I thoroughly enjoyed a recent post by Michael Tarraboto, that is linked here....
http://activerain.com/blogsview/368385/Basel-II-Rethinking-it
Yes, I'm a numbers geek, and hence enjoy seeing the high level conversations that are being had by the banks along with other participants in the securities markets at the highest levels....hence, this is where Basel II comes in. For a complete explanation, go to Mike's link shown above. I will merely take two paragraphs as excerpts, and explain why they are so telling.
Excerpt #1:
19. Markets are procyclical, economic capital is procyclical and human behavior tends to be procyclical-our optimism is amplified in good times, and our pessimism is magnified in bad times. What is more important is that supervisors recognize this inherent bias towards pro-cyclicality in the financial system, ensure that banks prepare themselves in good times to meet the rigors of the bad times and do not take measures in bad times that unduly amplify the cycle. Bank managers, too, should be aware of the cyclical profile of their business activity and their risk management systems; of the difficulty of shoring up capital in recessionary phases and of the costs this entails.
My summary: By overly diluting the lending channels specifically, the broker community specifically without their own warehouse lines, and commitments to live up to, operated, managed, and executed as if it were their own reality show, "How to Screw the Pooch Customer' without any regard to accountability, and even less to ensuring that a higher percentage of profits was set aside as reserves in the case of loss. Then again, if you're not asking your clients for more than 1 months reserves, or you were foolish enough to go Stated/Stated to 100% with a history of delinquent payments, I suppose you wouldn't be thinking of the future, cause the present is so wildly spectacular!
Secondly, I specifically point to the very last sentence that speaks to the ability of shoring up capital in these recessionary phases. We all know this is why so many companies have gone out of business, and even the largest mortgage companies are being acquired and absorbed. To this end, you've only seen the tip of the iceberg. Expect mergers, acquisitions, and consolidations to continue at a fervent pace through 2009.
Excerpt #2:
21. Procyclical behavior reflects the tendency to underestimate risk in good times, and overestimate it in bad times. A capital framework which better estimates risk through an economic cycle, is less likely to suffer from under and over estimations, and hence more likely to aid in smoothening procyclical effects. Basel II encourages the appropriate use of capital buffers through the cycle. Let me emphasize here that the idea of building robustness in good times is not only a prudent policy, it is also theoretically consistent because it is in good times when exposures and therefore risks increase, while in bad times these risks materialize.
My summary: Funny, when times were great, that tide helped all ships rise. I'm paraphrasing from something Bill Roberts spoke about previously. Very true though. Think about it...as Real Estate Professionals, whether you're a Realtor, Banker, Broker, or other affiliate, you've probably weathered the current storm because you have a large portfolio of clients and referral sources, as well as being able to adapt to the times. You invested in your personal knowledge during the good times, as well as marketed during the good times, so that when things turned as quickly as they did, you were able to draw from your pool of contacts and resources, and hopefully that investment account that you created and fed during the good times. More than anything that second excerpt SCREAMS to having those risk increase during the good times, as everyone appeared to be too busy to pay attention or to even care. Do you think that the same excesses and oversights will occur in the future?
Personally, I envision an extremely different model moving forward. Brokers will need to become banks to survive. Banks will streamline their operations with technology as they will need to work on more aggressive profits to account for unrecognized losses today. Mortgage Insurance companies will go through the same consolidations that you're seeing in lending. Real Estate companies will merge with less broker/owners, and more corporate or joint venture opportunities that spread the risk amongst several parties.
It is clear that Basel II will provide excellent framework in the future. In the interim, I believe survival will govern many of the changes that will be necessary to survive in the 2008 and beyond. Oh, and if you think government is the answer, I have great connections in the travel industry. I'm more than happy to help you book a ticket to Europe, if you like socialist behaviors and want to be managed by your government. I better quit before I go off on a tangent.
Mike, thanks for an excellent piece on Basel II. Now that I've read it, I can only thank you for sharing. Expect me to write more as I dig deeper on what I expect to be the long healing of the Real Estate Industry.............
Bill Nazur has an extensive background in finance & mortgage lending who gets to serve as an author, speaker, and consultant to the real estate industry, as well as a featured regular guest on FoxBusiness, MSNBC, and Univision. Bill also hosts a new radio show at http://www.realcoachingradio.com/, along with a thriving (yes, its thriving, not just surviving!) mortgage business, powered at Bank of America Mortgage. Bill's experience in calling the current foreclosure crisis, along with many of the real causes, along with the taboos in dealing with such a sensitive subject, led to the publishing of Finding Foreclosures, published by Entrepreneur Press. Allow my team to help you, as we can also lend in all 50 states. While Real Estate is local, knowledge is universal. We hope to help you soon.
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