The White House remains on the wrong track in its thinking on how to solve the mortgage mess. They do not understand how the mortgage business really works, nor how banks function in this area of their business, nor how borrowers really think. While they have some very smart advisors who are trying to create a fix, the reality is they do not have people who are deeply experienced in commercial banking and mortgage origination and servicing. They are working under various major misconceptions of what could work and why, how homeowners think, and what will motivate lenders and borrowers to act on programs. The result is we have had several programs which have failed and the White House and Congress have no idea why. The main problem is they are starting with a bad set of assumptions and are locked into regulatory and procedural dogma which inhibit solutions. As a result the housing mess is with us for a long time.

The banks are being forced to adopt new regulations on an unending stream. More are coming not just from Dodd Frank, but from a regulatory mindset that bankers are bad and government regulators know better and all bankers are fat cats making too much money. The regionals are being forced to open branches in minority areas more than they already have done, and to make loans and mortgages there. The deposit base is not there and we are still cleaning up the subprime mess. This is a diversion of otherwise productive capital. Add to that the tens of billions of lawsuits, and settlements, the management time to deal with the unending stream of litigation, publicity seeking AG’s like in New York, and another huge diversion of capital and human capital is being diverted from the making loans. While there were some bad things done by bankers and especially Countrywide, not all bankers are bad, over paid fat cats. Far from it. Debit card fees should not be set by Senator Durban who would fail miserably at running a bank. Cutting this prime source of income along with other restraints which deeply cut into income is one more setback for banks trying to rebuild business.

Both housing and banking are keys to economic recovery and yet the government is doing all of the wrong things to solve these major areas of the economy. Much of it is politically driven. They seem to think that beating up the banks is going to get them reelected, not understanding that these actions cause further economic erosion and unemployment which will lead to losing elections. Putting forward new programs to fix housing which do not work, only wastes time and money for banks and homeowners,

When you add all of this to Boeing, the EPA pouring forth new regs, other agencies pouring on even more regulations, and you get business unwilling to invest. Top it off with a banking crisis in Europe where the politicians are unable to get their act together to forcefully deal with the real issues of the need to restructure the Euro zone. Unless all of this changes drastically, we are condemned to continued slow GDP growth and slow job growth is any at all. Other than multifamily owners, none of this is good. Multi will likely continue to do well as more people are forced to short sale or just sell their homes and become renters. For all other product groups in real estate it is going to be a slow grind forward until we have a new government. While it is unlikely we will have another recession, GDP is simply not going to grow at a rate sufficient to deal with unemployment and housing. Rents will not be able to be raised as you may have hoped.

The good news for owners is little new construction will occur. Extended loans are going to start to mature soon. The 2006-2007 vintage loans are now maturing. Slow economic growth will mean borrowers will not see the rental growth they need to get the cash flows required to refinance their loans. Lenders will not be as likely to extend one more time. Maturities are going to force loans and properties to be sold in greater volume in 2012-13. More rescue capital is needed and more buying opportunities will be coming. If you have liquid capital, know how to underwrite, and can move decisively you will have new opportunities to buy. The main opportunities will be in secondary cities as the main ones are already picked over and over priced. The one requirement is patience. You will not likely be able to do quick flips. Assume you are in for a five year hold until the economy comes back, which it will. Assume minimal rental growth for a few years. The result of all this is the old adage-It is all in the buy. Don’t let the brokers push you past your ceiling. Set a price cap and stop. There will be more deals. Be disciplined. Stick with conservative fundamental underwriting. There are no magic financial tricks this time, not bubble CMBS markets and no over leverage. Just good old fashioned real estate.

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Joel Ross

Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.