Law and Politics
by Michael Gorman - October 3, 2008 1:28pm
Hello. I just want to take a paragraph or so to introduce myself. Like many of you reading this blog, I attended college here in Worcester, graduating from Assumption College in 1995. I went on to Law School at Western New England College, School of Law, and I currently have my practice over on Shrewsbury Street here in Worcester. The purpose of this blog is to address certain areas of law of which I practice (Residential Real Estate, Estate Planning) and also political commentary. Obviously there is an election in five weeks, so it’s likely that there will be more political commentary than law commentary, at least in the early going.
Obviously we all are keeping our eyes on the “bailout” of the American Economy. We all know that we have a huge credit crisis, not only here in America, but also around the globe. Banks and mortgage companies strayed away from their typical conservative lending back in the late 90’s, and started to expand lending. In theory, this was not a bad idea. However, banks starting to increase the debt to income ratio that a borrower could qualify with. 15 years ago, if your proposed loan would mean that 25% of your income would now be going to service your debt, it was unlikely you would be qualified for a home loan. While it may not have been irresponsible to qualify borrowers who may have had 30-35% debt to income rations, I personally had clients who had debt to income ratios of 50-60%. It was madness, and irrational lending.
No one knows exactly what a possible bailout may mean for the credit market. Some people believe that a bailout will make credit more available, and affect the interest rates in a good way. Some believe even a bailout will not matter, simply time will rectify the problems in our market. Unfortunately it seems our elected officials in both parties have decided to play the bailout situation for political gain, rather than attempting to work out a bailout plan in good faith, which might stimulate our economy and credit markets. Nevertheless, if you have found a property that you like, and it’s a property you would be comfortable living in for the next few years, by all means you should consider making an offer on that property.
As for financing, I work with several banks and lenders, including many local companies. The best advice I can give you, is to make sure you get quotes from more than one company. Ask the banks for a good faith estimate of closing costs. Once you receive that estimate, it is a good idea to consult with an attorney who can help guide you through the process of your purchase. Every bank calculates their good faith estimate differently, and you should also know this estimate does not include all the costs at closings. Extra costs such as tax adjustments, fuel adjustments, condo fee adjustments and owner’s title insurance are all fees which are generally not counted on a good faith estimate. A good real estate attorney should be able to walk you through the different fees, explain the closing process, negotiate your purchase and sale agreement, and make sure the closing on your new home goes smoothly.
Disclaimer: The information you obtain at this blog is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. I invite you to contact me and welcome your calls, letters and electronic mail. Contacting me does not create an attorney-client relationship. Please do not send any confidential information to me until such time as an attorney-client relationship has been established.
Michael– can you talk at all about how the credit crunch and the bailout bill could affect the worcester economy? Are Worcester businesses especially reliant on credit? Where do you see the impacts happening?
Hello Ben:
I would have to think that this credit crunch will affect all businesses in Worcester, who do not have a tremendous amount of liquidity in their business. Credit for small and large businesses has been increasingly tougher to get.
I’d be most concerned about businesses such as restaurants, bars, clubs, who are buying a lot of stock on credit, and who are completely dependant on discretionary consumer spending. When times are tight, people are less likely to go out, have a meal, have a beer, or spend money on nightlife.
Businesses that are based upon consumer staples. Clothes, dry cleaning, etc. These businesses should be fine. I wouldn’t suggest they will thrive, but I don’t think they will be as affected by the current economy.
It’s going to be terribly tough on start up small businesses. Many start ups are financed by the proprieter’s credit cards, and then during the first couple years, lines of credit. The limits on credit cards are being cut back, and lines of credit are much more difficult to attain.
I can’t say that Worcester businesses are more reliant on credit than say, Boston businesses. I think we’re all more or less in the same boat at this point.
Now if you have a good amount of cash on hand, it’s a different story. If you have lots of liquidity, you’re not reliant on short term or long term financing. Cash for the next couple years will be king. In the past companies who may have had a good amount of short term and long term debt have thrived because of their business or their product line, or their ideas. I think for the immediate future, you will see investors and non-investors favor companies who are free of most debt. After all you don’t want to be buying your widgets from a company which might disappear in three weeks do you?
Thanks, that’s really interesting. It would be cool to hear updates from you as this whole disaster rolls forward– maybe things you’re hearing from business folks around town.