The concept of entropy is one of the most useful terms for understanding just about everything. While it has its origins in natural law – thermodynamics, specifically – the concept holds true pretty much across all closed systems.
In the simplest of terms, every closed system will ultimately degrade toward a state of maximum entropy. I’ll use the current political system of the U.S. as a convenient example. When American democracy was first shoved out of the nest by the founding fathers, it was new, fresh, and energetic. It took the world’s breath away at its boldness and unlimited promise, and set the wheels turning on tangible change across much of the world.
Before the ink dried on the Constitution, however, the degradation began. From the beginning, the country’s political operations fell into the hands of a strictly limited number of parties, which quickly coalesced into just two. Since then, they have essentially shared power, with only minor differences in policies between the two. Simply, absent a disruptive external force, the closed political system quickly matured into an institutionalized “sameness” that all but assures no serious challenges – leading, ultimately, to the certainty it will degrade to only a shell of its former self.
It was, perhaps, because of his own understanding of natural law that Thomas Jefferson was heard to remark, “The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants. It is its natural manure.”
That doesn’t mean I am advocating revolution, dear reader – just pointing out the fact that any closed system, no matter how well constructed, will degrade. To expect the United States of America to avoid this fate is to expect the impossible. Switching to a corporate example, I used to be a regular buyer of Toyota cars. They were well made, innovative, and suited my changing needs over the years. And I wasn’t alone – in 2007 they became the world’s largest automobile maker, with a global manufacturing and distribution system that made them appear dominant. Behind the scenes, though, entropy was at work.
In 2008, when the time had come to lease a new car, I reflexively headed over to the local dealer fully expecting to drive off with yet another Toyota, just as I had done several times over the previous decade or more. But as I walked around the showroom, it was impossible not to notice that the company had lost its edge. The cars on offer were not only more expensive than the competition, but even the newest models had that “so yesterday” look about them.
As I said at the onset, you can see entropy at work in virtually every closed system. Consider the U.S. dollar, which became the world’s de facto reserve currency as a result of Bretton Woods. What an amazing advantage for the United States – this unique ability to provide the world’s central banks with their primary reserve component! And to have all the world’s commodities dealt in dollars. In short, the dollar became the centerpiece of the global economic system.
It was, of course, damned to entropy, with Nixon’s ending the dollar’s gold backing just being part of the natural progression. And if he hadn’t done it, one of his successors would have – due to some “emergency” or as a “temporary” measure, or some other flimsy political cover. Regardless, the degradation of the currency gained speed and, systematically, it’s been all downhill since.
We the people are no longer content with a free-market system that embraces periodically burning down the house in order to rebuild stronger and better – a system which has been proven to create wealth, and lots of it. Instead, we are hell bent on adopting the closed economic system of a socialist model where everything and everyone is tightly controlled.
On that point, an article in today’s edition of the Wall Street Journal titled “No Exit in Sight for U.S. as Fannie, Freddie Flail” sheds light on the continuing degradation in the free market that used to underpin the nation’s hugely important housing sector… Fannie and Freddie, for their part, remain at the core of a housing-finance system that inflated a dangerous housing bubble. After prices collapsed, sending shock waves around the world, the federal government put America's housing-finance system on life support. It has yet to decide how that troubled system should be rebuilt.
On Dec. 24, Treasury said there would be no limit to the taxpayer money it was willing to deploy over the next three years to keep the two companies afloat, doing away with the previous limit of $200 billion per company. So far, the government has handed the two companies a total of about $111 billion.
The government is willing to tolerate such open-ended exposure for two reasons. First, it sees the companies as essential cogs in the fragile housing market. Fannie and Freddie buy mortgages originated by others, holding some as investments and repackaging others for sale to investors as securities. Together with the Federal Housing Administration, they fund nine in 10 American mortgages. Worries about potential insolvency would cripple their ability to fund home loans, which would hamstring the market.
Second, the companies are a convenient tool for the administration to use in its campaign to clean up the housing mess. "We're making decisions on [loan modifications] and other issues, without being guided solely by profitability, that no purely private bank ever could," Mr. Haldeman said in late January in a speech to the Detroit Economic Club.
Besides playing a key role in the loan-modification program, Fannie and Freddie have jump-started lending by state and local housing-finance agencies by helping to guarantee $24 billion in debt. They also are lending support to the apartment sector by becoming the main funders of loans to builders and buyers of apartment buildings.
By using Fannie and Freddie for such initiatives, the White House doesn't have to go to Congress for funding. The Treasury and White House can simply issue instructions to Fannie and Freddie via their federal regulator, the Federal Housing Finance Agency, or FHFA.
The government is "running Fannie and Freddie as an instrument of national economic policy, not as a business," says Daniel Mudd, who was forced out as Fannie Mae's chief executive in September 2008 when the government took control.
(Full story here.)
Can’t you just smell the entropy? The results are not just predictable, they are evident – just look around.
As investors, it is, I would contend, important to understand the notion of entropy – and to watch for it in your portfolio companies, in your bureaucracies, and, on a more personal level, your relationships and your health. On that last point, the human body is very much a closed system and so, as we all are too painfully aware, will degrade until it ceases to exist.
You can slow the degradation by taking care of yourself. But it’s also worth remembering that it’s a one-way slope, so enjoy yourself while you are fit and able to.
======================================
Provided by Casey's Daily Dispatch
Showing posts with label bank crisis. Show all posts
Showing posts with label bank crisis. Show all posts
Wednesday, February 10, 2010
Friday, January 29, 2010
Banks Can No Longer Sing "What a Friend We Have in Washington"
These days, the financial industry's locus of power can't be found in London. It's not in New York City. Frankfurt? Tokyo? Davos, Switzerland? Nope, nope, and nope.
The real decisions that impact the capital markets are being made in Washington. And they're sometimes being made by politicians who don't really have a clue about how the industry works, or what unintended consequences their actions may have. If that doesn't scare you, I don't know what will.
Look no further than last week's market carnage for proof of who's in charge. The market was continuing on its merry way — until Washington lobbed several curve balls at Wall Street.
The reaction was swift and severe: The overall market suffered its biggest hit in months, with financial stocks getting hammered particularly hard. Moreover, the "VIX" index of volatility surged 55 percent in a span of three days. We haven't seen a move that large, that quickly since 2007.
It's clear to me that the political tides are shifting for the financial industry — and not in a good way. This could have widespread implications for the markets I follow most closely, so I want to expand on some key points.
Bankers No Longer Free to Run Wild?
President Obama shocked the markets last week with a new plan designed to rein in the nation's banks. It would specifically bar banks from holding or investing in private equity and hedge funds that aren't related to customers they're serving. Banks also would have to shed so-called "proprietary trading" units that use their own capital to place bets on the market.
Combined, these moves could impact companies like JPMorgan. It runs a OneEquity Partners PE unit that makes $8 billion in investments. It could also hammer prop trading houses like Goldman Sachs and Morgan Stanley, which generate billions of dollars in revenue from such activities.
President Obama has shocked the markets with a plan to rein in the nation's banks.
In the bigger picture, as Martin noted earlier, this signals that the "Bailout Brigade" of Treasury Secretary Tim Geithner and Fed Chairman Ben Bernanke may be losing influence. The outrageous behavior of Wall Street firms and the banking industry — and Washington's coddling of them — have finally pushed average Americans over the edge.
They're sick of watching companies make stupid loans, arrange stupid deals, blow themselves up, take billions of dollars in taxpayer money, and then — in a move that defies all logic, morality, and sensitivity — turn around and pay themselves billions and billions in bonuses! So they're rising up in anger and trying to "vote the bums out."
Result: The policymakers in Washington are finally being forced to listen to the masses — and the bankers and their lobbyists are running scared. So are bank investors, who have grown accustomed to a steady diet of D.C. handouts.
FHA Tightening the Screws?
Change is also afoot in the housing and mortgage arenas. The Federal Housing Administration, or FHA, has been making overly lax loans for several quarters now — even as house prices fall and defaults rise. Its credit reserves are running at the lowest level in modern history, raising the risk of yet another massive bailout.
But in an about-face from the recent trend toward blindly marching off a cliff, this federally-backed mortgage lender is tightening the screws. It plans to soon implement higher down payment requirements for borrowers with lousy credit.
It's also jacking up the upfront premium borrowers have to pay into the program from 1.75 percent to 2.25 percent of the loan balance. Those premiums fund insurance that protects lenders for losses on FHA loans. Finally, FHA will ask Congress for authority to raise the monthly premiums that borrowers have to shell out along with their regular payments.
A few years ago, when the FHA program was a seldom-used option for mortgage borrowers, something like this would hardly matter. But FHA now guarantees roughly 3-in-10 of all mortgages being made. So its move could be significant.
At the same time, the administration isn't entirely cutting off the housing and mortgage industries — or borrowers, for that matter. Reports are now circulating that the Obama team will soon revamp either its $300 billion Hope for Homeowners (H4H) program or the larger Home Affordable Modification Program (HAMP). We may even see changes in both.
These programs are designed to reduce foreclosures through the use of loan modifications, or "mods." But they've failed to significantly — and permanently — stem the flood of home repossessions because they don't aggressively attack the "negative equity" problem.
Efforts are underway to reduce foreclosures through the use of loan modifications.
What do I mean? These days, borrowers who go to their lenders or the government for help typically get their interest rates cut, their loan terms extended, and/or their monthly payments lowered. But their lenders don't cut the amount of principal they owe.
That leaves borrowers owing, say, $450,000 on a house that was once worth $500,000 but now is worth just $300,000. The question isn't "Why WOULD you just mail the keys back to your lender?" in that situation. It's "Why WOULDN'T you?" Even if home prices immediately turn around and start rising at their historical rate of a few percentage points a year, it would take ages for you to build positive equity again.
I highlighted this as a critical flaw of the Obama plan almost a year ago in Money and Markets when I wrote: "Higher loan-to-value ratio mortgages have ALWAYS had higher default rates than lower LTV ones. Why? When borrowers have none of their money at risk — skin in the game, if you will — they have no vested interest in sticking with the property. They're giving up nothing by walking away.
"Sure, they'll take the lower payments they're going to be offered as part of the Obama modification plan. Sure, they'll stick around for a while. But if anything ... anything ... throws their financial situation off balance, a high percentage of them will resort to "jingle mail" — meaning, they'll pop their keys in an envelope and send it off to their lender"
Because neither H4H nor HAMP has lived up to expectations, the political pressure on the administration is reaching a tipping point. And if the administration responds by fixing that crucial "principal reduction" flaw, it would be a big deal. It would be a significant step toward lowering the foreclosure rate and helping out the housing market.
The Impact on You
So what does this all mean for you, especially if you're investing in financial stocks or bonds and related industries? You simply can't be as bullish on them as you were when Washington was their best friend.
Policy is no longer being written by a bunch of bank lobbyists, then rubberstamped by the Wall Street cronies in Congress and on the Obama administration's financial team. That's good news for the long-term health of the country ... but a potential chink in the armor for the markets, especially financial stocks.
At the same time, the nasty knee-jerk market reaction last week could scare policymakers right back into bailout mode. If stocks roll over ... if home sales continue to slow (as opposed to just suffer a post-tax-cut hangover for a month or two) ... and if mortgage credit tightens anew, the Bailout Brigade might be rolled right back out again.
What is certain is that volatility and confusion levels among investors will rise. So while it's not exactly time to go all-in short here, or dump all your "longs," it IS time to pare back your exposure, take some gains off the table, and let positions that get stopped out stay that way. Then we'll see how this all shakes out.
========================================
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
The real decisions that impact the capital markets are being made in Washington. And they're sometimes being made by politicians who don't really have a clue about how the industry works, or what unintended consequences their actions may have. If that doesn't scare you, I don't know what will.
Look no further than last week's market carnage for proof of who's in charge. The market was continuing on its merry way — until Washington lobbed several curve balls at Wall Street.
The reaction was swift and severe: The overall market suffered its biggest hit in months, with financial stocks getting hammered particularly hard. Moreover, the "VIX" index of volatility surged 55 percent in a span of three days. We haven't seen a move that large, that quickly since 2007.
It's clear to me that the political tides are shifting for the financial industry — and not in a good way. This could have widespread implications for the markets I follow most closely, so I want to expand on some key points.
Bankers No Longer Free to Run Wild?
President Obama shocked the markets last week with a new plan designed to rein in the nation's banks. It would specifically bar banks from holding or investing in private equity and hedge funds that aren't related to customers they're serving. Banks also would have to shed so-called "proprietary trading" units that use their own capital to place bets on the market.
Combined, these moves could impact companies like JPMorgan. It runs a OneEquity Partners PE unit that makes $8 billion in investments. It could also hammer prop trading houses like Goldman Sachs and Morgan Stanley, which generate billions of dollars in revenue from such activities.
President Obama has shocked the markets with a plan to rein in the nation's banks.
In the bigger picture, as Martin noted earlier, this signals that the "Bailout Brigade" of Treasury Secretary Tim Geithner and Fed Chairman Ben Bernanke may be losing influence. The outrageous behavior of Wall Street firms and the banking industry — and Washington's coddling of them — have finally pushed average Americans over the edge.
They're sick of watching companies make stupid loans, arrange stupid deals, blow themselves up, take billions of dollars in taxpayer money, and then — in a move that defies all logic, morality, and sensitivity — turn around and pay themselves billions and billions in bonuses! So they're rising up in anger and trying to "vote the bums out."
Result: The policymakers in Washington are finally being forced to listen to the masses — and the bankers and their lobbyists are running scared. So are bank investors, who have grown accustomed to a steady diet of D.C. handouts.
FHA Tightening the Screws?
Change is also afoot in the housing and mortgage arenas. The Federal Housing Administration, or FHA, has been making overly lax loans for several quarters now — even as house prices fall and defaults rise. Its credit reserves are running at the lowest level in modern history, raising the risk of yet another massive bailout.
But in an about-face from the recent trend toward blindly marching off a cliff, this federally-backed mortgage lender is tightening the screws. It plans to soon implement higher down payment requirements for borrowers with lousy credit.
It's also jacking up the upfront premium borrowers have to pay into the program from 1.75 percent to 2.25 percent of the loan balance. Those premiums fund insurance that protects lenders for losses on FHA loans. Finally, FHA will ask Congress for authority to raise the monthly premiums that borrowers have to shell out along with their regular payments.
A few years ago, when the FHA program was a seldom-used option for mortgage borrowers, something like this would hardly matter. But FHA now guarantees roughly 3-in-10 of all mortgages being made. So its move could be significant.
At the same time, the administration isn't entirely cutting off the housing and mortgage industries — or borrowers, for that matter. Reports are now circulating that the Obama team will soon revamp either its $300 billion Hope for Homeowners (H4H) program or the larger Home Affordable Modification Program (HAMP). We may even see changes in both.
These programs are designed to reduce foreclosures through the use of loan modifications, or "mods." But they've failed to significantly — and permanently — stem the flood of home repossessions because they don't aggressively attack the "negative equity" problem.
Efforts are underway to reduce foreclosures through the use of loan modifications.
What do I mean? These days, borrowers who go to their lenders or the government for help typically get their interest rates cut, their loan terms extended, and/or their monthly payments lowered. But their lenders don't cut the amount of principal they owe.
That leaves borrowers owing, say, $450,000 on a house that was once worth $500,000 but now is worth just $300,000. The question isn't "Why WOULD you just mail the keys back to your lender?" in that situation. It's "Why WOULDN'T you?" Even if home prices immediately turn around and start rising at their historical rate of a few percentage points a year, it would take ages for you to build positive equity again.
I highlighted this as a critical flaw of the Obama plan almost a year ago in Money and Markets when I wrote: "Higher loan-to-value ratio mortgages have ALWAYS had higher default rates than lower LTV ones. Why? When borrowers have none of their money at risk — skin in the game, if you will — they have no vested interest in sticking with the property. They're giving up nothing by walking away.
"Sure, they'll take the lower payments they're going to be offered as part of the Obama modification plan. Sure, they'll stick around for a while. But if anything ... anything ... throws their financial situation off balance, a high percentage of them will resort to "jingle mail" — meaning, they'll pop their keys in an envelope and send it off to their lender"
Because neither H4H nor HAMP has lived up to expectations, the political pressure on the administration is reaching a tipping point. And if the administration responds by fixing that crucial "principal reduction" flaw, it would be a big deal. It would be a significant step toward lowering the foreclosure rate and helping out the housing market.
The Impact on You
So what does this all mean for you, especially if you're investing in financial stocks or bonds and related industries? You simply can't be as bullish on them as you were when Washington was their best friend.
Policy is no longer being written by a bunch of bank lobbyists, then rubberstamped by the Wall Street cronies in Congress and on the Obama administration's financial team. That's good news for the long-term health of the country ... but a potential chink in the armor for the markets, especially financial stocks.
At the same time, the nasty knee-jerk market reaction last week could scare policymakers right back into bailout mode. If stocks roll over ... if home sales continue to slow (as opposed to just suffer a post-tax-cut hangover for a month or two) ... and if mortgage credit tightens anew, the Bailout Brigade might be rolled right back out again.
What is certain is that volatility and confusion levels among investors will rise. So while it's not exactly time to go all-in short here, or dump all your "longs," it IS time to pare back your exposure, take some gains off the table, and let positions that get stopped out stay that way. Then we'll see how this all shakes out.
========================================
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
Thursday, May 14, 2009
Home Foreclosures are Souring
Just out...
Home foreclosures are soaring: RealtyTrac reported that home foreclosure filings skyrocketed 32 percent to a new all-time record high in April, making the March-April period the worst two-month surge in foreclosures ever with a record 682,000 homeowners receiving notices.
And as if that news isn’t disturbing enough, they’re also warning that the greatest surge in foreclosures of this crisis is still ahead.
Conclusion: The housing bust that lit the fuse on this economic crisis is nowhere near ending.
Home foreclosures are soaring: RealtyTrac reported that home foreclosure filings skyrocketed 32 percent to a new all-time record high in April, making the March-April period the worst two-month surge in foreclosures ever with a record 682,000 homeowners receiving notices.
And as if that news isn’t disturbing enough, they’re also warning that the greatest surge in foreclosures of this crisis is still ahead.
Conclusion: The housing bust that lit the fuse on this economic crisis is nowhere near ending.
Saturday, February 28, 2009
Shifting Tides
Sir Isaac Newton’s third law of motion: For every action, there is an equal and opposite reaction.
This law, discerned by Newton in 1687, applies to the laws of physics, but it could just as easily apply to every aspect of life, including the current economic crisis sweeping the Globe. Eastern philosophy refers to this idea as Ying and Yang. Everything is a product of two fundamentally opposite forces: cold, hot; light, dark; feminine, masculine; bull market, bear market.
The simplicity of this concept is somewhat overwhelming. Do we really need Newton or ancient philosophers to tell us that everything has an opposite? Intuitively, this is an easy concept to understand; of course everything has an opposite and overtime a balance is reached between the opposite poles of any situation. If this is an intuitively basic concept, how do we succumb to such drastic extremes? How do we lose ourselves in the euphoria of the highs or the doldrums of the lows? We listen to our minds rather than our intuition; we follow the herd rather than thinking for ourselves.
The economic bubble, built from the tech boom of the 1990’s into the housing boom of the 2000’s, is a clear example of being caught in a euphoric state and misunderstanding the intuitively simple concept of balance. The amazing growth the World experienced was unsustainable, and the economic crisis we are experiencing is the market exacting an equal and opposite reaction to that unsustainable growth. The crisis is clear, and it is spreading at an unprecedented pace. 2008 was one of the worst years on record; any number of gruesome statistics can be used to support this claim, but I’ll choose one near and dear to most gainfully employed Americans: on average 401K’s fell 27% in 2008! Retirement may have to wait; especially for Baby Boomers. To add insult to injury, 2009 is on pace to be much worse: jobless rates have climbed to 7.6%, 600K jobs were lost in January alone, it is estimated that the crisis has caused more than $13 TRILLION of lost assets and climbing!
It is difficult to speak about this crisis in terms that do not seem shocking, but just as the Eastern philosophers would point out, EVERY aspect of life has Ying and Yang. On a macro level we are experiencing the Ying to the Bull Market’s Yang, but on an individual, micro level, there is always positivity to be found. “For every buyer, there’s a seller;” one investor’s panic can be another’s profit opportunity. The “market” is not closed for business; we just need to be exceptionally careful with our investment decisions.
The economic crisis is in its initial growth phase, and the growing pains are sure to be with us for an extended time, but with great uncertainty and change comes great opportunity. The daily news has become a soap opera for investors, with as much rumor and in-fighting as the worst cliques in high school. The silver lining to this constant change is that patterns are forming and agendas are beginning to take hold. No question these patterns and agendas will continue to develop, but as patterns form and grow, investment opportunities will grow along with them.
The Obama administration is only one month old and the markets are already showing an increasing lack of confidence in the administration’s plans, but is that lack of confidence well founded? What is the focus of the administration, and how will this focus create investment opportunities?
Considering the severity of this crisis, any lack of confidence is well founded, however, the Obama administration is beginning to show signs that their plan will deviate from the course laid by the preceding administration. While this deviation may not be a cure-all, the current strategies are gathering increased disdain from citizens and demonstrating no discernable improvements; so, a new course is a welcomed change, and with a new course comes new opportunity. It may not be a “change we can believe in,” but it is a change and the patterns that develop will create investment opportunities.
Fed’s focus shifting from Wall St. to Main St.?
Treasury Secretary Tim Geithner’s plan to end the financial crisis was vague and lacking key details, and Wall St. responded accordingly with a 382 point drop in the Dow Jones Industrial Average which began while Geithner was still making his speech. While the lack of clarity of the plan raised questions on Wall St., it is understandable when we consider that the Geithner Plan began as a back-up plan that was moved to the forefront when it became clear that other plans for stability fell drastically short. In addition, as the Geithner Plan begins to unfold it is clear that the Obama administration is up against major political obstacles.
Originally, the discussion to come up with a plan to stabilize the financial system focused on two ideas: 1. Creating a “bad bank” to buy distressed financial assets to get them off the banks’ balance sheets, and 2. The government would extend guarantees to banks against catastrophic losses; similar to guarantees already made to Bank of America and Citigroup. However, these two ideas had major drawbacks that eventually led the Treasury Department to conclude that they were not feasible solutions.
•The tremendous expense would force the administration to ask Congress for additional money to put towards banks/Wall St., and it is clear that public sentiment (anger really) will not support any further “bail outs” to Wall St. Without at least lukewarm public approval it would be very difficult to get Congress’ approval.
•The government would be left in a weak position with the banks. Banks would have a position of control over the government if it was clear the government felt the banks were “too big to fail.” Leaving the banks with control would create further public and Congressional resistance.
•The government would be forced to determine the value of the banks’ assets, most of which are not even trading now.
The Geithner plan attempts to find solutions to these drawbacks. The plan shifts the Fed’s focus from saving the troubled banks at all costs to exposing the reality of the situation, and exposing reality is not always politically popular. The Geithner plan addresses the political impasse of offering further “bail outs” to banks. Instead of offering additional funds to banks based on information the banks provide, the Fed is now sending government regulators to apply a “stress test” to 20 of the country’s largest banks. These “stress tests” are likely to expose some brand name banks as insolvent. The general population expects this insolvency to some degree, but up to this point the potential for insolvency has been ignored, or at least pushed “under the rug” while offering more and more funds to the banks. Bringing the insolvency to light is key. We need to understand the true implications of this crisis. We need to know what we are up against in order to create a realistic plan. The hope is that when the true seriousness of the situation is revealed, it will be easier to create political support to enact drastic measures.
In addition to forcing the banks’ hands, Geithner’s plan shifts the balance of power in favor of the government. The current plan has allowed banks to hoard massive amounts of money in the hopes that eventually their assets would regain their value; in the mean time the banks are using their hoards of cash to slowly write off their assets rather than selling them off. The “stress tests” will expose the balance sheets for what they are.
A third step in deviating from the current plan is to allow the government to guarantee private investors from losses when they buy the troubled assets from banks. Private investors are sitting on the sidelines because no one knows how much the troubled assets are worth, and the banks are not pricing them attractively because they are sitting on government money trying to buy time. Geithner has proposed that the government buy the downside risk in these assets. This converts the high degree of uncertainty from a liability to an asset. A private investor can feel confident that if they invest 40 cents on the dollar they won’t lose that 40 cents and if the asset is worth more they could find a profit. Uncertainty and volatility adjust from a negative to a positive. This approach does mean the government (i.e. the taxpayer) could lose money, but it could also mean that if the market improves or the regulators are great at setting the guarantee prices, the taxpayer could actually profit. Either way, it’s a much more creative method of spending the “bail out” money currently flowing to banks.
If and when major banks are declared insolvent, the government will be forced to invoke the dreaded “N” word…Nationalization. At this point Nationalization is a feared term, but it is becoming clear that it is inevitable to some degree. Even free market advocates like former Fed Chief Alan Greenspan are beginning to discuss the inevitability. However, the Obama administration cannot discuss this step yet. From a political stand point, the only way Nationalization can be discussed is once there is clear evidence that it is the only option. The “stress tests” will create this evidence. Until that evidence is found the Geithner plan will continue to lack key details. Announcing plans to Nationalize would send Wall St. into a downward spiral greater than we are already experiencing.
If the government is shifting their focus away from artificially boosting up the banks, where is their focus turning? Obama’s recent speech in Arizona outlining a plan to reduce foreclosures shows a strong step towards supporting Main St. rather than Wall St. The Obama mortgage plan is designed to encourage a procedure that has been taking place through the financial crisis, but has yet to make a large impact; loan modifications. The Obama plan offers subsidies and payments to loan servicers, mortgage investors and borrowers encouraging all parties to take part in loan modifications to create affordable payment plans. The idea is to encourage more servicers and investors to allow modifications, rather than move straight to foreclosure out of fear home prices will continue to drop.
In addition to loan modifications, the Obama mortgage plan permits Fannie and Freddie to refinance mortgages they already hold up to limits of 105% of loan to value rather than the current limit of 80% loan to value. Lastly, the plan is pushing legislative efforts to allow bankruptcy judges to cram down mortgage balances. The goal is to allow judges to treat the portion of a mortgage exceeding the current value of a home as unsecured debt, thus allowing the judge to reduce the unsecured debt.
These are significant changes, but much development is needed to increase the plan’s impact. First, the modification plan only applies to owner occupied homes; this leaves a large population of second homes and investors without assistance. It is estimated by the National Association of Realtors that 40% of existing homes sold during the peak of the bubble, 2005, were purchased as second homes or investments. While helping these individuals isn’t politically popular, it is an absolute imperative if the intended purpose of the plan is to at stability to the real estate market. In addition, increasing the limits on refinances, while generous, will not impact many homeowners whose loan to value ratios are hovering as high 150%. Lastly, the plan does not address the main issue in the housing crisis; houses are greatly overvalued. In order for a mortgage plan to have any traction, loan principals need to be reduced. The general population is not willing to commit their dwindling cash flow to homes worth far less than the loans attached to them. However, principal reductions are exceptionally unpopular with lending institutions…perhaps another political chasm that may be crossed once the “stress tests” indicate the true nature of the banking crisis.
The Obama mortgage plan has clear drawbacks, but the shift is being made towards supporting Main St. The plan will help some borrowers and some lenders avoid some foreclosures, but it’s not a cure-all. Significant improvements to the plan are needed to create a larger impact, but a pattern supporting individual tax payers rather than large banks is a major deviation from the current plan, and this deviation has the potential to have large implications to personal lives and investments. The Obama plan could help you if you are a borrower at risk of defaulting on your loan or if you are already heading towards foreclosure. As the crisis and the plans to stabilize the crisis continue to develop, investment opportunities will continue to materialize. It is the task of every investor to make only well informed decisions, and understand that every investment carries inherent risks, especially in such a volatile investing climate.
The Opportunity in Real Estate
The key to investing in real estate is to educate yourself on the current market conditions, find quality investment opportunities, and act before the conditions change. PropertyVestors is here to help you accomplish these goals. In this edition of our monthly newsletter, we have highlighted three separate partners/projects that approach investing in the current market from different creative angles. Each of these strategies is designed to capitalize on the current market conditions, and because the strategies use different approaches to investing and utilize various locations, diversification of your investments remains a high priority. For institutions that are looking for additional strategies, please visit our asset management company website at www.PhoenixGAC.com.
Purchasing Rehabs for Rentals:
Blue Moon Capital
A $5,000 down payment is all it takes to transfer ownership while Blue Moon Capital completes the rehab of your rental property for you. BMC will facilitate, manage, complete & pay up-front for property rehab of an average $35,000 Scope of Work. You will get 20% Equity in the property as a head start, based on your lender's final appraisal, along with a 12-month home warranty. Current focus is Pittsburg, Atlanta, Baltimore, Cleveland, Kansas City, and Philadelphia. Property Management companies are ready to fill your rental property. Great cash flow opportunity!
The mortgage crunch has created the perfect investor opportunity....Experts say "BUY NOW" in modest markets such as Cleveland, OH. Foreclosures are high, prices are low and the rental market is strong. Yet, high down payment requirements and tight lending standards still prevent investors from taking advantage of one of the best buying periods seen thus far. Blue Moon Capital offers a $0 down financing, turn-key investment model not seen anywhere else. Learn how Blue Moon Capital is a great source for taking advantage of the BUYERS MARKET with a creative in-house financing model that requires $0 down and only a $5,000 Investment. Please contact PropertyVestors for more information.
Select Private Lending Investments:
American Homes
Due to the strict guidelines and "red tape" associated with bank financing these days, many real estate investors with great projects are turning to Private Lenders to obtain financing. The investors are able to obtain the financing quicker and easier, and the Private Lenders are able to have a great return with a secure investment. We have strong relationships with successful and established real estate businesses with strong track records. Our Spotlight for this month's newsletter is on our partner American Homes (AH). In December, a PropertyVestors member funded one of AH's projects, and you will notice a very positive quote from them in the newsletter. We currently have Private Lending opportunities open in Richmond, VA with AH, and the opportunities range from $15-$45k, offer 12% annual return, and have solid execution plans and security. Get more return than CDs, Bonds and Mutual Funds!
Preconstruction Syndicate Investments:
BridgePoint
A preconstruction syndicate is our most exciting, cutting edge strategy. PropertyVestors works closely with BridgePoint on our "Preconstruction Syndicate" deals as they are the leader in this market space. BridgePoint has created an amazingly creative strategy to capitalize on today's market conditions, with possible returns beginning at 40%. Their strategy includes protective addendums that are key to promoting profits and minimizing risk. Markets that we are currently focused on are Panama and Dominican Republic. Immediate opportunities available.
BridgePoint has developed a proprietary strategy that grants them the unique privilege of providing developers with the means to fulfill their requirements and, in exchange, negotiate terms that transfer much of the market risk from their purchasers to the developer.
Please contact us to learn more about these strategies and upcoming projects at invest@propertyvestors.com.
PropertyVestors is an investment group of CEOs, entrepreneurs and savvy real estate investors that are taking active steps to maximize their profits, while minimizing their risk by creating a diversified real estate portfolio. Investors are able to easily apply diversity in real estate geographically and by asset class through its various investment strategies and types of inventory.
Furthermore, PropertyVestors enables investors to capitalize on different market conditions. The strategies include conservative, private lending options; moderate with preconstruction syndication; and aggressive with partner deals in emerging markets, coastal regions and waterfront properties. With PropertyVestors, you can take advantage of a new investment model and innovative real estate strategies. PropertyVestors' real estate strategies and ongoing education can position you build your net wealth, while minimizing risk.
For general information about PropertyVestors or its offerings, email invest@propertyvestors.com or call 1-877-90-BUYER.
About the Author
Sarah Barry is the founder of PropertyVestors (www.PropertyVestors.com). PropertyVestors is a successful real estate investment group that creates above-market returns at below-market risk.
This law, discerned by Newton in 1687, applies to the laws of physics, but it could just as easily apply to every aspect of life, including the current economic crisis sweeping the Globe. Eastern philosophy refers to this idea as Ying and Yang. Everything is a product of two fundamentally opposite forces: cold, hot; light, dark; feminine, masculine; bull market, bear market.
The simplicity of this concept is somewhat overwhelming. Do we really need Newton or ancient philosophers to tell us that everything has an opposite? Intuitively, this is an easy concept to understand; of course everything has an opposite and overtime a balance is reached between the opposite poles of any situation. If this is an intuitively basic concept, how do we succumb to such drastic extremes? How do we lose ourselves in the euphoria of the highs or the doldrums of the lows? We listen to our minds rather than our intuition; we follow the herd rather than thinking for ourselves.
The economic bubble, built from the tech boom of the 1990’s into the housing boom of the 2000’s, is a clear example of being caught in a euphoric state and misunderstanding the intuitively simple concept of balance. The amazing growth the World experienced was unsustainable, and the economic crisis we are experiencing is the market exacting an equal and opposite reaction to that unsustainable growth. The crisis is clear, and it is spreading at an unprecedented pace. 2008 was one of the worst years on record; any number of gruesome statistics can be used to support this claim, but I’ll choose one near and dear to most gainfully employed Americans: on average 401K’s fell 27% in 2008! Retirement may have to wait; especially for Baby Boomers. To add insult to injury, 2009 is on pace to be much worse: jobless rates have climbed to 7.6%, 600K jobs were lost in January alone, it is estimated that the crisis has caused more than $13 TRILLION of lost assets and climbing!
It is difficult to speak about this crisis in terms that do not seem shocking, but just as the Eastern philosophers would point out, EVERY aspect of life has Ying and Yang. On a macro level we are experiencing the Ying to the Bull Market’s Yang, but on an individual, micro level, there is always positivity to be found. “For every buyer, there’s a seller;” one investor’s panic can be another’s profit opportunity. The “market” is not closed for business; we just need to be exceptionally careful with our investment decisions.
The economic crisis is in its initial growth phase, and the growing pains are sure to be with us for an extended time, but with great uncertainty and change comes great opportunity. The daily news has become a soap opera for investors, with as much rumor and in-fighting as the worst cliques in high school. The silver lining to this constant change is that patterns are forming and agendas are beginning to take hold. No question these patterns and agendas will continue to develop, but as patterns form and grow, investment opportunities will grow along with them.
The Obama administration is only one month old and the markets are already showing an increasing lack of confidence in the administration’s plans, but is that lack of confidence well founded? What is the focus of the administration, and how will this focus create investment opportunities?
Considering the severity of this crisis, any lack of confidence is well founded, however, the Obama administration is beginning to show signs that their plan will deviate from the course laid by the preceding administration. While this deviation may not be a cure-all, the current strategies are gathering increased disdain from citizens and demonstrating no discernable improvements; so, a new course is a welcomed change, and with a new course comes new opportunity. It may not be a “change we can believe in,” but it is a change and the patterns that develop will create investment opportunities.
Fed’s focus shifting from Wall St. to Main St.?
Treasury Secretary Tim Geithner’s plan to end the financial crisis was vague and lacking key details, and Wall St. responded accordingly with a 382 point drop in the Dow Jones Industrial Average which began while Geithner was still making his speech. While the lack of clarity of the plan raised questions on Wall St., it is understandable when we consider that the Geithner Plan began as a back-up plan that was moved to the forefront when it became clear that other plans for stability fell drastically short. In addition, as the Geithner Plan begins to unfold it is clear that the Obama administration is up against major political obstacles.
Originally, the discussion to come up with a plan to stabilize the financial system focused on two ideas: 1. Creating a “bad bank” to buy distressed financial assets to get them off the banks’ balance sheets, and 2. The government would extend guarantees to banks against catastrophic losses; similar to guarantees already made to Bank of America and Citigroup. However, these two ideas had major drawbacks that eventually led the Treasury Department to conclude that they were not feasible solutions.
•The tremendous expense would force the administration to ask Congress for additional money to put towards banks/Wall St., and it is clear that public sentiment (anger really) will not support any further “bail outs” to Wall St. Without at least lukewarm public approval it would be very difficult to get Congress’ approval.
•The government would be left in a weak position with the banks. Banks would have a position of control over the government if it was clear the government felt the banks were “too big to fail.” Leaving the banks with control would create further public and Congressional resistance.
•The government would be forced to determine the value of the banks’ assets, most of which are not even trading now.
The Geithner plan attempts to find solutions to these drawbacks. The plan shifts the Fed’s focus from saving the troubled banks at all costs to exposing the reality of the situation, and exposing reality is not always politically popular. The Geithner plan addresses the political impasse of offering further “bail outs” to banks. Instead of offering additional funds to banks based on information the banks provide, the Fed is now sending government regulators to apply a “stress test” to 20 of the country’s largest banks. These “stress tests” are likely to expose some brand name banks as insolvent. The general population expects this insolvency to some degree, but up to this point the potential for insolvency has been ignored, or at least pushed “under the rug” while offering more and more funds to the banks. Bringing the insolvency to light is key. We need to understand the true implications of this crisis. We need to know what we are up against in order to create a realistic plan. The hope is that when the true seriousness of the situation is revealed, it will be easier to create political support to enact drastic measures.
In addition to forcing the banks’ hands, Geithner’s plan shifts the balance of power in favor of the government. The current plan has allowed banks to hoard massive amounts of money in the hopes that eventually their assets would regain their value; in the mean time the banks are using their hoards of cash to slowly write off their assets rather than selling them off. The “stress tests” will expose the balance sheets for what they are.
A third step in deviating from the current plan is to allow the government to guarantee private investors from losses when they buy the troubled assets from banks. Private investors are sitting on the sidelines because no one knows how much the troubled assets are worth, and the banks are not pricing them attractively because they are sitting on government money trying to buy time. Geithner has proposed that the government buy the downside risk in these assets. This converts the high degree of uncertainty from a liability to an asset. A private investor can feel confident that if they invest 40 cents on the dollar they won’t lose that 40 cents and if the asset is worth more they could find a profit. Uncertainty and volatility adjust from a negative to a positive. This approach does mean the government (i.e. the taxpayer) could lose money, but it could also mean that if the market improves or the regulators are great at setting the guarantee prices, the taxpayer could actually profit. Either way, it’s a much more creative method of spending the “bail out” money currently flowing to banks.
If and when major banks are declared insolvent, the government will be forced to invoke the dreaded “N” word…Nationalization. At this point Nationalization is a feared term, but it is becoming clear that it is inevitable to some degree. Even free market advocates like former Fed Chief Alan Greenspan are beginning to discuss the inevitability. However, the Obama administration cannot discuss this step yet. From a political stand point, the only way Nationalization can be discussed is once there is clear evidence that it is the only option. The “stress tests” will create this evidence. Until that evidence is found the Geithner plan will continue to lack key details. Announcing plans to Nationalize would send Wall St. into a downward spiral greater than we are already experiencing.
If the government is shifting their focus away from artificially boosting up the banks, where is their focus turning? Obama’s recent speech in Arizona outlining a plan to reduce foreclosures shows a strong step towards supporting Main St. rather than Wall St. The Obama mortgage plan is designed to encourage a procedure that has been taking place through the financial crisis, but has yet to make a large impact; loan modifications. The Obama plan offers subsidies and payments to loan servicers, mortgage investors and borrowers encouraging all parties to take part in loan modifications to create affordable payment plans. The idea is to encourage more servicers and investors to allow modifications, rather than move straight to foreclosure out of fear home prices will continue to drop.
In addition to loan modifications, the Obama mortgage plan permits Fannie and Freddie to refinance mortgages they already hold up to limits of 105% of loan to value rather than the current limit of 80% loan to value. Lastly, the plan is pushing legislative efforts to allow bankruptcy judges to cram down mortgage balances. The goal is to allow judges to treat the portion of a mortgage exceeding the current value of a home as unsecured debt, thus allowing the judge to reduce the unsecured debt.
These are significant changes, but much development is needed to increase the plan’s impact. First, the modification plan only applies to owner occupied homes; this leaves a large population of second homes and investors without assistance. It is estimated by the National Association of Realtors that 40% of existing homes sold during the peak of the bubble, 2005, were purchased as second homes or investments. While helping these individuals isn’t politically popular, it is an absolute imperative if the intended purpose of the plan is to at stability to the real estate market. In addition, increasing the limits on refinances, while generous, will not impact many homeowners whose loan to value ratios are hovering as high 150%. Lastly, the plan does not address the main issue in the housing crisis; houses are greatly overvalued. In order for a mortgage plan to have any traction, loan principals need to be reduced. The general population is not willing to commit their dwindling cash flow to homes worth far less than the loans attached to them. However, principal reductions are exceptionally unpopular with lending institutions…perhaps another political chasm that may be crossed once the “stress tests” indicate the true nature of the banking crisis.
The Obama mortgage plan has clear drawbacks, but the shift is being made towards supporting Main St. The plan will help some borrowers and some lenders avoid some foreclosures, but it’s not a cure-all. Significant improvements to the plan are needed to create a larger impact, but a pattern supporting individual tax payers rather than large banks is a major deviation from the current plan, and this deviation has the potential to have large implications to personal lives and investments. The Obama plan could help you if you are a borrower at risk of defaulting on your loan or if you are already heading towards foreclosure. As the crisis and the plans to stabilize the crisis continue to develop, investment opportunities will continue to materialize. It is the task of every investor to make only well informed decisions, and understand that every investment carries inherent risks, especially in such a volatile investing climate.
The Opportunity in Real Estate
The key to investing in real estate is to educate yourself on the current market conditions, find quality investment opportunities, and act before the conditions change. PropertyVestors is here to help you accomplish these goals. In this edition of our monthly newsletter, we have highlighted three separate partners/projects that approach investing in the current market from different creative angles. Each of these strategies is designed to capitalize on the current market conditions, and because the strategies use different approaches to investing and utilize various locations, diversification of your investments remains a high priority. For institutions that are looking for additional strategies, please visit our asset management company website at www.PhoenixGAC.com.
Purchasing Rehabs for Rentals:
Blue Moon Capital
A $5,000 down payment is all it takes to transfer ownership while Blue Moon Capital completes the rehab of your rental property for you. BMC will facilitate, manage, complete & pay up-front for property rehab of an average $35,000 Scope of Work. You will get 20% Equity in the property as a head start, based on your lender's final appraisal, along with a 12-month home warranty. Current focus is Pittsburg, Atlanta, Baltimore, Cleveland, Kansas City, and Philadelphia. Property Management companies are ready to fill your rental property. Great cash flow opportunity!
The mortgage crunch has created the perfect investor opportunity....Experts say "BUY NOW" in modest markets such as Cleveland, OH. Foreclosures are high, prices are low and the rental market is strong. Yet, high down payment requirements and tight lending standards still prevent investors from taking advantage of one of the best buying periods seen thus far. Blue Moon Capital offers a $0 down financing, turn-key investment model not seen anywhere else. Learn how Blue Moon Capital is a great source for taking advantage of the BUYERS MARKET with a creative in-house financing model that requires $0 down and only a $5,000 Investment. Please contact PropertyVestors for more information.
Select Private Lending Investments:
American Homes
Due to the strict guidelines and "red tape" associated with bank financing these days, many real estate investors with great projects are turning to Private Lenders to obtain financing. The investors are able to obtain the financing quicker and easier, and the Private Lenders are able to have a great return with a secure investment. We have strong relationships with successful and established real estate businesses with strong track records. Our Spotlight for this month's newsletter is on our partner American Homes (AH). In December, a PropertyVestors member funded one of AH's projects, and you will notice a very positive quote from them in the newsletter. We currently have Private Lending opportunities open in Richmond, VA with AH, and the opportunities range from $15-$45k, offer 12% annual return, and have solid execution plans and security. Get more return than CDs, Bonds and Mutual Funds!
Preconstruction Syndicate Investments:
BridgePoint
A preconstruction syndicate is our most exciting, cutting edge strategy. PropertyVestors works closely with BridgePoint on our "Preconstruction Syndicate" deals as they are the leader in this market space. BridgePoint has created an amazingly creative strategy to capitalize on today's market conditions, with possible returns beginning at 40%. Their strategy includes protective addendums that are key to promoting profits and minimizing risk. Markets that we are currently focused on are Panama and Dominican Republic. Immediate opportunities available.
BridgePoint has developed a proprietary strategy that grants them the unique privilege of providing developers with the means to fulfill their requirements and, in exchange, negotiate terms that transfer much of the market risk from their purchasers to the developer.
Please contact us to learn more about these strategies and upcoming projects at invest@propertyvestors.com.
PropertyVestors is an investment group of CEOs, entrepreneurs and savvy real estate investors that are taking active steps to maximize their profits, while minimizing their risk by creating a diversified real estate portfolio. Investors are able to easily apply diversity in real estate geographically and by asset class through its various investment strategies and types of inventory.
Furthermore, PropertyVestors enables investors to capitalize on different market conditions. The strategies include conservative, private lending options; moderate with preconstruction syndication; and aggressive with partner deals in emerging markets, coastal regions and waterfront properties. With PropertyVestors, you can take advantage of a new investment model and innovative real estate strategies. PropertyVestors' real estate strategies and ongoing education can position you build your net wealth, while minimizing risk.
For general information about PropertyVestors or its offerings, email invest@propertyvestors.com or call 1-877-90-BUYER.
About the Author
Sarah Barry is the founder of PropertyVestors (www.PropertyVestors.com). PropertyVestors is a successful real estate investment group that creates above-market returns at below-market risk.
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