By Ozzie Jurock
"...it is more important to ask the right questions than to seek definite answers." -The Hitchhiker's Guide to the Galaxy
A lot of questions on the US crisis and what it may mean for us in Canada. Several start with this:
Question: What does the current crisis mean for us as home owners in Canada? Should I sell now?
Answer: Well, up til last week the largest bank failure was the Continental Illinois when it bit the dust in 1984 resulting in the Savings and Loans debacle of the eighties. Some 747 S&Ls went broke. (Actually from 1980 to 1994 some 1,600 banks failed in the US.) In an effort to take advantage of the real estate boom and high interest rates of the late 1970s and early 1980s, many S&Ls lent far more money than was prudent, and to risky ventures which many S&Ls were not qualified to assess. Said L. William Seidman, former chairman of the Resolution Trust Corporation: "The banking problems of the '80s and '90s came primarily, but not exclusively, from unsound real estate lending."
Sound familiar? At that time the US government created the 'RESOLUTION Trust Co.' forcing banks to divest themselves of non-core assets in a spectacular 'quick fix'. The result was, that after some 3-4 years of 'divesting' (slashing and burning bad assets) we went on another inflationary hard asset binge which resulted in the current crisis. This week (September 22nd) the US Government is trying to recreate a Resolution Trust type institution again to solve the worldwide credit crunch with a massive $700 billion (likely $1.5 trillion) bailout. The result - in my view - will be that we will have to go through a deep valley of tears again - but eventually we will have even more inflation. Oh, but then according to our esteemed economists - there is only a 1.7% core rate of inflation. (Read my other SUN articles on this subject.) If you NEED to sell, price your home below the competition. If you have cashflow stay the course. You can also come to the Real Estate Outlook conference on October 4 where we will tackle all questions with gusto.
Question: I heard you say on the radio, that in Las Vegas all credit lines have been cut. Could that happen here?
Answer: It is already happening here. Many small businesses and individuals have had their 'unused' credit cut. Not the matrix type registered mortgage, but regular credit line. If you have a credit line and you have not used it, but may want to in the future ... you may wish to get the cash now and park it into GICs ... call the extra interest insurance. (In the US some $33 billion of credit lines so far have been cut ... with American Express cutting credit to most of its customers as well.)
Question: I am developing a mixed commercial-residential project in downtown xxxxx. From the very conception, it received support from the City and the community. The lenders also sounded promising. Encouraged by this, area growth potential and City's tax incentive I started the project. Half a year later and roughly 30% into the $2M project, I still can not obtain financing - neither from banks, nor credit unions, nor even from private lenders. I am thinking of equity sharing or even selling the project in progress. Any advice would be greatly appreciated.
Answer: Unfortunately, you are not alone. The incredible credit crunch has hit a lot of sectors in the economy, in particular developers in small towns. We believe it is getting worse until this particular crisis is over or at least an end in sight. Equity sharing, joint venturing may well be the answer. You likely will have to give up more than you thought to make it happen.
Question: My mortgage broker wants me to roll my current mortgage into a credit line. Is that a good idea?
Answer: Not sure what 'rolling into' means. Credit lines have worked for many people, but remember that credit lines are reported to the credit bureau. Most mortgages are not. You could have a $200,000 mortgage now and it is not on your credit. Extend it by $80,000 credit line, you may have a $280,000 debt reported to the credit bureau ... even if you have not used the $80,000 yet.
Published in the Vancouver Sun, September 25, 2008
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