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Return to Lending Critical to Recovery

Tue, 09/22/2009 - 11:14
Getting banks that were hurt by the financial crisis to boost lending is critical to a sustained economic recovery, according to Christopher Thornberg of Beacon Economics. Courtesy iStockphoto.

 

By Andrew Brough
Overland Group
 
The U.S. economy will recover eventually, according to Christopher Thornberg, principal and co-founder of Beacon Economics, who spoke at a recent California Mortgage Bankers Association conference.
 
Thornberg said the United States is facing an S-curve, or slow, recovery. He forecasted that the third quarter of 2009 would be the first quarter since the recession started in 2007 to have positive GDP growth, indicating the recession may be over.
 
Mary K. Ludgin, Heitman’s managing director of Global Research, also spoke at the conference, saying many factors will come into play before the U.S. economy has fully recovered. She said two things, in particular, will signal a recovery: jobs and income growth. Until these two indicators become positive, we should be more concerned with deflation than inflation, she said.
 
Ludgin outlined some positive and negative events happening in the economy:
 
Positives
 
·         Global policy response to crisis
·         Signs of life in U.S. housing market
·         U.S. stock market rebound
·         Consumer confidence rising
·         GDP on pace for growth in U.S.
·         GDP growth elsewhere
·         Growth in global trade in June
·         Cash for Clunkers response
·         Inflation risk low for near-term
·         Initial claims trending down
·         Credit market has loosened 
 
Negatives
 
·         Multiple drags on global economy
·         Housing market not yet stable
·         Can rebound be sustained?
·         Stimulus at peak right now
·         Employment still declining
·         Unemployment peaks in 2010
·         Personal savings rate still rising
·         Deficit increasing rapidly
·         Excess capacity remains
 
Utah is in the middle of the pack among states forecasted to have positive employment growth, Ludgin said. The state is expected to have positive job growth in the third quarter of 2010. Texas, on the other hand, will lead the recovery, according to Ludgin.
 
Thornberg predicted that the fourth quarter of 2009 will be even better than the forecasted third quarter, followed by volatility in GDP growth thereafter through 2012. Part of the volatility is a result of banks extending and pretending but not lending. Recent bank closures and the forecast of more closures weigh heavily on the economy. Getting banks that were hurt by the financial crisis to boost lending is critical to a sustained economic recovery.
 
Inflation will result as job and income growth becomes positive. Thornberg said 1 to 2 percent inflation is a reasonable prediction for the U.S. economy.
 
The Commercial Mortgage Backed Securities (CMBS) market is a crucial piece of the U.S. economy, according to panelists from “Who has the Money Now? And Who is Lending it?” The halt of the CMBS market will keep banks at bay as well, requiring traditionally good assets to stay on their books longer, tying up capital for future lending. Without the collapse of the CMBS market, banks would be able to sell these assets and lend to the next borrower. This practice of holding assets on the books will keep banks from lending in the near future.
 
Only those banks which have positioned themselves to hold assets on their balance sheet will continue to do business as usual, Duane Hastings of Wells Fargo said during the “Who has the Money Now?” panel.
 
The CMBS market has buyers available, but Legacy CMBS are not appealing, panelists said during the “Perspective from Industry Leaders” panel. Only newly minted CMBS will be purchased, but few can package these when new deals are not forthcoming. In addition, the time it takes to package CMBS is another challenge for the recovery. Even with newly minted CMBS, investors would rather purchase unsecured 8 percent securities than what the secured market will bear: Five year SWAP plus 2 percent, five-year fixed rates (5 percent).
 
The CMBS market needs to come back without the help of Term Asset-Backed Securities Loan Facility (TALF), according to panelists during the “TALF Update.” TALF is helping to jumpstart the secondary market. There is movement, but it is going to take time before the CMBS are purchased again.

 

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