You gotta love John Stewart regardless of your politics. He kinda summed it up best:
“Funny story. You know all that money that we’ve been giving to the banks. They don’t have it anymore.” – John Stewart, The Daily Show
Before we get started, I think it is important that we talk about real estate, Realtors, and investors. Frankly, we got into this business because of the freedom it gave us, the tremendous satisfaction of being our own bosses, and the fun of closing the deal. Most of us never really enjoyed doing HUDs and preliminary closing statements; we don’t particularly like math, right? Hey, I have a MBA from Georgetown, but even I don’t really like math that much.
So what I’m about to talk about doesn’t involve a bunch of math, but it involves some concepts that every single real estate professional needs to understand. Why? Everyone is going to be talking about this, and you need to understand it! You need to understand why there is a crisis in confidence, why capital markets are frozen, and how this all impacts housing and Main Street, not just Wall Street. Arguably the most powerful man in the world is not George Bush today, but rather US Treasury Secretary Henry Paulson. You’re going to start hearing him called “King Henry” and other terms indicating his power and the rise of big government … but you need to know why. It is time to get educated as a real estate investor on topics that really matter to your bottom line. He’s gone from relative obscurity to a name that will be as well known as Obama or McCain before this is all over.
Let me be very clear. This is the worst financial crisis our nation has ever faced since the Great Depression. We’re talking about a lot of things in jeopardy. Home loans, retirement accounts, 401(k)s, pension funds, credit card debt, and job creation. So please forward this e-mail on to your colleagues at your real estate firm. As long as you provide attribution to www.shortsalesriches.com/blog you can post this anywhere and everywhere. My goal is real estate investor education … and hey, if I sell a few more courses of our short sale system courses, all the better.
Now, let’s get busy talking shop…
I received an interesting question from a reader over the weekend:
“Chris, you are a lawyer, so can you tell me what the difference between the RTC that helped bail out the S&L and with this proposed huge $700 billion bailout. How will it affect me as a real estate investor doing short sales? How will it affect the realtors that I use to help re-sell my properties? Will we have less inventory?”
First, let’s make sure folks understand the difference between the RTC and the proposed bailout. When the RTC was formed, it actually took possession of the assets and sold them. They would hold auctions and if you can recall, they had some nice fire sale prices for them.
Have you ever done a short sale and the loss mitigator says “Well, I have to check with the investor and I’ll get back with you…” You see, the mortgage that Countrywide might be negotiating isn’t necessarily owned by Countrywide Home Loans. It could very well be Mortgage Backed Security #122433542 owned by a Singapore or Hong Kong investment bank for all we know.
In this case, the government isn’t going to own real estate. It will own the actual derivatives or securities that own the real estate. They will then give this mortgage backed-security to another lender to run on their behalf. So perhaps the government will say, “Ok Goldman Sachs, you run this $60 billion dollars worth of mortgage back securities on our behalf.” So who wins? A lot of people. The bank or investor that is saddled with securities that aren’t liquid will now have a purchaser – the government. Then they can turn around and get hired by the government to sell these. They then continue to hire realtors to perform REOs and continue to hire loss mitigators to get the pre-foreclosures off the books, too.
But let’s add up our spending related to bad home loans, ok?
$700 billion for mortgage assets
$85 billion for AIG
$300 billion for Fannie Mae & Freddie Mac
$300 billion for FHA insurance for loans
$29 billion for Bear Stearns
For a total of approximately $1.3 TRILLION dollars. Wow, that’s a lot of cash huh?
But before you start thinking we’re all spending this money, let’s remember that King Henry used to be the CEO of Goldman Sachs, the venerable real estate investment firm. He doesn’t like to leave money on the table or lose it. So the $700 billion for mortgage back securities isn’t a total loss of $700 billion. The government will buy them cheap, then try to resell them at least for what they bought them for. The government is buying illiquid assets which are clogging up the financial system.
The taxpayer isn’t necessarily on the hook for $700 billion. This is money purchasing illiquid assets. The assets will be held and resold. The ultimate cost will be well below $700 billion. The effort is to stabilize the market, not to solve the crisis right away.
How will this impact us as realtors and real estate investors?
Folks, we just received another gift of the market shift. Why? Now you’re going to start seeing banks actually lend again. Within the year you’ll see banks come out with loan products that compete against FHA. Why? Now that their balance sheets will be improved, and the financial system will get unclogged, the banks will begin to lend again and take some amount of risk. So that person with a 700 credit score, who can’t obtain 100% financing but has a track record of making her payments, will get that loan again.
So financing is going to become more available … but guess what else is going to happen? In my opinion, more and more Americans are going to fall victim to this economy. Oil just spiked with a record $25 to $130 increase today over all the anxiety surrounding this bailout. The Dow Jones Industrial Average tanked 372 points today (Monday). Consumers just don’t feel “wealthy” anymore as the equity in their home … as well as the equity in their 401(k) has vanished. So get ready for a lot more short sales … and a lot more REOs. We’re in this for the next few years at minimum. That’s great news for Realtors who are focused on this market and great news for real estate investors. For others … well, we won’t go there.
More tomorrow …
Chris McLaughlin, J.D., M.B.A.
Attorney at Law, Licensed Real Estate Broker
http://www.shortsalesriches.com/welcome.html
e-mail: info@shortsalesriches.com
phone: (800) 452-7627
P.S.: The best way to get ahead of the curve in this economy is to master the market of the moment. That market is short sales and REOs. If you’ve been sitting on the sidelines and want the competitive edge to get your business back up the speed and start making serious money, check out http://www.shortsalesriches.com/welcome.html
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