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TMCNet: Hurting at home: Wall Street tremors felt locally

[September 28, 2008]

Hurting at home: Wall Street tremors felt locally

(The Anniston Star Via Acquire Media NewsEdge) Sep. 28--The daily headlines from Wall Street read like the scene of an impending natural disaster -- from the photos and news clips of panic-stricken brokers, their eyes fixed on the screens displaying their losses, to the fever pitch on Capitol Hill as politicians try to stave off a financial meltdown.

Without claiming any lives, it is one of the few events urgent enough to interrupt a presidential campaign.

Instead, there is the carnage of collapsed financial institutions, including Washington Mutual, the largest failure in U.S. banking history.

Because of the scale, tremors from the financial quake are being felt even here in Alabama. Businesses might have to delay expansion and find ways to cut costs. With financial and housing markets so intimately tied, many experts believe it will take at least a year or two to recover.

Bill Newman, president of Oxford Lumber Company, which employs more than 100 people in stores in Roanoke, Talladega, Jacksonville and Oxford, said the housing market and his businesses are feeling the pinch.

"I think speculative homebuilding is definitely down," Newman said.

Developers have seen a lack of demand for new houses despite lumber prices being stable and low, he said.

The seismic shocks caused by the recent lending crisis, with its Wall Street epicenter, has made Newman take a hard look at his future plans, he said.

"We have not yet taken any major projects off of the boards," he said. The potential reverberations on his business make this an economic landscape that requires cost cutting and better management, Newman said.

The problem began when financial institutions relaxed the requirements for receiving a home loan, said Dr. William Fielding, dean of the College of Commerce and Business Administration at Jacksonville State University.

"We pushed the envelope probably over the last 12 years of lowering our standards for mortgage lending," he said.

Traditionally, if a person goes to a bank for a loan, the bank looks to see if they have good credit and a solid income and requires at least a 10 percent down payment, he said. With that, the bank likely grants a loan.

Banks then normally sell mortgages to long-term loan companies like Fannie Mae and keep a cut of the interest, Fielding said.

If a buyer can't pay, the bank takes over the house.

On the "bad paper" loans that have caused the recent crisis, a bank may not thoroughly check buyers' ability to pay, Fielding said. Some banks labeled such mortgages as good and sold them to Fannie Mae anyway. Some loans were then bundled with many other mortgages and sold to investors as bonds in a "mortgage backed security," he said. An insurance company, like AIG, often insures the bonds to lower the rates.

When a number of people fail to pay their mortgages, it pulls the bottom from under this "house of cards," Fielding said.

Tough on homebuyers

All that bad paper has houses attached to it, which leaves homebuyers in a tough spot, said Craig McMurtrey, president of the Alabama Mortgage Broker's Association.

Lenders are being cautious now, and that is leaving many potential homebuyers with no credit, no sale, no house.

In short, "You better be really strong if you want to buy a house," McMurtrey said.

He said he runs a "small shop" mortgage brokerage that usually closes about one out of every 10 loans.

"The second quarter of this year, we closed one out of every 32 loans," he said.

John Harrison, superintendent of banks with the state Banking Department, said banks are being more cautious about everything they do.

When the sub-prime mortgage crisis came to a head earlier this year, banks initially tightened up their lending and assessed what they had, he said. But Harrison believes this most recent lending crises has "already bottomed."

The 129 banks monitored by Alabama's Banking Department comprise about $257 billion in assets and $175 billion in deposits.

"Naturally, we've been concerned, but our banks in Alabama have been and are still in extremely healthy condition," Harrison said.

The department began checking in with banks more often when they began hearing rumblings of trouble with Freddie Mac and Fannie Mae, he said.

After a recent poll of all of the banks under the department's authority, he said between six and nine of the 129 had had any dealings with "bad paper."

Harrison said he could not reveal the exact banks involved but said they represented a "medium mix of banks," and were not a major threat to the state's financial stability.

"They went ahead and did what they had to do to fix it ... it didn't help their earnings though," he said.

Harrison held, however, that there was no bank in the state that lost "substantial capitalization with the write-offs" they had to absorb.

"Alabama has not had a bank failure in over 21 years. We don't anticipate one in the next 20 years," he said.

Banks on the national level have not been so lucky. With the demise of Lehman Brothers and Bear Stearns, the bailout of Fannie Mae, Freddie Mac and AIG, and with Thursday's seizure and sale of Washington Mutual by the Federal Deposit Insurance Corporation, many are still waiting to see how deep and how far the aftershocks will go.

McCurtney and Fielding both believe the nation needs to reform the housing market. McMurtrey thinks Alabama needs its own state-level reforms as well.

It wasn't until 2002 that mortgage brokers had to have a license to operate in the state.

The state mortgage broker's association has tried since 2007 to push a bill through the Alabama Legislature that would help regulate mortgage sales. The bill's biggest feature would give the state regulatory authority over all loan officers, McMurtrey said.

Currently, anyone approved by the U.S. Department of Housing and Urban Development can broker deals in the state, but the state can't help with complaints against them.

"The federal government is obviously too understaffed to be able to handle it," McMurtrey said.

Residents are vulnerable

Meantime, state residents are vulnerable to a variety of bad business practices like bait-and-switch tactics, or brokers charging exorbitant fees.

State bank superintendent Harrison said he believes 2009 is going to be another down year for profits, but toward the end of that year, the state will see healthier numbers, and 2010 will be even better.

"Overall Alabama will be better off after we get through this," he said.

Despite the relative strength of Alabama's banks, the state is not isolated, Harrison said. He attributes the banks' stability to conservative management and lending.

Loans here are often used as investment money to buy houses and property. McMurtrey said investors in fast-growing housing markets around the country bought properties to sell after the value grew. They held on to their money, however, when the foreclosure crisis hit.

"It didn't take long for the sub-prime problems to affect the good market," he said.

Without investors buying the bundled mortgages, there was no money to buy more loans, McMurtrey said. The government stepped in, but it still may not be enough to convince world investors, he said.

Property values in Alabama didn't see the type of exponential growth that some locations in California, Florida and Arizona saw, McMurtrey said.

"Here we have had a constant and slow appreciation," he said.

As a result, the state housing market hasn't fallen as hard as some places around the country, he said.

"Alabama always kind of zigs when the rest of the country zags," he said.

Investors have now begun moving into the state, but those investors may not be building houses -- at least not yet -- and the slowing speculative market is having a real effect on material suppliers like Newman's Oxford Lumber.

"Most of the contractors right now are taking pretty much any jobs they can get," Newman said.

Many have been taking on more work themselves and not subcontracting it out, he said.

Neighboring states are in worse shape, and there are a lot of subcontractors and contractors coming across the border -- especially from Atlanta -- looking for work, he said.

The tightening up hasn't caused Newman to cut back his staff, but he has begun watching overtime, expenses and inventory more closely, he said.

That is a common theme among local businesses looking at tightening their belts, said Pat Shaddix, director of the Center for Economic Development in the College of Commerce and Business Administration at JSU.

According to Shaddix, many small businesses in the area are not feeling the effects of the troubles on Wall Street.

The strains on local small businesses are the same as always; success depends on location, knowledge in the business and financing, he said. Though poor management is greater risk to a business than a lack of financing, Shaddix said.

"These are times you have to cut back on spending and conserve cash, regroup and delay projects," he said.

Rising gas prices

One expense that has become an issue is transportation, for the average commute as well as shipping.

Higher gas prices are causing people to cut back on their travel, Shaddix said.

Terry Paschal, owner of The Wine Cellar in Anniston, said his small business has definitely felt the rise in shipping costs.

Over the course of the spring and early summer, gas prices started going up and sales have gone down, Paschal said.

"Traditionally, summertime sales go down a little anyway. This year they have gone down a little more than past years," he said.

In the economic downturn, customers have become a little more "budget minded" and sacrificed luxury expenses, Paschal said.

"People aren't going to stop eating, but they may become more spend thrift," he said.

Gas is also more expensive than it has ever been, which caused the state-owned Alabama Beverage Control distributor to raise its prices.

The national economy, however, has affected Paschal's business in more ways than just fuel prices.

"There has been impact on a lot of European wines because the dollar is worth less against the euro," he said.

With one location in Anniston, it is unique that the international exchange rate and foreign faith in Wall Street so intimately affects Paschal's business, but like many other small business owners, subtle economic fluctuations have real implications.

"Being a small business, you don't exactly have a retirement plan other than your business besides maybe some small investments. The downturn definitely affects your life," he said.

Newman said Oxford Lumber's retirement plans are in-house, "Safe Harbor" 401(k) plans, where employees get to pick their own investing options. The company contributes a certain percentage.

Consequently, the financial market affects the employee's investment, and could cause delays in retirement, Shaddix said.

"Times like this you just ride it out. It is going to come back," he said.

Shaddix views the national lending crisis through the same lens.

"The steps that the Federal Reserve has taken are right on. I'm not that upset about it," he said.

As long as the bailouts don't become political, money will continue to be available to keep the markets moving, Shaddix said.

"It's not what you owe, it's the cash flow," he said, citing an old adage.

Harrison tends to agree.

"Banks have to make loans to stay in business, he said. "We'll just be looking at them a little different. Banks can't survive without giving loans, it just can't happen."

About Nick Cenegy

Nick Cenegy covers the military, Jacksonville and northern Calhoun County for The Star.

To see more of The Anniston Star or to subscribe to the newspaper, go to http://www.annistonstar.com/.

Copyright (c) 2008, The Anniston Star, Ala.
Distributed by McClatchy-Tribune Information Services.
For reprints, email tmsreprints@permissionsgroup.com, call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA.

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