Things are just fine. Now let's not mess it up!

Article by Billy Procida, President of Procida Funding & Advisors

Institutional Investor - May 2013      

Over the past few months I've heard many a business news commentator say, "We're in a recovery, but we are still a ways away from housing starts and sales getting back to 2005 and 2006 levels."

I, for one, pray we never get back there and we all should be of that opinion.

The economy was at its most robust point in the history of mankind in 2005 and 2006, when a blind monkey could overnight become a real estate developer or hedge fund sensation. We knew it was artificial or worse—an unspoken conspiracy propped up by banks, Wall Street, public companies, rating agencies, our government and our own collective greed.

Yes, those were great days when every bartender, casino worker and auto mechanic had a half-million dollar home and 10 rental properties. Everyone was making money, but when the music stopped, the pain and devastation was much more real than the cars, boats and vacations were during the high times.

Yes, high times is a good way to define it. Everyone was smoking the same pot from the same pipe, feeling the same thing and believing it was actually real.

What was real from 2004 to 2007 was that more than half of the new homes built in America were bought by subprime borrowers. In hindsight, this means these homes should never have been built. The banks and Wall Street even created a category called "Alt A," a cool name for almost subprime. They accounted for another 15-20% of new homes sold in 2004 to 2007.

So where are we? And why should we be happy? One, we are working again. Okay, so we're working twice as hard for half as much but remember: 2004 to 2006 was not reality. Two, we have the best economy in the world. And three, remember that while we were having that euphoric feeling in 2004 through 2006 about our skyrocketing home values we also used to say, "How will our kids ever afford a home?" Well, now they may be able to.

Yes, we are just fine today. Not perfect, but fine. Life is never perfect and there are always issues and challenges. But we now have new housing production for the first time in years. Most of the half-builts left over from 2007 have been finished, the media is not scaring people from buying a home and the banks are lending. Maybe not as much as we would like but they are lending again. Yes, we're just fine.

We are about in the same spot as 1998-1999 when we finally emerged from the Savings & Loan Crisis and the Resolution Trust Company. Yes, the RTC of the early 1990s was same as the HARP and Quantitative Easing of today. Same thing keeps happening and the government just puts different words to "the fix."

But even with all of the regulations and regulators, the same thing always happens when the economy heats up: banks lend too much too fast. Bank boards, rating agencies, pension funds and politicians that cause underwriting to become lax to free up credit to boost earnings then create loans that get sold back to the public through our IRAs and pension funds and then the public must subsidize the bailout under a new name.

I, for one, am tired of the cycles. After 32 years, I am happy with being just fine.

So now that we are just fine, let's not screw it up again. There are several ways this could happen and, of course, several ways it can be prevented. Greed and evil are hard to keep in a cage and that's exactly what we are dealing with. Make no mistake about it: the savings & loan crisis of 1988-1992 and the great recession of 2007-2012 were nothing more than greed and evil. Sometimes this was by design and sometimes it was by just going along with things.

Let's remember that it was the rating agencies and the appraisal industry that were all saying real estate investments were fine in 2007. These industries then went to hell in a bucket in 2008, along with our financial industry and economy.

In an article published in July 2002, Real Estate will Return to its Local Roots, I predicted that Wall Street and too-big-to-fail national banks were going to ruin America. The same is still true. Big banks just can't function and manage. Most of America is small business and middle market business. Local banks understand and know their markets and customers.

Big banks only care about bottom line, short-term earnings and when the time is right, they free up capital so a hedge fund can buy a local business because the hedge fund knows how to run that company better. Like a hedge fund or private equity fund playing with other people's money can run a business better than the entrepreneurs who built it. They do, I agree make better spread sheets and pitch books.

So let's not screw this up.

Keep underwriting standards high, don't get creative. Art and music should be creative, finance should not.

Make banks hold their mortgages on their books instead of turning them into securities they sell back to us through our pension funds and insurance companies without us knowing.

We still have a lot of work to do. As I wrote in How the Real Estate Industry Can Save America, we need to focus on rebuilding the inner cities. We need the government out of the real estate lending business and we need municipalities to start insuring that projects that start get finished. Sure there is always more to do and fix but we're just fine.

Lastly, one word to the media: things are never as good as you say and never as bad as you say. The public listens to you folks. Be careful.

So we all know that too little liquidity collapses a market. It causes fear, cash hoarding and causes real estate and housing values to artificially fall. Too much liquidity causes the exact opposite, which is also artificial. Balance and sensibility sounds easy but rarely occur.

The big time banking and Wall Street folks as well as the local community banks need to remember the following:

Keep your brethren in check, keep your underwriting standards high and keep it simple.

Make sure your borrowers have skin in the game and genuine capabilities.

To developers, remember it's not about buying land, raising money, and building something. It's about being part of a community and adding to it. The key disciplines happen in planning boards, architects' offices and construction trailers NOT in lawyers' offices and in front of computer screens.

Lastly, to the big gamblers and cowboys: it's fine to be aggressive, just be honest with yourself, be honest with your investors and employees and try not to screw up the economy if it blows up. We in finance really don't need another black eye.

The economy generally follows the real estate market, more specifically the housing market. We in the business have more than just our own wallets riding on it but the economy in general. Let's do good.

William Procida is the president of Procida Funding & Advisors, LLC, Englewood, N.J.

Story ran in the NYC section on 05/28/2013