October 2010 E-News Bulletin
October 2010 eBulletin
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Welcome to the Franklin Financial Network October 2010 eBulletin!
At Franklin Synergy Bank, we try to be exceptionally careful in building relationships. With the recent news that the recession effectively ended in June 2009, I’d like to share some thoughts with you on the past, present and future of residential real estate construction in our community.
The past 18 months represent the longest, most severe recession since the Great Depression. As residential real estate lenders, what we see in the construction industry is that many contractors and developers have already failed and most have at least been wounded.
There is a familiar adage in banking that says that the further a real estate decision is from the home office, the more difficult and dangerous that decision will be.
Our bankers do not know anything about lending in Atlanta or Las Vegas, so we simply don’t lend in those areas. Bankers who do lend outside their markets have paid a dear price for not understanding the community in which they are lending.
Over the past decade, many bankers forgot the basics of real estate lending. We forgot that if someone was going to invest in real estate, they need equity. The amount of equity in an investment correlates strongly with the success of that investment. Further, we forgot that bankers are lenders and not equity partners.
The construction industry participated in the economic disaster as well, building inventory that sales could not support. With so many bankers no longer willing to say no, many builders and developers borrowed more than they could pay back under the erroneous impression that real estate values always go up.
Timing is Everything
If we truly are in a post-recession environment, my view is that, barring a political miracle, we may be in for a long, slow recovery period. The good news is that there is no better time for real estate bankers to be in a lending mode. And while the ability of banks to lend into the recovery is hampered by the tight lending policy of banking regulators, it is not only possible to lend now, it is critical that we lend now to support the recovery.
Additional good news for borrowers comes in the form of interest rates, which remain at record lows. Good or bad, we have had a stable rate environment since December 2008. Rates will increase at some point, but it seems obvious that the Federal Reserve Bank is intent on keeping rates low as a strategy to help the national recovery.
We have lost many of the smaller builders. Those left to lead us out of the recession will be the small builders still in business, some regional builders and national builders. All builders must learn what the market demands and build accordingly. They must learn to manage their risks as they ask banks to lend to them.
The economic landscape has changed substantially. To be successful we must incorporate the changed business environment into our strategies and remake ourselves. Banks must help clients make a plan for their future; a plan that they can actually execute. We must help clients manage their balance sheet and reduce their risk.
At Franklin Synergy, our competitive difference