Banks Show Little Appetite for Suicide
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More than a decade ago when the housing/credit bubble burst the focus on exiting the financial crisis was to bail out the banking industry. They were essentially insolvent and by not forcing them to “mark to market” their asset values to their new lows which would force them to declare insolvency, they survived. Banks had become reckless and in the eyes of the government and needed to be bailed out or the global economy would collapse and caveman days would return.
My friend and zen-goddess of the housing data vertical Ivy Zelman of Zelman & Associates paraphrased a quote by Howard Marks: “Capitalism without loss is like being Catholic without hell.”
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However, my thinking here is that the federal government is expecting healthy banks to take a bullet for the economy and the banks show little appetite for suicide.
Going into this downturn, banks were in relatively good shape and the government is leaning on them to facilitate saving small businesses and independent contractors. But the banks are not being reckless as I would assume the federal government wanted them to be in order to save the economy. Yes, the $350 billion dollar stimulus showed how the payouts were skewed to larger businesses and existing customers of the banks, but that’s how the legislation was written. There is another batch of money for SBA that was just put into law that hopefully will fix and redirect emphasis towards small business.
But the banks are doing what they didn’t do in the prior crisis, focus on risk management.
That’s because the banks are concerned about self-preservation and likely do not trust the word of the federal government in the execution of new rules to enable trillions of funds to be distributed to individuals and small businesses. Here’s a great summary by the Urban Institute.
In other words, the credit box is shrinking.
- Mortgage rates are low but higher than pre-covid-19 despite the 1.5% fed funds rate drop
- Credit score requirements are higher
- Loan-to-value ratios are lower
- Forbearance periods are followed up by immediate repayment
- 20% down on jumbos is commonplace
These institutions are demonstrating that they are fully aware of the risk and won’t be the backstop on the crisis – the federal government will be forced to take the lead. So much for hell.