Fee Simplistic is a regular post by Martin Tessler, whom after 30 years of commercial fee appraiser-related experience, gets to the bottom of real issues by seeing the both the trees and the forest. He has never been accused of being a man of few words and his commentary can’t be inspired on a specific day of the week. Marty, by way of Greenspan, and using the longest blog post title in the history of modern real estate, discusses supply and demand forces and the concept of buying low and selling high, or was that buying high and selling low?_ …Jonathan Miller
For those of you who read Alan Greenspan’s four column Wall Street Journal Opinion article of December 12th entitled, “The Roots of the Mortgage Crisis“, I wonder how many were elucidated by his macro-economic “gobbledygook” of the current situation. After spending some 1,500 words on the origins of the mortgage crisis as being too much savings from global accounts resulting in “equity premiums (that) were inevitably arbitraged lower by the fall in global long -term interest rates”. In other words we had too much money chasing deals. Mr. Greenspan then goes on to his final summation after more doctoral dissertation nomenclature that would be infinitely more palatable with a glass of scotch or bourbon. With this as background we are finally told by the former Fed chairman that the “The current crisis will come to an end when the overhang of inventories of newly built homes is largely liquidated, and home price deflation comes to an end”. In other words Mr. Greenspan has discovered the Law of Supply & Demand.
Surprisingly, there’s no mention of the flim-flam mortgage brokerage, underwriting/rating agency, CDO bond issue bonfires in which the financial world was enjoying roasting its rich gourmet marshmallows and for which it is now suffering severe dyspeptic cramps. There’s also no mention of the failure of the Fed’s actions in adding liquidity at the discount window and the Federal Funds Rate to move the large institutions into the lending mode. It is here that I, having no econometric pedigree to compete with Mr. Greenspan, offer my own version of the reason for the credit shyness by the banking world.
Back in the 1990’s and prior to the world of securitization the banks kept their mortgage lending on their balance sheets. Every quarter the banks (or at least the one I had worked for) would schedule CSR (Credit Surveillance Review) meetings comprised of the lending and appraisal teams that would review each borrower’s debt and the status of where the real estate collateral stood in the current market. As the collateral was reviewed a summary of each account’s loan to value would be brought up and a “mark to market” application would be made. Where a downturn indicated that a write-down would have to be taken the credit side would generally indicate the extent of the reserve and if the write-down was substantial it would be an orchestrated write-down of “X” dollars this quarter and “Y” dollars the following quarter. With securitization this process was done away with-enter the rating agencies whose livelihood depended on their bonhomie with the underwriters and bond issuers.
If you read the daily financial pages you will see how the write-downs by the big Wall Street firms are playing out. Each month there is another announcement of how the firms had underestimated the previously announced write-down and how they have discovered that additional write-downs and reserves would have to be revised upwards. It has already cost the CEO’s of Merrill Lynch and Citigroup their jobs and there are others such as Countrywide and WaMu that are teetering on the brink. They are all playing this game and it is no wonder that the banks are reluctant to lend when they are still grappling with the extent of their losses and write-downs and cannot expose their Tier 1 capital and balance sheets.
When I was in graduate school studying city planning at the University of Pennsylvania I lived in a rooming house across from the Wharton School on Locust Street. One of the Wharton seniors who lived directly below me would delight in imparting to me the wisdom he gathered after 4 years. “Marty”, he would say, “buy low, sell high, and remember its short term liquidity, long term solvency-follow that and you won’t go wrong”.
Somehow Mr. Greenspan left this out of this Wall Street Journal article but then again-he’s an NYU grad.
PS-I always used to study with the radio on usually listening to the old Tin Pan Alley tunes which probably should be incorporated into Economics 101.