans because using a borrower’s home has always been the preferred form of loan collateral in the commercial banking industry. Residential real estate has increased in value annually for generations so the risk was minimized… until 2007. Suddenly your bank finds itself on the regulatory watch list because it has too many loans that are out of margin. An otherwise healthy bank is threatened with closure. Some more numbers:

Loan balance:
$150,000 (after ten years of mortgage payments)
2010 Home value:
150,000 (after the real estate market drop)

There is no margin. To be in margin, an additional $30,000 must be added to the bank’s collateral position.

For the bank to have enough personal collateral from you, $30,000 of good assets must be added to bank’s collateral basket. Most people don’t have that amount sitting around to give the bank as collateral. The bank will soon tell the borrower to bring $30,000 more in assets to put the loan back in margin or the bank will be forced to call the loan and foreclose on your property. The auditors are screaming at the bank because of the margin lapse. They have to do something.

“But I’m not behind in a single payment!” you say, certain the bank won’t foreclose on your home loan just because of some bank regulation. If you’ve been thinking that all of the home foreclosures in process are caused by people who bought a house that was too expensive for them, think again. If you think they’re all people who aren’t making their house payments, think again. If you think the banks aren’t lending money because they don’t have money to lend, thing again. What they don’t have is access to a reliable form of collateral… like your house. Since the residential real estate market is still in a downward spin (and no one in Washington is doing anything intelligent to stop it), what asset does the middle class have available to provide the bank for collateral? Answer: None. No collateral, no loan access.

That explains why your local bank may be in trouble even though most of its loans are not (and thus it is a great takeover target for banksters). This also explains why banks aren’t lending: Without a healthy real estate market, they don’t have a solid collateral base.

 Read full article here.  (This lady really knows her stuff!  ~~LTG)


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8 years ago

I spent 30 years in a closely related industry, and I do not see a recovering real estate market, commercial or residential, even starting for at least the next 10-15 years.

8 years ago

I worked in the mortgage industry in the 198os when underwriting guidelines were strict and absolute for both purchase and refinancing. We once had to cancel a refi for an NFL player when an announcement was made during the broadcast of a game that his contract had not been picked up for the next season, nullifying his Verification of Employment on national television. When we shipped closed mortgages to banks, having even a single piece of paper out of sequence in the file was enough for a bank to reject the mortgage. The LTV ratios were ironclad and non-negotiable. Starting… Read more »