Greetings from the metropolis of Cedar Crest, New Mexico.

After a series of road trips to Arizona….Texas….and New Mexico….it is good to be home and good to be writing again.  I have had a blast exploring, discovering, and experiencing the Southwest with my family.

During all my expeditions, I have been thinking a lot about my next moves with regards to  my commercial real estate investing and my businesses.  The one thing I believe, with all the chaos in our economy, is that this is the most opportunistic time (for strong investors) will see in a long time.

I received an email from my commercial mortgage broker, Terry Painter, that encapsulates the opportunities that exist today for the “strong Investor.”

“Hi Rob,  It appears to me that commercial prices are starting to come down a bit, but usually after negotiating.  This is your standard MO so I think you should do well in this economic environment.  Many investors don’t want to face that their values have gone down and are refinancing.  Many of them no longer qualify to refinance their properties. Often the properties qualify but the borrowers do not due to tighter underwriting guidelines and a drop in personal liquidity and credit.   There is strong opportunity for stronger investors to swoop in right now.  Lets keep in touch my friend,  Terry”

Photo Credit: Sarah Giesecke

If you're new here, you may want to subscribe to our RSS feed or sign up for our real estate social network. Thanks for visiting!

Tags: commercial investing, Commercial Real Estate, Credit, experience, liquidity

It wasn’t that long ago that people were touting the extraordinary power of leverage. Use as little as possible to control as much as possible. Leverage was used in business and especially in real estate. You were considered an amateur if you put down 20% to buy a property, 5% and even 0% down became the rule rather than the exception. Businesses used easy money, or leverage, to expand their business empires. When used properly, leverage is a great tool. But it is also a double-edged sword that can lead to a fall that is as spectacular as the rise. How many businesses have failed and how many more will fail because they borrowed, or leveraged, more than was prudent?

Of course, it wasn’t only businesses and investors using leverage, consumers were doing it too. The run-up in real estate value caused so many people to feel richer than they really were. They then leveraged their homes, using home equity loans and bought things that made them feel very well off. The idea of $0 down and no payments or interest for 6 or 12 months made it seem like they were getting things for free. Of course, the piper had to be paid on that eventually.

Credit Fueled Expansion

What we had was an economic expansion that was fueled almost entirely by credit, or leverage. When the credit spigot was turned off the economy came grinding to a halt. It seemed like finding a living wooly mammoth or capturing Bigfoot was easier than securing financing for a real estate deal. Of course, the house of cards that was erected with all of this leverage came crashing down.

With the economy in shambles and facing the prospect of a total financial meltdown, the Government steps in to save the day. So how do they fix an economic catastrophe that was fueled by the use of too much easy money and credit? By borrowing more money of course! It’s like drinking a shot of whiskey to cure a hangover. Printing money that we don’t have is only using leverage to an extreme degree. The burden of this skyrocketing national debt will inevitably lead to inflation, and possibly hyperinflation. Governments that have over-leveraged their economies in the past (Article) have ultimately paid a heavy price.

More Than A Buzzword

Many corporations, large and small, are feeling the burden of excessive amounts of debt. In a shrinking economy they are taking steps to cut costs in order to remain profitable or even, in some cases, stay afloat. They talk of deleveraging in order to improve their balance sheets. In plain English, they know that they need to stop borrowing. If they don’t take these steps they may pay the ultimate price and cease to exist.

The entity with the greatest need to deleverage is the Government. Instead they keep creating more programs, more stimulus packages, and massive bailout plans. There are not enough tax dollars to pay for all this so they just use more leverage. Governments are not immune from failure, it has happened all throughout history. Economics has been the main catalyst for Government failure, don’t think it can’t happen here.

What can you do? Take steps to deleverage your own life. Avoid taking on any new debt and work to eliminate what debt you do have. Remember that leverage is a double-edged sword that cuts both ways. While you will generally use leverage, or loans, to do a real estate deal, be sure that it is manageable and that you have sufficient reserves to weather any storm. Avoid financing everyday purchases, do you really need that new flat screen TV or the latest electronic gadget? We all need to live within our means, if you want more, then increase your means.

A government big enough to give you everything you want is a government big enough to take from you everything you have.
- Gerald R. Ford

Tags: borrowing, Credit, Economy, leverage

I promised you last week after outlining my belief the “frozen credit markets” was a contrivance by Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson, I’d spill the beans on why the dynamic duo wanted to lay their hands on $700 Billion since it wasn’t needed to thaw out anything.

So here goes..and I warn you it’s a little radical…but given this weeks events, I’m even more convinced it’s true.

My Theory on the Fed’s Bailout

As we discussed last week, the TED spread is the measure everyone is using to show how frozen the credit markets are and to repeat, this measures the willingness of banks to lend to each other.

The current story is the banks that formerly lent to each other at .5% now won’t lend to each other at 4.5%…and the TED spread proves it. Paulson and Bernanke used this “fact” to extort $700 Billion from Congress for the expressed purpose of ‘buying the toxic loans’ (I never bought that “toxic loan” story. The banks already took the hit, so how does getting a few dollars for yesterday’s writeoff help?) which are causing banks not to trust banks. Once those bad loans are taken off the backs of the banks, the fear to lend bank-to-bank will disapper…frozen credit markets thawed…crisis averted.

There’s only one thing wrong with this story…it’s not true.

Did anyone bother to ask if there might be another reason banks don’t want to lend to other banks?

The real reason the banks still left with capital (ie. Wells Fargo, JP Morgan, Bank of American…a few other mega-banks) don’t want to lend to the those banks who need it is simply because they don’t want to.

Yep, that’s right…they don’t want to.

If you were them, one of the Big Three, why would you lend to a small regional bank when withholding the loan will most likely make the bank a takeover opportunity for you at pennies on the dollar once the FDIC closes them down due to (because they couldn’t raise the capital) failure to meet reserve requirements?

You wouldn’t. You’d let them go under.

Big banks are withholding loans so under-capitalized banks fail. Once the under-capitalized banks fail, invariably the FDIC brokers a buyout to one of the Big Three or another mega-bank. This is market consolidation at gun point, but it’s working. Two more regional banks failed today.

To support my hypothesis, over the last couple of days, Paulson has saber rattled about buying a direct stake in some banks (an idea he never mentioned as the bill was getting debated in Congress) seemingly frustrated by the lack of “thaw” so far. This means the few big banks are going to get Treasury money to continue their buying spree. Buying failed banks even at pennies on the dollar costs money and they just as well use Hank’s money (I mean your money) as their own.

What Hank doesn’t spend help big banks gobble up small ones, he’ll use to appease our foreign credit buyers. A little unintended consequence of an artificially raised TED spread is a stock market tumble and confused foreign central bankers.

Simply call a quick meeting of the G7 financial leaders to calm their worries…and that is taken care of. Watching the stock market fall has it’s up side. It lends further credence to the whole “frozen market” cover story and puts even more pressure on those banks on tilt.

The biggest consolidation of banking, investment, and mortgage power, after all this over, will rest with just a handful of companies…companies hand-picked by Ben and Hank. Call me a quack, but in a few years when you have only 4-5 companies to pick from to get a checking account…it will be too late.

I really hope I’m wrong…

Photo Credit: SmileMyDay.com

Tags: bank, banking, Credit, credit markets, housing, lending, mortgage, paulson

It’s soooooo old news, isn’t it? I mean, all that stuff about people not being able to pay their mortgages and the rising population of those facing foreclosure, is so old hat now.

What is really important, after all, is the survival of big banks! At least, it would seem that way from the news coverage of the last few days.

Asia stocks drop, says one headline. Britain to unveil major bank rescue package, says another. The U.S. stock market drops for 2nd, 3rd, 4th, 5th………day . Another bank wants to buy another bank. The Feds want to rescue another lending institution…..on and on it goes.

This is the big stuff. This is what the world really is all about.

But notice what is getting lost in the discussions: the homeowner and what will happen to him.

It’s not like they are not linked. We keep being told, in fact, that the world’s credit crunch will only be resolved when the housing market returns to normal, whatever the hell that means?

Really?

Then how is it that pretty much nothing is being done along those lines?

The much rushed socialized bailout to rescue big banks went out of its way to not include any language that would allow bankruptcy courts to change the terms of mortgages, something many experts say is vital to help the housing market recover.

The housing legislation that was passed earlier this year to help distressed homeowners is hardly off the ground, because it has no way to force banks to re-negotiate mortgages. In fact, with the government now waiting to buy these bum loans from the banks, why should they re-negotiate anything with homeowners? And, in point of fact, for the most part, they are not.

Backers of the bailout say that by buying up bad mortgages and mortgage related investments, the government itself will be able to change the terms of mortgages that are on the verge of default.

But anyone who understands anything at all about this crisis knows that a large part of the problem is, most mortgages are no longer owned by the bank that issued them…each mortgage has been divided and divided again and spread across many different investments owned by many different institutions. How can the government do anything with these mortgages when it is all but impossible to find out who exactly owns them?

Further, it is this very uncertainty that is fueling the crisis of confidence that is leading the world down the road to economic ruin.

And yet, I have zero doubt that things will improve…and sooner rather than later. This is NOT the 1930s when the government not only failed to act (before FDR anyway) but felt no need to do anything.

Unlike in the 30s, even the smallest country understands this is a credit-driven world. The system will be fixed to make credit flow again simply because there is no other choice and everyone understands this to be true.

Still, the $700 billion bailout is not the best way to do this. AIG already has reportedly zipped through lots of the taxpayer money pledged only a week or so ago. This will not ease the credit crisis for sure.

Those who say the economy will not recover till the housing market does are correct. But then the game plan needs to be focused directly and clearly on achieving that goal and not on helping one bank buy another.

Tags: $700 billion, bank crisis, banks, Credit, Economy, housing

What Make A Good Renter?

Is a good renter someone with great credit, or large deposit or maybe  high income?  The approach landlords take in qualifying their renter could be changing because of the housing crisis and the large number of foreclosures.

The main objective of renting your home should be to have a qualified renter that will pay rent on time and take care of the home to some degree.  Large deposits can maximize renters responsibilities to the care of your home, but what can be done to help minimize renters late pay or simple non payment and evictions.

The qualifying approach I encourage landlords to take is one similar to underwriting a loan.  The question that everyone should ask themselves before renting their home. Can my renter make the payment on a consistant basis and how?  This question is always answered by employment.  There are a number of way to increase the odds of finding a good renter just by looking at their employment.

Time on the job - The length time at the current employer is the first thing you should look at.  If a potential renter has been employed for a number years this helps build a case that consistant income can help provide for timely rental payments. 

Proof of income - Not only knowing where your renter works, but knowing exactly how much he makes is very important.  It is not out of the question to ask for the last two paystubs and last years W2’s.  While this may seen extreme, you have answered two critical questions.  Does your renter really work and how much do they make.

Debt to Income Ratio - While pulling credit can give you an idea of credit score and repayment history, how are you going to judge individuals that have gone through foreclosures and bankruptcies.  Sometimes a bad borrower is a bad borrower and you need to decline them for your rental,  but in today’s market place you will find more good renters with bad credit than ever before.  My suggestion is to look at credit, income and employment and determined a debt to income ratio .  This will illustrate whether they have sufficient income to cover their rent and debts.

This process is very similar to qualifying for a home mortgage.  It is up to the landlord to develop their own guidelines as to what is acceptable to their market place.  This is a very simple process to help increase the odds of a good renter - check employment, have proof of income, and determined debt ratio.

Tags: Credit, debt, employment, income, landlord, lease, rental, rental-property, renter, tenant

Recently somebody said, “Hey, you lost weight,” and I said, “Yeah, thirty-five pounds and three and a half billion dollars.” So I’m quite a bit lighter and more flexible than I was.” - John Malone

Greetings from the metropolis of Cedar Crest, NM.

Friday evening, I was watching CNBC when the news broke out about the IndyMac Bank seizure. I was in shock. I just got to a peaceful place….well…not really peaceful…but a place of “acceptance” (for a lack of a better word) in regards to the unavoidable bailout of Freddie Mac and Fanny Mae. Now this?

Doing some quick research, this is the FIFTH FDIC failure of the year. Fifth!!! And guess what….we are not done. Based on what the experts are saying (…just pick one of your favorites), not only has the “fat lady” not started to sing yet….from my understanding….there are a lot of fat ladies and they all have a lot of singing to do.

Although this was expected (not specifically IndyMac but obviously Freddie and Fanny), the reality of it all is still surprising. I guess it is still surreal to me.

I have written a lot in my own blog about how to invest in a tumultuous economy….so I was very aware of the prognostications by many experts regarding the future of the economy. One particular opinion stood out….Nouriel Roubini, chairman of RGE Monitor and professor of economics at New York University’s Stern School of Business.

Back in February, I wrote a post that discussed Glenn Beck’s “DEFCONOMY” scale regarding the “worst-case scenario” forecast of the economy. This DEFCONOMY scale is based on Nouriel Roubini’ s “twelve steps to financial disaster.”

Based on Beck’s DEFCONOMY definitions….I think we have met the requirements of DEFCONOMY 3….and well into DEFCONOMY 2. According to Roubini, in DEFCONOMY 2, we will see “Most forms of credit become virtually nonexistent. That results in a “vicious circle” of additional write-downs, stock market losses, and bank collapses, which leads to even less credit being available.”  Roubini also states that “…credit conditions are becoming worse everyday across a variety of markets and won’t be getting better anytime soon. Without extra credit available, people might have to actually (gasp!) live within their means.”

Now…DEFCONOMY 1….according to Roubini is “A full economic meltdown.”  In other words, “The Great Depression has arrived.”

I doubt DEFCONOMY will ever materialize.  Too much has to happen…..but then again….what do I know?

There is my “feel-good” article for the week…..until next time……rob

Tags: Credit, Economy, federal reserve, housing, real estate, Real Estate Market

Everybody knows a recession is when your neighbor loses his job. A depression is when you lose your job. Apparently more of us are coming closer to depression than we would like to believe.

The data you are about to read is from the June 2008 edition of Collections & CREDIT RISK magazine. This particular magazine touts itself as the consumer & commercial credit authority. I’ve been a subscriber for several years and agree with their self assessment.

Some of the people and sources quoted in the article, Late with Their Mortgage Payments, Consumers Lose Faith in the Economy, have been quoted before so you might recognize their names.

RealtyTrac CEO James J. Saccacio is one of the people offering an opinion. On the topic of federal, state and local governments and community groups offering a helping hand to consumers he, in part, says, “stopgap measures could be simply deferring another flood of foreclosures which would mean extending the length of time required for the market to recover.”

My question would be does it really make a difference if these entities attempt to help. By their own admission (in this article) the industry says loan workouts are far and few between. If the industry says it isn’t willing to work with the borrowers, what difference, in actuality, does it make if stopgap measures are utilized to halt the flood of foreclosures?

Another quoted source is TransUnion. I would think they know a thing or two about delinquencies and can paint a picture of the nation as a whole, at least credit wise. They say the mortgage borrower delinquency rate – people 60 or more days late with their mortgage payment - is expected to rise throughout 2008 to 4.0% up from 2.9%.

If their quoted figures of 15 million adults getting calls from collectors is true, I would believe this information has relevance. After all, 1.1% is a staggering rise in a short of period of time.

Experian Consumer Direct did a survey and found “the number of severely delinquent mortgage accounts grew 15% between February 2007 and February 2008.” They did not define severely but I have to believe it is people who are a minimum of 90 days late and are about to receive a Notice of Defualt.

Maybe the most telling remark made in this article is by Theodore Iacobuzio, managing director and practice leader for TowerGroup. He said, “No one doubts the seriousness of the current credit crisis, but it’s noteworthy that the largest financial institutions are more likely than others to characterize its impact as severe or worse.”

Compare that quoted remark with what we’ve been hearing from some of TV’s talking heads and the White House. Maybe, just maybe, the most relevant information sits with those inside the industry who have the capacity to look at the macro credit picture.

Maybe, just maybe, we should be hearing more from them and less from the bleached blond bauble heads masquerading as “news” reporters. Then, maybe not…

Tags: consumers, Credit, default, Economy, Foreclosures, housing, inflation, loans, realtytrac