January 14, 2010

Banks 2010: The Regulatory Angle

The lending industry is crucial to a strong housing recovery. Regardless of demand and price, any housing recovery will have to depend on lenders providing credit to buyers.

Where Are The lenders

The banking industry has cut back lending for the past 15 months. They have reduced access to more than $3 trillion of credit. Home buyers, dependent on credit, cant rely on the banks yet.

Just As Profits Drop Regulation Increases

Bank lending delinked from good business judgment and so caused the worst crises in modern economic history. In response to hugely irresponsible lending practices, Congress has been busy creating a range of new regulations, taking effect in 2010.

Overdraft fees and credit card predatory practices will squeeze billions of dollars from penalty income.

Marketwatch notes that that bank profitability may actually fall to where it was in the 1960s or '70s. After twenty years of deregulation, bankers will now face tougher rules.

Pressure is building in Congress

Congress and the administration want the banks to write down the principle on mortgage. To share the pain with their partners, the home buyers and property developers. Without some bank acknowledgement that they agreed to bad deals we will see even more foreclosures.

Obama proposes a tax on corporations to big to fail. This will hit all banks with more than 50 billion in assets. Looking at smaller profits for years to come, we will see a new conservatism in the way banks do business.

A New Capitalism

We are moving towards a more highly regulated, moderated Capitalism. The view of markets as a mechanism that naturally seeks equilibrium seems laughable now.

Pimcos Bill Gross puts it this way: Diminished growth, deleveraging, and increased government involvement will temper profits. As banks, auto companies and other corporate models become more regulated and therefore more like utilities and less like Boardwalk and Park Place, they will return less. companies are going to move toward a utility model.

Whats It Mean For Housing

The banks will diversify away from property as collateral. I think we will see less lending and that alone will moderate price. Pending sales index fell a 16 percent in November, suggesting weaker months ahead.

Stricter Fannie and Freddie qualifications will place more restrictions on loans and squeeze speculation even further.

A phase out of the Fed secondary market supports will also put pressure on interest rates. Long term interest rates are up almost a half-percent and mortgage rates cant be far behind.

Major regulatory changes, coupled with a weak consumer means a protracted recovery for the real estate markets, as the banks continue to keep a low profile.

On a more positive note, James F. O’Sullivan, chief economist for MF Global, said. But we’re at the point where strength is feeding on itself, and you’ll see more strength in six months time than you’ll see now (via cbsmarketwatch).

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