Front Seat to History

Whether or not you approved of the bailout, you have to count yourself lucky to be witnessing an historic event.  Take a good, hard look at what is unfolding before us.  One elected official after another said they could not vote for this legislation because their constituents back home were not in favor of it and would vote them out of office.  As a matter of fact, this was part of an openly discussed game plan yesterday before the vote:

Both parties were also scouring the political map to identify lawmakers who face little or no opposition for re-election in November, knowing they would be more willing to vote yes. New York Times News Service

Think about that again.   They wanted to vote for it, but the people they represented were overwhelmingly against it and would have thrown them out for approving the bill.  How often does anything of REAL importance happen this close to an election?  This is so close to election time that the legislators are accountable for their votes.  Imagine that!  And they are scared.  They can not do their politics as usual because they don’t have time so spin it.  This is a magical time to witness: politicians acting out of accountability rather than self-interest.  Were that it was always true…

(This post was first published here.)

Filed under: POLITICAL & ECONOMIC FOLLY , bailout, government

Some Details on the WaMu Buyout

In a comment to an earlier post I was sent the link to JP Morgan Chase’s Investor Presentation regarding their purchase of WaMu.  This was courtesy of Bob Wilson, a man I respect for his many thoughtful comments.  I highly recommend reading it by clicking here, but in the mean time – some of the highlights:

• They are taking over the deposits and leaving the liabilities.  This helps the FDIC out tremendously but I can’t help thinking of the great line from The Godfather: “Leave the gun, take the cannoli.”
• They plan to exit all non-bank originated retail lending.  Say good-bye to most of WaMu’s products.
• They are most excited by WaMu’s large presence in California.  According to their projections CA sees the most population growth, followed by Texas and then Florida.  This is great news for these hard-hit areas.  Arizona sees about half the growth rate and the northeast and rust belt continue their problems with fundamentals.  (I believe we are looking at a very stratified housing market for some time to come.  There has never been a national housing market and such a concept is becoming harder to even say with a straight face.)
• JP Morgan Chase paints a pretty rosy picture of potential earnings.  They look at their credit card and investment sales in-branch and overlay that onto all the WaMu branches.  But I don’t see the same types of customers at WaMu as I do at Chase and I have a hard time believing Chase will get the same level of commercial banking profits from them.
• Expected cost of this acquisition is $1.5 billion now and another $.5 billion over the next couple of years.
• They will keep WaMu’s low risk, profitable lending programs in the multi-family niche which should be welcomed by investors who are currently getting shut out of the market by underwriting constrictions.
• Finally, they project current-pricing-to-trough depreciations for CA, FL and the US as a whole.  The numbers are interesting, but what’s more interesting are the headings.  They project losses based on three scenarios: Current Estimates, Deeper Recession and Severe Recession.  Apparently the analysts feel we are in a recession now no matter what the government calls it.  Under these headings CA is looking at losses of 10%, 14% and 24% respectively.  Florida’s expected depreciation is 16%, 21% and 36%!  Finally, the entire US housing market (there we go again) is looking at price depreciation of 8%, 11% and 20% under those three headings.

Wish I had a summary of all this, but I’m just giving you the raw details.  I’ll leave it to a more banking minded writer to tell us what it means.  One last thought: I just got off the phone with one of my real estate agent clients.  He wanted to know what his WaMu stock is worth now…

(This post was first published here.)

Filed under: POLITICAL & ECONOMIC FOLLY , WaMu

The Mortgage Dance Continues

I posted the following back in July and with WaMu going down it seems like a good time to bring it back to the top.  If there is any confusion as to who is going down and why, make a point of clicking the link on the “accounting debacle”.  It goes to a post from August of last year and will explain a lot about what is really happening and why.

And the beat goes on…  but sometimes it helps to have that little bouncing ball show us exactly what lyric we are singing this week.  All together now:

Today the Fed surprised no one by opening the discount window to ailing siblings: Fannie Mae and Freddie Mac.  Together they hold more than half of all mortgages in the US and the guarantee that they would not fail has been implied for some time.  The Fed also intimated there would be no other bail outs in the foreseeable future.  Who is walking the thin line?  WaMu, Wachovia, Downey, Indy Mac (oops, they were written out of the chorus last week).  Now it looks as if the Fed has reworked a few more lines and their song to the Wall Street firms goes a little something like this: if you can not fix your problem with the ability to borrow at 2.25%, your problem is not fixable.

This does not bode well for our short list.  Downey is more of a regional and will likely go down under its own weight of Losses and Lawsuits (the real ”L” words).  Previous posts have fixed WaMu as the consensus “next big one” to fall.  Wachovia, in my opinion, is more of a question mark.  Straight-laced, tea-loving bank goes to a frat party where “everyone who is anyone” is drinking and the peer pressure just becomes too much.  This is a hangover for which they are ill prepared.

What does this mean for real estate and the mortgages that drive its cycles?  Here’s one thought: if you are a specialist in homes that do not play the Fannie/Freddie tune, you may want to create some more income streams and fast.  Any regional that has not already eviscerated it’s “improvisational jazz” lending will find themselves looking at a Wall Street that no longer believes anyone is above failing.  If recent history has taught us anything it is this: the big firms currently involved in lending are either asleep at the wheel or lying outright.  We watched Countrywide lie about their financials right up until the end.  We watched WaMu take hits twice their predictions.  Even Wachovia, a stalwart bank, was “surprised” by losses more than double what they had predicted for Wall Street.  Not sure why anyone believes anything these firms say now.

I believe this all goes back to a problem that is not discussed in the media (whether for lack of a sound bite or just ignorance is anyone’s guess) and never given the light of day by these firms themselves: the accounting debacle tied to neg-ams.  Want to know who is going down next or where “surprise” losses will most likely come into play?  Look to the firms that made a killin’ putting clients into neg-ams.  (And before some of you start commenting on how neg-ams are just a tool and can be a good loan to boot – you know who you are – let me say “I know.”  Loaded guns are just a tool too.  Cars are just a tool.  I am in favor of both.  But if I stand at the door handing out keys and guns to everyone as they leave the party… let’s just say the onus of responsibility comes back to me.)

I guess it is not so difficult to follow the bouncing ball afterall.  I think I’ll go to bed tonight and dream about how attractive Fannie & Freddie have become lately.  They just may be the only two left on the dance floor.

Filed under: POLITICAL & ECONOMIC FOLLY , Downey, option arms, Wachovia, WaMu

Keep Your Hands & Feet Inside While the Ride is in Motion

The bailout fails AND WAMU finally gives up the ghost.  It is going to be an interesting Friday!

(This post was first published here.)

Filed under: POLITICAL & ECONOMIC FOLLY , bailout, WaMu

Federal Bailouts, World Crisis… What About Little Ol’ Me?

Lots of talking heads.  Lots of outrage.  Even a little fear.  Keeping up with economic developments lately is taxing and I mean taxing in its most negative “IRS and April 15th” connotation.  Last night Brian Brady and I were interviewing Matt Padilla for Bloodhound Radio.  It was a great discussion and got me to thinking about what is (or rather should be) important.  I mean, the whole thing can be overwhelming: how did we get here, who’s to blame, what are the macro ramifications of this massive federal bail-out… makes one feel small and even a little lonely in the midst of this big economic world gone ’round the bend.

So I stopped on the way home for a big shot of wheat grass (substitute whatever manly libation you prefer here), calmed down and eventually found myself a little less interested in what it all means and a little more interested in what it all means to the real estate agent on the street.  In other words: What is the next step?

Last week I suggested that Wall Street’s Meltdown may actually help the housing industry.  Consumer debt will dry up in the credit crunch and this bail-out will not have much impact in that arena.  The financial industry is going to come out limping and take some time to lick its wounds.  Consumer debt has always been a risk and will end up on the back burner for a while, but the need for profits is always there; where will it come from?  Where is the supply of money going to be greatest?  Thanks to Uncle Sam it is going to be mortgage money that flows freely.  But flowing freely is not the same as distributed evenly and this is where the real potential lies for homeowners as well as real estate agents.

By the end of the year conforming loan limits are going to drop.  Here in San Diego they should end up around $625,000.  Under that limit there is going to be a large supply of federally backed (and encouraged) cheap money.  Over that limit, however, it is going to be a ghost town in a dust bowl surrounded by desert.  Over $1 million and it opens up a bit because you are generally talking about buyers with large sums of cash.  But between $625,000 and $1 million the ability to finance a purchase is going to tighten up and so too must demand.  As you may recall from Econ 101, when demand drops so does pricing.  On the other hand, back below the magic limit, the supply of money will create demand and here’s the really interesting part: that demand will bump up against a supply limit.  The supply of homes within that range is finite and the demand for homes below $625,000 will remain targeted; it is artificially capped.  What happens when increasing demand (due to cheap money) meets a finite supply?  Appreciation.

We can expect to see demand driven appreciation knockdown the oversupply of inventory in many parts of the nation over the next year (maybe two).  This will drive home prices up to, but not over, the conforming limit.  At the same time it will depreciate homes that are over the limit, possibly even push some below the magic line.  What does this mean to the agent on the street:

• If you are an agent working with move-up buyers within the temporary loan limits – but over the upcoming conforming limit – their window of opportunity is slamming shut.  Get them off the fence quickly and stop taking on new clients in that price range.
• Buyers below the new conforming range will see upward demand on appreciation in direct correlation to their distance from the conforming limit.  In other words, the closer in value your purchase is to the loan limit, the less appreciation you will see.
• Sellers below the conforming range will see greater demand and more price appreciation in direct correlation to their distance from the conforming limit as well.  In other words, the supply near the conforming limit will grow and appreciation slow (or stop) while the supply at the lower ends will decrease and appreciation grow.  If you already have a listing near the conforming limit, time is not your friend.
• As an agent, your marketing should be divided: for listings, your area of focus is the lower end homes where demand is going to increase and market time decrease.  For buyers, you can expect the best deals to be nearer the conforming limit where supply will grow and pricing will stagnate.

For the next couple of years you can envision real estate as a great freeway with virtually no tolls and cheap gas.  But the speed limit is absolutely enforced.  Cars starting out will see rapid acceleration, but as you near the speed limit there will be congestion and a corresponding drop in enjoyment.  Eventually the speed limit will be relaxed; in the mean time… enjoy the ride.

(This post was first published here.)

Filed under: BUYERS, INVESTORS, LENDERS, POLITICAL & ECONOMIC FOLLY, REALTORS, SELLERS , bailout, REALTORS, Wall Street

Alex, I’ll Take “Terrifying” for $1000

Even with all the financial failure that surrounds us, I still find myself loathe to accept any type of government intervention.  We throw around comments like “too big to fail” but rarely examine the end game.  Greg Swann recently reposted a very intelligent treatise on something he likes to call Rotarian Socialism and how each “fix” only begets a greater problem down the road.  As a matter of fact, Mr. Swann and I share a healthy fear of government and the implied force of violence that backstops all regulations and laws.

Earlier this week I followed a story out of Spokane, WA.  It centers around a Mr. Kevin Coe, convicted rapist and suspected serial rapist.  For the relevant details and background on this story click here.  Mr. Coe, however, is not the scary part of this story:

Coe has completed his sentence of 25 years in prison, but he is not getting out of jail yet.  Starting tomorrow, Coe faces a civil trial as the state tries to keep him locked up indefinitely as a violent sexual predator.

“We think he’s mentally ill and dangerous,” said Todd Bowers of the state Attorney General’s Office.

In 1990, Washington became the first state to create a program to keep behind bars people determined to be at risk of committing more sex crimes even after they have completed their sentences. A special facility near Tacoma holds about 300 of them, including Coe, whose sentence was completed in 2006.

A person is convicted of a crime and sentenced.  He never allocutes; he maintains his innocence throughout (despite the government’s repeated attempts at blackmail offered in the form of early parole) and he serves his FULL TERM.  At which time the government continues to keep him locked up; found guilty by a jury of legislators, of having the potential to commit another crime.

The state reserves the power to take away your property, your liberty and your very life.  They enforce this power at the tip of a gun.  All laws, all regulations (and, apparently now, all judgment on potential) is maintained by the government, ultimately, on penalty of death.  The abrogation of your liberty is a trifle by comparison.  Just ask Kevin Coe.

This is why the most terrifying thing in the world is not a murderer, not a rapist, not even the wholesale failure of our financial markets.  No, at all times the thing to be most terrified of is the government and its benign attempts to help.

Alex, I don’t think I want to play Double Jeopardy…

(This post was first published here.)

Filed under: POLITICAL & ECONOMIC FOLLY , bailout, government

How Wall Street’s Meltdown Helps Main Street’s Housing

Just for fun, let’s imagine a possible silver lining to the complete melt down on Wall Street.  In this scenario, the next big shoe to drop will be access to consumer debt.  No one is going to extend car loans, credit card debt, retail debt and so on.  But this may not be all bad for our industry.

Imagine John & Mary Homeowner talking about their day.  John says gas prices are up and his long commute is killing them.  They need to buy a different car.  “But no one is lending money for new cars,” Mary replies.  John decides that if he can not have a better ride, he will have a better destination.  “Let’s add on a nice deck for me to enjoy after my long commute.”  Mary smiles pleasantly and reminds John that no one will extend an equity line for home improvement.  Exasperated, John suggests they just buy a jacuzzi and settle for some easy relaxation.  But Mary points out that no store is offering credit, so large purchases are largely impossible.

What do you suppose John and Mary do?  What about next Sunday, out for a drive, when they see a nicer home, closer to work, with more square footage – and they realize they can own it for the same payments they are making now.  What happens when the only money available is purchase money? Thanks to Fannie & Freddie (and FHA, VA) home loans will be plentiful while every other kind of debt will disappear for a while.

Supply and demand… the meltdown might be just what we needed.

(This post was first published here.)

Filed under: BUYERS, INVESTORS, LENDERS, POLITICAL & ECONOMIC FOLLY, REALTORS, SELLERS , bailout, Real Estate Future, REALTORS, Wall Street

Alex, I’ll Take “Hypocrisy” for $800

Numerous stories in the press the past two days regarding the government bailout of AIG as well as the various financial sector failures.  There were many talking heads and an even greater number of vacuous comments.  But one quote stood out among all others.  In relation to the AIG bailout, Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee said:

This is one more affirmation that the lack of regulation has caused serious problems. That the private market screwed itself up and they need the government to come help them unscrew it.

Thank God for the Nanny State.  Big-daddy government is going to ride in and “unscrew” all the problems arising from our lack of responsibility.  This would be the same government, I might add, that bankrupted Social Security with criminal accounting practices, finds 44,000 pages of tax code reasonable, considers limiting their spending to their income irresponsible fiscal management, thinks nothing of paying $600 for toilet seats and bases most of its really, really important personnel decisions – not on talent or ability – but rather a thorough investigation into a person’s opinions on abortion!

Hypocrisy, thy name is government.

(This post was first published here.)

Filed under: POLITICAL & ECONOMIC FOLLY , AIG, bailout, Barney Frank

Alex, I’ll Take “Irony” for $600

The government is now in the mortgage business and the insurance business.  I am sure others will expound on the AIG debacle and all of its implications in due course.  I just wanted to point out the something that should make me laugh so hard it brings a tear to me eye… instead it just brings the tear.

Just before each financial giant goes down, there is a final blow.  One last lynchpin pulled that leads to the immediate cessation of breath for a company: the ratings agencies lower the company’s credit rating.  Standard & Poor’s, Moody’s, etc. take a look at the mortgage based assets the company is carrying, look at the write downs still to come and make an assessment on the credit worthiness of that company.  Once their rating drops they cannot borrow money at a cost that allows them to remain solvent and “a-begging they will go.”

Now that is the job of the ratings agencies and I do not begrudge them their responsibility.  Here’s the funny part though.  The failing, mortgage-based assets that are crushing these financial companies (and now an insurance company) were originally purchased, to a large degree, based on the credit worthiness assigned them by… wait for it… wait for it… these self-same ratings agencies!  Imagine the hubris of being so, so wrong in their primary mission of evaluating the creditworthiness of an investment vehicle, then lowering their evaluation of the creditworthiness of those companies that purchased the very investment vehicles they failed to correctly evaluate!  Talk about having your bread buttered on both sides. I know there is a great joke in there somewhere.  I am just too terrified to find it.

Welcome to the other side of the looking glass.

(This post was first published here.)

Filed under: POLITICAL & ECONOMIC FOLLY , AIG, Economy, government, ratings agency

Programs for the Pessimist

The latest news regarding Lehman and Merrill are not surprising.  Still, expecting an impending disaster and enduring a disaster are not the same thing.  For some, a pessimistic leaning may take hold and for you… I have great news.

In a recent article in the San Diego Union Tribune by syndicated writer Lew Sichelman, we learn about a growing business in refinance lending: the cash out, no interest, no payment, no loan… loan.   That’s right.  There are investment companies out there right now loaning cash against the equity in your home.  There is no interest rate and no payments because it is not a loan.  The company simply gets to share in any equity gain you experience between the time you receive the money and when you sell the home.

There are restrictions, including a kind of pre-pay penalty.  You can not sell the home for an agreed to time period (usually at least five years).  But there is also freedom: no restrictions on how you use the money.  The investment company shares in your appreciation and your depreciation.  Of course, if your home goes up substantially, the cost of the money you received can be exorbitant.  But you get use of frozen assets right now, which can be pretty handy.

Here’s the marketing gem in all of this: There are plenty of clients and prospects on the sideline right now, desperately wishing they could get in the game.  This is one of the best buying cycles I have personally ever seen.  The problem: they are house rich and cash poor.  Here is a solution and it does not add to their monthly budget or future debt-to-income calculations.  Show them how to get that “dead” money out their home and into an income producing property.

HIGHLIGHT: If you think housing is in trouble and things are not going to get better for some time, you can take your equity out now at a cost of: nothing.  When you do eventually sell you will still have to pay back the original amount but you will have gained no equity and so the “loan” will have been at no cost to you.

One last thought.  This is good news for everyone, optimist or pessimist.  Where there is need and the potential for profit, there is innovation.  As dire as the credit crunch appears, new innovation and twists on old innovation will continue… as will the real estate industry.

(This post was first published here.)

Filed under: BUYERS, INVESTORS, LENDERS, POLITICAL & ECONOMIC FOLLY, REALTORS, SELLERS , Economy, equity, lending