Grouper

Home Prices from the 70s: A Good Investment?

So I was looking at a house that was listed at 225K. Marginal neighborhood, busy street, rough condition, close to a lot of low/mid level jobs (households making $50K to $70K) . I figured with some work it was rentable for about 1200 to 1400 per month. My offer would have been in the $125 to $135 range (95 to 100x monthly rent). Closed today for $175K. I suspect it is a rental. Taxes will be $300 per month, insurance $150. Generously, $950 per month net = 6.5% ROC. I don't know what it means, but I am not a buyer at that yield. Will be interesting to see what happens.

Why Banks Want to Return TARP Money

Interesting information, but it sounds like no one on this board uderstands banking. First of all it is a hugely leveraged business. 6 to 8% real capital, which can include long term debt, preferred stock, common stock, etc. All the rest of the money is FDIC insured deposits or Fed borrowings (costing anywhere from 0% to 4%). That means that $1B in TARP can turn into $15B in loans. The average cost of funding the loans is in the 1% to 2% range, so lending at 6% is extremely profitable. TARP was created because no one else would give banks capital. Buffett did his deal with Goldman and GE at 10% plus in the money (at the time) warrants.

Goldman, Citi, and BOA are trying to repay their TARP debts because they got back door TARP money from AIG. AIG paid out obligations at face value with your money, so now these guys can repay their TARP with free money (really should have been huge losses because AIG was bankrupt, and they should have received nothing).

Cramdowns and Refinancings Won't Need Appraisals

Follow the money. The appraisers are POd because a bunch of transactions can be done without meaningless appraisals, which means a bunch of money doesn't get spent on appraisals, which means they make less money.

During the 80s, we referred to FIRREA as the full employment act for appraisers. Millions of dollars were spent getting appraisers to tell us what we already knew.

Obama's 'Bad Bank' Plan Is a Turning Point

Bad Bank, Bad Idea
I am a modeler, a former banker, and a real estate developer. Modeling is not the issue. Everyone forgot that the fundamentals of the underlying asset are what matters, not the models, risk speads, average default rates, seniority tranche, etc. In the big runnup, deals were done by expert modelers, with no understanding of the underlying asset.

We already have a bad bank. It is called the FDIC. In the 80s, we had a bad bank called the FSLIC. It went bust, so we made the RTC. If the FDIC goes bust, we can make the FDIC Bad Bank. Fundamentally, failed decisons need to result in failure of the institution, not a bailout of the institution though an attempt at removing bad assets via a model created by another expert modeler with no understanding of the underlying asset.

When the FDIC takes over, you wipe out the stockholders, the bondhoders, the preferred, the TARP investment, Warren Buffett (who apparently has lost his touch), the Saudis, Singapore, and everyone else. At the end of the day, the taxpayer still pays, so lets wipe the slate clean, let people who understand underlying assets make the bids, and move on. Otherwise, we will end up like Japan, unable to get out of our own way for the next ten years.

America: Is This the End of an Era?

Great article, mostly uninformed comments. Go get a list of the world's largest economies, ranked by total output. The US is so far ahead of its closest competitor it is a joke. So we are "insolvent" as a country. Who has the bigger problem if we default or if we inflate our way out of debt? Us, or the countries that "loaned" us the money? You just saw what happens to the price of oil and every other economy when the US is in a fairly severe downturn. Oil drops 70%, and everyone else panics. China is getting ready to stimulate local demand with a stimulus package in the range of 15% of its annual economic output. It will be fun to see them spend their US dollar reserves if we default......And oh, by the way, is there anything other than consumption? Think about it.

GE: Not-So-Good Things Come to Light

Based on a few news articles, GE added about $50 Billion in real estate assets to their balance sheet during 2006 and 2007. You can get more specific info from their annual reports, but that is a lot of real estate exposure, all as the market was peaking. I suspect there are a lot of write-downs to come.

Does GS Recapitalization Indicate It's Time to Invest?

It is a good time to buy if you got Buffet's deal. You and I can't, unless we buy Berkshire. Look at his deal: 10% Preferred, plus immediately in the money warrants: worth 500 million at time of issue, $1B after the market reacted 10%. As soon as you can get that deal from the company that performed best on a relative basis through the current disaster, you should take it, if you can hold for 5 to 10 years. Unfortunately, you can't get that deal.

Wachovia Stanley? Really?!

The only reason they would merge is because they have so much counterparty exposure to each other. By merging they wipe it out. If they don't merge, one goes down and they both go down.

Bank Insiders Made Out Like Bandits

A homebuilders analysis would be fun as well.

Jingle Mail: How Do You Value Home Equity?

If CA home loans are non-recourse by law that explains the unfathomable price-income ratios in CA for so many years. Borrow all you can, you never have to repay. I'm not arrogant, but 20 years ago I was the greedy banker and took a bunch of houses, businesses, land, shopping centers, hotels, cars, etc in the last good RE crash. Tthat is why I outlined what to pay or not, and strongly advocate: don't leave until the sheriff carries you out. I see all kinds of crazy stories and posts about people moving out of their houses and renting while the mortgage lenders are still chasing them. Make them work for it, live for free and protect your liquidity. And oh, by the way, I can't rent a house close to mine for my first mortgage payment. Stupid people borrow more than they can afford (or at terms they don't understand), but stupid lenders loan it to them. Happens in every up cycle, always has, always will. In the down cycle, lenders say "We have plenty of money to lend and our policies haven't changed" (They say it today at every seminar I attend). The BIG difference between an up cycle and a down cycle is how many policy exceptions you can get approved.

Jingle Mail: How Do You Value Home Equity?

Where do you come up with the notion that home loans are non-recourse? They are typically in the name of the owner, personally, and in the case of a primary residence, jointly with your spouse. So, typically, all joint or solely owned non-retirement assets can be seized in the event of a deficiency and a judgement. Short sales may or may not help, as the bank can pursue you for the deficiency, even if they allow the sale, unless you specifically get that right waived (in writing and signed, as they say in contracts 101). One more thing, the lender will likely file a 1099 for debt forgiveness (don't think they can agree not to do this), that leaves you with the IRS to fight with next year....although the anti-capitalists in congress are trying to eliminate this issue for primary homes (won't help investors or second homes).

It should be about cash flow, not debt/equity. If you can make the payments, make them. If you can't, don't, but triage your non-payments in the following order: unsecured, non-essentials like boat/RV/timeshare/seco... homes, home equity loans/helocs, cars (unless you live and work without a car), first mortgage should be the last thing you stop paying. Why? Because you have to live somewhere, and the first mortgage is likely less than renting a comparable place, and once your credit is screwed, renting gets harder. If you have to stop paying, don't send in the keys, stay until the sheriff carries you out. With proper planning, you can live payment free for at least 12 months, and pros can do it for 24 months or more.