December 2008 Archives

Just an excellent article today from Reuters on how one family in Hampton Bays New York has been affected by the whole securitization of the mortgage industry.  Take a few minutes and read this.  You will understand a lot more about the reasons problem mortgages can't be easily modified and have your heart torn by this family's problems.  It is what bothers all of us in this industry.  The family probably took advantage of a huge appraisal, caught up in the sudden increases in home values, to pay medical bills.  It has all come back to haunt them as their interest rate has gone up.  An example of a family that should never have been able to borrow as much money as they did, and how because mortgages are not just from your local bank anymore, there is no easy solution.

As I have been saying for some time, as much as it hurts, the best thing now is to get this housing market to its bottom and start the recovery in the economy.  Housing always leads economic recoveries and it will this time.  The more efforts to fix the foreclosure issue (which can't be fixed) the longer the economy will struggle.

The sad truth in my position can be understood in reading this article. 

This just in (after my six day holiday hiatus)..commercial real estate developers and lenders have requested that Treasury Secretary Henry Paulson include their industry in a new $200 billion loan program.   This new program has been created to keep the market for car and student loans, along with credit cards, afloat.  There are apparently $530 billion of commercial mortgages coming up for refinancing in the next three years (who comes up with these numbers?).  The fear is that developers will not be able to refinance these loans due to poor cash flow from these buildings. 

Darn it...where can I sign up?  I am worried about our company's cash flow also.  I sure hope there is just a small portion of that $200 billion reserved for small business owners.  Shoot, last I checked we create the majority of the jobs in America (note:obscure unsubstantiated reference to something I have read and heard many times-like $530 billion).  What the heck does it matter if there is cash flow to support these loans?  The ideas of basic finance where loans are supported with cash flow and speculation with equity are just not relevant anymore.  Other than the fact it is easier to massage the public and say we are giving a loan instead of just admitting we are in the process of nationalizing every struggling industy in America.

I am going to have the biggest party the day I hear somebody say..lets go back to free-enterprise.  Or, as many of us now fear, maybe our great nation really does not want a capitalist society anymore.  No matter how you cut it..the bills for this way of thinking are a crisis in the making.  The burdens our children are being left with are beyond imagination. 

For anybody who has spent any time with me they already know I believe that the markets are going to have to be able to take their natural run to fix the housing/foreclosure crisis.  There are so many politically charged proposals and statements that I hear daily that just show a total lack of understanding of the problem.  As a review..please review the well written Kiplinger analysis that I refered to in a post a couple of weeks ago.

With the understanding that investors who hold securites are really in control of most of our mortgages, I found it humerous this summer that a bunch of politicians, a few months before an election, announced the ridiculous "Hope For Homeowners" program.  This week it was announced that the program has had a total of 312 applications since August and not a single person has successfully rolled their mortgage into this program.  The political finger pointing has started as the HUD Secretary called the program a failure and blamed Congress, while the esteemed Chairman of the House Banking Committee, Barney Frank, says the program does not work because the Bush Administration did not let Congress have the program they wanted!

The truth lies in the markets and the simple fact that these problems are going to have to work themselves out in the natural flow of this economic cycle.  The government is not going to be able to make a dent in the foreclosure crisis because they do not understand it.  This attempt at solving the problem was a joke.  Why?  Lets look at a few of the conditions.

The program depended on the lender's willingness to participate.  Of course..what is so blatently obvous to those in the finance world is that most mortgages are only serviced by the so-called banks and they are following a contract drawn up to protect the investors interest who actually loaned the money that is secured with the real estate.  See the Kiplinger post for how this works.

The program allowed FHA to insure new loans for only 90 percent of a home's value.  Did they not realize that where the largest foreclosure issues are (California, Nevada, Florida) most people are way upside down on their mortgages to value?  Another example of being clueless and legislating with very little understanding.  Finally, in late Novemeber Congress wised up and raised this limit to 96.5%.  You still have an issue in that who is coming up with the shortfall to pay off the lender who has a $350,000 note on a property now worth $200,000 (not an exagerration-have seen this many times in Florida).

Borrowers who participate in the program must pay hefty fees and high interest rates, and they must split any increased value with the federal government when the home is sold.  So, I am hard up and I get to pay the government even more money to save my mortgage?

Your mortgage payment must exceed 31% of your income..supported with the submittal of two-years of financial records.  And for you stated-income borrowers..we have a statement that we insist you will sign that you did not give any false or misleading information on your loan application.  A large part of the problem is related to the ease of getting financing that was available earlier this decade.  This provision alone will scare off most borrowers.

So now we have lots of finger-pointing and astonishment that the Washington gurus were not able to solve this problem with a new program.  I sure hope PE Obama and his crew are taking notes. 

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Am I the only one who sees this news as another politically motivated decision that again, tells our citizens it OK to NOT take responsibility for your obligations.  The Internal Revenue Service (IRS) introduced an expedited process designed to make it easier for homeowners avoid having a federal tax lien block refinancing of mortgages or the sale of a home.

WHAT?  The IRS wants to help you sell your home when you start having financial difficulties?  What is the chance your home is the one asset you own that has any value when the IRS is looking for their money?  So, if I understand this correctly, taxpayers or their representatives (mortgage companies?) can request that the IRS make a tax lien secondary to the lien of the lending institution that is refinancing or restructuring a loan.  The IRS commissioner, Doug Shulman, is quoted as saying "We want to raise awareness of these lien options and to speed our decision-making process, so people can refinance their mortgages or sell their homes."

Do I need to say more about the message this sends about paying your taxes?  Nobody likes paying them..but isn't the debt that the government has taken on going to require some pretty strict rules regarding collections?  While the dollars involved are probably inconsequential in the scope of the national debt, and in my experience these liens are usually discharged in a foreclosure (unlike state property taxes) instead of attaching to the property.  They continue to stay with the borrower as a judgement but by then the borrower has probably filed bankruptcy and the bankruptcy judge gets to decide what to do with the federal judgement and liens.  In other words, this is purely a way to allow somebody to stay in a home and get the IRS off their back for a while.

As is usually the case..then you have the reality of this practice.  In the current lending environment, how many lenders are going to work with a borrower who has a big old IRS debt and liens?  More politics at work here but the message is loud and clear.  Read my headline if you want to be clear on the message.

Here is the full story from the Wall Street Journal.

Just read today's Charles Krauthammer column.  I swore this stuff off after the election..but where does one hide?  After reading this piece, and considering its rational...I guess that I would rather the reader focus on the "or what" in my headline.  I have been worried enough..now my firends contemplating moving to Panama are starting to sound pretty logical.

Prepare to be worried.

I think you will enjoy this..I did.  Distracts you from the daily nonsense!

Christmas Light Show.wmv

One of the items of news that seemed overshadowed this week by all the news of the auto industry bailout and the activities of PE Obam's favorite Governor, was news that was every bit as important..if not as dramatic..yet.  It was speculated by a prominent banking industry analyst that the credit card industry may pull back over $2 trillion (TT?) of lines over the next 18 months.  This speculation seems valid based on the current credit freeze and difficulties for most consumers to borrow money.  This represents an estimated 45% reduction in available, currently approved, consumer liquidity!

The credit card companies are mostly owned by the banks.  They are expecting a large default problem soon with the increasing jobless rate.  So..the logical plan is to take steps like closing accounts, raising rates, and cutting credit lines.

If this scenario plays out I will once again question the government's liquidity plan that has so far resulted in a total of basically five major banks in America and no apparent increase in liquidity.  I would like to assume these cut backs in credit will be to slow pay borrowers..but isn't that already part of the every day operating equation of a credit card company?  No..I read this similar to the notice my wife and I received earlier this year when National City Bank sent us a letter out of the blue effectively shutting off our home equity line of credit.  The letter said, we love you, thanks for paying your bills on time, this won't hurt your credit (not true-credit scores like to look at your free available credit), but we are not going to let you draw anymore of your availability on the line.  We had about 75% of the line free so this was fairly significant. 

Imagine if good borrowers start getting their credit cards closed out.  First, it will cause us to return to a country of buying only what we can afford-a good thing.  The untold story to me is the damage to people's credit scores.  We have all this automated reporting of credit and what does the computer know?  Big Federal Bank just wiped out the $30,000 of availability you had on your credit card..despite your great credit history.  FICO now says your credit score has dropped from 750 to 680 (obviously a blatant exaggeration to make a point).  But FICO scores will decrease as this component is one of the most important, besides timely bill paying, in your score!

Just another example of how this recession may be very drawn out.  Years of living on credit are now coming home to roost.  I am going to start making plans now for this next big change.  You should too. 

After writing yesterday's post, more information came to me that just clarifies in my mind that the tide has turned toward the political resurgence of organized labor.  I think it is clear to see that the automobile industry loan/bailout is being handled this way to preserve labor contracts.  If it was proposed as debtor in possession financing the support would change significantly.  Then we have the sad situation in Chicago with the Republic Windows company and Bank of America.  I guess banks can no longer make independent lending decisions due to their forced taking of government funds.  Now, we are going to hear a lot about the Employee Free Choice Act whcih essentially allows unions to take control of a company's workforce by getting a simple majority of employees to sign union authorization cards with no secret ballots.  Coersion, as seen in Chicago, will become the favorite tactic and won't most employees succumb to keeping their co-workers happy (whether anybody really feels the same-ever heard of the mob mentality)?

I am the first to believe workers need protections but I think it should be done in the framework of allowing businesses to operate in a competitive, profitable fashion.  We are just moving one step closer to socialism every day.  PE Obama has already pledged to sign this act into law if Congress will bring him a bill.  And they will.  As Michael Blickman, a partner in labor and employment law at Indianapolis firm Ice Miller states.."I am not the only one who believes that a better name for the Employee Free Choice Act is the employee Forced Choice Act."

Don't think if you do not work or own a manufacturing type business this affects you.  It most affects the service type businesses that now dominate the American landscape.  To learn more about this troubling legislation see what the Heritage Foundation had to say in an article a little dated but still relevant.

So, now do you see why all of these events are connected?   What frys me is these things are happening in the last few months of a Republican presidency.  Its a strange new world we live in,,,that is for sure.

As a proud owner of American cars all of my life, I feel I can personally attest to the improvements in quality and dependability that now is built in with each new auto purchase I experience.  I actually marvel at the technologies apparent in the autos I purchase, and have felt no doubt whatsoever supporting our American industry.  Here in the Midwest, there is a great dependence on the auto industry and its related suppliers and distribution networks for employment.

But, I am frustrated that another industry is sitting at the troughs of the Congress, about ready to turn over the reins of control to the same people who have basically for years created a playing field that has made it very difficult to compete.  Whether we are discussing trade arrangements, taxes, fuel economy regulations, health care rules..the lists for how our government has not supported our local industries are lengthy.

Besides the obvious irony that today the Big Three need our Congress to give them a lot of love, the news that a company like the Tribune company has filed for bankruptcy has left me asking the same question I have since the auto bailout talk started.  Why are the car companies not using the great American tool of bankruptcy to stave off the wolves, restructure their businesses, and come out with a company that can compete in today's environment?  Sure, I understand the credit freeze is making it difficult to sell cars..but I am not totally buying that logic.  My business, using a personal guarantee, just bought a car financed through Chrysler Financial and it took two days.  Financing is available.  This is just the argument being used to ask for the government loan.

I am now convinced this has more to do with not ticking off the unions and their workers.  Bankruptcy will allow the labor agreements to be thrown out and restructured.  The wonderful wages that are being estimated come in at around $75 per hour (including value of benefits) would likely be renegotiated.  Somehow, the government would object to significant changes in these labor agreements.  Bankruptcy would not work the way it is supposed to in this new social-capitalisitic world we live in.

Still, it is the best alternative.  At least one that should be part of the plan to get money from the governement.  The loan received should be "debtor in possession" bankruptcy financing.  That would also be a much better position for the taxpayer to be in. Politically, I am speaking the unthinkable. It is what 98% of all companies in America would be forced to do in this situation.  What makes the auto industry different..its size, scale, or the heavy presense of organized labor?  You tell me.

The best article I have seen, in layman terms, explaining how we hit the economic crisis that started in earnest this September is in this month's Kiplinger's magazine.  If you do not have access to this magazine, here is a link to the on-line version.  A plug for the magazine version..it is a lot more fun with graphics and a flow chart.  The article, by Editor Fred W. Frailey, takes the reader step by step from the cheap financing environment of 3 years ago, to the creation of a over active subprime lending market for mortgages, to the basics of how these collateralized debt obligations (not a new investment vehicle btw) were marketed and sold and eventually started the financial institution crisis of this fall.  Finally, some great advise for how to weather the storm (hint-don't sell off your securities!).

I really liked the way this simple article made the whole series of events make sense.  Important reading for anybody who cares about our world.

This is kind of fun and disgusting at the same time.  We don't normally publish pictures of what we find in some of the homes we go into after a foreclosure due to seller considerations.  Maybe you heard about this contest for the Ugliest House in America.  Homevestors are putting out on the web pictures of homes that reflect what we find routinely.  It is sad to see what filth people will live in, and how they leave their properties.  This will be an eye-opener for you if you have not been around these types of properties before. 

Unfortunately, I think this says something about why I do not think the government is going to turn around the foreclosure problem.  I truly think there is an undiscussed societal issue occuring also.  Not so much that people do not take care of their properties, but the lack of initiative to try and correct a situation gone wrong.  Look at these pics and think about it...

I find it not surprizing at all that it took the government about six weeks to figure out that these mortgage backed securities, that have created the issues in the housing market, just can't be purchased in order to save the institutions who hold them.  The sad fact..that most politicians do not really want to discuss, is there are a lot of folks in other wealthy, liquid, countries who hold these securities.  Problem is, like any investor, they want the best return on their investment.  In many cases, foreclosure of the underlying assets may be a better solution for providing the contracted return.  Nobody wants to say that..but there are just huge problems trying to change these investments.

A bit of news from last week echoes these thoughts.

 A recent decision by the U.S. Treasury not to invest in purchasing assets from financial institutions via the $700 billion Troubled Asset Relief Program has jump-started the market for bulk REO sales by banks and other institutional sellers, sources suggested to HousingWire on Wednesday.

Check out my previous post about Bulk Sales before getting all excited that you may have a new investment opportunity.

As I sometimes feel compelled to say..No, I am normally not this grumpy..

Wow!  Every investor interested in REO today hears "bulk" and they are ready to jump in.  There are so many misconceptions about what bulk REO sales are about.  Let me just summarize the intent of this post by stating bulk sales of REO properties are not something for an investor hoping to pick up 10 properties at $50,000 each.  In general, these packages start in the seven figure range.  We actually have been involved in a few of these sales and on our end of this equation (the brokerage) they are few and far between.  Generally, the bank offers these packages direct to significant proven investors.  They offer them as a package and there are pretty severe limits on picking and choosing assets.  These are professional plays and the normal investor we see should stick to negotiating their purchases one by one.

Here is a profile of a known REO bulk purchaser named G8 Capital:

I have seen banks offer bulk packages in the just over $1,000,000 range but if you think you want to buy bulk and have $500,000 to work with...you really are going to find it hard to get to even review a "tape" or package.  At this level of investment...maybe talk to a buyer of bulk packages and try to parcel out a smaller package for yourself.  Sure..you are not going to see the 40-50 cents on the dollar buy..but that is what the late night infomercial guys do not tell you.   The ability to buy at that big of a discount starts in the seven figure of liquidity range. 

If you qualify..I bet you are not staying up at night watching informercials!

For the last thiry days I have spent almost 25 of them in Florida.  Lee County to be specific.  Based on the success of our Tampa office, we were asked to open an office in what is now becoming America's foreclosure capital.  It is a mistake to say that the foreclosures are in Fort Myers (the largest of the cities in Lee County).  They are not.  Foreclosures are incredible in the cities of Cape Coral and particularly Lehigh Acres.  Cape Coral is to the north of Fort Myers, and Lehigh to the east.

For a detailed map of this area and the foreclosure problem, click here.  This map shows Lee County and foreclosure actions filed for the year ending June 30.  The primary thing to notice is homestead versus non-homestead properties.  In Florida that is the technical tax-related definition for whether a home is owner-occupied (Homestead) versus investor owned.  The blue dots represent the majority of foreclosure actions and they are non-homestead. 

I have read that in Lehigh Acres..70% of foreclosures are non-homestead.  The issues that result from a market totally built from speculation are amazing and I intend to blog about more in the coming days. It is something I can't imagine ever seeing again in my lifetime.  Cape Coral is a much more developed community and if I was to bet, I believe Cape Coral will recover much faster.  Lehigh Acres is a study all to itself.

I understand there are other areas of the country with foreclosure problems.  Lee County Florida is one of the top markets.  Built on speculation over the last few years, it was bound to crash as more inventory was built than there are people or jobs.  Here are the latest statistics to give you a broad overview:

November 2008

Lis Pendens Filings

1681 Mortgage Related Foreclosure filings

1775 total Lis Pendens Filed

88.4 Per Diem in filings

121 per diem filings for the month prior
Deeds Via Foreclosure
682 Deeds were transferred via foreclosure from the courts.

How long will it take to clean up the inventory in Lee County?  Being close to the issue, I think there is another two years of stagnant prices and high volume of vacant homes on the market.  I will continue to blog on my experiences here as it says a lot about what started the recession of 2008.

For my first post to my new blog I am going to start with a topic near and dear to me.  Yes, all my Purdue friends remind me that IU's basketball team is going to finish last in the Big Ten, and their's will battle for first (though they have had a little trouble against competitive talent the last 2 nights out!).  I have a new comeback..."I don't care!"  Sure, winning is fun but let me tell you what is even more exciting.

Sunday night I had the pleasure of watching a bunch of freshman (with a couple of exceptions-we all know the story) hustle, fight, and beat the defending Ivy League champs Cornell.  Yes..I can hear the cynics now..maybe IU should play in the Ivy League this year!  Well, here is why I am excited.  Not even that they won..but the way new coach Tom Crean has them playing.  Defensive fundamentals are seen from each player.  More importantly, something we never saw the last few years, tremendous ball movement and players moving without the ball.  These kids are hustling and they are playing like they do not know how tough it is for freshman to play with upper classmen.

After all this program has been through..you can tell a new day has dawned.  When the night was through..two other significant memories stay with me.  They both involve Crean and I think they say a lot about the way his teams will play.

When Verdell Jones was injured before halftime, Crean was on the floor trying to calm the young man.  He was not in the huddle with the team but seemed very personally concerned for his player.  Second..the man does not stop working during the game.  He never sits down..best I can tell there is not even a seat for him on the bench.  He is constantly coaching the players and when the game was over he made an effort to go to the band, student sections, and the alum sections and wave and say thanks.  His energy is apparent and the way these young men are playing shows it.

I needed to write this today as a trip to Wake Forest awaits tonight and in all likelihood this huge challenge (the first true road game for this bunch-what a nice place to start!) will bring challenges that may seem like we have taken a step back.  But, even if the expected occurs tonight, I am excited about the foundation being built in Bloomington.  If you are an alum, and frustrated with all that has occurred..watch a game.  A new day has dawned and I think it is going to be a very good one!