Repossession Orders Rise In the UK

Do you think that the mortgage crisis is confined to the United States? Think again.

This has only just begun.

Liquidity Is the Problem, Not Interest Rates

In my article about the Foreclosure Summit, I said that Vena Jones-Cox and Lucy Brenton gave us some interesting insights about the mortgage market. The real estate bubble is bursting, creating opportunities for distressed property investors to make money.

Here’s an article on the cause of the subprime crisis.

The Subprime Crisis and Government Failure by Michael S. Rozeff

Rozeff echoes what Vena and Lucy said at the Foreclosure Summit: the problem is not high interest rates. They’re already historically low. The problem is a lack of liquidity, and that lack of liquidity is the result of the credit contraction that always follows a period of credit expansion.

In other words, the Fed can lower interest rates as much as it wants, but this action has to result in an expansion of credit to have an impact on the subprime crisis. It doesn’t matter whether the interest rate is 6% or 8% if I can’t get a loan.

At the root of the crisis is Federal Reserve monetary policy. Bernanke is not expanding the money supply, which is the ultimate source of credit, so the credit needed to refinance bad loans is not available.

Rozeff believes that the markets will become very regulated. This is bad for the average real estate investor but very good for us as note buyers, since we’ll be buying notes and working with the homeowners as a lender, not as a pre-foreclosure investor. Since we’ll be buying at large discounts, we’ll have room to make concessions to the borrowers if necessary.

Get ready to reel in the profits!

Foreclosure Summit 2008

We just got back from Vena Jones-Cox’s Foreclosure Summit. The Summit provided us with a unique opportunity to network with real estate investors in the Indianapolis area. Here are highlights of a select few among many of the seminars from the four-day conference:

• Donna Bauer, otherwise known as The NoteBuyer (Inc.), taught a full-day seminar on buying and profiting from real estate backed notes. By special request from last year’s Foreclosure Summit registrants, she taught a special full-day seminar.
• Steve Dillon, a former experienced loss mitigation trainer at EMC Mortgage, spoke for two sessions on negotiating successful short sales.
• Kathy Kennebrook presented a seminar on raising private money.
• Don DeRosa, a real estate investor and nationally known teacher who presented in Oklahoma City last year, presented a seminar on negotiation techniques and a seminar on buying houses subject to the existing financing.
• Vena Jones-Cox and Missy McCall-Hammonds taught a seminar on building real estate business systems.

We noticed that investors are beginning to focus more and more of their energy on three strategies:

• Short Sales
• Bankruptcies
• Discount Note Buying

There was a feel of excitement in the air throughout the entire conference.

Vena Jones-Cox and Lucy Brenton gave us some interesting insights about the mortgage market. They explained why the opportunities for distressed property investments are only going to get better and better.

More about this in the next post!

Nine More Bank Failures

Nine more banks have failed. Read the article below (emphases mine).

Are you positioning your business to survive and possibly even profit from what is happening?

Nine ANB Financial Banks Closed By Federal Regulators
May 10, 2008 8:55 a.m. EST

Jupiter Kalambakal - AHN News Writer

Federal regulators said Friday it shut down nine ANB Financial National Association banks in Arkansas due to “unsafe and unsound” business practices….

The Associated Press said regulators found “lax lending standards” at ANB Financial, which financed construction and development projects in Utah, Idaho, Wyoming and Arkansas.

Financial Times added that the bank failure would cost ABN $214 million in its federal deposit insurance fund about $2.1 billion.

The FDIC said the bank had $2.1 billion in assets and $1.8 billion in total deposits as of Jan. 31.

ANB Financial is the third FDIC-insured bank to fold up this year.

The Coming Alt-A Crisis

I ran into this video posted at short sale expert Cory Boatright’s blog. It’s about the coming Alt-A debacle:

Mr. Mortgage: Here Comes the Alt-A Crisis

This is what Cory wrote in response to the video:

There is a crisis that taking place right now of which very few are even aware. It is called the “Alt A” crisis. What is Alt-A crisis?

Here are some hints:

• It is 50% bigger than subprime loan types and growing larger!
• It has an over 14% default rate with higher than a 700 average borrowers’ credit score/FICO
• It is going to be much larger than the subprime crisis
• It involves many exotic loans
• Many of the loans balances will go up significantly, thus creating even more defaults. Take a look at this Web page: New York Fed: Nonprime Mortgage Conditions in
  the United States

Bottom line: Negative equity is a huge contributor to loan default. It will make the subprime crisis look like a baby.

I recommend that you check out Mr. Mortgage’s Blog/Web site and subscribe to his RSS Feed.

Here’s the comment I wrote on Cory’s blog:

Thanks for posting that, Cory. I ran into the same video from another source. It seems that many of the experienced investors are talking about how bad Alt-A is going to be, but this sort of thing never seems to hit popular media until after it becomes a big problem.

IMF Mortgage Reset Chart

Alt-A [and option ARM] resets will peak in 2011. Things will remain bad for quite a while. Bad for everyone else, that is, and good for those who help bring liquidity to the markets through short sales, REO purchases, and note purchases.

Addition: It typically takes about six months after an adjustable-rate mortgage resets for the bank to repossesses the property. It may then take another six months for the property to sell and six more months before the property is no longer used as a comp to lower the values of the houses around it.

There’s a year and a half between an ARM re-set and the time when the house is no longer used as a comp. The fallout from the mortgage crisis is going to be around for a couple of years.

The Fed currently isn’t doing much to “save” the markets. The swaps for T-bills aren’t inflationary (yet), since the assets have to be swapped back every 28 days. I think swaps will become inflationary when the paper stops performing while it’s being held by the Fed.

I think Bernanke is more concerned about the value of the dollar than he is with bailing out the markets. I’ve written about this before:

The Fed Is Not Inflating

Will the Fed Bail Us Out?

Please comment with your own thoughts on the mortgage crisis.

An Everyday Negotiations Story

Negotiating on the fly can bring some unexpected results. It got me out of a sticky situation recently.

The Cop

About six weeks ago, I went through a yellow light on my way home. As I usually do, I watched the light carefully through the intersection to make sure it didn’t turn red. I also noted my speed: 38 mph in a 35 mph zone. This was especially important because a police car was stopped in the intersection to my right.

What I didn’t realize was that he was set on following me. I went south on Penn Ave. for three blocks and turned left as I normally do onto my home street. At the first stop sign after turning left, I made a rolling half-stop, saw that no one was coming at me from either the right or the left, and went through the intersection.

Then I noticed the flashing lights in my rear-view mirror. The conversation through my window went like this:

Cop: Let me see your driver’s license and insurance information.

Me: Here’s my license. I have some old insurance information here. Give me a moment to get my laptop out, since my updated insurance information is on it.

Cop: No, that won’t be necessary. I pegged you going through a red light. You also needed to make a complete stop at that stop sign.

Me: Actually, the light was yellow. I watched it as I went through the intersection.

Cop: Well, you were going kind of fast. You had enough time to stop.

Me: You’re right. I did have enough time to stop. I was going at 38. What’s the speed limit on this road, 35? [Cop nods] So I was speeding a little bit.

Cop: Where do you live?

Me [pointing forward]: About two blocks that way.

Cop: Give me a minute. [Returns to his car and spends about five minutes there before coming back] I’m going to write you up for three violations: Disregarding a red light, disregarding a stop sign, and failure to show proof of insurance.

Me [frustrated]: Well, I do have proof of insurance right here. It’s on my laptop. I can also go home and get it. It’s only two blocks away!

Cop: No; that will be too much trouble. If you show proof of insurance later when you go to pay the ticket, they’ll forgive the fine. And I won’t write you up for disregarding the stop sign.

Me: All right. Thank you. You know that I was watching that light all the way through the intersection, right? It didn’t turn red.

Cop: The light turned green for me while you were still going through the intersection.

Me: I understand what you saw, and I’m not disputing that. But I also know what I saw, and that light did not turn red. I don’t know how I could prove that to you unless I carried a video camera in my car. Would you mind please changing that to “disregarding a yellow light?”

Cop: [Crossing off ‘red’ on the ticket and writing ‘yellow’] All right.

Me: Thank you. I appreciate it. That is a fair charge, since I did have enough time to stop when I saw the light turn yellow.

The Result

I realized later that I did have a new insurance card in my laptop bag. I’d placed it there a few days ago because my insurance had rolled over for another year. I’d just forgotten to transfer the card from the laptop bag to my glove compartment.

I called my lawyer to figure out what to do, and he told me that I needed to show proof of insurance within 48 hours in order to avoid the fine. I missed the deadline by one day, and even though I asked for the fine to be forgiven due to lack of knowledge on my part, the judge would not do it.

Here’s the amazing part: My lawyer did some research and found out that disregarding a yellow light is not a ticketable offense in Oklahoma City. When I showed up, I found out that the judge had voided the ticket before I even showed up. After calling my name, she said, “Get this man his [bond] money back.”

I asked my lawyer, “Was that you?” He said that he had nothing to do with my great turn of fortunes. According to him, I’m the first of his clients who’s ever had a ticket voided in that way.

What to Take Away

Negotiation works! Here are some of the lessons I took away from this experience:

• Don’t be afraid to ask for something you want. Even if you’re asking a cop.
• It certainly doesn’t hurt to ask in a nice, appreciative way.
• Pick your battles. It helps to make concessions, especially where you know you’re wrong.
• Be honest. Even the person you’re negotiating with will want to help you if you’re honest. The alternative for him is to distrust everything you say, an attitude that most people don’t like to have.
• It can help to let the other person believe he’s in control. The cop and the judge held all the cards, yet I could have avoided all three of the fines if I had known to show proof of insurance within the 48-hour deadline. You don’t have to be a control freak to get what you want.
• Trust God. Not every situation works out the way we want, but sometimes we’re handed an unexpected surprise.

Conclusion

Since negotiation doesn’t have to be mean, immoral, or controlling, don’t be afraid to ask for what you want. As investors, we can buy right without compromising our principles. Now get out there and do it!

Real Estate Investors’ Clubs

I just got back from a Mastermind Group meeting sponsored by Millionaire Possibilities, a real estate investors’ club in Oklahoma City.

If you’re considering investing in real estate, it’s a good idea to attend the investor club meetings in your area. The more experienced members of these groups are in touch with the market. They can help you develop a business strategy, even a slower market like this one.

The clubs are also a good way to get leads on properties, find contractors, and network with other investors.

Here’s a quick summary of how the clubs in the Oklahoma City area have helped us in the last month:

• We received leads on two newly built, overleveraged houses in Oklahoma City through members of the club. Since the homeowners have missed payments and owe more than their houses are worth, we’re doing short sales on both.
• One of our short sales was approved in Edmond, OK. We’re listing it on the MLS through a club member.
• We bought a house in Edmond by taking over the existing loan and did three weeks of rehab work using contractors from the clubs. The first person who walked through the finished house put the house under contract and has agreed to close by May 1.
• Three members of the club called me to ask for advice about whether to buy houses they had put under contract. After hearing how much work the houses needed, I advised them to consider whether they’d be able to make any money on those houses after paying for rehab work, interest on their loans, Realtor commissions, and closing costs. They decided to use the inspection contingencies in their contracts and will not be buying those houses.

Use the links below to find real estate clubs in your own area. After you visit, post a comment here and let us know what the meetings in your area are like.

List of clubs at the REIclub Web site

List of clubs at the CREonline Web site

Robert and Angel Elder are the founders of Millionaire Possibilities.

Will the Fed Bail Us Out? (Make Money Anyway.)

Will the Federal Reserve bail us out of this mortgage mess? Jim Bradley doesn’t think so. He says they cannot do this without destroying the dollar. The only alternative to hyperinflation is to allow a recession to occur.

Fallacy 5 - The Fed can (or will or must) “bail us out”.

Not true. The Fed has diminished their ability to “inflate” because they operate on a base of roughly 900 billion in base money - and that’s after nearly 100 years in operation (and 95% drop in the value of the dollar despite major growth). There is no practical way to monetize a trillion-dollar mortgage-banking accident into cash without completely destroying the currency, ruining the market for U.S. treasuries, and effectively shutting down the Federal Reserve. The only option is to “borrow” our way out. Under current circumstances, to do so without price inflation will require extinguishing a multiple of that purchasing power in the private market to offset the public debt.

If investors sense hyperinflation, they will front-run the Fed even if the Fed isn’t yet inflating - which appears to be happening to some degree now. The Fed might need to go far into deflationary territory before a scared market is satisfied with the soundness of the dollar. Rather than analysts arguing for a persistent policy of excess monetary expansion, it is far more likely the Fed will oscillate policy from fast to slow, as then they have a more sustainable market for treasuries by pushing participants to extremes on in the market, effectively forcing a “bust” and creating demand for currency.

As I wrote before, I agree with Jim that the Fed is not inflating. Jim goes so far as to say that this stable-money policy is effectively deflationary: it was cause prices to go down. We’re already seeing price deflation in the housing market, which is most immediately tied to the credit crunch.

Is the Fed deflating now?

Most likely. Total credit is and will continue (without intervention) to fall strongly while the Fed holds base money expansion nearly flat. If those circumstances hold, policy is deflationary no matter what certain classes of prices do.

Ironically, if the Fed reverses soon enough, price deflation may not be evident across broad groups of goods that are now rising and the inflationists would appear right even though they are currently incorrect.

For now, the current credit contraction may be the worst since the great depression. The near collapse of U.S. housing is an effect that far outweighs the rise in oil prices (the banking system will probably register between 1 and 2 trillion in final losses, and probably 2-3 trillion in credit contraction over the next 3-5 years as old loans fail, cannot be refinanced, and only a fraction succeed). Already, defaulted loans are near 650 billion. Price deflation - should it occur - will be baked in when average goods (those that are not busted like housing or going up fast like oil) register price declines.

Only in the case where the losses are not taken (a bailout leaving a large part of the spending power in existence) AND the Fed complies by running looser money will that solidify the past monetary expansion and lead to future (very high) price inflation.

Jim’s post is detailed and worth reading in its entirety.

How to Make Money from the Mortgage Mess

Because our investment group’s background is in real estate and real estate backed loans, we’re not planning to buy put options on stocks or short commodities. Those markets are incredibly efficient, and predicting the future makes or breaks that kind of business.

We’ll make our profit when we buy, not when we sell. Bad loans have already begun to flood the market, and the price of the notes is declining more quickly than the price of the real estate securing the notes. This provides an opportunity for us to catch a spread by buying the notes, obtaining the properties, and selling the properties.

The keys for us will be to buy the loans at the right prices and to add value by selling the notes and properties at higher prices than banks normally can.

It’s the same reason that short sales are profitable. Investors pay banks more than the banks could recover by foreclosing themselves, and the investors utilize efficient systems to prepare and market the properties for quick sale.

Stay tuned as we continue to post updates on our investment strategies.

CitiGroup Negotiating to Sell Loans at a Discount

CitiGroup, America’s second-largest bank, is preparing to sell $12 billion of loans at a discount to investors:

April 9 (Bloomberg) — Citigroup Inc. is in talks to sell $12 billion of loans at a loss to Apollo Management LP, Blackstone Group LP and TPG Inc. as part of an effort to shrink the bank’s balance sheet….

The company’s so-called Tier 1 capital, the core measure of solvency demanded by regulators, was 7.1 percent as of Dec. 31, down from 8.6 percent a year earlier. A “well-capitalized” bank must have a ratio of Tier 1 capital to assets of at least 6 percent, according to rules set by industry regulators. Citigroup had about $2.2 trillion of assets at the end of 2007, more than any U.S. bank….

The leveraged loan market seized up last year after losses on mortgage bonds prompted fixed-income investors to shun assets deemed risky. Leveraged loans are made to companies with credit ratings below investment grade, meaning they’re considered by Moody’s Investors Service and Standard & Poor’s to carry a higher risk of default….

The deal may help clear the $200 billion logjam of unsold loans, said Chris Taggert, an analyst at CreditSights Inc. in New York. Money managers who have raised funds to invest in distressed debt are striking deals with Citigroup and other banks now eager to unload them….

CitiGroup sees trouble coming down the line, and they’re dumping their loans now before things get worse. There are people with money, lots of money, waiting in the wings. As more loans are made available for sale, their price goes down. These investors are buying because they believe they can sell the loans for more later.

The most actively traded leveraged loans, which fetched 100 cents on the dollar as recently as last June, fell to a record low of 86.28 cents in February, according to data compiled by Standard & Poor’s. Prices have since rebounded to 90.14 cents as banks reduced their backlog of unsold loans.

Apollo, Blackstone and TPG stand to profit if demand for the loans pushes prices above Citigroup’s discounted sale price.

A group led by TPG is also buying a $7 billion stake in Washington Mutual, the largest savings and loan company in the U.S.

WaMu joined more than a dozen commercial and investment banks seeking cash from outside investors in the last year. It suffered more than $200bn of write-downs and credit losses related to the US housing and credit crisis.

One company’s disaster is another company’s boon. Start thinking about how you can profit on a smaller scale in a down market.

The Fed is NOT Inflating. Let’s Make Some Money!

The rumor going around today is that the Federal Reserve is inflating the money supply and that this is causing the dollar to fall rapidly in value. The common advice has been to be in commodities, since commodities rise against the dollar. A lot of people are running to gold and oil in anticipation of future inflation.

The other rumor being circulated is that we’re looking at a severe credit crunch, which is bringing us into a recession. The International Monetary Fund has recently said that this is the worst financial crisis to hit the United States since the 1930s.

There’s a problem here. The rumors contradict each other. The expectation of future inflation is inconsistent with the claim that we’re in the middle of a credit crunch.

Forecasting the Future

This is not just a theoretical problem. Your investments succeed or fail based on how successful you are at planning for the future.

If there’s going to be future inflation, gold and oil will rise. If we’re in a credit crunch, gold and oil will fall. Gold mining shares and oil companies will follow suit.

In order to anticipate the direction of future price inflation, it’s important to look at the Fed’s present policy of monetary inflation. That is, if the Fed is producing new money today, we should expect prices to rise in the future. If the Fed is holding to a policy of stable money in the middle of a credit crunch, we can expect prices to fall later.

The best indicator of Fed policy today is the adjusted monetary base, a measure of the total amount of physical currency (dollar bills, etc.) in circulation plus commercial bank deposits held by the Fed as reserves. The Fed controls this directly by creating and destroying currency.

The St. Louis Fed publishes a chart of the adjusted monetary base:

Notice how the chart has been almost flat for the past two years. (This has also happened to M1.) The Fed has been creating hardly any money relative to its activity in the past. This is one of the sources of the credit crunch we’re facing today.

Rising Prices Today Do Not Point to Inflation Tomorrow

Yes, certain prices are going up - but remember that price inflation is a result of monetary inflation. Price changes lag behind the Fed’s activity. The cost of housing went up because the previous Fed Chairman, Alan Greenspan, expanded the money supply several years ago. The new mortgage credit created as a result of Greenspan’s policies artificially increased the demand for housing, driving up its price. The price of oil, copper, and other commodities rose because of the demand for materials created by the housing bubble.

Ben Bernanke, who is Greenspan’s successor as Fed chairman, slowed down the rate of monetary expansion. That’s why the adjusted monetary base is almost flat. The credit which had been created under Greenspan’s bubble then disappeared. Many people were no longer able to refinance out of their high-interest and adjustable-rate loans. This led to a higher rate of foreclosures, which lowered the value of mortgage paper, which made it even harder for banks to make new loans.

The credit crunch we’re seeing today is a result of Fed policy just as much as the housing bubble was.

Money is still moving into gold, oil, and other commodities, partly because people don’t want to put their money into the stock market or into real estate. However, we can expect the prices of those commodities to fall if the Fed continues its policy of stable money and allows the credit crunch to play out naturally. Inflation will return, but only after the Fed has started to expand the money supply again.

What We’re Investing In

Our investment group is not moving our money into commodities. I expect commodities’ prices to fall due to the Fed’s policy of stable money. We expect the credit crunch to be as exciting for investors as the housing bubble was; we just have to make sure we’re on the right side of the fence.

The credit crunch will force business to sell their assets in order to pay off their debts and try to avoid bankruptcy. When everyone starts to sell at the same time, prices will fall to the floor.

Get ready to pick up defaulted mortgage paper, foreclosed property, and business equipment at fire-sale prices. We’re already doing a lot of short sales. We recently got one approved in Edmond, Oklahoma. We’re also getting ready to buy mortgage notes at large discounts. Stay tuned for more updates on our investment strategies.

If you’d like to share your own investment plans or publish a success story on our site, let us know by posting a comment here.