financial management

A Snow Ball’s Chance in Hell

In my last post, I shared with my readers some soon-to-be-released research on the FDIC and its upcoming challenges. If you haven’t read it, you should.

In tonight’s reading I came across another significant fact worth sharing: According to the New York Times account, ” Fannie (Mae) and Freddie (Mac) now buy or guarantee almost two-thirds of all new mortgages. The Federal Housing Administration guarantees another 25 percent.”

Put another way, the Gov’t is financing 9 out of 10 new mortgages in the United States.

Hmmmm…….

With the S&P500 over 55% off its lows, one could say that the stock market has priced in a V-shaped economic recovery. Damn the torpedoes, baby!

But wait! How could this be? Is the recession really over?

Not so fast, partner!!

1. We’ve got banks going broke, with more to come, and no money to lend in the meantime.
2. The only reason that houses are selling at all is because the Gov’t is lending the money, plus giving 1st time buyers a free $8,000 for buying a house. (how else could houses sell with unemployment as high as it is?)
3. And heck, if you bought a new car recently, you’d have received another $4500 as part of the cash for clunkers trade in program, also courtesy of Uncle Sam.
4. Delinquency rates are home loans are still extremely high
5. Oh, and did I mention there’s no jobs?

Seems to me that without all the Gov’t stimulus, GDP would be so far into the toilet, we’d be seeing the D-word instead of “The Great Recession”.

Despite this, the stock market is going no where but up. I don’t know about you, but I don’t see ANY part of this picture that says “sustainable economic recovery”.

What’s the point of this rant?

Do you honestly believe that decades of excess, speculation, and outright fiscal lunacy can honestly be undone in a year or two?

I don’t know about you, but I don’t buy it. If I was a betting man, I’d say how about a “snowball’s chance in hell?”

So what should you do if you are an investor? Same advice as yesterday:

1. cut your living expenses to the bone
2. raise as much cash as possible
3. do as many seller financed purchases as possible (as seller financed deals are also the easiest to renegotiate if needed)
4. focus on flipping short sales, as opposed to fixing & flipping REOs, because it can be done without the need to tie up any capital

Your comments are always welcome,
TRD

financial management

Staying in the Shadows for Years to Come

On September 2nd the current foreclosure moratorium was to be lifted, according to my friend at the Bank of America.  Interestingly enough, the BofA was already exempt from the moratorium, and despite that, they’ve been loathed to add to their REO inventory, much less sell any of it.

In the circles I swim in, the conventional wisdom is that the shadow inventory (houses that are now REO but not yet for sale on the MLS) has to be released to the market at some point, and, when that happens, prices are going to continue to decline at least another 10%. A basic understanding of economics would suggest that 10% is not unreasonable, give the sheer (rumored) amount of the shadow inventory.

I have to admit though, that I’m now starting to think “at some point” will never happen, and that the banks are going to continue to parcel out the REO inventory in dribs and drabs for years to come.

Why?

There are a number of reasons that I’m starting to change my view on this.

Leading the charge is the fact that bank CEOs like to keep their banks in business, and to do that, they need to have money to lend. If they start selling REOs in volume, prices must decline and the net result of that will be that the bank’s assets will take a huge hit. As banks capital requirements are set by the regulators, a drop in assets will mean that more reserve capital must be set aside and that will, in turn, reduce the amount of capital available for lending.

With nothing to lend, a bank is essentially out of business, and a CEO is out of a job.

Next on my list is the fact that it is probably cheaper to let a family stay in a house they aren’t making payments on, than it is to hire lawyers, go through the foreclosure process, and then be saddled with all the costs associated with insuring and maintaining an empty house. Essentially, the delinquent homeowner is a caretaker that doesn’t charge the bank anything to look after the house.

In other words, why foreclose on a ton of houses all at once, and then be saddled with massive costs, when you can just let John and Mary live there (even if they aren’t making payments), until such time as you are ready to foreclose and sell in an orderly fashion?

Given the number of REOs on the banks books now, plus the number of borrowers that go into default on a daily basis, it could take years and years to slowly bleed off all that inventory.

The net result of a controlled redistribution of these assets is that they don’t get sold at fire sale prices and the underlying market for 1st time buyers remains very healthy – even if it is artificially so. Stability, be it contrived or real, has the same net effect, increased consumer confidence – a much needed ingredient if there is to be an end to the recession.

Your comments are always welcome,
TRD

financial management

Free Groceries for Life

I just finished a post detailing why I thought the housing recovery was further out than many think, and just as soon as I posted it, I started thinking about the concept of control.

What do I mean?

Instead of worrying about the economy and the never ending data-points that pundits (like me) are continually blabbering about, might I suggest that you focus your energy on the items in your economic existence over which you have direct control.

Burn Rate = Fate
Essentially this boils down to one simple concept; it is easier to lower your overhead than it is to raise you income. Moreover, when you earn a dollar, you must pay tax on that dollar, whereas when you save a dollar, you get to retain and then re-invest that entire dollar.

In the last 3 months, I made a decision to reduce the cost of my housing by 35%, or about $730 per month. We’ll come back to this in a minute.

Money spent is no longer available for investment
If you consider each dollar that you own as an employee, which I do, the act of spending a dollar is akin to firing an employee. And, unlike “real” employees, all “financial” employees are first class workers! How successful do you think your enterprise would be over 20 years if you continually fired your best employees? The answer is obvious.

It was this realization that made me want to sell my fancy car and buy a pickup truck. No matter how much I loved that car, it was never going to love me back. A nice rental house with tenants paying my mortgage, on the other hand, will love me for years to come.

Knowing what you are spending is one thing, knowing what it is costing you is quite another.
Using the $730/month that I’m no longer spending on my housing, lets look at how much it was actually costing me.

Assuming that I invest that $730/month an earn just 10% (and for those in my profession, earning 10% is the LOW end of what is easily possible) for 20 years, I will have amassed the tidy sum of $722,156 – probably enough to buy me groceries for at least a few months, don’t you think? Yes, there will be some taxes payable, however, if you have $0 and I have $722,156 before tax, I’m pretty sure I’ll be better off than you even after Uncle Sam’s share, no?

Your comments are always welcome,
TRD