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Derek Ezovski Derek Ezovski is a senior risk management professional. He is a former employee of Environmental Data Resources.
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Recent Blog Entries
I keep getting amused about the $700 Phase I conversations that keep occurring in our industry. I have two points to make on this subject and you can agree or disagree with me (in fact I encourage it).
1) First of all, the term Phase I ESA often means much more to EP’s than to many of the unsophisticated users, especially smaller lenders (which I will focus on here). This is in large part due to the fact that most lenders just need to get a read on a property and don’t always need a Phase I. For those who know me, you know that I have spoken to and with literally thousands of smaller lenders over the past several years and most unsophisticated lenders just consider getting an “environmental” for their due diligence…whether it is a Phase I or something much different is not a big deal to them if they feel they get a good understanding of it (this is a whole different topic which I will discuss in the future). In fact, many can be convinced of most anything that makes their costs go down.
2) We are in a very mature industry where the providers want to keep the status quo. What other industry provides basically the same product (if not better) over 15 years yet doesn’t have a price DECREASE…computers are better and cheaper than ever, cellular phone service is better and cheaper, even Starbucks is cheaper than it used to be…all because of one thing…competition.
I would argue that the computer comparison to the Phase I industry is the best. All of the components of the computer are better today than they used to be because the computer manufacturers have found lower cost providers. This allows them to sell a good product to their customers at a lower cost. This is the same for Phase I reports…many providers of Phase I reports are now looking to benefit from lower costs available to them now. For example, independent contractors who are willing to do the work for less money (I know many are quite happy with this arrangement and others wish to work full time for a firm but either way results in a lower cost service). In addition, there are many more data providers out there which have made data costs lower for those that shop around. In fact, in some cases, data is now free. There are sources of aerials, property information, public records, etc. that are much easier to find than in the past. For those that focus on a specific area, they often become experts in their geography and can acquire their own information from local sources.
The truth is that there are many more competitive forces in the industry than there used to be and while many are fighting the tide, things are changing. For the computer companies that tried to keep their price up without a differentiation that mattered to customers, they have lost significant market share (remember Gateway?) While there are clear exceptions to this rule, I would argue that this applies to our industry as well.
There was another article in todays WSJ about the CMBS market. Some quick facts from this article:
- More than 11% of $536B of loans packaged into commercial mortgage backed securities are expected to be at least 60 days past due by year end.
- A $4.2B CMBS deal underwritten in 2006 by Goldman Sachs Group, Inc. and Greenwich Capital is expected to see an 11.7% loss, the highest of any 2006 CMBS issue analyzed by Fitch.
- The default rate now is 7%. Before the real estate bubble burst, it was 1%.
Because of this, about $70B in loans are now in the hands of "special servicers", or companies that represent holders of commercial mortgage backed securities with underlying loans that are in default or imminent default. Servicers have restructured about $13.7B of these loans which includes extending loan maturities ("extend and pretend") and reducing interest rates. But some borrowers still end up defaulting.
This continues to loom over the industry and is probably where the next batch of distressed assets emerges from. Then again, maybe not...
When the weather people are more accurate than the predictors of when and where the distressed assets will emerge from, you know it is a challenge.
With all the talk about "too big to fail" and Wall Street bonuses, it would appear that the big banks are in trouble. However, when you look at who will most likely benefit the most from the upcoming stimulus packages, expecially the SBA money, it will in fact be the big banks. Why? Because they have the most money to use (remember the government gave them a whole bunch of capital last year, not the smaller banks), the most comprehensive structured SBA groups, and the easiest access to credit.
Meanwhile, it appeared that the community banks, while they have had a nice run of it recently, would soon be in the back seat again due to lack of access to credit and limitations on their production. Basically, they can't create large divisions to put together packages like SBA as cost effectively as the larger banks. In fact, in many recent conversations with community bankers, they have indicated that the SBA process is too much work to do unless they create a large staff increase. But community banks are run differently than that and they don't typically staff up without business to support it (pretty good concept).
However, this week Chris Dodd proposed a bill that would try to even the playing field not by giving community bankers more but rather by restricting the larger institutions. So there are competing forces on both sides and time will tell who will come out on top. Stay tuned as I am sure there will much discussion about both of these issues.
I have been quiet on the blogging front lately because frankly, there haven’t been that many great things to write about. However, one thing that has continued to bother me is whether our economy is able to be accurately assessed right now. I say this because without the support of the recent government handouts, the economy doesn’t appear to be sustainable. Here is what I mean.
I have followed the Small Business Administration and how it has assisted small businesses for many years and traditionally, it has been a great place for small business to go when a traditional lender might not want to extend a loan to that business. It was a place that a business went when it wasn’t a great fit for a traditional loan and was accompanied by higher fees and a more complex process. But it had a purpose - to fill a void/need in the market. Well, every month now, it appears that another bailout is required for SBA to keep lending money to small businesses and now they removed the fees. Businesses are getting the benefits of receiving money on a riskier loan wiithout any repercussions. It almost seems like the SBA could become the “subprime” commercial loan marketplace if this trend continues…after all, who else guarantees at 90%?
As an entrepreneur, this is attractive. However, as a citizen and taxpayer, it scares me. I don’t see anything else propping up the economy when the government doesn’t intervene. In many ways, the Federal Government is “bailing out” small business with borrowed money of their own to try to increase employment. Yet studies show that companies are not hiring until they are sure that the economy is fully recovered. And many small business owners are now saying that the SBA should lend directly because the banks aren't lending the SBA allocated money to them. My gut tells me that those businesses are not able to get loans due to traditional credit issues and are looking for a handout.
So my question is, where should money be used? Should it be to sustain the things that we already traditionally allocate taxes for within existing budgets or should it be a pseudo "venture capital" fund to create new businesses that somehow aren’t qualified to get a traditional loan (using borrowed money)? Either way, the money to pay for all of this will be coming from the remaining successful businesses and individuals via tax increases, as well as from a continued stream of loans to the government. And many experts seem to think that China, the source of much of this borrowed money, is sitting on a significant financial bubble right now which might prompt them to look for a payout sooner than we expect.
So, my feeling is that if the U.S. Economy doesn't find a way to sustain itself, we will never really know where the economy truly stands.
Recent Comments
- July 22, 2010 - While I understand your response, I think it adds much more complexity...
- July 22, 2010 - Interesting. While it is true that the cost of computers has gone down...
- July 21, 2010 - They only have negative connotations when they are taken out of...