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Banking, RE must join for recovery.

There's been a lot of talk about the auction-sale atmosphere in selling real estate today. No consideration is given by the buyers for the cost to build; the cost of land and improvements.

It's a "take it or leave it" stance. Sellers may be squeezed enough to finally agree to well below-market terms; many will not.

No one doubts that regulators, the Resolution Trust Corp. and the national recession have contributed to this atmosphere, but banks have been selling off their real estate at way below-market values, just to get these non-performing loans off their books. How will we ever be able to pull out of this recession when this continues to be considered "necessary"?

Banks today remind me of my childhood ... when someone did something wrong or made a mistake each child would try to avoid taking the blame by putting it on someone else when maybe it wasn't anyone's fault at all. Sometimes there were circumstances beyond control that faded into the background and were lost in the inevitable 'he did it/you did it' conversation.

I think everyone agrees that real estate has played a big part in the current banking mess, and bankers have been behaving as is there is some "person" within their ranks who may be responsible for the downfall of their real estate portfolio.

Let's take a look at the "real" causes of many of the banks' problems:

1. Deregulation

2. Fraud

3. Tax Reform Act of 1986

Every time I try to think of the root cause, these three situations inevitably arise. Giving U.S. privileges previously forbidden gave way to heavy investment in real estate, which heated up that market. Along the way, since everyone was making money, no one instituted any checks to insure that fraud was kept to minimum. This was something the regulators could have accomplished; this was their job. Since there were no policemen, there were many abuses that, ironically, have now caused regulators to behave more like jailers.

The Tax Reform Act of 1986 was the beginning of the end of real estate investment. Tax shelters were lost, not grandfathered, and lack of investment gathered steam. Real estate was no longer a favored investment, causing values to drop and subsequent refinancing nightmares. The stabilizing influence of real estate investment was removed by tax reform. Fraudulent practices were either unnoticed or overlooked.

The banks in New York State probably have the cleanest record in the country since fraud was not an overwhelming factor. In retrospect, the problem arose simply because bankers and developers alike believed what all of the economists were saying. Long Island and the greater metropolitan area were protected to some degree since we now had a service economy that would somehow transcend our previous record of recessions.

Great expectations for a continued expansion were predicted by all of the experts. The best in the business did not see this recession coming because they thought they were sheltered. Declines in real estate values began to surface gradually because of the lack of investors due to tax reform. Before anyone could get out fast enough, plummeting real estate values fed each other, appraisals were questionable, and the blame landed on the bankers who committed the loans in the first place. A 1-2-3 punch knocked out this area:

1. Tax Reform Act of 1986

2. Regulators tightly controlled banking after damage was already done

3. Lack of venture capital and financing sealed the coffin

It's time for the bankers to stop blaming each other -- stepping from one bad situation to another that "they had nothing to do with" and start working together with the real estate industry to get us out of this unbelievable mess. I'm positive that, if a real effort is made, it will happen. We have everything to gain.

Does this make any sense? I've been listening to all of the arguments on all sides, and the way I see it is this: Hindsight is the greatest way to avoid action. A groundswell must occur within the banking and real estate industry to make changes in the way things are being done from Washington, D.C. on down. Each industry-related organization seems to be working on its own. We are not powerless. Why not form a political front, a coalition, with each group remaining autonomous otherwise. With a conscious effort and a definite plan, Washington will listen -- remember, it's a Presidential election year. If the numbers are staggering, and they are, we can make the powers that be listen and act in our favor. Make a!
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Title Annotation:Insider Outlook; real estate
Author:Greenstein, Jane E.
Publication:Real Estate Weekly
Article Type:Column
Date:Apr 22, 1992
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