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The HQ Conundrum
SHUMWAY: We are seeing something kind of unusual—land became nothing. Sticks were whatever they cost. The builders that weren’t burdened with land, if they have a house right now they can sell it and they can make some money. And we’re starting to see a little bit of land development, maybe some ideas coming forward. Not a lot of it.
For residential construction, for commercial construction, in a certain segment it’s a good time right now. But if you are trying to develop land, dirt is not worth anything. But a built house in a certain price range is still moving right now.
There’s always been this fear of a lot of foreclosed homes coming on the market. Are we over the foreclosure issue in Utah?
BEARD: We are reducing.
CAMARELLA: That’s one of the unknowns. There’s still the quagmire of the whole foreclosure process—we don’t know what we don’t know. There are people living in the state that haven’t made a mortgage payment for two and a half years and they are still just in the system. So we don’t really know if we are over it or where we are in the process.
SHUMWAY: There’s an unusual situation here, too, that there are some people who are under water on their mortgage but they are continuing to pay. And then you have the flip side, some that haven’t paid a dime in two or three years; they are friends of the legal system and are able to hide in it and do whatever they want.
SALA: In certain parts of town, houses are going on the market and they are sold the same day or before they even hit the MLS. That indicates to me that we are probably on the back end of the problem. This is not to suggest that there are not pockets in other geographic areas that don’t have their own issues, and perhaps there is a lot of overhang with supply that needs to get worked through.
HOWELL: We have been blessed with an economy that is better than the national average for some time. We have had some great new companies come in. There are a lot of good things happening in our economy locally, and that will be good for the future. It’s not going to be ripping like it was. But it’s going to be steady and it’s going to be good. Our bank, our loan production has gone up 300 percent over a year ago.
Some businesses have a lot of capital; they are staying on the side, but some of them are coming in because when you can get rates where they are today, it’s a wonderful time for people.
Are we starting to see a shift from ownership to rental? Are there other things you are seeing that are changing in the fundamental nature of the market?
SALA: That trend has been evident for the last two and a half years—rental property, rental income. Vacancy is at some very, very historical lows. That trend is going to continue. While the cost of capital to buy is relatively low, qualifying and actually obtaining that mortgage is difficult. So the obvious alternative is renting.
There’s a lot of product out there; if I want to be an investor and purchase single-family homes as rental property, the economics are really good.
SUTTON: Let’s return to our friend Dodd Frank, which said if you originate a mortgage loan and it’s not within the safe harbor, then you have to hold back a portion of that loan. Well, that essentially kills lending for any loan that does have to be held back. The mortgage brokers don’t have the capital to do it. The banks don’t want to take the rate risk. It is really constraining. And FICOs have changed a lot for people to qualify for a mortgage. There’s a lot of people renting homes because they can’t get a loan to buy the house, which is a much, much better deal. Regulators still haven’t defined what the safe harbor is, so the lenders have retreated to where they know it’s going to be, and they are just not originating loans outside of that. It’s a perfect example how distorted the regulatory system has made the marketplace.
Is the same true for business loans, or if I want to build an apartment building? What is happening to your rules to qualify for a loan today?
SALA: Four or five years ago, the dance hall was full of attractive dates. Now there’s about six attractive dates and there’s about the same number of bankers wanting a date with that borrower.
Is that because your standards of what is attractive have changed?
SALA: Absolutely. And you talk about yield compression. The perceived pool of qualified borrowers has shrunk so small that everybody has capital to put to work. Everyone wants to give the pricing away to get one more attractive borrower. And that’s the dilemma. We need a growing pool, not a zero sum game, which is largely what it is right now. There’s almost a finite number of qualified borrowers out there—everybody at this table knows what they look like. And we want that person. We want that borrower. I’m not getting somebody new because their business is really growing. There’s exceptions, of course. But for the most part it’s Chase taking Wells’ client, and Wells taking another client and on and on.