In my blog on the BuildingCredibility.com website last weekend, I posed the question "Does the Rise in Foreclosures Constitute a Crisis?" Last Monday I responded to a commentor who reported a rumor that IndyMac bank was close to bankruptcy. Based on my research of the facts, I concluded that it was unlikely. While IndyMac did not file bankruptcy, IndyMac Bank, F.S.B., Pasadena, CA was closed by the Office of Thrift Supervision (OTS) and the Federal Deposit Insurance Corporation (FDIC) was named Conservator on Friday July 11th. This is the 3rd largest bank failure in U.S. history. So is this a crisis? Should we panic?
There is a great deal of debate over whether we are currently in a recession. It is commonly accepted that recession cycles are a normal part of living in a world of inexact balances between supply and demand. But what turns a usually mild and short recession into a great depression? I spent some time this past week and most of the day yesterday studying the Great Depression. The exact causes of the Great Depression is also the subject of debate and concern. While scholars have not agreed on the exact causes and their relative importance, the search for causes is closely connected to the question of how to avoid a future depression.
Was the October 29, 1929 stock market crash the cause of the Great Depression? The stock market turned upward in early 1930, returning to early 1929 levels by April, though still almost 30 percent below the peak of September 1929.Economists dispute how much weight to give the stock market crash, but it clearly changed sentiment about and expectations of the future, shifting the outlook from very positive to negative, with a dampening effect on investment and entrepreneurship, In early 1930, credit was ample and available at low rates, but people were reluctant to add new debt by borrowing.
Debt is seen as one of the causes of the Great Depression. In the 1920s, American consumers and businesses relied on cheap credit, the former to purchase consumer goods such as automobiles and furniture and the latter for capital investment to increase production. This fueled strong short-term growth but created consumer and commercial debt. People and businesses who were deeply in debt when price deflation occurred or demand for their product decreased often risked default. Many drastically cut current spending to keep up time payments, thus lowering demand for new products. Businesses began to fail as construction work and factory orders plunged.
As debtors defaulted on debt and depositors became worried about their deposits, worry turned to fear and panic. Panic created runs on banks. As panicked depositors made massive withdrawals from the banks which had financed this debt, banks began to fail. Government guarantees and Federal Reserve banking regulations to prevent these types of panics were either ineffective or not used.
Regarding the closing of IndyMac Bank, here are some excerpts from the Office of Thrift Supervision's Press Release last Friday:
The OTS has determined that the current institution, IndyMac Bank, is unlikely to be able to meet continued depositors demands in the normal course of business and is therefore in an unsafe and unsound condition. The immediate cause of the closing was a deposit run that began and continued after the public release of a June 26 letter to the OTS and the FDIC from Senator Charles Schumer of New York. The letter expressed concerns about IndyMacs viability. In the following 11 business days, depositors withdrew more than $1.3 billion from their accounts. This institution failed today due to a liquidity crisis, OTS Director John Reich said. Although this institution was already in distress, I am troubled by any interference in the regulatory process.
As a result of an OTS examination that began in January 2008, the OTS deemed IndyMac to be in troubled condition. An overwhelming majority of problem institutions are able to successfully modify their operations and business plans, work closely with their regulator and eventually return to a healthy condition. IndyMac had reacted to market conditions and OTS concerns in November 2007 by changing its operations and business plan to build a foundation for recovery. IndyMac was actively seeking to arrange a significant capital infusion or find a buyer. The recent release of the senators letter undermined the public confidence essential for a financial institution and took away the time IndyMac needed to pursue a recovery.
In addition to studying the Great Depression, I looked up the definition of Crisis. Wikipedia defines a crisis as
· A crucial or decisive point or situation; a turning point.
· An unstable situation, in political, social, economic or military affairs, especially one involving an impending abrupt change.
· A traumatic or stressful change in a person's life.
It says that reactions to a crisis include Fear, Stress, Shock and Disbelief, and Anger, and it describes the crisis response process as having definite phases which include Shock and Disbelief, Denial, Overwhelming Thoughts or Emotions, Acceptance, and Conclusion. After we accept what is happening, we are ready to work through the problems and all of their ramification and impacts on our lives. We are left with a desire to see things to their conclusion.
So does the rise in foreclosures constitute a crisis? The failure of IndyMac Bank, one of the largest bank failures in U.S. history, could certainly be considered a crucial or decisive point or situation; a turning point. I think we would all agree that are current economic situation could be described as unstable. And the rise is foreclosures is surely creating trauma and stress - for those facing foreclosure, for those homeowners who are seeing their property values decline, and for some depositors. So based on the definition of a crisis and after much soul searching, I have moved through the Shock and Disbelief, Denial, and the Overwhelming Thoughts or Emotions phases to Acceptance that this is a crisis.
I also looked up Panic. Wikipedia defines Panic is a sudden fear which dominates or replaces thinking and often affects groups of people.
So should we panic? NO. We should not allow our fear to replace rational thinking. We should simply accept what is happening and start working through the problems. We need to see this crisis through to its conclusion.
That's the primary reason I blog - to present the facts based on my knowledge and experience and encourage my readers to replace the overwhelming thoughts of fear and despair with rational thought based on the facts so we can all start working through the problems to find solutions.
What is the solution? I believe that one solution - possibly the best solution - is to halt the slide in home prices. The U.S. Senate last week passed an extensive package of housing legislation Friday, reacting to the continuing erosion of home prices and growing foreclosures by taking their most aggressive step yet to address the housing crisis. The package includes tax relief for homeowners, changes to the Federal Housing Administration, and a $300 billion program to refinance mortgages headed toward foreclosure into affordable loans. The legislation also overhauls regulation of faltering mortgage-finance firms Fannie Mae and Freddie Mac. The two companies have seen their stock prices drop precipitously this week because of solvency concerns, and lawmakers hope the creation of a new regulator with broader authority over the companies boosts market confidence.
House and Senate lawmakers still need to overcome a number of impediments before President Bush can sign the bill into law, but lawmakers are hopeful they can reconcile competing versions of the bill. The centerpiece for both bills is a program offering up to $300 billion of FHA-insured mortgages to help refinance struggling borrowers into affordable loans. The program would rely on lenders voluntarily writing down the value of a distressed loan for the homeowner to qualify for the new FHA-backed loan, and in return borrowers would have to share future price appreciation with the federal government. Other foreclosure-prevention and housing-related efforts in the Senate bill include $150 million in additional funding for housing counseling, $10 billion in additional mortgage-revenue bonds, and a housing trust fund to be funded by Fannie Mae and Freddie Mac.
The temporary first-time home buyer tax credit and foreclosure relief programs would increase home sales causing inventories to fall and helping to stabilize home prices and mortgage markets.
The National Association of Home Builders continues to lobby for several amendments to be included in the final cut of the bill - particularly a change to make the first-time home buyer tax credit (currently set at $8,000) effective for a full year starting on the date of enactment. Congress must move quickly to craft a final housing bill that will help struggling home owners and get the housing market and the economy back on their feet.
I encourage you to contact your Senators and Congressman and ask them to move quickly to reconcile the two bills and deliver the legislation to President Bush to sign.
Chuck Miller GMB CGB MIRM CMP MCSP CSP
President / Builder - Chuck Miller Construction Inc.
(208) 229-2553
chuck@chuckmillerconstruction.com
www.chuckmillerconstruction.com
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