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May 3, 1991
This morning's markets are giving up most of the improvement in interest rates gained early in the week. Today's report of April NonFarm Payrolls shows a contraction of 124,000, only half the job losses that had been feared. The Unemployment Rate actually fell .2% from 6.8% to 6.6%, while markets expected a climb over 7%.
New Home Sales rose 1% in March, Leading Indicators picked up .5%, Factory Orders dropped 2.8%, and Construction Spending slid 1.5%. The Purchasing Managers' Index recorded its second straight gain in April, up a solid 2.1% to 42.1%.
While Red Adair's Texans are fighting oil fires in a hellish landscape, other Texans are fighting financial fires in another strange place: Boston.
Combat veterans from Houston and Dallas have packed hat, boots, drawl, and greatgrandaddy's carpet bag. And it's great news.
In the early part of the real estate disaster in the oil patch, troubled bank behaviour was suicidal. If a borrower didn't perform, you foreclosed hard: you ran off the developer, tried to get a deficiency judgement, and seized the halfcompleted project.
The typical bank or S&L would then hand the crater to a loan officer to manage. The loan officer's rewards are usually $2,800 a month and a $43 annual bonus (if he remembers not to park in the Chairman's parking space). Typical loan officers were responsible for development decisions on tens of millions of dollars in foreclosed real estate.
REO "managed" in this fashion was quickly embalmed. Mummified projects languished all over Texas, with no one able or willing to decide to spend extra dollars to achieve leaseup or sale. Foreclosed property frequently enjoyed its greatest decline in value after being seized by the lender, or dragged off to the great RTC tomb.
It took time, but banks in Texas finally identified capable REO "workout" managers. They also made the key discovery that REO values performed best when property was left under the management of the original developer.
There were some developers who deserved tar and feathers, but many were good business people run over by a general decline in values. If these quality people were given an upside return from managing REO to health, the banks got a better outcome than they could ever have done for themselves.
These workout people are being deployed in New England with the full knowledge of the Texas experience. Much Yankee property will be wellmanaged out of foreclosure, and the losses to the FDIC and to taxpayers will be much less.
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