I was talking to a professional involved with New York City cooperative apartments who testily asked, "Why aren't the banks lending on cooperatives?"
"The banks are stupid," she said. "Prices have no place to go but up after the declines of the past several years. It's a great way for the banks to make money, but they are just unwilling to lend for some reason."
I tried to respond. I knew that banks do want to lend. Most bankers complain that they don't have any good loans on place on the books.
Lenders Left Holding the Bag
I talked about foreclosure, about how in New Jersey, for example, it takes two years for the lender to get its hands on the property if the borrower on a home or coop defaults. I explained how much damage the borrower can do in two years - not to mention the two years in which the bank does not get its interest or even an opportunity to get part of its money back.
But," she replied, "a bank should know what a property is worth so it doesn't lend too much and create the need for foreclosure."
"O.K.," I concluded, "if the banks should not have been lending on co-ops at prices that later fell, why should they be lending on them now when prices could fall further?"
Her response: "But they have already dropped. The next direction prices must make is back up again."
No Divine Assurance
I terminated the conversation at that. But I should have asked her where she got the divine assurance that just because prices were a lot lower than they had been that this meant that the next direction of movement had to be back up.
But I had sympathy for her feeling. Many of us have frequently made investing and lending decisions on the assumption that because something had gone down, it was bound to go back up again.
We forget the basic rule that a stock or a piece of property has no memory. A coin that has been thrown up in the air and come up heads 19 times in a row still has a 50-50 chance of coming up heads on the 20th toss.
Similarly a stock, a piece of property, or any other asset traded in the free market, if it has no final maturity date when it must be paid off, offers no certainty at all that the price it once commanded will ever be seen again. And the banker who lends because he figures, "This is cheap now, and the price will certainly rise enough to cover my position," may well live to regret it.
Similar to Stock Prices
The principle that history is of no value as a predictor of future price moves applies just as well to investing.
I always use the example of one of the few times I bought a real winner in the market. A stock that soared, from 37.5 cents to $140.
"Sell it, sell it," my broker said. (He was not impartial, as he would have received the commission had I done so).
I held on and still do. My reasoning: First, if I sold. I would have to pay about a 35% capital gains tax, which means that to break even I would have to reinvest the proceeds in something that was 35% better than this stock. I feel prices reflect what the market holds in real value. So to me no stock has any such inherent advantage over any other.
Past Price Irrelevant
Was it overpriced? At a price of $140, there were just as many investors who thought it was cheap as there were those who felt it was overpriced, or it would not have traded at $140. The only reason I could have felt it was overpriced was because I remembered when it was 37.5 cents. And this fact is just as irrelevant as the price of co-ops in New York City five or six years ago is to co-op values today.
The co-op, professional poo pooed the issue of foreclosure and the difficulty of banks getting their money back.
"This never happened until a few years ago - we had practically no foreclosures. Why should we have them now?" she asked.
I responded that certainly there are no foreclosures when prices are going up and up. At such times people even buy apartments to flip" them - to sell them immediately to someone else at a higher price.
As Values Fall
But if prices are moving lower and people have borrowed more than the co-op is worth, they give the lender the key and walk away - after milking the bankruptcy laws, the sheriff s unwillingness to issue summons, and the court's unwillingness to make nonpayers into the homeless.
I am sure the co-op professional still thinks the banks are missing a lending opportunity (forgetting that they share only in the losses and not in the profits as co-op prices move).
But the bankers who have good memories know all too well that memory itself can be a dangerous faculty if it is used to justify a loan or purchase by saving. "It was worth this at one time, so it is bound to go back there."
This should be among "famous last words" along with, "Watch me beat that train to the track."
