“Bad Decisions Are Made In Good Times”
The Asbury Park Press reports from New Jersey. “When Kara Homes filed for bankruptcy this month, Amboy National Bank of Old Bridge was listed as the largest creditor with $58.2 million in loans. When local real estate mogul Solomon Dwek’s $400 million empire was frozen by a judge following charges of bank fraud, Amboy was again the largest creditor, for $49.7 million.”
“Just as Amboy has been surprised by the loans gone bad, a real estate market in decline could spell financial trouble for other local banks and thrifts that have lent heavily for housing developments and commercial real estate, bank analysts and federal regulators say.”
“‘It’s a disaster waiting to happen out there,’ said Gerard Cassidy, bank analyst for RBC Capital Markets, an international firm based in Toronto. ‘We’ve seen this movie before, and it doesn’t end very well.’”
“Regulators are proposing that banks do not lend more than three times their capital for all commercial real estate combined. That means if the bank has $100 million in capital, it should be careful about making more than $300 million in loans to businesses or developers, or it could face regulatory scrutiny.”
“In New Jersey, 47 percent of the 95 national- and state-chartered banks are already over the proposed guideline, an Asbury Park Press analysis of federal data showed.”
“‘Are we alarmed or very concerned? The short answer is no,’ said Steve Fritts, an associate director at the Federal Deposit Insurance Corp, which regulates banks and insures depositors against losses. ‘But every bank is different. In some (specific) cases, we might be concerned.’”
“Vincent D’Alessandro, VP of Shore Community Bank in Toms River, said the real estate market downturn has put more pressure on banks to beat last year’s earnings. ‘I know there are loan officers out there making loans because they have budgets to meet and job security issues,’ D’Alessandro said. ‘Banks get focused on hitting numbers, making sure their loan officers are hitting their numbers — and you set yourself up for making bad loans.’”
“Shore Community has $96.8 million in real estate loans to developers and businesses, about five times the bank’s capital. D’Alessandro said the bank is confident it has made wise loan decisions, but nonetheless it is tightening requirements for new borrowers. Unfortunately, D’Alessandro said, that hurts little guys.”
“‘It’s all about a credit crunch right now,’ D’Alessandro said. ‘You hate to say that, but banks like us will have to tighten the screws; the guy who wants to develop his house, or the roofer that needs some funding, we’ll be looking at that much more carefully. Some people may have to borrow for their living expenses, but those are the people you have to cut off.’”
“New Jersey banks are not alone in facing more risk in the real estate slowdown. Banks in 10 other states have an even greater investment in commercial real estate, the Press’ analysis showed. In Arizona and Washington, more than seven of every 10 banks have more than three times their capital wrapped up in commercial real estate loans.”
“Bank regulators have a maxim: ‘Bad decisions are made in good times.’ So regulators and analysts think there is a greater chance that bad lending decisions were made in the go-go real estate market of this decade.”
“‘Rapid growth can mask problems,’ said Michael E. Collins, VP of the Federal Reserve Bank of Philadelphia. ‘Whenever there is rapid growth, heightened competition can cause people to go out on the risk curve more than they would normally.’”
“Amboy National Bank held $1 billion in construction and land development loans as of June, the latest figures available. That’s nearly quadruple the amount from five years ago. Amboy now must deal with $108 million in bad loans stemming from Dwek’s downfall and the Kara Homes bankruptcy filing.”
“Bank President George E. Scharpf of Colts Neck has not responded to telephone and written messages asking for comment.”
“Bank analyst Cassidy said the court-ordered sale of Solomon Dwek’s $400 million real estate empire is a prime example of risk-taking gone bad for local banks. He said that if the economy falls into a recession, then ‘credit losses could skyrocket.’”
“‘Dwek is a canary in the coal mine for a developer with multiple projects in the air, and there’s a domino effect,’ Cassidy said. ‘If one starts to have problems, there are repercussions in the market.’”
‘Except for political campaigns, New Jersey isn’t making any more dirt. The lack of available land is why home prices here have appreciated so much in recent years. But no more. Almost overnight, it seems, the state’s housing market has turned upside down.
Sales of existing homes are off nearly 13 percent from a year ago, according to the National Association of Realtors. Inventories are rising, and the median price of a home fell in August for the first time in more than a decade. Home prices have dropped roughly 5 percent to 10 percent from a year ago, Realtors say. Overpriced McMansions will sit for weeks like dust-covered SUVs on a used car lot.’
‘There could be downward pressure on prices for the next three to six months,’ said William Kelleher, chief executive of Prudential Properties in Somerset. The turnabout in home sales presents challenges and opportunities for sellers and buyers alike. Here are some tips on how to get the most for your money. If you’re buying … Don’t insult sellers with a low-ball offer. They won’t counter-offer if they think you are bottom-fishing.’
“Don’t insult sellers with a low-ball offer. They won’t counter-offer if they think you are bottom-fishing.”
It would be much wiser to wait a couple of years until there are lots of desperate sellers and almost no qualified buyers. That is when the risk of insulting the seller will no longer be a factor.
Oh boy . . . I half expect to turn on my TV now and see a old guy with black slicked back hair telling me “It’s Morning in America.” Have I been asleep for 18 years?
After Bush, I miss the Gipper. Hell, I miss Nixon.
I’m not so sure, remember federal wage and price controls? Phase IV anyone? Of course these days WIN would stand for Whip Insurgents Now.
Who cares about making a lowball offer, it is just an offer.What are they going to do, say no? You better not worry about hurting someones feelings or offending them with an offer. You never know when someone will bite.
“Overpriced McMansions will sit for weeks like dust-covered SUVs on a used car lot.”
it’s funny how fast perceptions, for both SUVs and mcmansions, change when the economics don’t go the right way. let’s face it, in many communities an SUV is much more of a want(status symbol) than need(as in not paying a lot in gas). we’ll find out that mcmansions are more want than need, especially if the costs of ownership go up as the price goes down.
Even if you could lowball on a McMansion, who in their right mind would want to take on the property tax exposure? Local governments have only just begun a thirty year orgy of mass property tax increases. Garbage men will be earning $60/hr with full benefits in 2020 and taxes on a $600,000 McMansion will be $30,000 per year to pay for it. Buying a new build on the coasts is like signing a suicide pact to hand all your assets over to the local government(s).
In addition to mega-property taxes, those McMansions come with super-sized utility bills.
then its time to bottomfeed not fish
What a sorry attempt to bark prices back up! Here priceey, priceey, up…up…up…pleeeaassssse…UP!!
In a market that is trending down, if you’re not embarassed to present your offer you’re offering too much.
Nicely phrased. A keeper.
I would urge folks to not be too smug with “profits” earning X% in a CD. That savings of yours is being lent to someone. Otherwise, the bank would be losing money quickly. Folks on the blog are sure there will be a housing bust, but don’t realize what that will do to CDs, banks, stocks, etc. Be careful.
Umm…CDs are fixed by definition. They are also FDIC insured up to $100,000. And the problem with CDs is…?
Yea, I see these vague “portends” posted with no back up…. Wait, am I on Mish’s Blog?
http://bankrate.com/
I know they rate etc. it’s pretty extensive should have the info
For state by state and in branch only deals try hear:
http://bankdeals.blogspot.com/
Read “Conquer the Crash” for more about this, but of course if a bank goes belly-up, what happens to your “guaranteed” investment?
It also gives a good lesson on FDIC insurance, which is just a pool of money to pay out to banks that fail, contributed to by all of the banks. Customers of the weakest banks to fail will get the benefit of FDIC insurance, but if enough banks fail, that pool dries up and customers of safer banks are sh*t out of luck.
With this credit bubble popping, it’s definitely a good idea to do some deeper digging into the banking system and FDIC insurance… It’s not as safe as it seems.
-weakest banks to fail
+first banks to fail
If they’re not insulted you offer was too high.
I met a NJ transplant a few weeks ago. she used the bubble as an opportunity to dump her house, buy a bigger home here for 1/4 the price and retire early. She said she has no plans to go back, regardless of what happens to the market. She didn’t have anything nice to say about the Garden State.
This is so strange. Is there really fraud in New Jersey?
Ahahaa! Aaaaaaaahahahhaa.
- “‘It’s a disaster waiting to happen out there,’ said Gerard Cassidy, bank analyst
- ‘We’ve seen this movie before, and it doesn’t end very well.’”
Stop it Gerald. It is reported everyday in this blog by many fine Realtors that the bottom has been reached and things will begin to pick up at the beginning of the year.
Nah-just go ask Tony Soprano’s appraiser, Victor about all those trashed FHA insured multi’s he appraised for a half mil each.
“Regulators are proposing that banks do not lend more than three times their capital for all commercial real estate combined.”
Great, so if the real estate developers go broke the banks will only loose 3 times their capitol.
Regulators are pretty hypocritical. They turned on the money spigot and eliminated most reserve requirments. Now they blame the banks for bad loans? Believe me, if you are a banker you don’t go to your board and say ‘We shouldn’t make loans, they might go bad’. That will get you fired. Shareholders want returns, quarter after quarter. Lend or find another line of work, at least until the roof falls in.
I agree, bad standards drive away good standards as long as the people who benefit from the bad standards get away with it.
Now we see why Amboy is offering 5.25% on a savings account.
In Arizona, many of the thrifts and smaller banks are over 6%, as high as 6.4%.
Incredible. Have a name?
FDIC-insured?
We’ve been discussing moving some of our money out of our EmigrantDirect.com account (basically where we have all of our non-retirement savings).
Now will somebody please tell me why a bank would need to offer 6% interest rates when they can borrow all the money they want from the FED at 5.25%?
You don’t borrow money from the Fed at the fed funds rate. “Fed funds” refers to cash or federal reserve notes. The funds rate is the approximate rate at which banks borrow money from each other to meet their reserve requirements. Typically smaller or more conservatively-managed banks have excess reserves and lend them to larger or more aggressive banks.
In emergencies, you can borrow money directly from the Federal Reserve at the discount rate, but it is very rare and highly frowned upon. Bottom line: banks don’t borrow money directly from the Fed.
I’m curious where you got this idea that banks can borrow all the money they want from the Fed at some rate: TV, school, internet, friends?
Hmmm… Internet.
So when people show graphs of the money supply growing by trillions over the past several years, I assumed that was borrowed by banks from the Fed. If the banks aren’t borrowing it directly then how does the Fed inject liquidity into the market place. Educate me please.
Damn, everybody wants a free education these days - tough to make a living.
Here’s a quick and dirty. First, think of cash (Fed reserve notes, or bank reserves which can be converted in the notes) as money supply concentrate, not as the money supply itself.
Q1 - How is this money supply concentrate created?
Q2 - How is the money supply created?
1 - The basic way is that the Fed “monetizes” a portion of the debt (a fairly small portion). The Fed goes into the open market and buys (or sells) securities for its own account. It does this through auctions through Fed-reporting dealers (investment banks, banks, and other dealers).When the Fed buys treasury securities, a credit is created at the Federal Reserve Bank which can be converted into bank reserves. Opposite when the Fed sells securities. When the fed announces a new funds rate, it is announcing that it will add or drain reserves from the system (through open market operations) if it sees the funds rate moving away from its target. Thus, increasing the funds rate has the tendency to drain reserves, or reduce money supply concentrate.
2 - We (and all the world, for a very long period of time, probably since time immemorial) operates under what is called a fractional reserve banking system. When a bank lends money it is essentially creating a demand deposit (a checking account balance). Banks can create loans based on the amount of money supply concentrate they own. But demand deposits are part of the narrowly-defined money supply - you and I certainly can spend the balances in your checking account without restriction.
The bank has the loan as an asset and the demand deposit as a liability, opposite of the borrower. When you make a deposit in the bank, you give the bank the claim on the reserves of another bank (or on the Fed itself, if cash).
There are different kinds of money - CDs or savings account balances, for example, are part of a broader definition of money than checking account balances, because they are not instantly useable - and different reserve requirements, not only for different types of assets (loans) but also even for different types of financial institutions.
Pick up any macroeconomic textbook and you will be more up-to-date on it than I am. (I have both worked as a Fed-reporting dealer on Wall Street and also taught macroeconomics at the university level, but it’s been awhile. BTW, I traded CDs and BAs - - here’s an interesting datum: the Fed will or at least used to also buy high quality bankers’ acceptances (as well as treasuries) for its own account because BAs (unlike CDs were collateralized by goods in transit.
Meanwhile, if you think education has value and want to make a small contribution to the blog for me, thanks!
So, if rate hikes essentially are reducing the money supply, why is it that in the face of 16 or whatever it was 0.25% hikes over the last few years M1 and M2 have essentially grown or remained the same? Refer to the first table.
http://www.federalreserve.gov/releases/H6/Current/
And, of course, M3 has gone haywire upward (I think this is due to growth in derivatives and collateralized debt obligations, since M3 includes types of credit.
It seems to me there is another way the FED or source controls the money supply or credit.
Ok, I’ll make a donation. Although when I was at University I thought educating the public was part of our general mission. But then, subatomic physics is a breeze compared to understanding this stuff. I’ve come to assume that it’s deliberately made as convoluted as possible to keep the proles ignorant of what’s going on.
Ok, so. The Fed buys and sells securities with money it creates from nowhere, slightly increasing (or decreasing) M1 which then increases banks capital reserves which allows them to lend out many multiples of that which increases M3.
Nope. I’m still lost as to the mechanics of it. I guess I’ll have to pick up a macroeconomics textbook.
Thanks anyway.
BM - It may seem to you, but you are wrong. Also, raising the fed funds target rate does not necessarily reduce the monetary base (money supply concentrate) - it simply makes it lower than it would it would be by not raising it. Money supply has continued to rise (it is slowing recently) because of high consumer and business confidence and a generally easy bank lending policy.
The Fed has 3 policy levers only: target the funds rate, raise or lower the discount rate, set reserve requirements.
diemos - you’ve got the mechanics of it, although you’re a little mixed up on the M1/M3 stuff. It’s really not that complicated - it’s only complicated because people don’t understand the nature and *meaning* of money on a very basic level. It’s not as hard as physics - I made C’s in Physics (but A’s in math and econ).
Actually, here is an 8.30% APY CD.
http://azholsumcu.org/billboard.asp
Ben, the fine print says friends of AZ residents can qualify for membership. I’ll give you a point to help me sign up =p.
I remember when the S&L’s in Texas started bidding up rates as their business unraveled.
8.30% ……….This rate is surely a warning bell
This is an excellent rate for local residents but with the maximum amount limited to $8,000, it’s not worth the trouble for out-of-town people.
The $8k limit would have me worried even if I was only looking to deposit a couple thousand. On its face, that indicates to me that the bank is trying to develop a wide-but-narrow pool of depositors. Generally the only time banks do that is when they’re looking to screw over as many people as possible for losses small enough that many won’t go to the trouble of pursuing claims for. Not many people are willing to pay a few thousand in legal fees to possibly recover $8K.
Anytime above-market rates of return on short-term “safe” investments (I believe the CD term was 8 months) are being offered, its not an investment that I want any part of. I didn’t see “FDIC Insured” anywhere on the advertisement…
Saw this on their “about us” is NCUA the same as FDIC ?
Our accounts are insured for up to $100,000.00 by NCUA a U.S. Government agency
The link does not say if it’s FDIC insured. My B of A 10 month 5% CD is FDIC insured. During the term of that 8 month CD, my $8,000 will earn $426. Not bad. I’m forwarding this info to some friends - after I apply for my CD of course.
-
VG Prime MM pays 5.11%. Why lock up your money for 10 months for probably less yield?
Credit Unions are federally insured by NCUA.
No kidding, Gekko. I get 5% from money market accounts, and I’m free to move into other investments quickly if I need to.
“VG Prime MM pays 5.11%. Why lock up your money for 10 months for probably less yield?” Well I do have the Prime Money Market and regularly put cash in that. The rate has come down lately from 5.14 to 5.11. The Bank of America High yield 10 month CD last month was 5.35 and this month 5.0. I think I want to lock in some of my $. VG MM may be yielding below 4.8 by December if the trend continues
money markets carry no fdic i believe all cd have to be fdic
“In Arizona and Washington, more than 7 of every 10 banks have more than 3 X their capital wrapped up in commercial RE loans”.
Great. Not only is WA. in the top 10 for toxic loans, now we’re in the top 10 for this too.
In fact, one of the credit unions in Bellingham just began building a whole new multi-story BUILDING across the street from it’s main branch that is specifically designed for RE lending. It’s almost finished, just in time for the crash, and everyone’s real excited about it because it’s a “green” building.
The greenest building is the one that isn’t built.
Sorry if you’ve seen this already on CalculatedRisk, but it seems so apt I just have to repeat it here:
“Tanta’s prediction for 2007: ‘nonperforming’ loans will be reclassified as ‘differently performing.’”
“Bad Decisions Are Made In Good Times”
Like, “I am in love!” When, in fact, one is in lust. Creating good feelings are necessary to con people. That is what good bubble-meisters do. There other is: creating fear!
Jas Jain
What happened to too big to fail?
Oct. 16 (Bloomberg) — Treasury bond investors, who forecast lower interest rates two weeks ago, now see no chance the Federal Reserve will reduce borrowing costs until late next year as policy makers continue to warn about the threat of inflation.
Interest-rate futures show traders expect the Fed to keep its target for overnight loans between banks at 5.25 percent. Fed funds futures traded on the Chicago Board of Trade projected 20 percent odds of a cut two weeks ago. Last month, the contracts suggested a 50 percent chance for lower rates.
Reads like the other shoe just dropped!
Last week a very old friend visted from europe (London). His semi-detached house in London, which he has owned for almost 40 years, just keeps going up and up in price. Now worth close to $800,000. He bought it for $40,000 in 1970. I was telling him how the property bubble had started to deflate here in the US and, seeing as his next stop was Las Vegas, I asked him to let me know what’s happening. Also, I knew I would be getting the “straight and true” info because the people he is visiting in Las Vegas are in real estate. The wife is a realtor of many years and the husband was previously a casino employee who became a carpet bagger mortgage broker about 4 years ago. Last night my friend phoned me from Las Vegas with an update as related to him by the realtor. To put it bluntly, the Las Vegas property market is a train wreck but worse, the “train” has smashed through one accident and is now fast moving toward the next accident. Namely, the problem of exotic loans which will re-set in 2007 and 2008 AND 2009. The realtor told him that prices are dropping fast and the Joe Sixpack “investors” who figured they were going to get rich are more than a little worried but the big story is the McMansions. They are REALLY being hit hard. A few hundred thousand dollar drop is common place. The husband, the mortgage broker, said his business is a horror story. It was interesting to hear my friend’s reaction, seeing as he had not been in Las Vegas for 6 years. He said, “These people who bought these houses must be nuts. Why did the builders build them? houses? Who’s going to live in them?” On the other hand, a commercial building property boom appears to be gaining strength in places some distance from Las Vegas itself.
UK (and London in particular) really is a conundrum. It defies rational analysis.
The only part-way credible explanation I have heard is that actual immigration from the new Eastern European EU members is way, way higher than the official numbers and concentrated in SouthEastern England. This would significantly increase demand in an area where because of zoning rules there isn’t that much new supply.
“Industry analysts recall the savings and loan crisis from the late 1980s and worry that a new round of bank bloodletting could start if a once-robust real estate market founders.”
Oh boy!
“‘Are we alarmed or very concerned? The short answer is no,’ said Steve Fritts, an associate director at the Federal Deposit Insurance Corp, which regulates banks and insures depositors against losses. ‘But every bank is different. In some (specific) cases, we might be concerned.’”
Ah, here’s your government Joeseph Gobbels type.
In ‘90/’91 every commercial bank in NH went into FDIC receivership.
100 year Maine Savings Bank went down in ME. Peoples Heritage (now TD Banknorth-) was on the brink, but the Office of Comptroller fudged some kind of reserve requirement and kept the doors open.
Throw in Bank of Boston and Bank of New England for MA plus a major credit union in Rhode Island and there’s your bust.
And everybody thinks the S&L crisis was limted to FL, TX and the Southwest.
This debacle is 10X worse.
Watch your local news and papers closely.
The next coming bank failure and closure could be your own.
How does one find out which banks are exceeding these loan vs. capital ratios? (without having to call the banks individually). Is there some sort of report?
Good question. Anybody??????
You can get FDIC call reports typically from the bank or FDIC sites. Here’s one
http://www2.fdic.gov/Call_TFR_Rpts/search.asp
Veribanc rates banks based on capital risk, but it isn’t free and having not done much but see the service I can’t vouch for them.
http://bankrate.com/
should have it
http://bankdeals.blogspot.com/
good for deals, in branch only etc.
If this is a repost sorry. It’s doesn’t seem to be posting….
This is a great time to point out http://www.treasurydirect.gov for those wondering about a safer place to store US dollars than a bank. 4-week T-Bills are the way to start.
I like to mix 4 week and 3 month ones. I have a 3 month on order for today’s auction. The current high rate at this posting is 4.925%, so it’s gone up. The investment rate should easily be over 5%. State income tax free, no expense fee to buy these things. Such a deal!
The high rate for the 3 month settled at 4.94% and the investment rate settled about 5.072% for this week’s sale. Cool!