Real Estate News & Commentary by Chris McLaughlin, April 16, 2009
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Loan modification program starts
The Treasury Department announced that the first six participants to sign up for President Obama’s loan modification program are JPMorgan Chase, which will get up to $3.6 billion in subsidy and incentive payments; Wells Fargo, $2.9 billion; and Citigroup, $2 billion. The others are GMAC Mortgage, $633 million; Saxon Mortgage Services, $407 million; and Select Portfolio Servicing, $376 million. A statement issued by Wells Fargo said, “We view this modification program as yet another incremental opportunity for thousands of homeowners to preserve and maintain the dream of homeownership.” Left unsaid is the fact that now the second wave of foreclosures will begin, as banks decide which loans are worth trying to save and which are not.
Details of the loan modification program
Only loans where the cost of the foreclosure would be higher than the cost of modification will qualify. The modification plan calls for the bank to reduce interest rates so that the monthly obligation is no more than 38% of a borrower’s pre-tax income, and the government would then kick in money to bring payments down to 31% of income. Mortgage servicers (banks and mortgage companies) can also reduce the loan balance to achieve these affordability levels, and the government will share in the cost of the reduction, up to the amount the servicer would have received if it had reduced the interest rates.
Treasury will not provide subsidies to reduce rates to levels below 2%. In addition to subsidizing the interest rates, servicers will use Treasury funding to pay for incentives for themselves, homeowners, and investors. The program gives servicers $1,000 for each modification and another $1,000 a year for three years if the borrower stays current. It will also give $500 to servicers and $1,500 to mortgage holders if they modify at-risk loans before the borrower falls behind. Homeowners will even get up to $1,000 a year for five years if they keep up with payments. The funds will be used to reduce their loan principals. “We’re confident we’ll have enough money,” said Treasury spokesman Andrew Williams. Of course you will…if you run out, you’ll just print more, right?
Housing starts down
The US Commerce Department said housing starts fell 10.8 percent to a seasonally adjusted annual rate of 510,000 units, the second lowest on records dating back to 1959, from February’s 572,000 units. Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto, said, “While the situation in housing and in the labor markets is not necessarily deteriorating, it’s clear that there is no real sign of recovery whatsoever…taken together, both releases will put a damp on the nascent optimism we’ve seen in the markets in the past couple of weeks.” Analysts had expected an annual rate of 540,000 units for March.
JPMorgan beats expectations
JPMorgan Chase said its net income for the first quarter was $2.1 billion, or 40 cents a share. This was down 10% from a year ago, but still beat expectations. According to Thomson Reuters, analysts were only anticipating a profit of $1.38 billion, or 32 cents a share. The strong investment banking performance was driven by a revenue surge in its fixed income division, but Chase’s credit card division reported a net loss of $547 million, down from a profit of $609 million a year ago. The bank cited a sizable increase in allowances for loan losses and higher charge-offs, or loans the company doesn’t think are collectable. CEO Jamie Dimon expressed interest in paying back TARP funds, and unlike Gold Sacs, says Morgan can pay them back without issuing stock. After what some call Goldman Sac’s accounting sleight of hand, and KBW’s downgrading of Wells Fargo, it will pay to watch the details in this reporting.
Initial jobless claims slow, but joblessness at a record high
The U.S. Department of Labor says initial jobless claims dropped to 610,000 in the week ended April 11, but a record 6 million-plus continued to file unemployment claims during the week ended April 4, the most recent week for which data are available. That’s up 172,000 from the prior week’s revised tally of 5.85 million. John Lonski, chief economist for Moody’s Investors Service, said he puts more of his focus on the continuing claims number: “That tells you that things are getting worse and we’re going to see another rise in the unemployment rate, and that’s not good news.” He’s right of course; a sinking ship doesn’t stop sinking just because its rate of descent slows down. The job market is one of the most important foundations of the economy, and one of the greatest causes for concern.
Now on to our real estate investing education section…
Understanding Volatility Versus Risk in Short Sale Investments
One of the most common mistakes made by novice and veteran short sale investors alike is to confuse volatility versus risk. Unlike the stock and bond market where the principle can go to zero, real estate always retains some type of inherent value. To put it another way, when dealing with stocks and bonds what goes up must come down..and when it does it can drop to zero never to return again. On the other hand, real estate can go down but rarely drops to zero. Companies can and do go out of business. Real estate is still standing. Even if the structure is totally eliminated the value of the raw land beneath remains.
This brings us to an important difference between volatility and risk. Risk involves loss. True loss of the type that wipes away fortunes over night. A company is here today but gone tomorrow…along with it the stocks, bonds and investments that represent a lifetime of work. Volatility is different. Volatility means prices can go up and down then up again. It is a function of time – not absolutes. Wait long enough and the inherent value of the land itself will retain some type of value. It might rise, it might fall. It might rise relative to the work able to be performed on it or it might fall related to the value of the interest rate used to finance it…but in all cases the volatility is relative. The land does not cease to exist.
Today there are two types of investors – those seeking a return of their capital and those still seeking a return on their capital. In large part, the difference has to do with where they have decided to invest their cash. Those that follow a traditional investment strategy (buy and hold stocks, bonds, treasury bills and keep some cash on hand for an emergency) are watching in utter dismay as they watch some of the biggest business concerns in the nation – indeed the world – drop to a fraction of their former value while others may simple cease to exist. The risk is very real and leaves traditional investors few options rather than attempting to park their cash into ‘safe’ federal treasury bills in an attempt to preserve their capital.
On the other hand, short sale investors are still indeed seeking actual returns on their capital – not merely a return of capital. While most are able to turn relatively quick profits, even those that made an early mistake are comforted by the fact that the long term risk is relatively minor…if in fact, even existent. While the price of a home and land may be volatile and subject to increase or decrease over any given period of time…it is equally likely to remain in existence. Unlike financial instruments where absolute loss is a very real concern, hard assets like real estate are primarily a function of time. The inherent value eventually returns.
Consider a worst case scenario for each of the following investments:
Stocks/Bonds: Worst case = cease to exist. Value drops to zero and unable to sell.
Cash: Worst case = cease to exist. Value drops to zero. Unable to spend (ie, confederate dollars).
Real Estate: Worst Case – price drops. Still can rent, sell, owner finance, plant crops or otherwise retain some form of value. Price never drops to zero as land retains an inherent value depending upon use, natural resources and other productivity.
See you at the top!
Chris McLaughlin
http://www.shortsalesriches.com/welcome.html
P.S.
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P.P.S.:
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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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{ 1 comment… read it below or add one }
Nathan,
My business partner and I listened to everyone that was talking about short sales on the web. We listened to so many different people that it was hard to understand why so many people were trying to tell how to make the short sale formula work in so many different ways. It became quite confusing as to who really knew what. When I heard you and Chris then I knew we had finally found the folks who really were in the trenches doing this business and had a desire and the knowledge we needed. We bought your course and we have followed it faithfully and we are seeing real results from the information that is presented in this course. The paperwork is fantastic and it seems that when we need an answer to something we always seem to find it in the material.
I believe that the investor can help save this economy if the banks will just allow us to do our business. When we become educated and can present the programs necessary to the consumers like you have taught in your course then we can keep people from facing foreclosure and in turn put new people in homes that they can afford. However, it seems it is so hard and takes so long to do the short sale process so a lot of homesellers end up in foreclosure because we can not get to them in time. My passion is to do what I can to help anyone from facing foreclosure because I have been close to several who have had this horrible experience and it seems it has been real hard for them to get over.
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