Fastest Way to End Recession

The single biggest factor presently holding businesses back from expanding and hiring is the lack of credit. I recently returned from attending the National Association of Home Builders conference in Florida where tens of thousands attended dozens of education classes and seminars on the industry.

And besides lengthy discussions and amazing innovations in such areas as green building, energy efficiency, and the like, a primary topic was the lack of being able to secure a loan. I knew credit was tightening for what the industry calls AD&C lending, otherwise known as Acquisition, Development & Construction lending, and the chief economist of Freddie Mac confirmed in his Economic Outlook that there is a large gap between what the banks are saying in terms of loan availability versus what the borrowers/businesses are saying. Banks are saying credit is available, but business owners are finding that is not the case for them.

One thing for certain, our new Governor, new Senator, and other newly elected officials need to tell the bank regulators to loosen up. Every bank I contacted told me that the regulators are imposing stringent standards and tightening ratios that are in turn causing the supply of credit to decrease. Sure, banks and Washington are saying that loans are available, but the reality is that these new tight standards make less capital available and cause many prospective borrowers to be shut out.

Being told that banks are making loans only to find out that you don’t qualify is like seeing a commercial on TV for a flat screen television only to find out that the store only carried a couple in inventory and there are none left. The price was cheap, but if the product is not available, the price could be zero and no one would be able to buy it.

The same is true with the Federal Reserve Bank and its new policy of pushing down interest rates under the premise of making credit available. Baloney! The Fed could push rates to zero and no one is going to get a loan until the regulators loosen up their lending standards. (The Fed’s real objective is to monetize the federal debt, thereby giving all of us a pay cut through a lower valued dollar.) Talk to the builders; they can’t get loans. Talk to small business owners; their lines of credit are being cut and demands for equity pay-downs continue.

One problem contributing to the situation are the new federal appraisal standards. Your bank tells you that you can refinance, but then you find out that the value of your home or business or property collateral has fallen on paper because the appraiser applied an arbitrary discount, or he used foreclosed properties (pushed on the market by those same banks) to depress your asset value. And it’s not the banks’ fault; regulators have imposed a new appraisal process that prohibits the loan officer from talking to the appraiser, along with other changes. Heaven forbid if the two actually communicated with each other!

Home construction has always been a big part of our nation’s GDP, but now many home builders can’t even get financing on existing loans. Bankers tell me “land” is a four-letter word, and appraisers are artificially holding down asset values in many parts of the country. Fortunately, the Madison area has not been as negatively impacted as other cities have.

One solution is a new bill in Congress that will prohibit appraisers from using foreclosed property fire sales in determining the value of regular home loans. You can see the damage being done; banks fire sale homes and then those fire sales lower the values of other homes being refinanced, causing those loans to go into default, causing more fire sales at even lower prices. This vicious cycle has to stop if the recovery that is presently taking hold is to sustain itself.

Despite the difficult environment, many banks are working with borrowers. However, some are being forced to push customers out the door in order to meet their ratio requirements. I have had two lines of credit for a number of years. I admit that I haven’t used them much, but the purpose of a LOC is to be available when I really need it for emergencies or a fast acquisition of a property from a distressed seller. In November, the availability on both my lines of credit was cut on short notice. My stellar credit record and high credit score didn’t matter; the banks needed to get their ratios in line and those cuts were part of a bigger picture of achieving the demands of the regulators.

Imagine if you’re a small business and the bank cuts your working capital line of credit, demands a pay down on your line, or reduces the value of your asset and demands a “re-margin,” a pay down based upon a lower value. Or imagine the uncertainty created when your bank is in limbo (i.e. is being sold or is under a compliance order from one of the regulatory agencies.) So while Washington and the Federal Reserve Bank continue the bailout of the big regional and national banks and continue low interest rates that banks pay the Fed, the rest of the business world has to find capital to also bail out the banks. We shouldn’t fix the financial industry on the backs of small businesses.

The good news is this: the economy is on the mend, and if the positive steps that the new Congress and new Governor have already taken continue, we should see a recovery take hold by this summer. And for those tens of thousands of builders, contractors, architects, developers, and small businesses who attended the home building conference, congratulations to you. Unlike other special interest groups, I didn’t hear one gripe, not one complaint, not a single moan during the week I was there. I didn’t hear one request for a hand out or a government bailout; in fact, what you asked for was the opposite: “Could the government just get out of our way so that we can begin rebuilding this country?!”

Their can-do spirit and attitude stands in marked contrast to never-ending complaining of other groups, particularly and ironically those associated with government employment who demand pay raises and more benefits from the taxpayers. When is the last time you had a pay raise? It’s the hard working, high-spirited people like home builders and small business owners who will turn this country around; if only Washington will let them do it.

Remember the classic retail saying, “The more you spend, the more you save.” In Washington, that saying goes, “The more the government spends, the more you save!”

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