What Jimmy Stewart says about short sales

Mid-Day Market News & Commentary by Chris McLaughlin, October 21, 2008
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Stocks were mixed in early trading after the Federal Reserve announced that it will begin purchasing commercial paper, primarily owned by money market mutual funds, by establishing the Money Market Investor Funding Facility (MMIFF). The Fed is attempting to bring further liquidity to the markets. “Improved money market conditions will enhance the ability of banks and other financial intermediaries to accommodate the credit needs of businesses and households,” the Fed said in a statement.

In real estate and banking news, US Bancorp net profit dropped 47 percent to $576 million versus a profit of $1.10 billion in the year ago period. The Minneapolis-based lending institution reported earnings of 32 cents per share versus 47 cents per share in the year ago period.

The National Association of Realtors called on Congress recently to adopt its 4-point housing plan that included, among other things, expedited bank review of short sales and REOs. NAR further recommended that the government eliminate the requirement to pay back the $7,500 tax credit and to expand it to all buyers of primary residences, not just first time homebuyers. The Realtor association recommended that the government permanently prohibit banks from entering the real estate brokerage and management business.

Now on to our real estate investing educational section…

The Wonderful New World of Banking and Finance

“Something funny is happening down at the bank…”

Jimmy Stewart in It’s a Wonderful Life

Borrowing a line from Jimmy Stewart, short sale investors may have noticed something funny is happening down at the bank. It’s not your imagination…we are in new and totally unprecedented territory when it comes to banking and finance. Here is what you need to know about some of the major changes coming soon to a bank near you…and the implications for how you do business today and into the future.

1. Bank Closures. To date, only a handful of bank closures have taken place but experts expect more in the coming months. The average short sale investor shouldn’t have much to worry about when it comes to bank closures, nearly all of which involve small local banks. In fact, see our former article about stalking sick banks or how to buy FDIC real estate assets and use it as a buying opportunity. If you have a short sale pending, some other bank will buy that loan for pennies on the dollar and then mitigate it … so hang in there, but understand it might take more time.

2. Recapitalized/Nationalized Banks. Big banks dsileon’t fail…they are recapitalized (and some would argue nationalized) by the United States government. In fact, recapitalization and nationalization of banking and financial assets is taking place on a global level via government intervention and ‘bailouts’ designed to keep the economy going despite the most massive loss of wealth in the history of the modern world. Those investors that held paper-profits (stocks, bonds and other securities) have seen fortunes wiped away practically overnight. On the other hand, those holding tangible assets like real estate have a commodity with inherent – tangible value. So, wonder what recapitalization might mean to you as a short sale investor? Long wait times and less future inventory for one. Unlike banks which must show quarterly profits and report to shareholders, the government can (and has in the past) sit on its assets for years.

3. Silent Bank Runs. Although few media outlets have reported on the rash of silent bank runs, the problem persists just the same. For example, Wachovia recently reported $5 Billion dollars of withdrawals in one day – a hefty sum to be sure as depositors withdrew their savings in a flight for safety. Expect more of the same and continued volatility in the banking industry as former investment banks offset their balance sheets with consumer checking accounts and Joe Six-Pack begins stashing cash under the mattress in order to pay the bills. Until things stabilize it is a good idea to have more than one checking account in order to make sure deals go through without incident. No need to jeopardize a great opportunity because your account was frozen.

4. Getting short sales done. There is a lot of talk about what happens to short sales when the government comes in with a bunch of money. Folks, what happens is that they are more likely to get done! Right now some of these banks might not be properly staffed to even handle the amount of short sales coming down the pipe. Understand that FHA, a government program, actually has the most sensible approach to homeowners in distress and PAYS THEM to cooperate, up to $1,000, unlike the typical conventional lender. Why? Think about it … ever heard the term “cash for keys?” Once the bank owns the property they approach the person foreclosed upon and tells them they’ll pay them to move out willingly, as long as they leave the house in good condition. While I certainly don’t think the government usually “gets it,” in the case of FHA short sales they certainly get it more than those loss mitigators at other lenders…

What Jimmy Stewart says about short sales

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