| The TACT, or Toxic Asset Conversion and Transfer | | | | economy does not continue to improve there will be |
| Program is a simple and effective solution to both the | | | | even more toxic assets on their books. The banks' |
| banking and real estate crises. It builds on the progress | | | | real estate strategy seems to be "put up and hope". |
| made by banks and real estate investors to bring us | | | | Put up the properties for sale, and hope another bank |
| back from the brink of a liquidity disaster. Unfortunately, | | | | makes a mortgage loan so we can sell a property and |
| if TACT is not implemented quickly by banks, both | | | | improve our capital ratios. I guess the Catch-22 is just |
| large and small, the US (and world) economy will likely | | | | not obvious enough. The banks are reluctant to lend on |
| be in a double-dip recession. The Great Recession, as | | | | real estate and to businesses at the current artificially |
| it will be remembered for generations to come, was | | | | low interest rates. And the government will gladly |
| triggered by a greed inflated real estate bubble. Just | | | | borrow all the money banks have to fund the deficit. |
| as signs of recovery were becoming apparent in all | | | | This government stimulus funded by the banks and |
| sectors of the economy, Europe's socialistic spending | | | | taxes cannot continue forever. Recall Margaret |
| habits have brought us back to the edge. As Margaret | | | | Thatcher's words. |
| Thatcher said "The problem with socialism is that | | | | A key reason for the improvement in bank liquidity |
| eventually you run out of other people's money [to | | | | since the depths of the recession is that buyers and |
| spend]". | | | | real estate investors have been buying up the bank |
| TACT is not, and should never become, a government | | | | owned properties being dumped on the market at |
| run program. The government has already done | | | | extremely low prices. Real estate investors use their |
| enough to plant the seeds of the real estate crisis, | | | | own cash or private loans to buy these properties and |
| devise incentives to ensure banks made risky loans, | | | | thus help the banks improve their balance sheets. The |
| and later encouraged renters with no savings to | | | | investors will achieve returns on their cash far above |
| become homeowners. The best the government can | | | | the one percent rates offered on bank CDs (often |
| do is encourage banks to implement TACT, avoid new | | | | referred to as Certificates of Depreciation). Eventually |
| regulation that inhibits it, and eventually eliminate the | | | | though, investors will run out of cash, and the bank |
| arbitrary guidelines they themselves implemented that | | | | recovery will stall. |
| slow the continued economic expansion. | | | | How does the TACT Program work? Banks have |
| Why is a double-dip recession imminent? The budding | | | | toxic assets (TA) in their portfolio that stymie their |
| economic expansion is being constrained by a lack of | | | | lending. These assets are primarily real estate owned |
| bank lending. Businesses with increasing demand will | | | | (REO) and non-performing loans. These toxic assets if |
| not hire new employees to handle the growth if banks | | | | converted (C) to performing loans would dramatically |
| will not provide the loans to finance the required | | | | improve the banks' liquidity. How? The easiest way to |
| working capital. As businesses grow, their payroll, | | | | explain is through my catchy phrase "A banker's trash |
| inventory, and accounts receivable grow. Funding that | | | | is an investor's treasure". The bank owned property is |
| working capital expansion requires bank loans. | | | | transferred (T) to an investor in return for a performing |
| During the Great Recession, banks' balance sheets | | | | loan. TACT is a very simple and effective solution that |
| and thus their ability to make loans dropped off a cliff. | | | | takes banks' Toxic Assets and Converts them to |
| As mortgage loans went into default, banks needed to | | | | performing loans by Transferring the assets to a real |
| create accruals, their capital ratios deteriorated, and | | | | estate investor. |
| reserve requirements grew. Those capital ratios | | | | In my mind, the choice is obvious. Implementing TACT |
| deteriorated further as banks foreclosed on those | | | | is far better than a double-dip recession. A double-dip |
| properties. Since there was virtually no market for | | | | recession will drive more homeowners to turn over |
| non-performing loans and bank owned properties, they | | | | their keys to their bank and further degrade balance |
| would need to write down the value to zero. The | | | | sheets, and choke lending completely. It does not |
| banking system was near a tipping point, so the | | | | matter what your opinion of bankers is, we need a |
| government and accounting board decided to relax the | | | | healthy banking system for businesses to grow and |
| mark-to-market rules. This was a necessary step but | | | | create more jobs. Healthy banks are far better than |
| NOT a solution. For that matter the prior | | | | the federal and state governments creating more jobs |
| mark-to-market rules should be reinstated as the | | | | to get us out of the second dip, and raising taxes to |
| TACT Program is implemented. Those rules will | | | | fuel government growth. |
| provide more incentive for bankers to keep moving | | | | Maybe the TACT Program can be more easily |
| forward with this solution to their liquidity problem. | | | | remembered by the two definitions of REO. A bank |
| The banks now have more money to lend than in the | | | | thinks of it as Real Estate Owned, a toxic asset. An |
| depths of the recession, however they are still very | | | | investor thinks of it as a Real Estate Opportunity, to |
| constrained by the number of bank owned properties | | | | convert foreclosures to family homes! |
| and non-performing loans on their books. If the | | | | |