General Growth Properties files for bankruptcy

Real Estate News & Commentary by Chris McLaughlin, April 17, 2009
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General Growth Properties files for bankruptcy

The U.S. real estate sector witnessed one of its largest failures yesterday when General Properties, the second largest mall owner in the U.S., filed for bankruptcy protection. While the company has been making money at the operating level, it was forced into bankruptcy on account of it not being able to refinance mortgages.  The company blamed it on the collapse of the credit markets.  Mike Prew, an analyst with Nomura securities said, “This underscores that real estate companies are most vulnerable to refinancing risk rather than market risk.”  Indeed, liquidity problems can lead to solvency problems. The competitors of General Growth Properties must be looking for cheap pickings from the real estate portfolio of the company.  How endemic is the problem?  What about the fate of smaller real estate companies?  What is the likely impact of this on banks that have made loans to real estate companies?  Scary and depressing.

Joseph Stiglitz lambasts the bank rescue initiatives of Obama administration

Nobel Laureate Joseph Stiglitz, who, some weeks ago, described the toxic asset plan of Tim Geithner as “privatizing of gains” and “socializing of losses,” came down heavily on the bank rescue initiatives of the U.S. government in an interview yesterday. According to Stiglitz, the size of the Troubled Asset Relief Program (TARP) is not big enough to adequately capitalize the banking system, and tax payers’ return from TARP is just about 25 cents on a dollar. “The bank restructuring has been an absolute mess,” said Stiglitz. Stiglitz also expressed concern about the links between Wall Street and the President’s advisers. Citing potential conflicts of interest, Stiglitz said those who designed the rescue plans are, “either in the pocket of the banks or they’re incompetent.”

Credit-card securities under pressure

According JP Morgan’s Bankcard Index, an indicator of credit card market performance, charge-offs (card credit debt gone bad) increased from 8.4 percent in February to 8.82 percent in March. This is in line with the rise in unemployment rate. Despite the increase in charge-offs, JP Morgan expressed optimism in the future performance of the credit card market on account of the positive impact of the Federal Reserve’s Term Asset-Backed Loan Facility, a program aimed at reviving consumer lending. Obama administration officials will meet executives of credit card companies next Thursday to discuss lending practices and rates charged. The government is considering introducing a legislation to curb “deceptive” practices (read, hidden fees and usurious interest rates) of credit card companies.

Banking stress test

As part of introducing its plan for bringing about financial stability, the Obama administration has been conducting stress tests and what-if analyses to evaluate the impact of the economic environment on the banking system. The government will disclose the assumptions underlying the stress tests on April 24. Between April 24 and May 4, the banks – some 19 of the nation’s largest — that are participating in the stress tests will have an opportunity to comment on the test framework. On May 4, the government will announce the results of the tests and highlight the capital adequacy requirements of the banking system given the different economic scenarios. The test results are likely to provide fodder for both critics and supporters of the government bailout plans.

Residential Capital hiring 1000 people

Some good news, at last. Residential Capital LLC, the mortgage unit of GMAC, has announced it is hiring 1000 people to meet the requirements of business growth. With over $10 billion in losses over the last couple of years, Residential Capital’s very survival was in question not so long ago. GMAC announced last September that it was planning to fire over 50% of Residential Capital staff and close down all its offices. The firm received $6 billion bailout from the government last December and has benefited from the growth in demand for refinancing on account of drop in mortgage rates.

Now on to our real estate investing education section…

Time is On Your Side – Short Sale Investors

Like the old Rolling Stones song “Time is one my side” short sale investors may also find themselves joined by millions of Americans who have come running back to real estate after taking a temporary respite. Wondering why? It’s simple. Real estate has historically been one of the few roads to real wealth throughout the world. Going back as far as Greece, Rome and other empires, those that owned land and the underlying natural resources were the wealthiest in the land. It’s a simple time tested fact.

However, that isn’t the end of the story, Another equally important phenomena is at work. Namely, short term losses are typically less important than long term gains. Over time, the inflationary pressures exerted by a capitalistic based economy result in a rise of all asset groups. Consider these interesting statistics…

On any given day, roughly half of all investors will make a profit while the other half of investors will lose money.

Over a one month period of time, roughly 55 percent of investors will make a profit while the rest lose money.

Over a three month period of time a little over 60 percent will make money while the rest lose.

Over a year that may grow to as high as 70 percent and eventually, if you take the time period out long enough, close to 100 percent of people will “make” money.

So, how can so many people make money while still losing so much? It’s simple. Most investments are measured in nominal terms prior to taxes, interest, holding fees and other expenses. Next, the time value of money means it is entirely possible to “make money” while watching the true purchasing power of an investment shrink.

The same trends hold true for real estate as other investments. While it is entirely possible to lose money now and then, the long term potential is quite positive for turning profits related to buying short sale real estate. History has also shown this to be true; hold long enough and real estate invariable looks like a real steal.  Not convinced? Just take a look from the pages of history itself; each of these were scorned as a bad buy. Today they would be pocket change for large private investors like Trump.

The Louisiana Purchase: The United States paid roughly $15 million dollars for what later became Arkansas, Missouri, Iowa, Oklahoma, Kansas, Nebraska, parts of Minnesota, North and South Dakota, Wyoming and Colorado.

The Alaska Purchase:  Costing just over $7 million dollars, Alaska was considered little more than a barren wasteland by many.

The Florida Purchase: At $5 million dollars, the original purchase price of Florida could barely cover the cost of many personal estates today.

See you at the top!

Chris McLaughlin

http://www.shortsalesriches.com/welcome.html  

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About the author:

Chris McLaughlin is widely known as America’s top
Real Estate Attorney and Investment Consultant.

    * As the top Florida foreclosure and pre-
      foreclosure expert, he oversees more than
      100 short sale & REO closings each month

   * Long-time authority on real estate investing
      and rapid flipping of distressed homes.  Owns
      portfolio of nearly 100 high-value, high-profit
     properties

    * Owner and Supervising Broker of one of Florida’s
     largest Real Estate firms, running 4 different
     offices, supporting nearly 450 agents, uniquely
     positioning him to help thousands of investors
     make money in the biggest market opportunity ever!

     * Highly sought-after speaker, consultant, and
      seminar leader for current trends and hot topics
      in Real Estate Investing, Entrepreneurship, and
      Wealth Building

     * On twitter: http://twitter.com/mclaughlinchris
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