(Michael Chamberlain/Nevada Business Coalition) – The third and final installment of NBC’s interview with Bank of Nevada President and COO John Guedry.
NBC: The mortgage industry and housing industry collapsed. Every time things begin to look better we get more bad news. There are a host of ideas out there, possible solutions that run the gamut from allowing all homeowners to refinance at their current value to letting banks process foreclosures faster. Every solution creates its own sets of problems. What do you believe is the best solution for the situation we’re in right now?
John Guedry: You’re making the assumption that I think I’m smarter than the people who are coming up with these solutions. I don’t know that there is a perfect right answer to this very complex problem.
Personally, my feeling is I’m more of the school of letting the markets run their course and swallow the bitter pill and reset everything then let it start to come back. In this particular case, since it was so much more of a complex problem than a traditional market cycle, I don’t know that that would have been the best approach.
Several years ago, I’ll credit a guy who came up with what I thought then was a really good idea, a guy named Mark Daigle, who used to be the President of Colonial Bank here in town. Mark did a white paper and presented it to the Nevada Bankers Association.
I don’t know where it went from there and if any of our delegates had a chance to look at it. The gist of the paper was that, it was about the time the market was about to slide in ’07, that we were going to see houses underwater in value pretty quickly. Rather than lenders writing off the principal balance that was underwater or the federal government coming in and buying down the mortgages because that would ripple into, “Well, why don’t I get my mortgage written down? Because I was responsible and I wound up having equity in my home, I don’t get the same benefit as somebody who was more irresponsible, and overleveraged their house.” There was an argument to this.
The point this particular gentleman made was you had a pool of qualified applicants and to be qualified their home has to be underwater, they had to have an event occur that caused them to not be able to afford the payment. An event would be one or both of the spouses lost their job so their income level declined or the event could be that they were structured in a loan that was probably a poor loan for that type of borrower. They were given an artificially low rate to start and they completely knew this was happening, it was fully disclosed. I tend to believe that was more of the case than they covered up the numbers because they didn’t want them to see anything. But the reality is they probably didn’t think a couple of steps ahead to, what does a 8% rate look like versus a 2% rate, in terms of my monthly payment.
If one of those type of events happened that caused them to not be able to service the mortgage and they were underwater so there was no way for them to sell the asset to be able to get out of the mess, rather than spending hundreds of billions of dollars, if not close to a trillion dollars, in federal programs to try and keep people in homes that they really couldn’t afford and knowing that the on-balance sheet lenders – whether they were a bank or a mortgage company or an investment bank or whoever was holding the paper – was going to have to mark down the asset once it became impaired, and impaired by our definition is they were more than 90 days past due on their payment. They have to go get an independent appraisal, an independent evaluation, on the property. If it was a $200,000 mortgage and the appraisal said it was worth a hundred, then you write down a hundred thousand in mark-to-market.
Take that pool of mortgages, and maybe that was a third of mortgages in the country… whatever that pool of mortgages were that met those qualifications. Then the federal government and the lending industry partnered up, reduced the principal balance and potentially the interest rate to a payment level the borrower can not only afford to make but will be motivated to keep the home not lose the home.
Take that balance write-down, so we’ve got a $200,000 mortgage that’s now a hundred thousand value, the lender comes in for 50 [percent], the government comes in for 50 [percent] and they record a second on that property with no interest, no payment that will be recouped or partially recouped at some future date when the homeowner either sells the home or he’s in a position to maybe refinance it with hopefully a higher value.
The theory being you’re spreading those events out over a much longer period of time and you don’t have this large pool of inventory immediately dumped on the marketplace driving prices down, just the reverse of what drove them up, not enough inventory, too much demand. Now you’ve got too much inventory, not enough demand, and all of a sudden prices fall off a cliff.
I’m a capital markets guy so I have a little bit of a problem with the government stepping in every time there’s a problem, especially if so many parties were contributing to that problem. But because the government, in my opinion, actually played a part in creating the problem I think there was a responsibility on the part of the government to find a workable solution.
To me that would have been a workable solution where the taxpayers weren’t just bailing out an industry, they were actually protecting themselves. They were protecting their home values so they didn’t see their home values fall of the cliff with these other more irresponsible borrowers, or irresponsible lenders. I don’t want to say one party was responsible for all of this mess.
I actually thought that the idea had some merit to it. The estimates were, I don’t remember the exact numbers, but the estimates were the government would fund, and this was ballpark because nobody really knew exactly how many mortgages would fit in this parameter, the government would fund approximately $500 billion to $1 trillion and the industry would fund the same amount in actual writedowns on their balance sheets.
Instead of having this massive amount of foreclosures in the marketplace it would end up being at a much more manageable level. The only foreclosures that would actually occur at that point would be the defaulted borrowers who had the ability to make a mortgage payment and chose not to. Or had no other options – I defaulted on making mortgage payments but I’m not underwater so I could actually sell the asset.
Today that’s actually a pretty good idea. But it’s hindsight. I actually don’t remember how I reacted to it when I first read it. Maybe I thought it was a good idea but wasn’t sure if the government should be involved in that.
Now looking back at it, that probably would have been the least expensive way, the least impactful way to level this cycle out so it wasn’t so straight up and straight down.
NBC: There are a lot of things that look different in hindsight now. Part of it was, I think, that nobody realized the scope of the problem at the time. When you think the problem is this big (holding fingers about 2” apart) but, looking back, you now know the problem was this big (holding hands about 2 feet apart) it calls for a different solution than what you thought at the time.
JG: Maybe that reaction would have been the right reaction. I think there’s some value, even today, while we can’t change the decisions that were made we can learn from them. I’m hopeful that all of us who played a part in getting us where we are today are looking back and saying, “What could we have done differently?” and not overreact to it.
If we hadn’t made any loans we wouldn’t have had the problem. Well, that’s not an appropriate reaction.
But look at the steps we’re taking…If you knew then what you know today what would you have done differently? I guess we could all come up with a pretty lengthy list. That’s what we need to be doing is remembering that and making sure to keep that list if for nothing else, in the back of our lives, if we begin to see similar characteristics in the market that we quickly pull that out and think about how do I handle this if ultimately this is where it’s leading.
I think we’ll make better decisions. I’m an optimist so I hope that we’ll learn from our mistakes. We will repeat some, no question. But hopefully few of them.
NBC: What do you see for the future?
JG: It’s a question I asked myself in the last 3 or 4 months that I was really looking for an extensive answer to because I was considering whether I did or didn’t want to come back into the banking arena. Ultimately, I made the decision to come back in. So that maybe should tip you off that I am cautiously optimistic about where we’re headed, with the understanding that the kind of markets we saw from 2000 to 2007, specifically here in Nevada and Southern Nevada, aren’t sustainable and shouldn’t occur again.
I’m not anticipating that, as I look out into next year and an even more blurry look out into 2013, that we’re going to see big growth, boom-type years. I just don’t see that happening.
What I’m hopeful for is that we are at or near the bottom, that we’re going to see some recovery in our primary industry, which is gaming and tourism, and that that will result in more jobs as we finish this year out and head into next. Then we become a savvier community because of what we’ve been through and become less dependent on the gaming and tourism industry in leveling out how these cycles impact us.
That’s been the discussion for as long as I’ve been in business here, which started in ‘84-‘85 when I was with Valley Bank. I say cautiously optimistic.
I’m not convinced we have everybody rowing the boat in the same direction, recognizing that, while it sounds good to talk about diversification, are we really committed to it? I hope that we are really committed to it. I hope that we are willing to make the sacrifices necessary for this economy to become a less risky economy, more diverse.
I’m sure the people in the gaming sector are hoping for that as well because at the end of the day when things go bad you always look to Dad and they’ve always been Dad in this market. They’ve always been the go-to industry when things get tough. Nobody wants to be, especially when they’re dealing with their own challenges, the one industry that has to be the savior all the time.
I think that probably the biggest change I’ve seen here in the 25, 30 years I’ve been in business is that you’ve probably got an industry that recognizes now more than ever that we really need to diversify. That may mean reinvesting in education and reinvesting in infrastructure and using our tax dollars wisely. It may even mean not being the perceived low-tax state but being the state that is investing in growth wisely.
That’s where my optimism comes from. I think that when you go through as challenging a time as this market has been through it forces everyone to kind of think about what got us here and what will stop us from being here again…
This is really the fourth economic cycle I’ve been through here in the banking industry and far and away the most memorable, in a bad way. Most of them have been relatively short and relatively shallow. This one’s been very long and very deep and isn’t done. It’s given us all a lot of time to think about what can we do to avoid it again.
This is probably anecdotal but it’s a good example of what I’m talking about. I have been involved with the Las Vegas Chamber and one of the programs they put on is the Leadership Las Vegas program. Roughly 44-48 students each year go through an indoctrination and education in how the community works. At the end of that 9 or 10-month period they become much more informed leaders in the community.
Also at the end of that period they come up with a class project to give back to the community. More often than not the project isn’t really well-thought out. They have a short window of time and trying to get 44 A-personality types together on any idea is tough.
For the first time, I’ve been involved in discussions with members of that leadership group, the Leadership Council, and the Chamber about how we can get the roughly eleven hundred alumnus who’ve been through the Leadership Las Vegas, to use the same analogy I used earlier, to row the boat in the same direction. What can we all do together where we will find the vast majority of everyone in that group will agree is a need in this community and, specifically, how can we help service that need?
In a couple of very short meetings we’ve realized that there’s really only 2 or 3 areas where there’s really a consensus that we need to work together. There will be differences on what needs to get done and how to approach it but I think everybody agrees that making sure that we’re providing human resources, volunteer support and just overall support to primary and secondary education and making sure that it is a system that works and isn’t broken. Most people will agree that’s an area we can all get on board with and the same thing for higher education.
My hope is that we will wind up with several hundred volunteers from our donor base, we’ll work together on a common goal, whatever that goal may be. The new superintendent may help us define it.
The university president, or the regents, or somebody in a leadership role in education may say, “This is really what we need.” To me that would be a good sign that this community has learned a valuable lesson that we can keep working against each other or we can work to find a way to common ground that will benefit us all.
Optimistically, I think that we will have more people wanting to find that common ground if for no other reason than self-preservation. I don’t want to go through it again. I’m not sure I could survive it again.