What should the banks do now?

Perhaps banks should consider the next lending practice to be one that (a) is proven safe and (b) is profitable to hold on their books. I am thinking that a loan on an apartment building that has proven, reliable income in excess of the debt by a comfortable margin, and that is also guaranteed by the borrower’s personal collateral (in other words, both the building and the borrower have the means to repay the loan) just might be a good loan to make.

The above describes pretty much all of the apartment building loans that have been made during the past five years or so. I have not heard of a single one of these loans going into default. The spreads that a bank can get today are relatively huge and the loans may have the lowest default rates of any that a bank can make. This should be a great time to be a lender and a great time to borrow on an apartment building.

Interestingly, since last week’s failure of WaMu, my inbox has been flooded with lenders seeking buildings to loan on. Even my loan guy at WaMu reached out to me last Friday, only two days after the bank’s demise, to seek new loans.

I think the lenders get it now: making safe loans with a good margin is a good business practice.