In January and July each year, I conduct account reviews with our sales team. This four-day process consists of going line-by-line through every account to see what is going on. During these account reviews, I receive good intelligence, and many times I'm alerted to potential issues and problems. But most importantly, we clear off dead accounts, which can potentially lead to misbillings. Frankly speaking, in the last two years the most commonly used statement by our salespeople during these reviews has been something like, "I talk to them weekly, but they just don't have any work."
During the January account reviews, another statement echoed: "He had a contract to build a house from a strong customer, but he couldn't get bank financing." By the third day of the account review process, I told our sales manager, Susan Adams, that we have a real trend happening and I wanted to quantify these comments. I asked our salespeople to go back over the last six months and count the number of houses wherein deals fell apart at the bank.
The number was staggering--86. Yes, 86 homes in a three-county area of Central Florida.
A few years ago, I did an analysis on the number of jobs created per home, which concluded that 161 individual jobs were created by the construction of one house. Based on 86 homes lost, there were also 13,846 jobs lost. That is a sad testimonial considering my home, Lake County, has 11.9% unemployment.
During the account reviews, I heard many outrageous bank turndown stories, but a couple of them really stuck out. Here are just two real-life stories:
- A builder had an established, successful doctor who was going to build a 6,000-square-foot home. The doctor owns the land and was putting $150,000 cash in the home. The bank initially approved the project but later turned it down, saying the doctor must put up half of the cost of the home as down payment.
- A builder had a customer in south Lake County who owned 10 very expensive acres of land free and clear, and the customer was putting down more than $100,000 in cash to build the home of his dreams. The bank turned him down because it said he wanted to build a home too big for the area.
In both of these cases, the builders stated that their customers were strong with superior credit ratings. However, some paper pusher at the bank arbitrarily decided the bank didn't want to loan the money. Everything in financing is hard now, and getting a true appraisal is like spinning a roulette wheel because there is no value to actual cost--it's all subject to a distressed foreclosure in the neighborhood. This is why home values in America are in the toilet, because appraisals have nothing to do with real costs anymore.
Those who know me well will report that I am personally very conservative, and at times can make Rush Limbaugh look liberal. For the first time in my adult life, I am in agreement with socialist Sen. Bernie Sanders of Vermont. On CNBC's Kudlow Report, Sanders said the problem with TARP (the Trouble Asset Relief Program) and the government bailout of banks is that the Federal Reserve gave the money with no strings attached. The Fed should have required that the money given to banks be pushed into the economy via loans to small businesses.
Sanders is right. The banks don't have any motivation to loan money to small businesses or new home buyers because they are getting government money at 0% from the Fed and buying government securities to earn a guaranteed spread. It is sanctioned, high-tech money laundering by the federal government to reward their friends in the banking industry. The relationship between Fed board members and those in the banking industry is worse than a Mississippi marriage--they're keeping the money all in the family.
The other reason many banks aren't lending money for new homes has to do with their own prioritization. Many banks are more focused on clearing their books of bad loans or refinancing their customers with troubled loans than on making new loans. New home loans are counterproductive to these selfish efforts. Why allow new homes in the market, which would compete with distressed foreclosed properties? In addition, most banks are so focused on large profits and bonuses they won't add the staff to process new loans. Keeping home values down makes it easier for them to clear off their books the loans they never should have made.
New Homes are Important for America
A common theme by many Americans is that we don’t manufacturer anything in this country, and they lament about all the jobs lost to China and India. Yet, they forget about housing. Housing and most of its components are manufactured and distributed in America. Housing has a ripple effect in the economy unparalleled by any other industry. The fuel for America's housing industry is financing, and as long as banks have no motivation to lend money this motor will misfire.
According to David Crowe, chief economist for the National Association of Home Builders, there are about 1.5 million to 2.5 million homes' worth of in pent-up demand. People who want a new home will not buy a distressed foreclosure, and this country must get these folks breaking dirt. Housing is one of the things we actually manufacture in this country, and the banks are standing in the way.
The bankers try to blame regulators for not lending, and the government is blaming the banks. The banking system is broke when government tax dollars are doled out to large banks, and they aren't motivated to lend. It's time we attach strings; it's time for the federal government to stop favoring the concerns of large banks and corporations, and begin focusing on the engine that runs this country--small business. Builders, dealers, and those who have been unjustifiably denied home loans should start telling their stories to the nation and our political leadership. The jobs being lost are astronomical and it appears no one is addressing how damaging the current banking system is for the economy.
No one advocates the irresponsible lending of the mid 2000s, but banks arbitrarily being allowed to ruin this country's economy by denying capital to qualified borrowers must stop. A friend of mine recently got his home refinanced after nearly two years, and he said that he was required to sign a document verifying the signature on the original document was his. Signing for signing a document means the banking system has gone to silly season and the pencil-neck geeks in government and banking have taken over.
Every major turndown in America since World War II has been led in by housing, and it has been housing that led this nation out of past economic woes. The reason why housing is not leading America out of this Great Recession and the economy remains in shambles is the banks. Fixing housing and getting qualified people in homes will lift values, create jobs, and expand the tax base. It-s time the political leaders of this nation and the Fed to put the heavy hand on the banks to explain their job-killing policies that only profit themselves.
Don Magruder is vice president of Ro-Mac Lumber & Supply in Central Florida and former chairman of the Florida Building Material Association. This article originally appeared in FBMA's Jan. 27 newsletter.