Investment Musings

Is the Lack of Credit Available Hampering Your Investing?

2008-09-30T13:10:00.000-07:00

Residential mortgages and, especially, home equity lines of credit are getting harder and harder to qualify for. The fees are also much higher now than they were a couple of years ago.

This has made real estate investing harder for many people.

One source of credit that hasn't been hit as hard is business credit. It has taken some hits but those changes are more because the lenders are getting smarter than getting more cautious. You can no longer buy a two year old corporation that only exists on paper and start qualifying for $1,000,000 plus loans. I don't think that's necessarily a bad thing.

With a new business (just started or a shelf corp), you can get between $150,000 and $300,000 in business lines of credit. That's enough to invest in real estate in most of the USA.

Now, if you do have a company that's been active for eighteen months or more, you can reach the $1,000,000 mark.

To find out more, check out Business Credit Tips.

Jeffrey J. Miller, Economist, MBA
Business Credit Tips
Investment Musings
Real Estate Seminar List

What will the government do about Fannie Mae and Freddie Mac?

2008-07-20T13:44:00.000-07:00

In What will happen to Fannie Mae & Freddie Mac? I

One is to take over Fannie Mae and Freddie Mac. I'm sure there is a worse choice but none come to mind at the moment. What we don't need is another works program for bureaucrats. Worse, it would be subject to even more political influence that it is now.

They could gift money to Fannie Mae and Freddie Mac to bail them out. This is a possible solution but where will the government get the money? By borrowing it or printing it. In a time when the dollar is already depressed, this isn't a good idea. It will cause import prices, including oil to rise even further.

They could extend credit to Fannie Mae and Freddy Mac (as has been proposed). This would allow Fannie Mae and Freddie Mac to borrow at rock bottom prices to cover their near term shortfalls. The problem is that this might decrease the credit rating of the US government and increase the cost of our national debt.

As I said earlier, letting Fannie Mae and Freddy Mac fail would be terrible. However, it would not be a national crises level of terrible. Most of the worst loans were bought by foreign investors and foreign governments. The heaviest conversion of retirement accounts took place when the loan products were merely questionable rather than the border line fraudulent loans of 2004. I doubt if the government will but they could just say: "thank you for the cash infusion, did you even look at what you were investing?" Still, I don't think that'll happen. We rely too much on foreign investment dollars to burn investors world wide.

I think that the government will extend credit. While that will put the US credit rating at risk, it will only have a negative impact if the situation worsens. The only way for the situation to get worse is for investor confidence to stay bad or get worse. I think that the lending reforms that have already taken place in Fannie Mae and Freddie Mac have gone a long way toward solving the situation that led to the lack of investor confidence. Having the full weight of the US government to back them up should bring investors around. If that happens, the government's credit rating will not be negatively impacted. If anything it will get better as we emerge from this "crises."

Jeffrey J. Miller, Economist, MBA
Investment Musings
Real Estate Seminar List

What will happen to Fannie Mae & Freddie Mac?

2008-07-18T12:05:00.000-07:00

Fannie Mae and Freddie Mac will not be allowed to fail.

For one thing, things aren't as bad for them as it seems and for another their failure would cost too much.

The bad loans that I've talked about previously in US Housing Market Crises caused by Mortgage Backed Securities and The Future of the Housing Market only make up a small fraction of the entire Fannie Mae and Freddie Mac holdings. It is my opinion that the lending halt earlier this year hurt them more than the defaulting loans.

Will the government bail them out? Probably.

They are in short term trouble which they can probably survive on their own but the government cannot take the chance. Too many retirement accounts are invested in hedge funds that bought Fannie Mae or Freddie Mac backed loans. With the demise of even the illusion of Social Security on the horizon, they cannot afford to allow people's retirement accounts to take that kind of hit. It would be like Enron times 10 or so.

So, what are the government's options?

I'll cover that in the next post.

Jeffrey J. Miller, Economist, MBA
Investment Musings
Real Estate Seminar List

Home sales improve? Decline? Both are right

2008-07-13T12:41:00.000-07:00

I found this great article in the Detroit Free Press. An excerpt follows:

Realtors say numbers up, counties disagree

BY GRETA GUEST • FREE PRESS BUSINESS WRITER • July 13, 2008

Realtors have been reporting recently that metro Detroit home sales have moved into positive territory, yet county government tallies indicate mostly that sales are down compared with last year.

While somewhat confusing, both sets of data are accurate. They measure different sales within different time frames and, for both buyers and sellers, they are important gauges of market activity.

The rest of this article

Jeff Miller, Economist, MBA
Real Estate Seminar List
Investment Musings

Great List of Foreclosure Resources

2008-06-25T11:08:00.000-07:00

I found a great list of foreclosure resources on a relator's blog.

The Foreclosure Investing Web Guide: 100 Useful Resources

They have foreclosure resource lists for: Tutorials, Articles, Websites, Auctions, Listings, Blogs, and Forums. Each list has 10 or more entries and the author has screened them to make sure they are real and useful. My own spot check of the sites he lists confirms this. Every one I checked, looked helpful.

Jeff Miller
Investment Musings
Real Estate Seminar List

Stock Market Tools

2008-05-18T17:20:00.000-07:00

My main background is as a real estate investor. However, I have studied other investment areas. One area that I looked at a while ago is the stock market.

It's just never been my cup of tea. It is a lot of work and you have to pay attention to it constantly. So, I looked for (and am still looking for) tools that help make buy and sell decisions (from the simplistic "red light/green light" program to programs whose data looks like JPL astronomical data sets. However, until now, I've never seen one that uses astrology to help pick stocks.

OK, OK. This program isn't all about astrology. It has a lot of good tools and an easy to use interface. They just decided to add astrological algorithms to the list of algorithms they support. As with anything they do, they kind of went overboard with it. I'm sure that if I knew anything more about astrology than my sign, their data would be really impressive. If you know anything about astrology, please look over their samples and let me know if they know what they are talking about. It sure looks impressive to me.

You can find them here:

I must say that if the astrology algorithms are as good as as the financial algorithms (which I know), they will be accurate.

I'll leave determining their usefulness to those with more qualifications and interest in that field.

Jeff Miller

The Future of the Housing Market.

2008-04-22T19:55:00.000-07:00

As I mentioned in US Housing Market Crises caused by Mortgage Backed Securities, the recasting of the minimum payment loans caused a lot of what we are seeing. Looking back on those loans will give us a clue as to what is going to happen in the housing market.

The minimum payment loans started being mass marketed in 2004. At that time, many of those loans were set to recast after a set interval. There were two intervals, 3 year and 5 year. The 3 year recasts hit in 2007. The 5 year recasts will hit in 2009. So, we know what will be coming in 2009. I don't think that 2009 will hit us as bad as 2007. For one thing, the institutions will already be geared up to handle the loans (loss mitigation departments, REO departments, etc.). Also, the public will be use to it and is less likely to panic (unless the new media succeeds in its "the sky is falling" reporting).

I expect that the rest of the 2008 market will be pretty stable with a trend toward a slow, steady drop in prices (especially in California) followed by a slightly steeper drop in prices beginning in 2009. I think that prices will generally bottom out in late 2010 to mid 2011. After that point, I'm unclear as to what housing prices will do. My gut instinct is that they will start a slow rise. However, politics, new media and group psychology can all affect that outcome.

In the last paragraph, I singled out California because, as is often the case, California reacted differently to the value drop. In this case, Californians refused to believe that the price was dropping and were still trying to get the old, higher price for their houses. You often heard "I'm waiting for the right buyer" or similar statements. It took a long time for prices to start falling even though the values were already going down. However, the laws of supply and demand could not be held off forever. As it is, I believe that prices are still lagging value. So expect prices to continue to drop in California after everyones else has flattened out.

US Housing Market Crises caused by Mortgage Backed Securities

2008-04-19T09:32:00.000-07:00

Some believe that 100% financing led to the current real estate crisis. That wasn't the cause of the bust. It did set the stage, however.

Yes, it would have been bad if the banks were lending 100% and the housing market turned down but that wasn't the actual cause of the crises. If fact, while we might have had a bit of a bumpy road, we would have been able to ride the high prices for another few years before a relatively minor correction happened.

The problem is that the 100% loans were able to satisfy the US demand for Mortgage Backed Securities (MBS). The MBS were generally bought in people's IRAs. Supply of MBS generally equaled demand.

The problem arose when foreign investors saw how well the MBS were doing and started investing in them. Suddenly, the demand was much higher than the supply. The investment houses were almost begging for more loans. However, the loan market was saturated by then (from a big refi boom). They needed another loan product that would create another refi boom. So they created one: the minimum payment loan (sometimes called an option pay).

The minimum payment loan was just another version of a negatively amortized loan (Neg-Am Loan). In general, if the interest only rate was 6%, the minimum payment was 1-3% (with the rest of the interest being tacked on to the principle). All in all, this type of loan isn't a bad loan. It also wasn't anything new and it didn't offer anything that would cause people to jump on it.

The problem came from the broker's being pressured to make more product available for the MBS. They started qualifying people, not on the real payment based on 6% interest but on the 1-3% interest payment.

This did a number of things. It created a new refi boom, it provided enough product to satisfy the foreign investment in the MBS, it fed the real estate boom and it set us up for a crash.

The real estate boom happened because more people could afford houses and people could afford bigger houses than they already had. Since house building lags so far behind demand, this created a surge in house prices. People were then refiing their houses at the new higher prices and facing lower loan payments than they had before the refi.

Then the shoe dropped. Most of the minimum payment loans were set to recast in 3 or 5 years. That means that 3 or 5 years after they were created, the loans jump to the current interest rate. If a person could, according to the brokers, afford a house at 2% interest and the rate jumps to 6%, they are now expected to pay 3x what they were paying before.

THAT is what caused the bust.