Random Musings & Clicks

6 Things I Think:

1) Gold is at an all time high (not inflation adjusted). Gold as a precious metal/hard asset is one of the 5 branches of investment everyone should own. However, now may not be the best time to buy into the market. I fear that if gold goes past 1040/ounce, you'll see the general public run into gold pushing it to 1200+, which means you should sell, as whenver the masses enter the market, the smart money leaves.

2) The tax credit for home purchases is running close to the end (November 30 is the closing date for those to qualify). There is a fear out there that this will either be extended & increased (causing buyers to not want to buy right now) or not renew (causing fools to overpay). It balances each other out. More concerning is the FHA running out of money to be at their reserve requirement.

3) Eviction patrols overloaded with foreclosures. Nuff said.

4) Wells Fargo Executive Parties in Foreclosed Home. Wow, another nuff said.

5) Russian leader demands curbs on alcohol purchases. Yeahhhh, sure. Telling Russians not to drink is like telling a stoner not to smoke it up.

6) Harvard & Yale the big losers in investing. Just goes to show you that an Ivy League education doesn't mean shit....all it gets you is connections & networking. With the advent of social networking, this may make Ivy's a little more obsolete.

Free For All Links to Interesting Articles

Top 6 Financial Articles of the Day:

1) Homeowners Becoming Reluctant Landlords

2) Goodbye Fannie/Freddie, hello McGee? Simply put, the MCGE buys mortgages from banks, pools them into securities, pays an insurance premium to a new government fund and then sells them to investors with government guarantees against the default of those securities. So the investors take the interest rate risk but they are not taking a credit risk.

3) Has the Obama administration failed already? Here are 10 things to do to restore their hope

4) An inventive way to clean up foreclosed homes with pools

5) Florida may invest in Florida real estate

6) Making the switch from being nice to banks to being tough on them

Banks & their foreclosures part deux

Interesting info from CNBC's Diana Olick:

I spoke with Ted Jadlos of LPS Applied Analytics. He says there is no clear evidence of purposeful accumulation by the banks of these foreclosed properties. They are, he believes, working through the huge onslaught of new defaults as fast as possible, but it takes time. He says they are selling REOs at a fast clip as well, within about three months of taking them as REO.

Jadlos notes: Just getting to the average isn’t saying all that much. We need to be close to the four year low to be fully entrenched in a meaningful recovery. Based upon foreclosure and REO timelines, it’s going to take at least 18 months to flush the system of our current problems. But to flush the problems in only 18 months, more problem loans need to leave the system relative to the new problem loans of today and tomorrow. That does not appear to be the case right now—we aren’t clearing faster than new problems are emerging.

Banks making more $$$ from Foreclosures than Loan Mods

And now, the truth starts coming out...the banks would rather foreclose than do a loan modification out of a belief that many people are capable of "self curing" their default and don't need to do a loan mod.

The problem is that modifying mortgages is profitable to banks for only one set of distressed borrowers, while lenders are actually dealing with three very different types. Modification makes economic sense for a bank or other lender only if the borrower can't sustain payments without it yet will be able to keep up with new, more modest terms.

A second set are those who are likely to fall behind on their payments again even after receiving a modified loan and are likely to lose their homes one way or another. Lenders don't want to help these borrowers because waiting to foreclose can be costly.

Finally, there are those delinquent borrowers who can somehow, even at great sacrifice, catch up without a modification. Lenders have little financial incentive to help them.

When Your State Goes From NonRecourse to Recourse Mortgages

Hat tip to Housing Doom on this one...

I smell the law of unintended consequences about to happen here...the state of Arizona, in their infinite wisdumb, have decided to make some mortgages into recourse mortgages (where you have to pay back the entire amount), a change from it being non-recourse. (where you just lose title to the home).

The new law would affect any Arizona homeowner in foreclosure who has not lived in the home for six straight months. This might include landlords, second-home owners and investors who bought homes hoping for quick resales and big profits. Once the home is sold in foreclosure, the homeowner would have to pay back the remaining value of the loan, minus the proceeds from the foreclosure sale. Currently, Arizona homeowners, including investors, who lose a house to foreclosure take a big hit on their credit scores but aren't usually required to pay back lenders.

Banks Ignoring Foreclosures

Banks walking away from foreclosures. I saw some of this earlier this week. Properties so run down and overloaded with liens that they aren't even worth doing anything with them. What happens to a property if the lienholder doesn't take it back. I guess it eventually goes to the city for back taxes and municipal liens. What does it become then. Worthless I guess. Who would have ever thought that a building could become completely worthless.

I saw some really crazy stuff today

I was looking at some short sale opportunities today. It's a rather large portfolio with a pretty typical trainwreck story. Today I looked at 20 properties in some old industrial cites of SE PA. It's amazing the decay of what was once some amazing housing stock, as far as craftsmanship goes. It is really sad what it has become, and the destitution of the population living here.

I must admit sometimes I wallow in my own self pity of how a failing business can bring me down. I had a wake up call today. I may have some financial struggles, but I am not struggling to survive. Looking at these properties today I saw what true struggles are. The 1st building we went in to was obvious that people were breaking in to drink, do drugs, and crash. There was no power or water in the house, and it appeared they used candles for light. The next property around the corner was quite startling. The front door was open, and the house was rather clean. The power was on, the water running, and it appeared someone was cooking in the kitchen when we walked in. About 3 trash bags worth of clothing and a few jackets were lying right by the front door. A few dolls and a small doll house were on the living room floor. There was about 3 or 4 days worth of basic food in the fridge. Upstairs there was a single mattress, and a tiny air matress, and TV with DirectTV box hooked up. This is a home that was supposed to be vacant and not cleaned out yet. The tenant was evicted in May. There was even mail sent to the address concerning her food stamps. When we pulled away we saw a woman and small girl appear on the sidewalk from the neighbors. We drove around the block and saw them standing out front. It was obvious they were afraid of what happened.
The next few properties weren't secure either. It appeared all the back doors were pried open, and the locks on the front doors were changed, because none of our keys worked. The one house looked like someone was dealing out of the kitchen since it was tough to get out back, and the train tracks were right out back for a quick getaway. I actually chambered a bullet in the barrel of my pistol. I have never carried it chambered before. The neighbors were all checking us out with concern. Two white guys taking pictures and going in and out of buildings seem to make people nervous. The blight of these areas is worse than ever, yet for one reason or another alot of people still choose to live there. The rent must be really cheap.

These properties were bought between 02 and 04. They were bought pretty well, and it apperars the guy did a lot of cash out refi's(who didn't, I know I raped a few buildings to buy some more) The amount owed on these properties is rather staggering, compared to what they are worth. There was most definetly some fraudulent appraisals pushed through, by greedy underwriters. Our offer prices might be 25% of the debt owed, and even then I don't know if they are worth it. To be quite honest, if these properties go back as REO's I truly wonder if anyone will ever live in these properties again, or will they just be boarded up, and decay to nothing. Slowly but surely a once thriving industrial city will become functionally obsolete, and decay to nothing. I have seen a lot of $hit in the 13 years of being a RE investor and landlord. What I saw yesterday was the worst I have seen.

What's coming next?

That Winters coming post really got me thinking. I keep waiting for the other shoe to drop, but now I'm starting to see things slowly get worse, not quickly. The foreclosure and default levels are now at all time highs. 1 in 8 American homes is in default. I have a few buddies in the contracting, landscaping and asphalt business. They just can't find work, or are working so cheap to get the job it almost isn't worth it. One of them just fell 90 days behind and just got fired.

On the flip side(pun intended) I have another friend that has successfully flipped 5 homes this year. Each flipped for a decent profit. I know there will be any money to be made in the car business the next few years. There are wants and needs, and people are only spending on needs right now. If you have a car you don't need another one. I hope to be out of business by October.

The government scares me. The things they are doing is only going to stretch out the pain. Cap and Trade, and the health care reform is going to pinch small business in a big way. It will cost millions of jobs. Obama playing "Rob in da hood"(Robin Hood) Taxing the rich to give healthcare to the poor will backfire miserably. Over taxing the rich will cause further investment decay, and possibly the wealthy and their businesses to leave the country all together.

The stock market is sideways, and more cash is on the sidelines than ever. The only way to get a mortgage is through the FHA, other than that banks just aren't lending. Hell you can't even get a credit card, a 5000 dollar personal loan, or lease a car. Until lending comes back we are dead in the water. I see the downward spiral continue for another 3 or 4 years, and an overall crappy economy for the next 10.

I think buy and hold, reasonably low to mid grade rentals the way to build wealth. You need to buy cheap enough(which at 50%LTV you can right now) to be able to undercut your competition, because rental prices are coming down. Household startups are at an alltime low. Kids coming out of school can't find jobs and are just chillin with Mom and Dad. I think that banks are starting to get reasonable enough that you can buy a few flips as long as you can sell below market, and stay under 200k purchase prices. The market may be slow but people are still buying if they see a perceived value.

I would love to hear other peoples comments on where they think this trainwreck is headed, and what they plan on doing to profit from it. I think the next 10 years will be the best time to be a contrarian Real Estate investor, both on the flip and buy and hold side. I think it will be harder than in the past, and you must be willing to play the landlord game for the next 12 to 15 years before you can sell for a big hit. I also think that learning how to short the stock market, and learn how to option trade a sideways market will be good income streams. The next thing I need to do is have a low overhead cash flow business. Possibly home inspections, especially with the cap and trade inspections coming. What's your thoughts on the trainwreck, and what are you doing to profit from?