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What exactly is the problem today with banks, financial institutions and the financial markets?
Problem #1 – Over-Leverage
During the last several years, financial institutions borrowed more money to engage in their business activities than at any point in the history of the United States banking industry.
If a 30 dollar asset prices fall by just 3% ($1 in this case) the financial institution’s equity in the investment asset is wiped out and they need to raise more funds to restore their 30:1 leverage ratio! When you hear about “capital requirements”, that is exactly what it means. In other words, financial institutions need to raise more funds in order to meet their minimum capital requirements of having $1 of equity for every $29 of leverage. Every time asset prices fall, financial institutions need to raise more money to maintain their minimum capital requirements. Now here’s the billion dollar question: where are the financial institutions going to get the money from?!
Yep. You guessed it! They are forced to sell even more of their investment assets!! If they sell off their investment assets, prices decline even further due to supply and demand. After all, prices always decline when there are more sellers than buyers in any marketplace. This creates a downward spiral in prices, causing the financial institution to sell even more assets into an already depressed market. A bad situation quickly becomes even worse and that is exactly what has been happening among financial institutions since July 2007.
There are two other ways for financial institutions to raise funds:
-Sell stock in their company or merge with a larger institution
-Borrow more money
Problem #2 – Lack of Liquidity
Financial institutions will continue to try and raise funds to meet their obligations and continue running their businesses. Although it is scary to think of the various doomsday scenarios that could result from the high leverage and the lack of liquidity, these worst case scenarios are unlikely to occur for two main reasons:
Foreign investors and governments, sovereign wealth funds and other large investors have too much invested already in the US to allow the US financial markets to collapse. If the financial markets and institutions collapse, these investors would lose enormous amounts of capital. Not only that, but their own economies would crumble because US consumers would no longer be able to afford to purchase their products. Therefore, foreign investors are likely to continue being an important source of funding for US corporations and banking institutions.
The Federal Reserve has been very active in providing liquidity to financial institutions throughout this crisis and will likely continue to do so.
Problem #3 – Ineffective Regulation
The financial industry regulatory structure in the United States is, to a large degree, over 100 years old! Various government officials have proposed certain reforms that are currently in the process of being considered and debated. Although the reform process has started, it will take several years to fully reform the regulatory structure of the US financial markets. As a participant in the CMPS Institute I have been very active in helping to reform and shape the future of the US financial regulatory structure.
Conclusion:
It is always advisable to consult with a Certified Mortgage Planning Specialist TM (CMPS®) when navigating today’s turbulent mortgage and real estate marketplace. As a CMPS® professional, I am committed, qualified and equipped to help you evaluate your options!
Standardizing the mortgage planning process through participation with the CMPS community of experts.
Dani McDonough, CMPS ®
Market Conditions Got You Down?
Join us for our upcoming happy hour event to learn new condo sales techniques aand have some fun!
Thursday, Sept. 25
Master Builders Association
335 116th Ave SE
Bellevue, WA 98004
For directions to the venue, please visit www.masterbuildersinfo.com.
Market conditions making it difficult to sell your condo project?
Join us at Master Builders Association for a Happy Hour meet & greet, as well as to learn about important market updates, including:
• Sales strategies
• The national lending climate
• Local and national economic factors
• New construction/existing home market trends
• Standing inventory and profit erosion
• Buyer demographics and life-cycle marketing
• Recent Fannie, Freddie and mortgage insurance condo reforms
• Legal and structural strategies
This free, fun and informative event is the perfect place to network with industry experts and hear new approaches to sales and marketing!
Meet the Speaker
Anthony Grasst is the Regional Builder Manager for MetLife Home Loans. He is the sales production manager for all builder business, manages more than 36 sales offices in the Northwest, and works with hundreds of builders.
Anthony’s region is one of the company’s most successful builder territories, accounting for nearly $1 billion in annual sales.
Anthony is a regular speaker at Home Builder Association meetings, and teaches new construction realtors, single family and custom builders, and national multi-family developers how to adjust and sell homes in today’s market. He is an accomplished real estate finance professional with
more than 17 years of experience in construction and real estate lending, investment and development, single, multifamily and commercial real estate, and consultative selling techniques. He holds a BA in Economics and MBA in
Business Management, and is a licensed Real Estate Broker.
*Please RSVP contact Andy McDonough at (206) 818-5191 or amcdonough@metlifehomeloans.com
