Realty Views By Terry Ross
October 11 – The financial meltdown that has strangled the economy and led to a real estate retrenchment not seen since the Great Depression, has caused our nation’s banks to face challenges not seen in modern times: non-performing loans coupled with a shrinking consumer and business loan customer base has aggravated our unfortunate economic condition.
In 2008, the previous administration began the well-chronicled bailout and consolidation of America’s banks by purchasing these so-called “toxic” assets, or failed loans, remonetizing the largest banks. The current administration has continued this policy, dramatically changing the landscape of the banking industry, which looks far different today than it did three years ago.
Prior to the bailout, most financial institutions counted much of their profits from loan origination and servicing fees, and interest collected. Due to the enormity of the financial collapse, much of this income was curtailed and banks resorted to other sources of revenue (in addition to the taxpayer bailout) such as account fees, debit fees and any other form of income stream that could be gleaned from business’ or consumer’s everyday transactions that did not entail taking a risk, such as lending money.
On the government side, bailing out banks with citizens’ money looked to be good business for the country since a strong financial system is a key ingredient to a healthy economy. And, of course, arranging the consolidation of Countrywide Mortgage with Bank of America, Wachovia Mortgage with Wells Fargo, and Washington Mutual with JP Morgan Chase has created three much larger banking behemoths.
Theoretically, this made the nation’s banking system stronger and shored up a staggering amount of these failed institutions’ sour loans with government bailout money. Also, as the plan called for, these banks would be able to again make loans on homes, commercial properties and businesses because the loans were backed by the Fed.
In reality, a much different outcome has presented itself. Although the banks are healthier and their balance sheets have been repaired thanks to government assistance, we now have far fewer banks than before, creating a virtual monopoly in the financial industry. For example, Bank of America has 57 million consumer and small business accounts.
And as for as reigniting lending – forget it. Many banks took the government bailout and then found ways to earn money without lending by raising account fees, debit fees, overdraft fees – in what has become a non-competitive environment. Many institutions were able to repay the bailout money ahead of schedule because of their success in charging new fees – billions of dollars worth – to the consumers who paid the taxes to bail the banks out.
Meanwhile, as the administration attached strings to the bailout money – such as a limit on executive compensation – banks wanted no part of that and those who were able paid off their government loans. They were able to do this rather quickly because of the government’s assistance in eliminating much of the competition and helping banks with their bad loans.
None of this has helped free up financing due to the dysfunction that has enveloped the industry. When the government had the opportunity to establish guidelines – such as only writing checks to the banks based on the volume of new loans they were writing in order to stimulate the economy – it simply wrote checks to the financial institutions with little oversight or accountability.
Now, the Administration’s attempt to reign in the bank fees has backfired as well. The Durbin Amendment of the Dodd-Frank legislation that went into effect October 1, was geared towards reducing debit card fees – but only on the merchant’s side. Previously, an average of 44 cents was collected from merchants for each transaction; banks will now only be able to charge 21 cents per transaction. Bank of America, according to one published report, was scheduled to lose about $2 billion over the course of a year from these new regulations.
No problem. B of A announced in late September that is was going to be attaching a $5 monthly fee to accounts that made purchases using their debit card. Again, according to published estimates, the bank will then realize an additional $3 billion in fees or a net gain of $1 billion prior to the legislation. For users of debit cards, this is a combined additional cost of $3 billion – from just one banking institution. Merchants will save initially, but if they use debits cards they, too, will pay additional fees.
Other institutions are announcing similar fee schedules, and it looks like banks are adroitly finding their way around poorly conceived legislation that does little to solve the issues.
According to one law firm, the bill created 243 new rules, authorized 67 studies and 22 reports, but failed to prevent banks from taking advantage of their largest customer base.
What needs to be addressed are ways to compel banks to lend the money they have and clean up the administrative disconnect that is strangling our economy.
Terry Ross, the broker-owner of TR Properties, will answer any questions about today’s real estate market. E-mail questions to Realty Views at email@example.com or call 562/498-1049.