Tuesday, July 29, 2008

'Extreme Home Makeover' sees family foreclose on 'free' house

 Getting a 'free' $450,000 construction job, a paid off mortgage, and $250,000 in cash and scholarship money just wasn't enough for one Extreme Home Makeover family who is getting foreclosed on 3 years after receiving their new home. How are they getting foreclosed on you ask? Well apparently getting a new home with no mortgage wasn't enough. After blowing the $250k that was raised to help them, apparently the 'Buffetts' took out a 2nd mortgage to the tune of $450,000 dollars which they cannot pay back!! I call them the 'Buffetts' with a straight face and not a hint of sarcasm in my voice.

I don't know the details, and it really doesn't matter. I use this case to illustrate the lack of financial awareness by the average joe. This goes back to my 'owning a house is a responsibility...and lots of people are NOT responsible enough to own a house'. I pose this question to you: how many people that are looking to get some of that $300 billion of guvment bailout money made bad decisions like the 'Buffett' family??

Should we feel 'sorry' for these people? Essentially, this family has blown well over a million dollars inside of 3 years. They got a $450k construction job (I am sure the house appraised for more when done) for free, they got $250,000 in donations from generous people, and they took $450k out of the house on a refi. You know how bad I am with numbers, but I think that is $1,150,000 blown through in 3 years. Based on the comments from people in the story, it wasn't like a freak illness or accident caused hospital bills to eat up that money, it appears to be nothing more than just terrible financial habits.

Maybe they should have been forced to watch a bit more Suze Orman, and bit less MTV Cribs. Either way, I just want you to think if there could be more people out there like them, with a 'sob story' of losing their home. Obviously you won't get much sympathy from me, as I am partially footing the $300 billion dollar bill with my tax dollars for people that cannot afford their homes, while I rent mine. If I had known the guvment was going to help my buy a place I couldn't afford, I would have bought one years ago. Another black-eye (can I say that...or will I offend people) for the responsible people of America.

On to more positive housing news...well, at least for those who saved their money and are looking for a good deal. Appears that housing dropped 15.8% in May from the same time last year. I didn't believe it until I saw this article, but I guess real estate doesn't always go up! I thought with the way salaries were growing 15-20% a year, that would have no problem keeping real estate propped up. Guess I was wrong. Maybe I should go read 'Economic Fundamentals for Dummies' and watch a bit more Kudlow and Company. Ok I apologize for the dry sarcasm here.

It is just that NONE of this is hard to see or understand, IF you take emotions and feelings out of it. I knowwwww you want that house or car, but the numbers do NOT lie! I know that new guvment program is going to cost hundreds of billions of dollars we don't have, but man, it feels so good to 'help' these people. This country needs fiscally responsible people with integrity to turn things around. We need people on Wall Street, on Main Street, and in government that will make the 'right' financial decision even though it might not be 'popular' by people that don't understand the ramifications of poor financial decisions. Sure, a $300 billion housing bailout 'sounds great' to a large portion of this country, but the precedent that sets is very dangerous, not to mention the long term effects of government policy decisions like that. Sadly, there isn't a political party that is fiscally responsible anymore. With more and more people being raised on the 'guvment do it all for me' mentality, it is going to be hard to get enough responsible voters to actually make a difference.

All I can do is help you to be informed so that you and your family are less likely to fall prey to the unethical people out there, and to not make preventable financial mistakes.

Stay tuned...


PS. If you haven't been here for a while, there are 3 new posts in the past few weeks!!

Wednesday, July 16, 2008

Soft Landing too much for Indy Mac...and exposes lack of cushion for Freddie's Fannie

soft landingIt is no secret that all the real estate experts were correct, we are experiencing our soft landing. This soft landing is merely weeding out the small and weak companies such as Indy Mac, and possibly 2 even smaller companies that only the most astute financial analyst has probably heard of: Fannie and Freddie.

I don't have time to rehash all that has happened, but I want to ask some questions, give some insight, and offer some solutions.

Could somebody please tell me where in the Constitution it says that the US Taxpayers are responsible for financing, 'guaranteeing' mortgages, or bailing out anybody (private or institutional) that cannot make their debt payments? I think it is an absolute 'scam' that a 'private company' (which is NOT backed by the government, yet given special 'treatment' by the government in the form of a GSE) can reach out to the taxpayers to cover their irresponsible behavior while providing liquidity to the mortgage market.

Here is the thing, if there is not an investor in the US or abroad that will buy a pool of mortgages, why should the taxpayers of the United States buy those mortgages? Let me tell you something, 100% of mortgage companies were guilty of knowingly and/or unknowingly committing and/or passing along fraud. Some were victims of unscrupulous mortgage brokers and couldn't catch every attempt at fraud, others 'knew' it was going on, but applied the 'if I don't do it, somebody else will' logic. Besides, who cares, real estate only goes up...right?

It is bad enough that the government (READ TAXPAYERS) is looking at a $300 billion bailout, an $8 billion dollar FDIC bailout of Indy Mac, but now they are looking at possibly taking over Fannie/Freddie too??? Looks like a socialized bailout in my opinion.

So why on earth is a 'company' that is supposed to be private, and NOT tied to the taxpayers (directly...but as a GSE) have exposure to over 50% of the mortgages in this country? And since they are 'private', why don't the have to follow the same rules as other private companies do? Why do the GSE (government sponsored enterprises) get special tax rules (the don't pay any state/local income tax)? If they are truly a private company, they need to have the same rules other private companies have. They need to survive on their merits, not the fact that 'we are too big for the government to let us fail'. Another problem is that because Fannie/Freddie are GSE's people perceive that they ARE backed by the government, even if it is blatantly stated otherwise. If they make bad decisions, they should reap the same consequences of other business. It is OK for regular businesses to fall by the wayside or go bankrupt, why not a bureaucratic juggernaut that has made terrible financial decisions the past few years? I am sure plenty of banks made crappy loans knowing that Fannie and Freddie would take them off their hands and 'guarantee' them. Yes, I know they have special standards, but you would be shocked if you saw some of the loan programs those entities offer.

Let me ask you another question: why should the government have any role in helping people buy a home? To me, it is pretty simple. You save your money for a downpayment, and then you find a house where you can afford the monthly payment on your current income levels. If you don't make enough money to buy a place, you keep saving, or you purchase a less expensive place that you can afford. I don't think it is the taxpayers job to guarantee your mortgage. If there isn't a private institution in the free market that finds your risk acceptable, why should the government or GSE (again READ TAXPAYERS)??

This is from the Fannie website: "Fannie Mae has a federal charter and operates in America's secondary mortgage market to ensure that mortgage bankers and other lenders have enough funds to lend to home buyers at low rates." Why should people be given artificially low rates?
I know it 'feels good' to help the 'poor' buy a home they wouldn't be able to afford, but is it really the best thing? By giving poor people, or people with bad credit artificially low interest rates, you are in a way making the problem worse. I know it is 'noble' to give a borrower a 5% loan rate when they should have a 9% loan rate, but that is not the best thing for the markets and certainly not the best thing for the responsible people that pay taxes. CNBC asked the question today: is capitalism in trouble? Capitalism is NOT in trouble, government interference with capitalism IS. For example, with a 9% loan rate, a borrower might be able to afford only a 100k place, but with a 5% loan rate, the might be able to afford a 115k place. Great for that borrower, but not so great for all of the other people in the 6-8% loan rate range that want that 115k house, but cannot afford it without some 'charity'. Besides, what is the incentive to clean up your credit, save some money, or earn more if you are going to get what amounts to a 'taxpayer funded' special interest rate?

This brings me to another point. We NEED to determine the REAL value of real estate. The only way for that to happen is to have a HANDS OFF approach so we can determine where property values really are. This will be based on income, and what people can afford with a real fixed rate mortgage. Propping up property values only makes things worse in the long term. Foreclosures are NOT a bad thing, they are a GOOD thing. For every 'ex-homeowner', that has to go rent for a while, there is another person that has saved money and is looking to buy a house at a more fair market value. One persons foreclosed house, is another families new residence. Sucks to be the bank or investor that bought the loan, but they are all 'big boys' and should be able to take their losses the same way they take their profits. They made a loan to a bad borrower, or they loaned too much on the value of the property, but often they did both.

This is going to sound bad, but I don't think 70% home ownership is a good statistic. Owning a home is a great responsibility, along with having children, and voting. Honestly, I don't think 70% of the population is responsible enough to own a home. If they were, then we wouldn't have the wave of foreclosures we are currently experiencing. Let me put it to you this way: what if I said we had 70% neuro-surgeon-ship. That means that 70% of the population could be neuro surgeons. Do you think that is a good thing? Does it cross your mind that the standards (what's that?) might just have to be lowered to get 70% of the population to be neuro-surgeons? I think we are all in agreement (or should be) that 70% of the population doesn't have the ability to be neuro-surgeons. This is not a good or bad thing, it is just a fact. I know this example is extreme, but I am using it to make a point. Using artificial methods to inflate statistics will NOT last in the long term as evidenced by the 'soft landing' we are currently experiencing.

Sadly, we are now living in a time where people would rather look to government to solve all of their problems instead of taking responsibility for their actions. Because the masses are this way, the politicians are all to eager to pander to them, hence the bailout, and about 90% of all government programs that are proposed today.

So, what is my solution. It is actually pretty simple. I didn't say it was painless, no REAL solution will be painless. Take 100 billion of that bailout money (just pulling a number out of the air...just like government likes to do) and contract with a civilian company (I will help start it if necessary) that has the job of going through ALL of the 'bad loans' out there. They will then work back through the loan applications to find the fraud that was committed. They will look not only at mortgage brokers, they will look at underwriters, appraisers, property management companies, CPA's, 'employers', etc. All of these people have at least one piece of 'key' information that is needed to get a loan approved. I know there were CPA's selling CPA letters 'stating' income for people. I know property management companies were supplying false VORs (verification of rent). I know appraisers were inflating the price of property. I know underwriters were 'working' with some or all of these people to push loans through. After all, nobody gets hurt right?

Once an individual has their name come up on X-amount problem loans, they start being investigated. Same with companies. The amount can be tied to volume, or just an arbitrary number for individuals. Then you go after these people, and make their lives absolutely miserable. I am not talking about some gray area stuff, I am talking about the repeat offenders, the people that were knowingly building their business on committing fraud and doing bad loans. Go after these people. Take their homes, cars, assets, etc. The money taken from them can be used to 'reimburse' the taxpayers for any or all of the money spent on the investigations. If they need to have a license, they obviously get it pulled. Go after the people at the ratings agencies, go after the liars on Wall Street. Go after the people that KNOWINGLY committed fraud and profited hugely from it.

Take their Bentley's, their mansions, and their fabulous lifestyles that were financed (literally) through fraud and lying. Until there are consequences for fraud and lying, along with consequences for making bad financial decisions, nothing is going to change. Pushing it off on future generations of taxpayers is NOT the answer. How are they going to be able to afford their own homes when they have to pay high taxes to pay off the irresponsibility of previous generations?

Second, Fannie/Freddie lose all their 'special' government perks and have to become like every other private company out there. This will allow other companies to enter the business and provide liquidity to the markets. If companies want to provide 'low rate' loans to certain borrowers. Then fine, but there will be ZERO taxpayer connection to those transactions. We cannot have 5+ trillion dollars worth of loans held by 2 companies where the 'fail safe' is the American taxpayer. We need competition. We need companies to go back to assessing risk because there isn't a 'taxpayer parachute' if things go bad. Loans need to be made on ability to repay the loan, not some PC criteria that sounds good. Make people earn it. I know this sounds bad, but all these government programs have gone too far. We need to get back to the basics. We need to get back to a straight forward standard that applies to everybody.

Just try not to think too hard about the TRILLIONS of dollars that could potentially become the responsibility of the taxpayers of the government decides to rescue their own fanny by saving Fannie...and Freddie.

That said, this financial mess is NOT over. Look for another wave of bank failures when the A-paper borrowers start feeling the pain in 2009/2010 when those 5 and 7year ARM's start to reset. Hard to refi to a fixed rate loan when you are upside down on your property, or have so little equity to qualify for the good rates at lower LTV (loan to values).

I know his was a little long, and I jumped around a bit. I am on the road for 2 weeks and keep losing my train of thought as I answer phone calls and respond to e-mails. Just be glad that I am posting! :)

I look forward to the comments.

Stay tuned...


Tuesday, July 08, 2008

"There will be a soft landing...if it even goes down"

FB logoRemember when that is all you would hear from Real Estate professionals, mortgage brokers, the MEDIA, etc. Well, I guess it wasn't true.

I know I haven't posted here in a while. I have been very busy, and on the road for well over half the time since my last post. I started a business with a classmate of mine from the Naval Academy. We bootstrapped the whole thing and took out zero loans. It has been a lot of work, but it is definitely paying off.

As far as the blog goes, yes, a lot has happened, but I guess I figured that you can 'read about it' in a million different places. The difference is that this blog was saying the stuff BEFORE it all unfolded! I think I told the 'important' side of the story...when the DAMAGE could have been avoided or mitigated for people that read what I was saying. I still get e-mails from people thanking me for this blog. They are looking back 1, 2, 3 years and seeing how much reading my blog opened their eyes to the MATH behind what was going on. They decided to take a chance on the numbers I was putting out there and the data I was giving people. They took the 'risk' of waiting to buy, and for most (if not all) people, it paid off in spades! They either got their house for less money, or a lot more house for the same money, and many are STILL waiting patiently to see where housing prices end up.

I told you what was really going on behind the numbers, and each day that goes by, I am proved correct more and more. I told you that underwriting standards were tossed out the windows. I told you that once the adjustments came, there would be lots of foreclosures and lots of inventory on the market. I said that in 2008/2009 is when things would really start getting interesting. Trust me, there is more to come. We have seen the problems with 'subprime' and some with Alt-A. Just wait until the wave of A-paper defaults starts coming in 2009/2010. Sure, a lot of A-paper borrowers have made it 'safely' to a 30-year fixed mortgage, but there are a ton of people that can't refi because the 'value' isn't there.

We are just starting to see big problems with Fannie and Freddie. I haven't had time to research all that is going on with those two companies at this time, but I can honestly say that not much will surprise me. Bloomberg is reporting that Fannie and Freddie need a 75 billion dollar infusion of capital to keep going. Will be interesting to see how that pans out. Not sure where they will get the money, maybe they can just 'sell out' to another Middle Eastern investment group.

Here is another list of things we have seen or are seeing:

- We have seen our own government pass a 300 billion dollar 'bailout' to help people that cannot pay their mortgages. (don't get me started on this one)

- Ghost towns in the Inland Empire Should that really come as a surprise? I know it was discussed here, and especially on Ben's blog in great detail. So much speculation in an area where there is NO reason why 'starter' homes were 400k+. It was all creative financing & speculation, and we are seeing how that is ending.

- Vegas is taking a 'dive' now that all that 'easy' RE money isn't flowing in. Vegas has a 4-fold increase in bankruptcies and is a nation leader in foreclosures. To make matters worse, hotel occupancy rates are down from 95% to about 80%. Things are so bad that 3 gentleman's clubs have had to close their doors.

- Wall Street is not doing so well as a whole either. They made their bucks 'selling' MBS (mortgage backed securities) for a few years there, now it is time to pay the piper.

That said, I will continue to keep some sort of activity on this blog. I know that 4 months or whatever it was, was too long. That said, since this 'housing bubble' thing is no longer a secret, would people object to me talking about other things related to finance, business, money, etc., even if it isn't about housing?

Thanks again to my loyal readers. I look forward to the responses and comments.

Stay tuned...


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