History lesson: Lending during recessions and melt downs

[Stephen Chu]

My RE education is young, and I want to learn not just what is currently happening, but also during hard & tough times in the past. As someone famous once said, "... not learn history ... doomed to repeat it."

We all know what happened during the 2008 melt down: liquidity became super tight, the big banks needed bailout money, and all that. What I want to know is, when it came to HMLs, or even smaller lenders or funds or syndicated lending pools, how did these entities fare?

Did most abruptly shut down just like Lehman Brothers did overnight?

Did some fare better than others somehow? Maybe entities who owned actual CF properties at the time (without being underwater) fare better than those who were merely providing a service?

Did the SMB businesses feel it first, before the big banks/companies started to? Which domino fell first and in what order? Residential or Commercial? Low quality region first or highly appreciated market first?

I'm trying to think: if there is a future financial melt-down #2, as a lender (or a business owner in the lending or note business), what did history teach you to prepare for it this time around?

Thanks!

[Chris Mason]

Originally posted by @Stephen Chu:

"... not learn history ... doomed to repeat it."

 I'd actually caveat that a bit and claim that "history rarely repeats itself because everyone is paranoid about it repeating itself and knee-jerk over-corrects." The old adage that we "fight the next war with equipment and tactics from the last war" applies. I have no idea what the future holds, but while everyone is focused on real estate and mortgages as the "source of the next crash," what's going on with our national student loan debt and car loans and middle class inflation adjusted income growth? Our eye isn't on the RIGHT ball, our eye is on the LAST ball, with the incorrect assumption that "history repeats itself."

A factoid I'll share as a lender that highlights that fact, about how everyone is paranoid to a fault. If you only plan to live in a property for "3 or 4 years" with 99% certainty, a 7/1 ARM might make a great deal of sense. Do I typically say that when speaking with one of the millennial first-time homebuyers that make up a significant chunk of my clientele? Hell no! Any mention of an ARM to that group is going to have them instantly thinking that I'm trying to pull a fast one and party like it's 2006. (If someone is operating at a high level I might actually mention the option; you can tell pretty quickly how much trust someone does or doesn't have for our industry)