Reality Check

The elections will have been decided. Our new president will inherit the worse banking mess since the great depression. Don’t get me wrong, I am not predicting doom and gloom, but we all have to have a reality check.

Who would have predicted that an aggressive mortgage broker in the valley could create a worldwide economic and banking meltdown? Well, that’s just what happened. One mortgage broker, Countrywide, started giving easy loans to homebuyers without doing proper credit checks, and income verifications. That created a competition which all the other banks rushed to meet. With Wall Street fanning the fires by adding cheap money and ultimately spreading the risk world wide for a deadly combination of easy loans, an aggressive mortgage broker and Wall Street greed led to the crisis.

Now that the cat is out of the bag, the whole industry is frozen. Ultimately, things will get back to normal and new loans will be made.

Bankers on Wall Street love the stock market and real estate when things are going up. However, they have no appetite for a downturn. So, cooler heads will not prevail. The bankers are now running scared. They are afraid of what they created.

Since we live in the internet age everything is happening at a much faster pace. In the eighties, a lot of the S & L’s (remember those) did not even file a notice of default for a year. They stuck their heads in the sand and refused to acknowledge the declining market values and increasing number of bad loans. When it finally hit the fan, it slowly built up and took years to get out of the mess. Then in the nineties the commercial banks took the brunt of the hit, and it didn’t last quite as long.

This credit crisis is being played out at a much faster pace then ever before. It has caught everybody by complete and total surprise by its speed, thus causing panic. Also contributing is the fact that between CNN and the internet we are watching this liquidity problem unfold in real time. In the past, it was hidden from public view. The bad news is that we have to watch it unfold, but the good news is we will clean it up faster than in the past.

As the banks have pulled back on their lending, it has created a liquidity crisis which has rippled throughout the world. Ultimately, it will get sorted out and lenders will continue to make loans. Our apartment loans are probably the most conservative loans they can make.

As apartment owners on the Westside, we should be better insulated in this economy. However, it will be a little more difficult to sell in the next year then it has been in the past. Rents will not continue to go up as they have been and building values will probably remain flat. While that might not sound so rosy, it is a lot better than being a fidelity account which just lost 40% since the first of the year.

Most of us have seen economic ups and downs and have suffered through twenty years of rent control. So when you look at the economic outlook, just remember this will be a lot less painful to us in Santa Monica– certainly no worse then rent control without vacancy decontrol. So from our perspective we just need to hang onto our buildings and if you are lucky enough to have cash and liquidity in this market place, it is a very good time to buy well positioned properties.
Speaking of Loans….

I recently attended a small lunch for the Honorable Karen Bass, Speaker of the California Assembly. I found her to be very personable, friendly, and very bright. She had a great understanding of the issues that were confronting California. The Madam Speaker relayed a story of her 80 year old grandfather, who had a small apartment building in central Los Angeles. At some point, the inspectors came in and asked him to do so much work he got disgusted and sold the building. Sound familiar?

At one point she was complaining that she had to raise $14 million for her party. I quipped, “the only thing harder then raising $14 million for a political campaign is refinancing an apartment building in California.” The Speaker also had an understanding of the financial crisis that was gripping the country.

She had just returned from a trip to D.C. and commented how scary it was there. I said, “Ah, the crime rate’s down from when I used to live there.” She informed me she was talking about the Capitol. She met with Boxer, Feinstein, and other National legislators in order to present the Governor’s financial plan. This was right before the bailout. In meeting with the legislators she commented on the state of fear that prevailed in Washington. It was a nerve racking time with all of the banks unable or unwilling to loan money. Everything was coming to a halt. To everyone’s benefit, the bailout has occurred and the economic wheels are beginning to turn again.

I had a loan application in at WaMu at the time WaMu was taken over. I called them the next morning and of course was assured they would still make the loan. As of writing this, the loan is still in underwriting but everything is progressing smoothly. We have also closed other loans since then and things seem to be getting back to normal.

Usually, in January I do a recap and reflect on the year past and then think about the year in front of us. This will be an interesting winter to have that reflection. On the Westside we all have a lot of stability to be thankful for.