Posted on Tuesday, September 1, 2009
Government intervention has officially become a bigger problem than letting free markets fails before they can recover. Far more investors, banks and even folks on main street are frozen in their tracks waiting to see what Washington will do next or because they know the rules can be changed any minute. On top of that, much of the intervention is concealing real problems of kicking them down the road. Case in point, cash fo clunkers. Sure the program increased car sales to an annualized 19 million week one and then leveled off to 12 million. But as soon as it stopped sales dropped back down again to 8 million and will probably go lower still. So what did we really get for out money? The same will no doubt happen to housing as soon as the $8k first time home buyer credit stops in the Fall - this is NOT to say anyone should lobby to extend the credit - and in addition to the number of sales, prices in that first time home buyer bracket will likely drop again too. Essentially the numbers the program is designed to improve will return right back to where they were before th program, perhaps eve worse BUT the tab for the program will be with us for years.
Which leads to anyother topic, what other changes are we initiating now that will long out last the crisis itself? For one, moral hazard. Foreclosure continues to grow as accepted financial tool for millions. Don't be surprised if that "new normal" for foreclosure levels in out country is much higher than before for many of our future generations to come.
Last, everyone's still talking about the looming issues for commercial real estate yet still little is being done. I say let the free markets work this one out, but lets at least give them the tools they need to do so...first and foremost some flexibility to modify loans held in REMIC trusts. We've all seen the numbers; July's 3.14% delinquency rate was 6 times that of only a year ago. A few years back when these loans were being originated everyone assumed, as they did in residential, that things would keep getting better. In the commercial context that meant occupancy would continue to grow. In fact the exact opposite is happening now for reasons e are all too familiar with. And, as was the case in the residential segment, loser underwriting standards applied back in the day are coming back to bite us. $153 billion in CMBS are expected to mature by 2012, the majority of which is predicted to default if things dont change. Banks hold another $1.7 trillion on their own books (and anyone who doesn't think they're doing everything within their power to kick those defaults down the road seriously needs to smell the java). All those Armageddon clauses" banks put in their loan documents are actually playing out now. If you think we've seen adverse feedback in the residential market just wait to see what happens in the $6.7 trillion commercial real estate market over the next 2 years!