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Jay Young

When the Pendulum Swings Too Far

Harford Business Ledger: May, 2009

The economic turmoil has certainly caused much angst and hardship. Most businesses that are not directly affected are affected indirectly, and even those few not affected are likely stricken by fear that they could be next.

All of this has caused banks and lending institutions to enact over-reactive policies -- which has caused things to worsen.

For instance: a friend of mine has had a mortgage for eight years at 7%. His monthly payment is approximately $1,000. When rates dipped below 5%, he calculated that he could refinance and lower his payment to $750 a month. After submitting all of the required documentation, he was told that his loan was denied. The lender informed him that, under the revised formulas and ratios, "he could not afford to pay a $750 per month mortgage payment." This -- from the same bank to which he had been making $1,000 monthly mortgage payments for eight years! What kind of logic is there in a formula that indicates that you can't afford to pay less than you are already paying?

Another local tragedy is PNC Bank. It seems that what many around here feared would happen, following the acquisition of Mercantile Bank by PNC, became a reality. PNC recently made the decision NOT to renew many of its real estate acquisition and development loans, most of which have short terms -- usually from 2 to 5 years. PNC has also exercised its demand powers upon many demand notes. This has caused a great upheaval in the local real estate market. Refinancing is at least challenging and can be impossible; plummeting land values make acceptable new appraisals difficult to obtain.

New bank rules and formulas such as my refinancing friend faces make things ever more difficult. Add to that the drop in the net worth of most borrowers as a result of the stock market "adjustment" -- and the hardship can become unbearable.

Here in Harford County we are more fortunate than in many places because BRAC is keeping the bottom of our real estate market a little higher than other places. Most of the APG base construction is significantly ahead of schedule and local realtors are starting to see increased activity. As of early April, the stock market appeared to be recovering somewhat.

Let's hope the end is near. It certainly has been a bumpy ride!

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