By Gary Dunlap
CHICAGO (March 9, 2009) - The $700 billion bailout of the mortgage banking industry has gotten very mixed reviews. Its actual implications on real estate financing and purchasing have yet to produce solid gains. The news for weeks about the Troubled Asset Relief Program has been filled with allegations of alleged abuses by industry management who received bailout funds:
· Refusal or inability to release information by banks on where money received has been spent with only 5 percent of banks responding to inquiries about spending;
· Claims that some CEOs have redecorated their offices and purchased private jets or expensive toilets or office furniture with allocated funds; and,
· Reports that substantial bonuses have been paid to senior managers in spite of the downturns in their respective companies.
Most disturbing is that roughly half of the $700 billion has been distributed to the industry and, it appears, very little of that $350 billion has gone toward assisting homeowners. The Bush Administration was criticized for the handling of the first half of this relief effort. President Obama does not wish to be vilified for the use and results of the second half now that he has inherited the problem. Thus, on February 17, he announced additional stimuli, hoping to directly and quickly create relief for millions of beleaguered homeowners facing foreclosure.
The disappointing track record and lack of success to date caused Federal Reserve Chairman Ben Bernanke (pictured below) in January to broadly outline three possible courses of action for the new administration to take with the mortgage lenders as well. As reported by The New York Times, these solutions were:
· A purchase by the government of troubled assets;
· Guarantees and agreements to purchase some of the banking losses in exchange for warrants and other compensation; and,
· Bad banks" that will be created to buy declining assets for cash or stock in the new entities.
Bernanke's comments subsequently prompted critics to suggest that a government buy out of as much as $1 trillion in subprime and in-default loans from mortgage lenders was ill-considered. In fact, The Times noted that the first option Bernanke outlined had been previously raised and widely rejected a year earlier.
All three options were immediately criticized by industry experts as being short-sighted and unworkable; because banks use different criteria to determine eligibility for loans, it was stated that the government - even if it were deemed competent and solvent enough to take on this burden - does not know how big the market is in terms of the value of those jeopardized properties. Therefore, the current administration and Congress would be unlikely and unwise to walk blindly into a commitment. In addition, the government would try to purchase the loans at a much reduced rate while the banks would attempt to secure as much funding from the sales as possible to minimize their losses, putting the two at odds. Needless to say, these particular proposals have not received much support.
So, with a new federal administration and Democrat controlled Congress in place, where does the Obama regime stand in regard to the real estate industry longterm? First, everyone has seen the President's displeasure with what he believes to be the lack of cooperation from and excesses of the industry in regard to the bailout. Second, it's a bit early to determine what more Obama may be considering because his administration is dealing with the larger economic stimulus package at the same time it is waiting to see if the mortgage bailout produces results. There may not be additional reveals of Obama’s direction until the latest program works its way through Congressional approval, is implemented and has a chance to work, if it does.
Q1 2009
Obama's Sounding Board
It is likely, though, that White House insiders like Valerie Jarrett (pictured above) will play an import role in shaping Obama's continuing policies regarding the real estate market, according to Michael Alexander, founder and principal of the Illinois-based lobbying firm Alexander & Associates. Jarrett's role as Senior Advisor and Assistant to the President for Intergovernmental Affairs and Public Liaison will likely be similar to her role on the campaign, with the President probably running most major decisions on the industry by her. Jarrett’s long-standing relationship with Barack and Michelle, coupled with her private sector experience in real estate, means she is likely to have a big voice on this issue.
She is the great-granddaughter of the first African-American graduate to M.I.T. and the granddaughter of the first African-American to head the Chicago Housing Authority. But she also brings with her a legacy of activism and dedicated business acumen, as well as a fierce loyalty to the President. She has been referred to as Obama's closest friend, the complement to the President's intellect and "big sister" to Barak and Michelle.
With the nonprofit Habitat Co. for some years, she has functioned since 1997 as that company's CEO and President. Her latest responsibilities for Chicago? Vice Chair of both Chicago's 2016 Olympic Committee effort and Metropolis 2020, and Director of the Metropolitan Planning Counsel (only three in a long list of real estate and other community groups and corporations to which she is committed).
The Chicago Tribune in July 2008 quoted Obama as saying: "I trust her completely." For Jarrett's part, she told Vogue in October last year: "I am a sounding board (to Barak). I know him well." Subsequently to Time she confided: "He is my dear friend. I would do anything (he) asked."
Getting - and staying - close to Jarrett will give real estate companies the ability to better understand and anticipate Obama's policies. If President Obama has a chance of saving real estate, he is wise to look to Jarrett for advice. In the meantime, Obama’s administration has admitted that the current $700 billion relief package may be insufficient. So wait for more pronouncements about financial support as the year progresses.
Gary Dunlap is senior vice president and group head in Edelman Chicago’s crisis and issues management practice and a national co-coordinator of Edelman’s real estate network. He can be reached at gary.dunlap@edelman.com. This article first appeared in the latest edition of Property Lines, Edelman’s real estate newsletter. For a copy, please e-mail Tony Wilbert at tony.wilbert@edelman.com.
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