After the boom: how lending has changed in SWF
Interest rates are heading down but is it enough
BY EVAN WILLIAMS Florida Weekly Correspondent

SOURCE: FEDERAL RESERVE

Five interest rate cuts made by the Federal Reserve in the past six months are intended to stimulate the economy. They're supposed to encourage spending, especially in the anemic real estate market by lowering the rates banks pay on their deposits, giving them more money to lend.

Yet, foreclosures keep mounting and new homes sit vacant, waiting for buyers.

Florida Weekly asked local bankers - community bankers who have a huge stake in Southwest Florida and its economy - for their thoughts on interest rates, mortgage lending and the overall health of our nation's finances.

"They're going to have to calibrate the interest rate - too aggressive or too low and it spurs inflation," Commerce Bank President Mark Morris said.

Morris said he recently met with Congressmen and members of the board of governors of the Federal Reserve in Washington, who feel time will be the biggest factor in spurring on the economy and enticing banks to lend and people to borrow.

"All of them were very concerned about over-legislating and over-regulating this, the knee jerk reaction to do something," he said. "The free market system will fix our ills. And yes, it may be somewhat painful."

MORRIS

Morris pointed out that 93 percent of all the mortgages in the country are currently being paid on time.

"Why would we want to over-regulate (a small percentage) of the homeowners - and half of them are investors?" he said.

But ultimately, the Feds actions will work, he said.

"It provides liquidity not only to the banks but to the brokerage worlds," he said. "And as interest rates lower, customers or consumers get more interested in borrowing."

First Community Bank President David Hall said the cuts unfortunately work both ways: adding to the coiffeurs of banks and borrowers, but taking from customer's certificates of deposit or long-term savings accounts. For example, Hall said a retired couple with the average $500,000 in savings has their interest rate cut almost in half too. That means they will now earn about $1,000 less per month.

"That's money they won't be spending at the theatre or the grocery store or on music," he said.

HALL

And Barry Ritholtz, CEO of Fusion IQ, an asset management firm, and frequent

commentator on CNBC, questions whether the interest rate cuts will actually cause banks to lend more. Even with the federal funds rate, a key overnight bank lending rate, down to 3 percent from 5.25 and expected to be cut even more, banks will still be treading carefully on the last few year's shaky economic ground.

"It's not that there aren't loans to be had," Ritholtz said. "The problem is that there's a real specific reluctance to take on additional risk.

"This is a very complex situation - there's no silver bullet, no magic wave of a wand that will make this go away. This whole credit crisis all goes back to housing and there's a giant inverted pyramid that sits atop several years of reckless lending which took place because interest rates were very low. There were a lot of fees to be made…The process just ran amuck. There was no supervision, no self restraint on banking and the mortgage side…And this is what happens when unbridled stupidity meets excessive amounts of liquidity. So as an underlying problem you have mortgage foreclosing in massive numbers."

ROEPSTORFF

Now interest rates are low again, and with fallen market prices, houses may be bought at better deals than ever, Morris said; it's a buyers market.

"We currently have in Southwest Florida a tremendous inventory of single family homes and everything else," Morris said. "That needs to be absorbed before there's any more vibrancy."

But banks are being careful this time around. The foreclosures, lower sales and falling market prices, haven't boosted their confidence.

"They went from one extreme, which is giving out mortgages to everybody, to gee, we don't wanna end up embarrassing ourselves the way these other guys did," Ritholtz said.

Hall said it's going to be more difficult to get a loan now than two years ago. Also, the demand for jumbo loans, mortgages over $417,000, has dropped because homes aren't worth as much.

Edison National Bank President Geoffrey Roepstorff agreed. He said it will

SHULTZ

take time to get back the confidence everyone felt in the economy a few years ago.

"I think we all want to be positive and get back in a good market," he said. "But it's just not a strong market today. Even though somebody walks in and has excellent credit scores, the next level of discussion is, let's talk about your job stability."

Southwest Capitol Bank President Bruce Shultz said the new loans aren't as much of a problem as the old ones.

"It's not necessarily more difficult to get a mortgage now (versus two years ago)," he said. "But we are finding that the value of property has changed. For people who are buying it is not an issue, but refinancing can be an issue…

"We tell folks, 'We have money to lend.' It's really the role of community banks to help people achieve the dream of home ownership or help them finance their business, help them expand."

And those lenders no longer offer the types of loan deals that Ritholtz said caused foreclosures, like no money down without too much regard for your yearly income, creating a "cascading effect on all the infrastructure."

"That's tightened up significantly," Morris said. "All of that product offering is off the table. What you're back to is that primary home - that's the type of loans I was accustomed to. The no-money-down opportunities allowed some folks to get into some homes they otherwise wouldn't have been able to afford."

The results of the past few years should cause homebuyers, as well as banks and the Federal Reserve, to take a look at lending and borrowing practices, they say - although the prices are good and the interest rates low, let's not make the same mistakes again.

"Buy the house that you can comfortably afford," Shultz said. "Because you just see too many sad situations where someone's bought a house they couldn't really afford and it doesn't get you very far in the long run."

Local bank presidents recommend the 30 year fixed-rate mortgage, but they said it all depends on your lifestyle. Morris said now would be a good time for any mortgage.

"If there are two things I believe in, it's cash flow and collateral," he said. "You have to have both to get the loan. We make sure we've got the right borrowers, the right project. We put a lot of time and effort in that review. We do it now and we did it then."

Is now the bottom of the market? The banker's all said determining that is not an exact science.

"That's very hard to predict," Morris said. "I would tell you we're pretty close to it if not already there. I will tell you this, we are receiving calls from moneyed investors from out of the area that are searching for bargains, for problem loans at banks - that indicates to me that the ones with money are thinking it's pretty close to the bottom."