"Nobody's borrowing right now, Steve," a bank CFO told me over breakfast on Friday.
"You hear that banks aren't lending… But that's not what's going on. What's going on is Main Street America is getting killed. People simply don't have a positive net worth – they don't have assets for banks to lend against."
This banking insider gave me some surprising specifics on real estate today and some intimidating insights on what will happen when the government exits the mortgage market.
Let's hear his take on the real estate market first…
"The math for Main Street is pretty simple… Maybe half of homeowners here in Florida are underwater on their mortgages. They can't borrow money from banks when they're in bad shape like that. Another 20% can't refinance because they don't have enough equity. And another percentage is older folks are in a homesteaded house and don't want to move because their property taxes would soar."
In other words, "The population of capable consumer borrowers is very small." He said the only active market now is "starter" homes under $200,000.
So I asked him, "Who's buying?" I know people are buying… I told him about a home-inspector friend of mine. He says he's busier than he's been in years because of people buying. This home inspector friend said his new clients need the inspections done "right now" and they're doing "all-cash deals."
The bank CFO replied, "You hit the nail on the head… Those are ALL-CASH deals. We are not in that loop. This is that very small percentage of people I was talking about that have the net worth to buy. With prices at these levels, all-cash investors are certainly buying."
The latest talk is about the government exiting the mortgage market… This is a big deal, as something like over 90% of mortgages are government-backed. I asked the banker what he thought. He didn't hesitate…
"Mortgage rates would shoot up," he said. "Nobody in their right mind in my industry would lend at 4% for 30 years. If there was no government subsidy, there would be very few 30-year mortgages."
Here's how he explained it:
"Look, as a bank, I'm trying to make a 4% interest margin. If I lend the money out at 4% in a mortgage, I have to pay zero percent on deposits. I can't do that forever. What happens when I have to pay more on deposits? Four percent mortgages are not reality."
And then he asked me, "Here's an idiot-proof test… Would you lend to someone for 30 years at 4%? How about at 5%? At what rate would you be willing to accept on a loan for 30 years? I don't know about you, but I'm not willing to put 5% on my books for 30 years."
These two conclusions from the banking insider are important:
- The problem isn't that banks don't want to lend… It's that consumers can't borrow because they don't have the net worth to borrow against. And that situation doesn't look like it will change anytime soon.
- Thirty-year mortgages could be a thing of the past, and mortgage rates could shoot from their lows around 4% in late 2010 to 7% or more, when the government gets out of the mortgage market (like it's talking about doing now).
I wish I had a prettier picture to report. But that is part of the view from the trenches.
I've written optimistically about real estate recently. I still believe now is an excellent time to buy a house, with near-record low mortgage rates and great prices.
But if my banker friend is right – if you want a 30-year mortgage with a low interest rate – you'd better act soon, while the government is still subsidizing mortgages. If you're not in the market for a house, pass the word along to your kids or someone else who could benefit.
Mortgage rates are still near record lows, and prices are extremely cheap. In a couple years, you probably won't be able to say one of those things… and maybe both.
Wilmington NC Real Estate, Carolina Beach Real Estate, Kure Beach Real Estate, Wrightsville Beach Homes for Sale. If you want to buy a home, contact Cosatwalk Real Estate ay 910-458-9119.