REAL
ESTATE LENDING In 2004, fully thirty-five percent of our nations real estate lending came from interest only loans. Since I have written about the huge boom in real estate lending for over a year, I thought it would be interesting to approach the topic from a historic viewpoint. If we journeyed back to 1864, the end of the Civil War, we’d see a much different attitude in our nation about real estate lending. The National Bank Act of the same year virtually prohibited lending with real estate as collateral.1 Since it was very illiquid, real estate was not considered a suitable investment for bank deposits. Indeed, this rigid view toward lending with real estate as collateral proved to have its benefits. After the Panic of 1873 and the ensuing depression that lasted through 1877, as John Thompson was stepping down as president of First National Bank (which went on to become Citicorp), he reflected on the period through which he’d just come. “A bank which has no real estate, not a debt in the world, no law suits and plenty of cash need fear for nothing. I leave the First National sound as a nut and hope it may be kept so.” 2 With the establishment of the Federal Reserve in 1913, lending experienced its first boom. From 1914 to 1920 over 1700 new banks were established. 3 Insurance companies also had an abundance of money for real estate loans. With the advent of state and federal cooperative banks and the liberalization of real estate lending under Federal Reserve Act, our largely agrarian population assumed the majority of this debt. While lending standards did soften during the roaring 20’s, bankers still required borrowers to have at least 40% equity against mortgage debts.4 As the merger of AOL and Time Warner, in March of 2000, signaled the top of a mania, so also did the establishment of the New York Real Estate Securities Exchange in the ominous month of October, 1929. The Chrysler Building 6% issue revealed that bonds too participated in the crash. In two years, from early 1930, their price fell from 95 to 38 cents per dollar.5 After the Crash, bankers shifted from too much lending to too little. In 1933, Frank Sisson, president of the American Bankers Association, feeling that government bailouts would open the door to more aggressive lending, was actually against the founding of the FDIC. 6 And surely Sisson was right. In our lifetime, we have seen the Federal Reserve bail out Penn Central in 1969, our major American banks from the Latin American Crisis in 1982, the Continental Illinois in 1984, and FSLIC, better known as the Keating Five, in 1990. With the issues currently facing Fannie Mae, second only to the US Treasury in lending, what will happen next? Footnotes: Doug
Wakefield © 2005 Doug Wakefield Ole Bear, Editor’s Commentary Real Estate Wealth Transfer Some folks have the ability to say a heck of a lot in less than a page. We find that to be case in Doug’s essay which was contained in his May 2005 newsletter. In colonial times before the American Revolution and after it, in the early days of the nation as a Confederacy [Articles of Confederation], and then as a fledgling Constitutional Republic beginning in 1789, there were no central bankers, no Realtors, and no real estate appraisers. The thirteen colonies got their first lessons in legal tender fiat paper money that wasn’t worth a Continental, printed freely by the Continental Congress to finance George Washington and the Continental Army. The coin of the realm was the British money and the Spanish piece of eight, which became the standard for the US Dollar at 371.25 grains of fine silver per the US Constitution. Real property sold by word of mouth, and folks usually paid cash for it. There was no such thing as a home equity loan at 125% to 150% loan to value, no mortgages, and no funny stuff going on in real estate markets. My how times have changed. With Andy Jackson defeating the extension of the Second Bank of the United States [a central bank run by Charlatan Nicholas Biddle] during his second election, with the exception of Mr. Lincoln and his printing press greenback [legal tender fiat paper money which depreciated], after Federal forces defeated the Southern Confederacy and the greenbacks were finally redeemed in the 1870s, the rest of the 19th Century was mostly stable with respect to the money system being backed by specie, and paper money was redeemable in legal gold and silver. Real estate usually sold by word of mouth, mortgages were limited, there were no real estate appraisers or Realtors, and folks generally paid cash for their property. It is interesting that both Lincoln and Jefferson Davis, both used paper money and the printing press to finance the War of American Secession. 1913 is a banner year – the beginning of the greatest transfer of wealth in economic history. True wealth being paid for property, real money as gold and silver, and paid for possessions now become supplanted by debt and a debt backed inflationary money system. Since 1913, the American central bank has destroyed about 95% of the purchasing power of the US Dollar – that it would have bought in 1913. This is a process of bailout, boom, and bust with the Federal Reserve as the lender of last resort. The Mandrake Mechanism of selling bonds for debt backed money, and then printing all you want now uses the housing and the commercial realty markets to support the money and financial system through mortgage backed and asset backed securities in the game of two tiered structured finance. Our debt backed money system of legal tender fiat paper is very largely supported by debt on real estate. Without this transfer of wealth from the American People using real estate as the carrot, the smoke and mirrors of the Federal Reserve would have been revealed to Main Street America long ago, and it is quite possible that the financial markets would have collapsed before now. But if you really think about it, the financial system collapsed from 1965 to 1968. The money system melted down right under everyone’s nose. Clad coins [a form of coin clipping used by Kings and Queens] were minted in 1965. Silver money was gone. In 1968, the last Silver Certificate true one dollar bills were removed from circulation and replaced with legal tender fiat paper Federal Reserve Notes like the fives, tens, twenties, fifties, and hundreds which had already been in circulation. Gresham's Law? The bad money chased the good money out of circulation. Ergo, we got the inflation of the 1970s -- a new Cadillac in 1970 was about $6,000, and by 1980 it cost about $15,000. A new Cadillac in 2005 is... well you just blew $40,000. There is a chapter in Ed Griffin’s book, Creature from Jekyll Island, a second look at the federal reserve, called Chapter 2, The Name of the Game is Bailout that makes for an interesting read, and is a companion read to Doug’s last paragraph of his essay. Through the process of mutual fund money market intermediation, theGSEs are able to create money also out of thin air, operating like second tier central banks. Check your supposedly all cash money market accounts on Wall Street, and most of you will find that unless the fund is in just treasuries, that 9 out of 10 have some MBS or ABS linked to the GSEs or some financial corporation like GE, GM, or Ford in some manner. Well, folks that ain’t cash in my view. Real estate lending – How much is too much? Fasten your seat belts – it could be a fast bumpy ride. Ole
Bear, Editor © 2005 Realty Reality |
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