Tuesday, June 2, 2009

The Media'a Recovery Meets Real World Collapse

Its fun to turn on the television in the morning and hear about the new bull market. The mustard seeds in the economy that have now sprouted into green shoots that are laying the foundation for our recovery and future economic bliss. What a wonderful thought.

I spent a few hours this afternoon with a custom home builder in the community that I sell real estate in. He has a few inventory homes for sale around the city, one of which is located in my community. All of his homes are currently "under water." This means that his loan/mortgage on the properties are higher than the value of the homes if he were to sell them.

For example, he built a house 3 years ago that is still for sale today. His loan on the home is $800,000, and its price if it were to sell today would be $600,000 before commissions and closing costs. He is $200,000 "under water" on the home.

This builder has two options; he can continue to make the interest payments to the banks on all of his homes every month and hope that a buyer comes along, or he can stop making payments and call the bank to work out a deal.

He has decided to do the latter. (Which is the correct business decision) He called the bank this morning and told them he is ready to declare bankruptcy. That word immediately prompts the person taking the call to transfer him to the part of the bank known as the work out department. They try and "work out" deals so the bank does not have to take the property back on their books and recognize a loss.

Where the world on television differs slightly from the real world was the conversation that followed.

The girl who answered the phone listened to this builder's situation. He then asked her if his situation was beyond repair. To comfort him some, she let him know that the last three people she got off the phone with were in tears the entire phone call. She told him that she takes calls daily from very, very prominent people in Charlotte who are in his same situation only with hundreds of millions in debt.

She told him that restaurants, shopping mall owners, office building owners, small businesses, land developers, regular citizens, and just about every home builder in the city were all calling her department on a daily basis. (Or the work out department of a similar bank that holds the debt)

She told him that they have shut down most departments of the bank, and they have essentially moved the ENTIRE staff to the work out department. Its not that they are not giving out new loans, its that the thought would never even cross their minds.

She told this man that she would be in touch with him in 5 to 6 weeks at the earliest. She said with the entire staff working around the clock, it will take that long for them just to look at his loan.

This conversation has not been exaggerated in any way. This is what is happening in the world behind the curtain. This is what is taking place in every bank across the country as we speak. Fortunately for her, Charlotte has not been hit as badly as banks in California, Nevada, or Florida. I can only imagine what is taking place in those offices.

When a bank takes losses that exceed their capital base (cash on hand), they are forced to close their doors. When this happens the FDIC shows up at their door, takes over their bank, and sells off their assets to a new buyer. The FDIC takes losses during this process that it must pull from their reserves.

The FDIC started 2008 with $60 billion in reserves. A few weeks ago they approached Congress and told them they were now down to $13 billion. With a swift weekend move that many around the country did not even notice, Congress approved an additional $500 billion for the FDIC to use as reserves.

(The reason this money is necessary is so customers keeping money at the bank do not fear that their money is in danger. For example, you may have heard that the FDIC guarantees $250,000 of your savings if your bank should close. This keeps a panic bank run from taking place)

Seeing what is happening every day on the economic battlefield is a frightening image. The losses pouring into banks across the country are only at the very early stages, and by the time its over I believe that $500 billion will only be the down payment needed to rescue the regional banks.

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