Many people may remember reading the novel 1984 in high school or college. The novel, written by George Orwell, is famous for its depiction of a future dystopia where all modes of expression such as the news, language and art are controlled by an authoritarian government. Admittedly, I haven’t read the novel in years but I have been hauntingly reminded of many elements in the novel as I have listened to some of the rhetoric coming from the executives of major, publicly traded corporations such as Fannie Mae and Freddie Mac. The parallel I find most striking between the language used by financial executives and the language used by the fascists in 1984 are what Orwell referred to as “Newspeak”.

Wikipedia describes Newspeak as the following: “The basic idea behind Newspeak is to remove all shades of meaning from language, leaving simple dichotomies (pleasure and pain, happiness and sadness, goodthink and crimethink) which reinforce the total dominance of the State. Similarly, Newspeak root words served as both nouns and verbs, which allowed further reduction in the total number of words; for example, “think” served as both noun and verb, so the word “thought” was not required and could be abolished. A staccato rhythm of short syllables was also a goal, further reducing the need for deep thinking about language. Successful Newspeak meant that there would be fewer and fewer words – dictionaries would get thinner and thinner.”

Orwell would have to invent a new word to describe the language from top executives at financial institutions now facing ruin essentially because they wrote, bought or held poorly underwritten loans. You will never hear anyone in authority at these institutions express their dire situations quite so succinctly. Instead you will hear what I would call, in homage to Orwell, Bankspeak. Let’s take a look at some examples of Bankspeak used in real life. Below is an email sent to employees by the former C.E.O. of Freddie Mac, Dick Syron, before his departure. These emails appeared unedited in the Wall Street Journal Online:

“To the Employees of Freddie Mac:

As you have probably heard, the Treasury Department announced today that it has placed Freddie Mac and Fannie Mae under the conservatorship of our regulator, the Federal Housing Finance Agency.”

Orwell would be proud of the Bankspeak word “conservartorship”. It subtly obscures the potential negative connotations of the more accurate “take over”.

Mr Syron continues: “We have been through a lot together. Earlier this year we completed a multi-year accounting restatement, a massive and complex project. More recently, we have had to manage significant increases in delinquencies, foreclosures and loan modifications as a result of the sharp decline in house prices.”

The Bankspeak in the above statement should be readily apparent. “A multi-year accounting restatement” is a beautifully obscure phrase of Bankspeak grandiloquence for the more exact “digging ourselves out of our cooked books problem”. Too bad for Mr. Syron, that the housing market behaved so badly and the “ multi-year restatement” efforts were hampered by significant increases in delinquencies, foreclosures and loan modifications as a result of the sharp decline in house price.” As a whole, the above statement, translated from Bankspeak, should read like this: “It really is a shame that our un-cooking of the corporate books was stopped by the whole housing mess that we helped to create.”

Thankfully for Mr. Syron, his mastery of  Bankspeak has served him well and his future looks brighter then ever. In the New York Times he is quoted bidding his final farewell, “I’ve had four other jobs as C.E.O. and I came out of them all pretty well,” Mr. Syron said. “What I’m working for right now is to save my reputation.” A perfect Bankspeak adieu.

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Tags: Dick Syron, fannie mae, Foreclosures, freddie mac, Real Estate Market

It’s NOT over yet! In fact, it may have only just begun?

We have already seen the economic destruction wrought by the so-called sub-prime mortgage crisis, as foreclosures escalated in many parts of the country, contributing greatly to putting the credit market in a tailspin from which it has yet to recover and may not for some time to come.

So this is not exactly the best of times to be confronted by the very real possibility that–as they say in show biz–”you ain’t seen notin’ yet!”

A New York Times article this week begins with a paragraph that should make your skin crawl : “The first wave of Americans to default on their home mortgages appears to be cresting, but a second, far larger one is quickly building.”

That’ll take your eyes off your morning corn flakes for sure.

Even The Good Die (Default?) Young!

The article is talking about homeowners who have good credit ratings and how they are rapidly and in “growing numbers” starting to fall behind.

Says the paper as proof: “The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time.”

The paper points out that a key reason for more defaults ahead will be that monthly payments are going up fast–while, at the same, time, the value of home prices keep dropping like a lox that slid off a deli counter in Queens.

Says Thomas Attenberry, president of First Pacific Advisors, “Subprime was the tip of the iceberg.”

Up, Up and Away!

Meantime, as they like to say in Dark Knight comics, the nation’s inflation rate has come alive with the energy of a dozen hungry pit bulls munching on a postman’s leg.

Consider this: “Consumer prices jumped at the sharpest rate in more than a quarter centuryduring June and consumers coping with soaring costs received their smallest income gain in a year,” reports Reuters, quoting a newly released government report.

Now what?
Now that is one damn good question, ain’t it? Now what?

The other day, while driving through a well to do Los Angeles neighborhood, I lost count of the number of for sale signs on the front lawns of well taken care of homes. Not all are in foreclosure I am sure, but many no doubt are. And this is a “good” part of town.

My guess is, many of these signs will still be out there weeks and maybe even months from now since people can’t get credit to buy at a time when price bargains are surely to be had.

That housing “rescue” plan passed by Congress last week and signed into law by Bush is not likely to have any impact –if at all?–for many more months because it just takes time to get things of this sort rolling. In the meantime, the defaults and foreclosures keep mounting.

And out there, beyond the horizon remember, is that second, bigger wave silently approaching.

Tags: bubble, Housing, housing, mortgage bubble, real estate, real estate crisis, Real Estate Market

Before we can talk about the good news of a recession, lets define exactly what a recession is: 

 ”In macroeconomics, a recession is generally associated with a decline in a country’s real gross domestic product (GDP), or negative real economic growth.  According to widespread definition, a recession occurs when real growth is negative for two or more successive quarters of a year.” - Wikipedia

The biggest problem with current economy is that there great debate on whether we are in a recession or when it might of started.  So lets forget about the guessing game of a recession and take a look at few facts.

Since the 1940’s there have been 11 recessions.  On average the have lasted 10 months.  The good news on past recessions is not only are they short lived but the economy is generally already recovering by the time we declare that we are officially in a recession.

More good news on recessions. According to a 2007 report from The Wall Street Journal the stock market has actually rose seven times.  Further more, of the last 11 recessions the market has seen returns at a 3% average.   

So if we are in a recession now, what can investors take advantage of?

Interest Rates: Individuals that have equity in there property, this is a great time to do home equity lines of credit (HELOC).  Heloc’s are tied to prime and that is currently at 5.00%.  While most individuals just rolled their eyes and thought about how Chase, Wells Fargo and many other national lenders only go to 65-80% of the value of their property.  There are still a number of Portfolio lenders out there that still go to 95-100% of the value of your property.  See my other article about “How to Find a Portfolio Lender” if you are curious.

Awareness:  While a recession does not effect everyone in a the US, it certainly can create awareness.  This awareness can lead to individuals paying closer attention to their personal finances.  By this I mean, purchasing things one can not afford, paying down unsecured debt and actually saving money. 

Rebound:  Historically the economic cycle has never failed.  It cycles both up and down, and there have been winner and losers in each cycle.  From a real estate prospective we can all predict that the market will return to normal.  Investor and home owners can argue about what normal is, but when appreciation returns to your market, that is a least a starting point.  The good news that every market has begun to see this return of appreciation.  Across the board you can find major resets in housing prices, mostly facilitated through foreclosures and short sales.   While these foreclosures and short sales are a travesty to the individuals going through them, it is an opportunity for others.   92% of the US are not apart of the foreclosures, this along with a new affordable price point will bring back the first time home buyers and appreciation.

While there is nothing any one person a can do to change a recession there is plenty one can do to prepare for one.  Some will reduce their expenses, some will save money and others will find new affordable homes.  But we should all raise our awareness and plan for the future, do not be scared there is always good news to find.  

Tags: Economy, foreclosure, housing, Interest Rates, Real Estate Market, recession

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

At a recent real estate club meeting much of the talk centered around the state of the market. This is certainly to be expected as investors were networking with each other and comparing notes. It is imperative that investors stay abreast of the trends and conditions if they are going to be successful. However, there was a distinct difference between seasoned investors and relative newcomers.

Investors who had been around for some time were looking for ways to meet the challenges of the day. They sought solutions to their funding issues and looked for creative ways to deal with problems. There were deals all around them, they just needed to make them happen.

Meet The Newbies

The newcomers were a different story altogether. Those that were fairly new to the game had never seen a market where money wasn’t easy and real estate didn’t always go up. They complained about lenders who wouldn’t fund their “no money down” deals or whined about being stuck with a property that they paid too much for in the first place. Others had bought into the fallacy that cash flow didn’t matter because the appreciation would make it all worth it in the end. Now they are hemorrhaging cash and see no way out.

Instead of asking how to make things happen, the newbies wanted to know when things would return to “normal.” They don’t seem to realize that they already have. The recently burst real estate bubble was the aberration, not the norm. Giving money to people who shouldn’t get it was the fuel that fed the recent market frenzy. It allowed people to pay too much with the expectation that a bigger fool would come along and pay even more. This was totally unsustainable, yet the newbies are waiting for this to return.

The Seasoned Investor

Investors who have been around for awhile know that any market has its ups and downs. When conditions change the successful investor adapts to the situation. When a traditional funding source dries up they seek out alternatives. Instead of pining for the old days, they create new techniques or revisit some tried and true older methods of doing deals. To make money they need to keep moving forward, they can’t be immobilized because something changed.

In the real estate jungle it is truly survival of the fittest. There is a common thread that runs through people who are successful. They keep going when others would quit.

Tags: loan, mortgage, no money down, real estate, real estate investing, real estate investor, Real Estate Market

It seems that during the high-flying days of the real estate boom novice investors were a lot like Alice In Wonderland. They went through the looking glass into a bizarre world of an altered reality where the normal rules of economics didn’t apply. These neophytes jumped in with both feet and paid a heavy price when reality returned to bite them.

Appreciation Is Not A Birthright

The cost of liquidating real estate may be as much as 10% when you factor in sales commissions, transfer taxes and other selling expenses. That means that a property has to appreciate about 10% just for you to break even on your investment. Let’s say you didn’t do your homework and paid 15% too mush when you purchased the investment. That means you will need a 25% gain just to get back to where you started. In this environment you could be waiting a very long time.

Reality

Investors need to accept the fact that a new reality is upon us. This new reality is very much like the reality of years ago. You need to make sound investment decisions and have a plan that isn’t a get-rich-quick scheme. Multitudes of people have become fabulously wealthy in real estate. They didn’t get-rich-quick, they did it the old fashioned way – hard work.

Tags: housing, loans, mortgage, real estate, real estate investing, Real Estate Market

Okay…so what’s wrong with this picture? In communities all across America the value of homes has dropped faster than the New Year’s Eve ball in Times Square. Lower prices should mean bargin prices. Bargin prices should mean people jumping back into the housing market.
People jumping back into the housing market should help inflate the value of homes…..

But things aren’t working out that way and it is all because of the credit markets.

Most “experts”–and I do use that word with great caution when talking about the real estate mess–seem to agree that lenders are sitting on the fence because they still are not sure just when this mortgage crisis will hit rock bottom.

The banks and other financial institutions worry, and not without good cause, that if they do start freeing up credit and people buy up those cheaper homes, the homes will still continue to loose value leaving the lenders holding the bag.

What will turn this around?

For one thing, if the lending institutions get convinced that the U.S. government is as serious when it comes to helping out home owners as it was in helping out Bear Stearns, they may feel a bit more relaxed about freeing up some credit.

But it is hard to feel that way when Congress is still trying to come up with legislation that the president will not veto–though it appears more and more likely each day that Bush will not stand in the way of anything Congress will offer for fear of further damaging Republican party candidates in the fall.

Lending institutions must also take stock of their own practices and either self police or face regulatory action under a new administration, especially if it is a Democratic one. That means
putting a stop once and for all to those misleading radio ads that still pop up telling people who have credit scores that suck that they can still get a nice, big, fat mortgage with hardly any financial pain on their part. Yeah, right.

But buyers can also contribute to the solution to this problem by realizing that homes are places to live and raise a family and not either an ATM card with a front lawn or an investment to dump back on the market in a short amount of time hoping to strike it rich.

When all of the above things are in place, it is my best guess that lending institutions will free up credit, which will grease the way for more realistic mortgages, which will allow people to finally start taking advantage of all those bargin homes flooding the market.

Tags: Credit, credit market, default, home value, house values, loans, Mortgages, Real Estate Market