Death of the Short Sale

I was asked just yesterday whether or not I thought the government bailout of the mortgage banking industry would put a end to short sales. My answer was unfortunately, no. The $700 billion initial proposal has already been scaled back, and we are now seeing some of that bailout that was intended for banks and ultimately home owners, now potentially going to the auto industry. In an ideal situation, the money would flow into the banking system, allowing banks to loosen lending guidelines and proactively and aggressively modify as many mortgages as possible, slowing foreclosures and ending short sales. Although short sales have been an important part of weeding out foreclosures and ultimately stabilizing the housing market, there has been a greed factor that has put additional and unnecessary strain on the housing market. The greed factor happens when seasoned professionals turn larger profits in a short sale scenario when others, banks and home owners, suffer the greatest losses. I anticipate big changes in the first quarter of 2009. The new administration has the ability to radically effect our current housing and banking meltdown. Regardless of what side of the fence you are on, hope that they get it right. You will be affected.

What about Me

With the election only hours away, I sit and reflect on which one of these candidates will be better for my business. Selfish maybe; but if my business is going good, people are buying houses and we are lowering homeowner interest rates. Home prices are stabilizing, maybe even appreciating. My business is good for the country. It is what it is. Right McCain? Right Obama?

McCain's history states he would be good for deregulation of big banks and the lenders who fund my loans. This is appealing because the industry has over reacted and tightened up far too much. The government has taken control over Fannie Mae and Freddie Mac. The government has seized Washington Mutual and Wachovia. Stated income loans have been banned and down payment assistance has been abolished. What's next? Certainly McCain cannot be in favor of such "big" government intervention. Maybe McCain as President of the United States would ease governments control over Fannie and Freddie, loosen lending guidelines and let us get back to free market capitalism. That would certainly be good for business; although isn't that what help caused the mortgage meltdown?

Obama is all about the "little" guy; Middle class America. Obama would potentially tax the wealthy at higher rates, and maybe pass that on to the middle class by adding some tax incentives when buying or selling a home. I need not worry about the other tax breaks if it does not encourage people with little or no down payment to purchase a home. Obama would likely help bring back down payment assistance, regardless of the higher default rate. If the borrower can't make the payment, the government can with the additional money it is collecting by taxing the rich; and we are not talking about plumber rich.

So tomorrow it will all be decided. The question is, what will the next President of the United States do? Capitalism allows for free markets, and for free choice. It allows me to make loans to those that in good faith can pay them back. Deregulation gets the government out of private enterprise, and allows for people to make their own decisions. Going above and beyond to help the less fortunate, the middle and lower classes of the economic food chain, the ability to better live the American dream of home ownership. When did both concepts become so separated, so completely removed from one another. The mortgage industry cherishes both ideologies; doesn't America? So whoever is the next President, deregulate the mortgage industry and bring back down payment assistance. With the increase of volume of mortgages being funded, I can get rich. Then tax me more to help pay for the increase in defaulting loans. If I am rich, I will gladly pay more to help the middle class buy houses they may not otherwise be able to afford.

RATE CUT 101

In all likelihood the Fed is going to cut the Fed Funds rate tomorrow. The last cut came on October 8th in an emergency session, dropping the rate to 1.5%. This new cut may bring the Fed Funds rate under 1%; for the first time in history. The concept of the rate cut is to get banks leading cheaper money to businesses and consumers on "short term" loans; such as car loans, business loans, and credit cards. This would also lower the rates on home equity lines of credit; which no one can qualify for any more. This move by the Fed is the same thing that Alan Greenspan has been criticized for. After 9/11, Greenspan cut the short term rates so low, banks essentially could borrower the money for free, so there was great incentive to lend as much as they could, to whomever they could. The depressed interest rates is part of the reason we experienced a rapidly appreciating housing market.

This time around, things may be a little different. Banks are still shell shocked by their recent losses in the credit markets. So although the banks may be borrowing the money at a low cost, they may not be lending it to the consumer at a low cost. Also a cut in the Feds Funds rate, may send long term rates, i.e. 30 year fixed mortgages up. After a Fed rate cut, long term rates traditionally spike up, at least initially. Regardless, this likely move by the Fed will not have an immediate positive effect for the struggling homeowner, or home buyer. We will just have to wait and see what else they have in their bag of tricks.

SALES UP VALUES DOWN

I long for the day when the news headlines state "Home Sales are Up." That's it. But unfortunately everything comes with a "but, however, or although." Today's headlines for housing news states that new homes sales are up almost 3% in September; however they are down 33% from September of 2007. The increase of new homes sales may be a sign of a recovering housing market, although home prices were down another 9%. New home sales inventory was down, but there are still 394,000 new homes on the market (cnnmoney.com).

What the news headlines also fail to point out is why new home sales were likely up for September. New home builders and new home buyers alike have relied heavily on down payment assistance since the elimination of 100% financing mortgage options. A recent bill that was passed eliminated down payment assistance as of October 1st, 2008. There was in increase in volume of home purchases using down payment assistance in September as a result of the elimination of this program. Many homeowners still missed the deadline, losing their financing and their new home. Did this account for the increase in new home sales? We will likely find out when the numbers are reported for October.

It is always nice to see some encouraging news in the media regarding the housing market; although it would be far more encouraging to read simply "Home Sales are up!," or "Down Payment Assistant Reinstated!" It is unlikely you will get one without the other.

GET PASSIONATE

"I read this article a while back, that said that Microsoft employs more millionaire secretary's that any other company in the world. They took stock options over Christmas bonuses. It was a good move. I remember there was this picture, of one of the groundskeepers next to his Ferrari. Blew my mind. You see sh@! like that, and it just plants seeds, makes you think its possible, even easy. And then you turn on the TV, and there's just more of it. The $87 million lottery winner, that kid actor that just made 20 million on his last movie, that internet stock that shot through the roof, you could have made millions if you had just gotten in early, and that's exactly what I wanted to do: get in. I didn't want to be an innovator any more, I just wanted to make the quick and easy buck, I just wanted in. The Notorious BIG said it best: "Either you're slingin' crack-rock, or you've got a wicked jump-shot." Nobody wants to work for it anymore. There's no honor in taking that after school job at Mickey D's, honor's in the dollar, kid. So I went the white boy way of slinging crack-rock: I became a stock broker." In my case, a mortgage broker. (famous quote from the movie Boiler Room).

Unfortunately today, there is no quick buck int he mortgage business, or in most businesses. I realized after giving an hour and a half webinar last night to a large number of investors, is that regardless of how painful my business is, I am passionate about it. I didn't get into the mortgage and real estate business to make a quick buck. I didn't launch a new mortgage bank during one of the greatest financial crisis of our time for the easy dollar. I did it because I am passionate about what I do; and I am good at it. I then realized that if everyone else got passionate about what they did, not only in career, but in life; we may all turn this economy, and more importantly this country around. Find your burning desire in life, and get passionate about it. It is not easy and we will all have to work hard for it. So whether your goal is to own a VW or a Ferrari, go get. It is yours to have. You are just going to have to work for it; and there is nothing wrong with that.

PLUMB THIS!

Now that the cat is out of the bag that Joe the Plumber does not make $250K per year and will be unaffected by Obama's proposed tax plan; can we now start talking about reality. I understand that it would be political suicide for either candidate to have a "come to Jesus" talk with the American people and let them know that taxes are going up, in some fashion or form, for someone and likely everyone. The national debt is now over $10 trillion and climbing. The government just voted to pump $700 billion into the banking system, which some critics believe will exceed $2 trillion before the financial crisis is over. The war in Iraq is costing the United States over $300 million a day. How can anyone cut taxes when spending is increasing? Regardless of what side on the political fence you are on, if you hear increased spending, and reduced taxes, you have a mathematical problem on your hands. Can we all agree that somebody is going to have to pay more? It will hurt the economy if Joe Six Pack is burdened by higher taxes. You do not want to tax middle America (what's left of it) in a recession. But then why should financially successful individuals and companies pay a higher share; that doesn't seem fair. I do not have an answer, but I can tell you that I don't want to pay any more taxes either, but will if it is for a good cause. Two things before I start my weekend and cash what is left of my check. 1st: Warren Buffet, who Forbes recently ranked as the world's richest man, while speaking at a $4,600-a-seat fundraiser in New York, said: “The 400 of us [here] pay a lower part of our income in taxes than our receptionists do, or our cleaning ladies, for that matter. If you’re in the luckiest 1 per cent of humanity, you owe it to the rest of humanity to think about the other 99 per cent.” 2nd: When did paying taxes for a good cause become so unpatriotic?

WHAT CAME FIRST THE CHICKEN OR THE EGG

Because I am in the mortgage banking and real estate business, I am often asked, "When will this market turn around." My optimistic answer is typically 12-18 months; which I have been saying for the last 12-18 months. I am not talking about appreciation, but simply a flat market. That would be worth celebrating.

Here's what needs to happen. Home prices need to stabilize, and they will not stabilize until lending guidelines loosen. Lending guidelines will not loosen, until home prices stabilize.

Since the government intervention, guidelines have choked off mortgage banks ability to lend; at least lend to most people. In an attempt to stop losses and prevent future losses, they have restricted or eliminated all mortgage programs that we considered the least bit risky, mortgage programs that had a higher than average default rate. In doing so you eliminate a large cross section of borrowers/buyers, thus reducing demand. Once demand drops, prices have to follow. Now "good" borrowers begin walking from their homes that are terribly upside down, driving values down further. Now so called "good" mortgages start defaulting, and the guidelines tighten again. It is a self fulfilling prophecy.

The government needs to bring back down paymnet assistance for FHA buyers, or create a 100% FHA program. Throw in risk based pricing to pad the increase risk of default. Bring back "stated" income loans (income not verfied) for self employed borrowers with high assets and good credit. Increase the allowable number of financed properties back to 10, instead of 4 which it was just reduced to; allowing investors to buy up some of these distressed properties. Or if you think that is a bad idea, lets just keep doing what we have been doing. In no time at all home values will have fallen so low, you will not even need financing; you will be able to afford to pay cash.

STOP POINTING FINGERS

As I prepare myself for another brain damage presidential debate tonight, I wonder who is going to blame who for our real estate and financial crisis. What we now know is that Clinton is responsible because he put pressure on Fannie Mae and Freddie Mac to loosen lending guidelines to allow more lower and middle class families qualify for a house. Greenspan cut rates so low that money was essentially free for banks to lend which encouraged them to lend to just about anyone that could fog a mirror. McCain is guilty for deregulation of the banking industry. Bush is guilty, well do I need to say more. Mortgage brokers are guilty of selling "toxic" mortgages. The homeowner is guilty of not reading the fine print. Instead of pointing fingers, everyone should blame themselves. We as a whole caused this problem. When banks were making a killing lending Alt A and sub prime mortgages, people cheered as there stock and 401(k) accounts soared. We bragged over cocktails about how our home values double in the last 12 months. We showed off our new cars and boats that we purchased with the equity in our homes. No one wanted to believe that the low rates, excessive lending, and rapid appreciation of home values was an anomaly that would not last. Now we find ourselves at a time of correction, and unless we take responsibilities for our own actions, the road to recovery will be a long one. We have reached a dark time in our country's history where people think it is OK to walk away from their house, that they agreed to buy, that they can still make the payment on. A time where people think the bank, and now government should share their pain, because they did not read the fine print. Be mad, get angry, but stop pointing fingers. The sooner we take responsibility, the sooner we can focus on the future. Your home value will go back up. Your 401(k) will survive. The economy will get better. But when it does, lets all be better than we were when our homes doubled in value in less than a year.

THE BANK BAILOUT CONTINUES

Today the United States announced that it would inject $250 billion into the banking system in attempts to free up frozen credit markets. The goal is to get banks to start to lend to one another again. Nine banks will initially reap the rewards of the cash infusion. $250 billion to help BANKS. Bank stocks soar on the news. In anticipation of the cash injection into the banking system, the stock market posts its biggest one day percentage gain since 1932, up 936.42 on Monday. That is good news for your 401(k). The surge in the stock market was countered by a massive sell off of the 10 year T-Bill, forcing long term interest rates, i.e. 30 year fixed mortgages to yearly highs. The 10 year T-Bill continued to sell off Tuesday morning, sending yields to just over 4%. Now that the banks are happy, when can the consumer have some relief. It is not likely to happen anytime soon. Banks can now lend to banks, but they are not lending to you. Mortgage guidelines continue to tighten, and interest rates are climbing. Don't shoot the messenger, I am just telling you what it is. To date, nothing the government has done has helped the consumer. I assume that it is on the way, but in what form is yet to be seen. My bank just got $25 billion. I wonder how much they will lend me.

TOO BIG TO FAIL

Over the last several weeks we have heard repeatedly that certain banks and insurance companies are "Too big to fail." On September 8th, the US government, in an unprecedented socialistic move, took over struggling mortgage giants Fannie Mae and Freddie Mac. AIG, Wachovia, and Washington Mutual were all just recently bailed out by the US government for fear of the alternative. The $700 billion dollar bailout plan, which will likely exceed $1 trillion was the biggest bailout yet; and it is not bailing out you. You are not too big to fail. There is another institution too big to fail, called the United States. Just as the US government pumps money it does not have into the financial system to prevent it from crashing down around us all, the rest of the world will continue to pump money into the US. The United States is "Too big to fail," because if the world allowed free markets to be free, we may just fail. US treasury bonds are already performing as if there is risk the United States may default on its debt. The United States will not fail because it would be far too costly to the world. Sometimes intervention is a necessity, despite the grave costs to everyone.