Tag Archive : crisis

Commercial Loans And The S&L Crisis

Wow.  If you walked into the executive offices of some savings and loan associations in the early 1980’s, the wealth and opulence would have amazed you – walls paneled with expensive oak, glistening marble floors imported from Italy, and genuine crystal chandeliers hanging from the ceiling.  On the walls you would often find wildly-expensive oil paintings created by the great masters.

If invited, you might dine in the executive dining room, where highly-paid chefs would treat you to a masterpiece of culinary delight.  The President of the S&L might even fly in on the corporate jet to meet you.  And hence came the famous expression…

In other words, if the president of a publicly-traded S&L started spending money like a drunken sailor, dump your stock.  The orgy of excess spending all came crashing down just a few years later, when this lavish spending and some reckless underwriting caught up to the S&L’s.  But how did we get here?

From the year 1933, which represented the bottom of the Great Depression, until the year 1986, Federal Reserve Regulation Q limited the interest rate that banks and S&L’s could pay on time deposits (CD’s).

In other words, suppose you owned a bank, and your bank desperately needed more deposits.  The other banks in town were paying just 2.0% on C.D.’s, but you were willing to pay 2.5% interest to your depositors.

Guess what?  You couldn’t do it.  Regulation Q limited you to just 2.0%.  Your bank was not legally allowed to offer 2.5%.  In order to compete, banks offered free toasters or free transistor radios in order to attract depositors.

Then in 1986, Federal regulators relaxed Regulation Q.  As long as your bank was healthy, you could offer whatever interest rate you wanted in order to attract new deposits.

Suddenly, wealthy real estate developers were opening their own banks and S&L’s.  Hot money was quickly being moved from bank to bank, as certificates of deposit matured.  Whichever bank or S&L in the entire country was offering the highest interest rate would get these fast-moving deposits.  After all, the deposits were insured by the Federal government.  It didn’t matter which bank a depositor chose.

But as interest rates on bank certificates of deposit increased, it became increasingly difficult for a bank or an S&L to make a profit.  There was a practical limit as to how high of an interest rate an S&L could charge for a mortgage loan.

To make matters worse, the bleeding heart California Supreme Court, in an infamous decision known as Wallenkamp v. Bank of America, had ruled in 1980 that a due-on-sale clause in a mortgage was unenforceable.  Other states soon followed suit.

Prior to this boneheaded decision, a bank could make a 30-year home mortgage at a fixed rate of, say, 3.5%, knowing that the vast majority of homeowners would move and sell their house every seven years.  When they sold their homes, the mortgage would have to be paid off.  If interest rates crept up to 4.25%, it was not the end of the world for the bank because the loan would almost certainly be paid off in just a few years.

As interest rates on both C.D.’s and mortgages marched upwards due to raging inflation, banks and S&L’s soon found themselves actually losing money on the older fixed-rate mortgages in their portfolio.  They might be forced by inflation and competition to pay 6% on deposits, while earning just 3.5% on a mortgage loan that potentially could stay on the books for the next 30 more years!

Banks did not suffer as badly as savings and loan associations.  Banks always wrote fewer mortgage loans than S&L’s.  Banks, in those days, also priced many of their business loans at 2% over prime.  As the prime rate marched ever upwards, so did the interest rate charged to their borrowers.

But S&L were only allowed by charter at the time to make mortgage loans, not business loans.  These mortgage loans were almost universally fixed rate loans.  The fixed rate on the mortgages in the portfolio of an S&L soon became too low for most S&L’s to make a profit.  Remember, the prime rate reached 21.5% in 1981, as inflation approached 16% annually.

The Explosion of Construction Lending:

Savings and loan associations therefore became desperate to earn more income.  They found this additional income in the form of construction loans.

Construction loans, assuming the project goes well, are very profitable for a bank or an S&L.  The bank gets to earn its two-point loan origination fee (competition has since forced this typical loan origination fee down to just one modernly) on the entire loan amount, but in the early months, the bank has only a tiny fraction of the loan outstanding.   Cha-ching.  This works out to a huge yield for the bank.

In addition, construction loans are short term.  Banks greatly prefer short term loans because they can get their money back and then go into turtle mode if they see a recession coming.

Therefore, in the early 1980’s, commercial construction lending went wild.  The skylines of every football team city in the country were lined with huge construction cranes, as huge office towers and hotel towers climbed towards the heavens.

The Savings and Loan Crisis:

Then the government changed the tax law.  No longer could depreciation losses be used to shelter the incomes of the rich and of high-income earners, like physicians.  They began to dump, and even walk away from, their commercial real estate holdings.  Prices plummeted by 45%.

At the same time, the price of oil also plummeted.  Oil-producing regions like Texas and Colorado saw their incomes shrivel and their office buildings soon emptied.  The era of see-through buildings had arrived.

A see-through building was typically an office tower with no tenants and no tenant improvements.  Because the building was just an empty shell, you could literally look in one window and see the seagulls flying outside of the far windows.

The S&L’s Crisis rolled across the country, starting in the East first, reaching Texas 18- months later, and finally reaching California 18-months after that.  The crisis came to a head and resulted in the failure of 1,043 out of 3,234 savings and loan associations in the United States between 1986 and 1995.

The rest is history.

By George Blackburne

How To Get Commercial Loans in This Crisis

Wrap your head around the concept that every business owner in the entire country needs cash right now.  His bank is definitely not going to loan it to him.  Banks today are terrified.  Here is exactly how to find some small commercial real estate loans during this Coronavirus Crisis.

I want to emphasis the word, “small” commercial loans.  Small commercial loans close.  Commercial loans larger than $1.5 million have a closing rate that is 1/20th of smaller deals.  One-twentieth (1/20th)!  You are foolish to work on commercial loans larger than $1.5 million right now, when every large commercial lender in the country is hunkered down in his bunker.

Go to Google Maps and type in the address of your office.  You will notice on the map a number of businesses plotted close to your office.  Ignore the big businesses, like the huge car dealerships and the huge national banks, like Chase.

Then call them up and ask to speak with the owner.  At first the receptionist might try to protect him from you, thinking that you are a salesman.  Explain to her that your company loans money to businesses, and right now her boss’ business almost certainly needs money.  You might also mention that you are located right around the corner from her boss’ business.

Perhaps the first time you will be sent to voicemail, but that’s okay.  Make your pitch and leave your phone and email address.  You might call the receptionist back and explain that you left your name and number on his voicemail; but if she will please give you her boss’ name and email address, you can send him more information about a coronavirus business support loan.

I just invented that term tonight.  Sounds pretty good, huh?  A coronavirus business support loan.  If the receptionist fights you, you might politely remind her that her job might depend of her boss getting some business support cash right now.

Instead, focus on the small restaurants, the mobile home parks, the auto repair shops, the hairdressers, the RV parks, and the little retail shops.

Now the first time you reach out to the boss of the auto repair shop, he might not respond.  Keep leaving messages.  Make a call list, and try to call thirty small, nearby businesses every day.  Explain that your mortgage company is located right just down the street, but that you are working from home right now due to the crisis.

Send the business owner a new email every four days, personally addressed and referencing his particular business.  “Hey, Steve, this is Don from Jackson Mortgage, right around the block from you.  I drive by your auto repair shop there on Madison Avenue almost every day.  You must need cash right now, and I may be able to help.”

As the days go by, slide left and right on Google Maps to find even more businesses to solicit.  It is important that your potential customers – and their receptionists – understand that you are located very close to them.  You are not some call center located in the Philippines.

When you get a deal, please do NOT call or email me.  I’m retired.  Phew!  Stressful times.  Haha!  Instead, please call Alicia Gandy, our largest commercial loan originator, at 916-338-3232 x 310.  We call Alicia our Loan Goddess.  Yes, she’s that good.  You can also call my wonderful, first-born son, George Blackburne IV, at 916-338-3232 x 314.

Remember, because you know Blackburne & Sons, you know one of the only conventional commercial lenders in the entire country still making commercial real estate loans.  We just closed a $1.65 million commercial loan on a hotel in the heartland on Friday.

Final lesson:  Alicia Gandy – we call her our Loan Goddess – will be absolutely killing it over the next two years.  Her fastest and best service will go to those commercial loan brokers who brought her deals when the market was saturated with competing hard money mortgage funds.  These loyal commercial loan brokers have a relationship with her.

Those competing hard money mortgage funds are all gone now – along with the dinosaurs and the dodo birds.  Going forward, you also need to develop a relationship with Alicia and George IV, so they will be especially loyal to you when the proverbial stuff hits the fan.

Remember, Blackburne & Sons put together a fresh syndicate* of wealthy private mortgage investors on every deal.  There are always savvy investors willing to invest when blood is running in the streets.  It’s just a matter of price (interest rate).  Therefore, we were able to stay in the market every single day of the S&L Crisis, the Dot-Com Meltdown, and the Great Recession.

We are a small family company, and only a handful of brokers know us.  That’s huge for you!  So get out there and feast.  Every business owner in America needs money right now.

Hard money mortgage funds rely on fresh deposits to make new loans.  When the financial markets are in turmoil, not only do new deposits dry up, but existing investors line up to withdraw.

Remember, every business owner in America needs money right now.