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TARP Bailout Criticized by Oversight Group

Chris McLaughlin — Wed, 10 Dec 2008 19:55:16 +0000

Mid-Day Market News & Commentary by Chris McLaughlin, December 10, 2008
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Ouch! The Government Accountability Office, along with the Congressional Oversight Panel for Economic Stabilization, blasted the Treasury Department’s management of the $700 billion TARP program. The 38 page document noted that “Treasury cannot simply trust that the financial institutions will act in the desired ways; it must verify.” The report further commented that the Treasury had “administrated the TARP without seeking to monitor the use of funds provided to specific financial institutions.”

And other eyes were on Capitol Hill today as the Big 3 Automakers got a lot closer to sealing a $15 billion bailout package. The package will lead to the creation of a “Car Czar” to oversee the loan grant, in order to avoid the “take the money and hoard it” approach that many banks have taken after receiving their bailout. But several Senate Republicans were outraged, with Sen. David Vittner of Louisiana called the approach “ass backwards” and promising to filibuster it.

More money is headed out the window to the morons at AIG, the folks who partied it up at the St. Regis and seem to have no ability to control their spending. The Wall Street Journal reported that the insurance conglomerate owes other Wall Street firms about $10 billion for because of speculative investments that didn’t pan out.

Now on to real estate investing information …

Gross Income Multiplier

Short sale investors are a different set; they take action when others are too cowardly to act. They remain informed while others rely upon others for information and perhaps most telling of all…they crunch numbers. Last week we examined how to calculate the Cap rate of a property in order to determine the price of an income producing property. Although the Cap rate is a favorite among many bankers and brokers alike, another widely used formula is the Gross Income Multiplier.

How to Calculate

To calculate the Gross Income Multiplier you will need to divide the asking price or market value of the property by the current gross rental income (or potential rental). For example, let’s assume a home is listed for $150,000 with an annual rental income of $10,000. The Gross Income Multiplier would = 15. The higher the better. To provide some perspective, it may be useful to draw examples from other industries and areas. For example, if you were purchasing a publishing concern then you (and the banker) would expect to see earnings worth 5 to 10 times the pre-tax earnings on an annualized basis whereas insurance agencies sell for 150 percent of annual commissions.

When to Use

Using the GIM provides an excellent method to compare the asking price with industry norms or as a potential negotiation tool when making an offer for a short sale property. It is a good idea to use conservative numbers when calculating the GIM since it does not take extraneous expenses or future tax and insurance rate hikes into account. Repairs, utilities and other considerations may wreck havoc on even the most robust calculations so it isn’t a good idea to use the GIM when dealing with older properties or those in need of extensive renovations and/or repairs.

A Quick Word about Hedonic Pricing Models

No discussion of GIM would be complete without a quick word about hedonic pricing models. Like the government itself, builders and brokers alike will often try to maximize value by including the full “value” of hedonic measures. While that is a valid method during robust economic times, during downturns in the economy those same granite countertops, luxury pools and other customized features tend to lose value – or worse – may actually be considered a liability by some buyers. Short sale buyers would do well to base GIM calculations on conservative building alternatives or sharply discount hedonic estimates especially during tough economic times.

Caution is Advised

There is a reason the GIM is favored by corporate raiders and strategists; as a general “rule of thumb” price estimate it often results in an aggressive method for determining valuations especially when dealing with more “favorable” properties that require minimal maintenance, upkeep or repairs. Short sale investors may find this a more desirable alternative than the Cap rate formula for some properties; just keep the limitations and risks in mind or you may find yourself on the losing end of a tough negotiation strategy.

Over 50% of Loan Modifications In Default Again

Chris McLaughlin — Tue, 09 Dec 2008 17:11:31 +0000

Over 50% of Loan Modifications In Default Again

Mid-Day Market News & Commentary by Chris McLaughlin, December 9, 2008
http://www.shortsalesriches.com/welcome.html

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Good news for Realtors and investors … Home sales in October weren’t off as much as expected. The National Association of Realtors Pending Home Sales Index dropped .7 percent to 88.9 versus 89.5 in September. Economists had been expecting a drop of 3.2 percent versus the .7 percent. “Despite the turmoil in the economy, the overall level of pending home sales has been remarkably stable over the past year, holding in a generally narrow range,” said Lawrence Yun, the NAR’s chief economist.

And if you thought REOs and short sales would slow going into 2009, you better think again. According to the Office of Comptroller of the Currency, which evaluated loan modifications made in the first half of 2008, 36% of borrowers had re-defaulted by being more than 30 days late. Furthermore, after 6 months, the rate was 56%.

What does this mean? It means that there is a lot of legitimacy to the argument that the government should not throw good money after bad and provide loan guarantees for loan modifications; rather they should use that money to create jobs for new purchasers. As Office of Thrift Supervision John Reich said: “I do have a concern about money for loan modifications, particularly with such a high range of re-default.” Reich further stated that “[f]ocusing on job creation is a better way to focus federal dollars than on a loan modification process may be only partially effective.”

All eyes were on Congress today as Fannie Mae and Freddie Mac officials defended their actions, or at least tried to spread the blame around for the current housing crisis. But House Oversight and Government Reform Committee Chairman Henry Waxman (D., Calif.) said that” the CEOs of Fannie and Freddie made reckless bets that led to the downfall of their companies…[t]heir actions could cost taxpayers hundreds of billions of dollars.

“But it is a myth to say they were the originators of the subprime crisis. Fundamentally, they were following the market, not leading it,” he continued.

Now on to our real estate educational section…

Safe Money Moves for Unstable Economic Times

Searching for save money moves during these unstable economic times? Chances are you drive by one of the best investments every day; short sale real estate remains one of the best places to park your cash. Not convinced? Keep reading to find out why short sale investors are taking in more profits than ever despite the downturn in the economy.

1. Inherent Value – Not an I.O.U….unlike other forms of paper-backed investments, real estate has an inherent value rather than simply an I.O.U. issued in exchange for debt. Stocks, bonds and other financial instruments are no better than the paper they are printed upon when the economy takes a turn for the worst. When confidence fails, there is little more you can do with them than use them as fuel for a fire. On the other hand, real estate provides shelter, food, entertainment, natural resources and more.

2. Indexing “Hedge”. The media is beginning to talk about the possibility of devaluation of the dollar. Should this type of “worst case” scenario take place, all dollar denominated investments are likely to be impacted. Historically, tangible assets fair well during even the toughest economic times.

3. Contrarian. Investing is a numbers game; by definition for there to be winners there must be losers. As harsh as it may sound, savvy short sale investors recognize this reality and take steps to protect the financial future of themselves and their family by buying when others are selling and selling when others are buying. Ask yourself – what is the real estate market doing right now?

4. Diversify. Concerned about putting all your eggs into one basket? Short sale investors have a plethora of choices including types of property (single family rentals, condos, farm, timber, natural resource rich land, apartments, commercial, retail, office, fixer-uppers,), locations, amenities (age restricted, waterfront, luxury, golf etc) plus so much more. Rather than look outside of real estate, simply seek alternative forms of investment properties.

5. Plan for Prosperity. Even during the worst economic era there were those who managed to make fortunes by realizing the potential in every situation. Today is no exception. Rather than follow the masses worrying whether or not the government will have enough money to bail-out their company or fund their beleaguered retirement account, take your financial future into your own hands by planning for prosperity. Find out how easy it can be to automate your short sales investments and build a prosperous financial future by joining in for one of our seminars.