So what is your so called “Adviser” (salesman) telling you to do!!!!

Walking Away from the American Dream

http://seekingalpha.com/article/84220-sean-rakhimov-3-digit-silver-ahead

            Both teams practiced long and hard to reach their peak
 performance before the race.

            On the big day, the Japanese won by a mile.

            The Americans, very discouraged and depressed, decided to
 investigate the reason for the crushing defeat.  A management team made up
 of senior management was formed to investigate and recommend appropriate
 action.

            Their conclusion was the Japanese had 8 people rowing and 1
 person steering, while the American team had 7 people steering and 2 people
 rowing.

            Feeling a deeper study was in order; American management hired  a
 consulting company and paid them a large amount of money for a second
 opinion.

            They advised, of course, that too many people were steering the
 boat, while not enough people were rowing.

            Not sure of how to utilize that information,  but wanting to
 prevent another loss to the Japanese, the rowing team’s  management
 structure was totally reorganized to 4 steering supervisors,  2 area
 steering superintendents and 1 assistant superintendent steering  manager.

            They also implemented a new performance system that would give
 the 2 people rowing the boat greater incentive to work harder.  It was
 called the ‘Rowing Team Quality First Program,’ with meetings, dinners and
 free pens for the rowers.  There was discussion of getting new paddles,
 canoes and other equipment, extra vacation days for practices and bonuses.
 The pension program was trimmed to ‘equal the competition’ and some of the
 resultant savings were channeled into morale boosting programs and
 teamwork
 posters.

            The next year the Japanese won by two miles.

            Humiliated, the American management laid-off one rower, halted
 development of a new canoe, sold all the paddles, and canceled all capital
 investments for new equipment.  The money saved was distributed to the
 Senior Executives as bonuses.

            The next year, try as he might, the lone designated rower was
 unable to even finish the race (having no paddles,) so he was laid off for
 unacceptable performance, all canoe equipment was sold and the next year’s
 racing team was out-sourced to India.

            Sadly, the End.

            Here’s something else to think about: Ford has spent the last
 thirty years moving factories out of the US , claiming they can’t
 make money paying American wages.

            TOYOTA has spent the last thirty years building more than a
 dozen plants inside the US   The last quarter’s results:

            TOYOTA makes 4 billion in profits while Ford racked up 9
 billion
 in losses.

            Ford folks are still scratching their heads, and collecting
 bonuses…besides a million dollar annual salary  !

                             Need a Bailout ??
          IF  THIS WEREN’T SO TRUE IT MIGHT BE FUNNY

On the ‘bond’ (CMO) I referenced Tuesday, a few people wanted clarification, so let me wind and slog through the details:  The deal / AAA mezzanine CMO/bond started as $850-million 2.5 years ago,.  That was 2,466 loans.  Today the deal has just over $620-million among 1621 loans.  These are pay option arms - so on day one they had just under 75% LTV values, and now they are just under 82% LTV loans as people chose to pay interest only in many cases (to keep the home). 

If you just look at a single loan on a $500-thousand house, then that loan typically started out as a $375,000 loan on a $500,000-thousand house.  And that borrower took the option of doing a minimum payment, so that over the last 2 1/2 years, that loans has gone up to $410,000.  Still the same house. LTV sliding up.

Now comes the situation where that loan is foreclosed.  So for the first few months, when the borrower isn’t paying, the servicer is actually advancing the money.  That because most borrowers get flaky once in a while, so that goes on for a few months.

Then it turns out that borrower is never going to pay.  So the servicer starts the foreclosure process and along come a few thousand in legal fees.  And the servicer continues to advance until the foreclosure is completed..  The servicer may be on the hook for half a year of payments plus fees for legal and the green pool guys.

Bottom line: Once this house hits the foreclosure bucket, and the people get moved out, it then moves into the ‘real estate owned’ (REO) bucket, that’s what this deal had 21% of as it went to the wall on Tuesday.  So that’s how the $621-million slices and dices.

When we look at an individual loan, remember, these are going up, and there may have been $10-thousand in taxes, payments, insurance and such, so we did all that - so maybe $15,000 out of pocket.

Next the house goes on the market.  Starts at $450 large but it quickly becomes obvious it won’t move.  Eventually, maybe it sells for $200-thousand.  Major discount. 

The ‘deal’ doesn’t get the whole $200-thousand.  Costs of servicers, pool guys, and such, after all the bills, it’s about a 65% loss on the $410-thousand  on a net of $144-thousand.

If we assume that 20% of the loans get foreclosed every year, then that ends up with 88% of the pool getting foreclosed with these kinds of horrible losses on each loan. Fortunately its a 3-year mess deal.

If we assume all of that, then this this bond which we offer 30-cents for each dollar of face value, then the yield will be 21% over the life of the bond.

Does the Bond Dude feel that 88% of the people with 700 credit scores in California going to lose their homes in the five 1/2 years between 2006 and whenever?  No.  Anything better than his worst case makes money for the company beyond his 21% forecast.

If only 83% get foreclosed, this bond yield pops to 28 1/2 percent.  But, this begs the question, why would anyone buy conventional corporate or stocks? Not when these kinds of yields are out there.  Believe me, the bond guys are hoping for low default rates - it means a higher yield.

Knowing this you might go looking for a good real estate bond game, but lotsa luck finding them.  Big money can play, but much harder for us  ‘little guys.’ 

Oh, and if you dig up one of the super senior bonds that sit ‘over’ the mezz level offerings, you might get the chance - as they are out there -  to lock up 18% for 10-years in a deeply discounted a senior subordinated CMO.

And that class, is why the rich keep getting richer and why at a certain level, a good wringing out is good for the fat cats ov er in fixed incomes.  Gotta know people and have real dough.