Cash King vs. BanKing

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Are you afraid to be “a Loan”

Four years ago in 2006, the real estate boom began its decent into the abyss.  While most of us in the real estate profession always see the glass half full, there were some who were ahead of the curve with the knowledge that we were in for rough times.  Those half empty glass people were the Bankers.

The banking institutions were well too aware that the loans that they made were not built on sound foundations and the sudden over abundance of vacant inventory sent shivers up their balance sheets.  Unfortunately for the rest of us, the upcoming Presidential election gave us false hope that all would be better once there was a changing of the guard in Washington.

Hope soon gave way to fear of the unknown, only to end up in panic.  The economy collapsed and our wealth evaporated in an instant.  Still in denial, we hung on to hope that our properties would be saved from drowning by government intervention.  We hoped the ugly waters would recede and our investments would be saved.

Hold on a little longer” became the mantra.  Give the economy a chance.  We need a little more money and a little more time.  In 2009 it became evident that we were going to have plenty of time, but not enough money.  The well was going dry and our thirst for financial infusion was nowhere in sight.

2010 began a new decade of hope.  Unfortunately, HOPE is not a strategy.  Hope is the emotion of feeling good about “something”.  The “something” has to be a plan, a solution, a strategy we can hang Hope on.  A possible strategy might have been for the banks to start loaning money again.

We all know now that the banks were so afraid of the loans they made, they wrapped them up in sweet smelling packages and sold them to unsuspecting investors around the world.  Although the outcome had monumental consequences, the reason not to ever loan money again, unless there is no risk,  is ludicrous.  So this leads me to my point.

If the economy is going to reignite, businesses must have capital.  If banks are not willing to make loans, we must look elsewhere.   Bankers tell us they are loaning money as long as you don’t need the money.    What does that mean?  To secure a loan from a commercial lender, you must be able to pledge something of value.  So far, that has always been the formula.

Today, it seems that pledging property has come down to the liquidation value.  If you are fortunate enough to be able to make a 50% LTV loan…..you better hope that the value doesn’t drop below that ratio, or you will be coughing up more equity on demand.   This is called the transference of risk.

The reason it has been reported that business is sitting on $1.2 trillion in cash is that business knows that if they need to re-capitalize their business, they will be funding it themselves……Why, because today….” Cash is King!” Unless we demand that the banking institutions free up lending to small business ….we All will be bowing to a new “King.”

 

 

Brad Lindberg

Vice President – CID

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