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Rick Tobin's Blog

By Rick Tobin | Broker in Los Angeles, CA
  • The number of all cash home buyers is quite high

    Posted Under: Home Buying in Los Angeles, Financing in Los Angeles, Investment Properties in Los Angeles  |  August 15, 2013 12:46 PM  |  407 views  |  No comments

    In Southern California, upwards of 55% of all homes purchased in 2012 may have been acquired with either all cash or FHA loans partly since the secondary markets are so restricted. A very high percentage of these home purchases were for homes priced below the conforming / FHA loan limits of $417,000.

    Many of these all cash buyers were investment or hedge funds, domestic and foreign. Obviously, the mortgage lending markets have tightened up significantly since 2007 with the Jumbo Mortgage market (loans above $417,000 in many regions of the U.S.) dramatically shutting down the most in recent years due to less secondary market investors.

    In 2012, the Jumbo Mortgage market began to slowly increase partly due to the record low interest rates, and the improving residential home prices related to lower home inventory numbers and increased demand from both U.S. and foreign investors. The weaker U.S. Dollar has helped attract lots of foreign investors from regions such as Canada, China, Europe, and Mexico.

    More sellers and builders have considered and / or used “seller financing” options (i.e., creating a new 1st mortgage, a Contract for Deed, All Inclusive Deed of Trust (AITD), or using private money sources) in order help sell their properties at a faster pace.

    Yet, there is a brand new lending rule in effect which I am still trying to learn myself which may adversely affect residential property lenders, sellers, builders, and brokers. This new rule is The Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA), which began on January 21, 2013.

    The rules related to DFA note that no creditor may make a residential mortgage loan without first making a reasonable or good faith determination that the customer may have the ability to repay the loan based upon several statutory factors.

    Some sellers may be exempt from DFA if they sell less than three (3) properties every year or they may be considered “Mortgage Loan Originators.” Please confirm with your personal advisors since these guidelines are brand new here in 2013.

    Some of these qualifying DFA (Dodd-Frank Act) factors that may determine if a seller may provide various forms of seller financing options may include:

    1. The seller did not build the home. This may hurt many small to mid sized builders.
    2. The loan must be fully amortizing with balloon payments potentially being completely prohibited. How may sellers really want to offer seller financed terms for more than one (1) to five (5) years as opposed to 20, 25, or 30 years instead with no balloon options?
    3. The seller determines that the buyer is able to later repay the loan. This new option may turn sellers who offer financing options into strict “bank underwriters.” One of the many benefits associated with seller financing in years past was related to the ease of qualifying options.
    4. The loan must have a fixed interest rate for a minimum of five (5) years.
    5. The loan must also meet other guidelines established by the Federal Reserve Board. As of now, I do not know what those additional seller financed lending guidelines may be though. How do we find out?

    In today’s “Credit Crisis World” (www.thecreditcrisis.net), a buyer or a seller working with either residential or commercial properties should consider using either conventional bank financing, private money, equity funds, or even by structuring much of the financing by themselves (i.e., Contract for Deed, AITD, etc.) in order to sell or purchase properties throughout the USA.

    Once again, it is the availability of capital that is typically the # 1 factor for a “boom or bust” housing cycle. The “Easy Money” time periods of 2001 to 2007 experienced significant price gains while the “Tighter Money” time periods of between 2007 and 2013 experienced price declines.

    Those buyers and sellers who are open minded and flexible may later learn that they have the best odds of profiting from distressed real estate opportunities in their regions.

    *** The original version of this same article may be found here: http://www.reiclub.com/realestateblog/high-real-estate-cash-buyers-recent-times/

  • Why and how are mortgage rates rising in recent times?

    Posted Under: Home Buying in Los Angeles, Financing in Los Angeles, Investment Properties in Los Angeles  |  July 24, 2013 12:34 PM  |  384 views  |  No comments

    The 30-year fixed rate recently increased the most in one week since mid-April 1987.  Freddie Mac reported that the average national Fixed Rate Mortgage (FRM) reached near 4.5% as compared with 3.93% in the previous week in mid-June 2013.

    Why would interest rates suddenly spike skyward, and why would the Dow Jones index drop quite a bit during the same time period in late June 2013?

    ANSWER: After a recent Federal Reserve meeting, Fed Chairman Ben Bernanke released some remarks in which he implied that the Federal Reserve may potentially “taper off” their future Quantitative Easing investments in which the Federal Reserve may possibly decrease their investments in stocks, bonds, and mortgages at some point in the near future.

    What is the primary reason why both the Dow Jones stock index has reached 15,000+ and why interest rates have been near record lows during our ongoing Credit Crisis (www.thecreditcrisis.net)?

    ANSWER: In my opinion, it is mainly due to the Fed’s investment of seemingly trillions of dollars of capital in these stock, bond, and mortgage markets. The Fed admits to investing approximately $85 billion per month in Treasuries and Mortgage Bonds in order to better stabilize these markets, so that rates continue to stay low. Should this $85 billion monthly figure decrease, it may adversely impact the financial markets in a variety of ways.

    How the Federal Reserve Creates Money “Out of Thin Air”

    Our “Fiat Money” supply (assets backed by nothing)  is created by The Federal Open Market Committee (FOMC), a group within the Federal Reserve System. As the saying goes, the Federal Reserve is about as “federal” as Federal Express because the Fed is, in fact, a private consortium consisting of banks, investment banks, and other entities.

    Since 1913, the Fed has been given their power under United States law to oversee America’s “Open Market Operations” in which the Fed buys and sells U.S. Securities. Additionally, the Fed makes key decisions about the present and future directions of interest rates, which directly impacts both individuals and businesses nationwide and worldwide.

    Six Ways the Fed Creates Money

    The Fed, by way of the Federal Open Market Committee (FOMC), creates money in the following ways:

    1. When the government is short of funds, the U.S. Treasury issues bonds (fancy “IOUs” for debt). The FOMC will also approve the purchase of U.S. government bonds on the “open market” and third-party bond dealers will sell them off.

    2. If the Fed wishes to increase the supply of money, they will buy more bonds from the independent bond dealers. In theory, this allegedly helps stimulate the economic expansion of the U.S. in both good and bad economic times. However, it does not always stimulate the economy in a positive way. In fact, an increasing supply of money can cause rapidly increasing rates of inflation, just like we have seen in recent years since the introduction of “Quantitative Easing” and other bailout programs.

    3. The Fed provides electronic credits to various banks in order to buy these same bonds. Supposedly, 97% of all “money” here in the US is created by way of computerized digits, thanks to the power of the computer keyboard. If true, then only 3% of all U.S. money may originate in the form of coins and dollar bills.

    4. Fractional Reserve Lending: Banks, in turn, will use these same electronic credits, and loan them out to their banking customers in amounts leveraged 10, 20, 30, or 50+ times the same bank’s existing capital reserves. For example, ABC Bank may have $10 million in capital reserves (electronic credits, cash, etc.).

    Thanks to the magical powers of “Fractional Reserve Lending,” the same bank may make $100 million + (or ten times their capital reserves) in loans to their banking customers for automobile, credit card, home, construction, or business loans. With many banks, their branches may have only 1% to 3% in actual cash reserves on hand in their bank vaults, which is primarily used for ATM machines.

    5. Money can also be created if the Fed changes the reserve requirements for banks. If the Fed tells U.S. banks that they may decrease their reserve requirements, then banks will  be able to make even more loans in the future while simultaneously keeping even lower cash reserves on hand.

    6. If banks run too low on cash reserves, the Fed will give the banks loans by way of the “Discount Rate” for short periods of time at very low rates of interest. The banks will then charge their customers much higher rates of interest for various types of loans. The interest rate and fee difference between the Fed’s Discount Rate loan to the bank, and the bank’s loan to their customers will be profit to the same bank.

    No Historical Precedence for the Credit Crisis Bailouts

    Back when the world’s financial system almost collapsed (per Fed Chairman Ben Bernanke himself) in late September 2008, the Fed used a series of multi-trillion dollar bailouts, anonymous auctions, emergency loans, and other glorified “financial band-aids” in order to try to save many financial institutions, insurance companies, and investment banks from collapsing because they were deemed “too big to fail.”

    Many financial institutions have on and off balance sheet derivatives investments such as Credit Default Swaps and Interest Rate Options (both are akin to financial and insurance bets on the directions of future interest rates, investments, and other complex financial assets), which may equate to $1,500+ trillion dollars. This alleged $1,500 trillion of derivatives assets supposedly dwarfs all assets on planet Earth combined by a multitude of times.

    ABC Bank may bet $10 trillion that interest rates tied to an index like LIBOR (London Interbank Offered Rate) may fall in the near term while XYZ Bank takes an offsetting bet that LIBOR rates may increase. In this scenario, somebody will win their bet while the other may lose badly.

    Sadly, the financial bets are so interconnected worldwide that the implosion or collapse of ABC Bank can take down not only XYX Bank, but another ten or so financial institutions, which may be directly or indirectly tied in with ABC Bank’s trillions of dollars of complex derivatives investments. This is why many of the bigger banks like the fictional “ABC Bank” are deemed “Too big to fail.”

    Quantitative Easing Infinity or Bust

    The Fed has been the primary buyer of stocks, bonds, and mortgage bonds for the past several years here in the US. If the Fed stops buying trillions of dollars of Treasuries and mortgage bonds, then the 10-year Treasury yields will increase.

    30-year fixed mortgage rates are tied to the directions of the 10-year Treasuries. Fewer buyers for Treasuries historically has led to increasing mortgage rates. How can the Fed really stop this hyper-inflationary “Quantitative Easing” concept without potentially causing the stock market to fall?

    How can the Fed stop buying so many Treasuries and mortgage bonds without causing interest rates to rapidly increase? Tragically, QE bailouts are weakening the value of the U.S. dollar which, in turn, is causing inflation to skyrocket for many goods and services such as oil or gasoline, food costs, clothing, and real estate prices in many regions.

    For more proof of the importance of the “double-edged sword” QE options, Fed Chairman Bernanke’s recent comments about possibly “tapering” off their future Quantitative Easing investments caused some panic in the financial markets since so many “Mom and Pop” investors and very well informed financial analysts are also quite aware of both the positives and negatives associated with QE policies.

    I hope and pray that the U.S. economy may rebound on its own more so than continuing to have to rely upon bailouts from the Fed, and other sources worldwide. “Capitalism” is typically an economic state in which the “Free Markets” sort themselves out with individual buyers and sellers than by way of governmental or Central Bank bailouts, as we have all seen in recent years.

    Even so, the combination of low interest rates and increasing rates of inflation historically has helped the asset class of “Real Estate” more than any other type of investment.



    Read more: http://www.creonline.com/blog/why-real-estate-mortgage-rates-are-rising/#ixzz2ZzdsJacW
  • The Ongoing Credit Crisis

    Posted Under: Market Conditions in Los Angeles, Home Buying in Los Angeles, Financing in Los Angeles  |  July 2, 2013 10:05 AM  |  391 views  |  1 comment

    The Ongoing Credit Crisis

    Posted by Rick Tobin | www.thecreditcrisis.net

     
     

    Credit MortgageThe ongoing and worsening Credit Crisis (www.thecreditcrisis.net) continues at a rapidly escalating downward spiraling pace. The various bailout programs offered by governments and Central Banks worldwide have done absolutely nothing to help the everyday citizen on the street.

    These bailout programs have only worsened the financial crisis worldwide, and have adversely impacted our once capitalistic ways of life by having more and more centralized government control over our various major industries such as the automobile, airline, and health “care” industries as well as the last remaining firms on Wall Street.

    Fannie Mae & Freddic Mac

    Most obviously, the banking and mortgage market systems have been dramatically impacted by the nationalizing of both Fannie Mae and Freddie Mac which purchase most residential mortgages nationwide. FHA continues to represent a larger percentage of the national mortgage market although the FHA insurance system (and SBA) themselves are close to being technically insolvent sadly.

    The first major financial meltdown of this century was probably the 2000 Nasdaq meltdown. Do you remember when the Nasdaq index hit near 5,000 in March of 2000 just prior to the High Tech Bust? This was followed shortly thereafter by the Telecommunications Meltdown (i.e. Global Crossing, etc.). Few people may remember that the Telecommunications meltdown was actually a bigger financial disaster than the High Tech meltdown as the stock and bond losses were staggering.

    The official start of the latest financial crisis officially called “The Credit Crisis” began back in August of 2007. However, major sub-prime lenders such as New Century Mortgage (based in Irvine, CA) and others were shutting down well before this official starting date. This mortgage collapse was also followed by a collapsing structured debt product meltdown.

    Banks - Are They Safe?

    As I have been saying and writing for years, the largest banks in America are all technically insolvent primarily due to their off balance sheet derivatives investments (Credit Default Swaps, etc.) which they seem to “forget” to calculate in their earnings reports each quarter. Sadly, their current losses may far exceed the entire value of their respective financial institutions (cash, stock value, interest income, etc.). Local credit unions and community banks may be a much safer place to put your money than in the largest banks nationwide.

    The Credit Crisis, again, is primarily all about the unwinding of the derivatives markets worldwide which may include structured investment or debt instruments such as Credit Default Swaps (a glorified form of a bet which may be hedged or insured by a third party which is probably a shell entity based in the Caribbean as many of these “insurance companies” actually were shown to be in the past), Collaterized Debt Obligations (or Mortgage Backed Securities pools – a package of real estate mortgages in the hundreds of millions of dollars), Structured Investment Vehicles, or other complicated financial entities which are really only understood by a few Ivy League MBAs.

    Real Estate Investing Opportunities on Rise

    Out of chaos though, comes opportunity. When banks or motivated sellers need to liquidate their homes, commercial properties, or other assets as quickly as possible, then there may be some exceptional buying opportunities for investors who are willing to spend the time searching for these deals today.

    *** To read the original version of this article link on the REI (Real Estate Investing) Club website, please click here: http://www.reiclub.com/realestateblog/real-estate-credit-crisis-continues/

  • Why Commercial Property Values are improving as well

    Posted Under: Market Conditions in Los Angeles, Financing in Los Angeles, Investment Properties in Los Angeles  |  May 14, 2013 10:53 AM  |  418 views  |  1 comment

    Since the Credit Crisis began back in the Summer of 2007, both commercial and residential property values have fallen significantly throughout the USA. As I have written before, property owners are more likely to walk away from their “upside down” homes, office buildings, retail shopping centers, or other types of properties if their existing mortgage debt exceeds their current market value.

    Thankfully, home prices have begun to stabilize or increase in price ranges of between 5% and 20% + in various regions of the country over just the past year partly related to near record low mortgage interest rates. The faster and the lower that interest rates drop, then the higher the mortgage loan amount the prospective mortgage borrower will qualify for which drives home sales prices even higher.

    Sadly, incomes for the vast majority of Americans have stagnated or declined since the start of the 2007 Credit Crisis. To best try to stabilize real estate values, the borrower either needs higher personal or business income levels, or access to cheaper money by way of incredibly low interest rates and more flexible qualification guidelines.

    Lenders have more “skin in the game” than borrowers

    In many regions of the USA, residential and commercial property buildings (i.e., retail, office, industrial, etc.) experienced price or appraised value declines of 50% or more since the last market peaks near 2006 – 2008, depending upon their region of the country. Increasing vacancy rates in small to larger retail shopping centers, office buildings, or other property types also made it more challenging for property owners to refinance or sell their properties at prices anywhere near the peak values in recent years.


    When purchasing commercial properties just like residential homes, it is typically the lender who provides most of their own capital in the purchase deal as opposed to the borrower. Whether it be a 5%, 10%, 20%, or a 35% down payment invested by the property buyer, it is the lender who has more “skin in the game” or money invested in the deal. As such, the lender tends to not be as optimistic as the prospective borrower about the property since they have more of their own money at risk.

    Commercial Underwriting Guidelines: It’s all about the numbers

    When underwriting, analyzing, or investing in commercial properties, it is all about the numbers. How is the gross income? How high are the expenses or expense ratios? What is the true NOI (Net Operating Income)? What is the typical Cap (Capitalization) Rate used for the subject property’s building and location? How is the Cash Flow? What is the potential Cash on Cash return? What are the typical vacancy rates for the building type and region?

    Commercial properties can be much more subjective deals for both potential buyers and lenders. Regardless of the building’s unique design style, prime oceanfront or downtown location, sales comparables in the region, or the quality of the tenants, lenders tend to look first at the numbers.

    Many commercial loans are taken on by business entities such as LLC’s (Limited Liability Companies), Partnerships, or Corporations as opposed to individual borrowers. Some commercial loans are “Nonrecourse” in that the lender or creditor may only seized the subject property in the event of a default, and not pursue any of the individual members, stockholders, or partners for any additional remaining losses or deficiencies.
     

    Why don’t commercial loans typically have 30 year fixed rates?
     

    With commercial loans, many banks will borrow the money wholesale, and sell it to the borrower retail. The commercial bank or mortgage banker needs to be fairly comfortable that they are pricing the mortgage loan’s margin above the pegged cost of funds’ benchmark index (i.e., LIBOR (London Interbank Offered Rate), Prime Rate, COFI (Cost of Funds Index), etc.) for a decent anticipated profit margin spread.

    If the commercial banker prices the commercial loan too low for a 3, 5, 7, or 10 year fixed loan and his underlying index goes in the wrong direction in the near term, then the banker can actually lose money on the loan.

    Additionally, many commercial loans will have early prepayment penalties or “Defeasance”, “Lockout”, or “Interest Guarantee” penalties for terms of between one (1) and five (5) plus years. Many of these loans will be “securitized”, or sold off in a bundled package of mortgage backed security bonds to Wall Street, Fannie Mae, Freddie Mac, or other entities, so the early prepayment penalty fees protect the secondary market investors as well.

    Should the borrower pay off the mortgage too soon, then the lenders or investors will try to recapture some of their early payoff losses by way of some type of an “Exit Fee” which may equate to a small percentage amount of the outstanding loan balance, or several years of mortgage interest payments.

    Some borrowers want longer term fixed rates for the perceived stability of the loan while many bankers want to make short term loans in order to try to minimize their lending risks. There are some portfolio commercial lenders, however, who will lend out their own money at longer fixed rate terms at higher interest rates though.

    Yet, many types of commercial loans may be fixed up to 15 or 20 years, and others may be fully amortized over 25 or 30 years so it will provide the borrower with lower monthly payment rates.

    Cap Rates: How lenders and buyers analyze values

     

    In years past, lenders typically used cap (“capitalization”) rates of between 6% and 10%+, depending upon property types and location. The capitalization rate is a measure of a property’s potential performance without factoring in or considering the mortgage financing. It is effectively the NOI (Net Operating Income) divided by the sales price.

    The Cap Rate is also used to convert the expected future Net Operating Income (NOI) over time into a prevent value number today. Many borrowers today are willing to pay higher prices for all types of real estate partly since their borrowing costs are so low due to almost near record low interest rates. Cheap money and rising prices are akin to a “see saw” with one another.


    The lower the cap rate used, then the HIGHER the potential sale price. Between the fourth quarter of 2002 and the first quarter of 2008, average national cap rates plunged from 9.3% to 6.75%. If investors and lenders can’t increase rental income numbers in the short term, then why not ease lending underwriting analysis calculations so that property values stabilize or actually increase?

    As a result of the declining cap rates considered by both lenders and investors, commercial property values increased for prime buildings such as apartments or multi family, office, retail shopping centers, and industrial / storage facilities. As the Credit Crisis continued onward between 2008 and 2012, then more lenders began to consider lower cap rates for properties partly due to the rapidly decreasing interest rates as well.



    Cap Rates = Interest Rates

    Amazingly, some prime properties located in prime big cities like Los Angeles, Seattle, New York City, Baltimore, Washington D.C., San Diego, San Francisco, Atlanta, and Boston now may sell at cap rate prices as low as the 3% and 4% range for some multi family apartment deals which also parallels many of the best fixed rate options for mortgage loans today, surprisingly.

    These rapidly declining cap rates are helping to increase commercial property values significantly in many regions of the USA today in spite of the ongoing sluggish economy, regardless of whether or not the subject property’s net operating income actually increased in recent times.

    For example as it relates to trying to partly determine a commercial property’s potential value or sales price using much lower Cap Rates today:

    * Net Operating Income = $100,000 per year


    * Cap Rate using 7% equals an approximate value of $1,429,000.

    * Cap Rate using 4% equals a $2,500,000 value.

    ** Please note that lenders use a few other types of property underwriting analysis formulas as well to better determine property values and loan amount limits.

    Inflation is the key to prosperity when owning real estate

    When incomes are stagnant or continue to decline, then one of the best ways to improve property values (commercial and residential) is to drop interest rates as low as possible and ease up the underwriting guidelines such as decreasing the allowable Cap Rates, considering higher vacancy rates, and being more flexible with the borrower’s credit and financial histories.

    In spite of our questionable U.S. economy, residential and commercial property values have improved in many parts of the country. Cheap money and easier underwriting lending guidelines are two of the main reasons why property values have appreciated right along with our increasing rates of inflation.

    Once again, real estate continues to be one of the best asset class hedges for inflation so more flexible underwriting guidelines can help property values continue to increase right along with the higher rates of inflation. 
  • Real Estate: An Exceptional Hedge Against Inflation

    Posted Under: Home Buying in Los Angeles, Financing in Los Angeles, Investment Properties in Los Angeles  |  May 1, 2013 2:03 PM  |  409 views  |  No comments
     
    Historically, real estate has been one of the best forms of investments to counteract or to benefit from high rates of inflation. Traditionally though, when inflation rates are high, then the Federal Reserve typically likes to increase interest rates in order to potentially offset or slowdown high rates of inflation. On the other hand, low rates of inflation may then lead to lower interest rates. Today in 2013, we have both record low interest rates and increasing inflation.

    Historical U.S. Median Home Sales Prices: The Past 50 Years

    According to data published by the U.S. Census Bureau, the median priced U.S. home back in January of 1963 sold was just $17,200. Ten years later in January 1973, the median U.S. home was still a quite low $29,900. Twenty years later in January 1983, the median U.S. home price increased significantly to $73,500.
    Thirty years after the original 1963 date, the median U.S. home price finally crossed the $100,000 threshold level as it reached $118,000 in January of 1993. Forty years after the 1963 date was reached in January of 2003, the median U.S. home price reached $181,700.

    Today in 2013, which is fifty (50) years after the original 1963 year used in my study for this article, the median U.S. home sales price reached $170,600 (according to the National Association of Realtors). Sadly, the median U.S. home sales price in 2013 is below the median home sales price of ten years ago (2003 - $181,700).

    “Upside Down” or Ride The Inflation “Wave” Again

    Numerous housing studies on “upside down” properties note that people are more likely to walk away from their home when their existing mortgage debt exceeds their current market value. Whether an “upside down” or overindebted homeowner tries to use a “Strategic Default”, a “Short Sale”, or a conventional home sale, the owner may not financially benefit, regardless. As a result, neighboring homes may be adversely impacted by another distressed foreclosure sale in the neighborhood.

    Question: What is one of the best ways to improve the value of real estate than by using national economic and financial strategies to increase property values? Answer: INFLATION. When home values increase, then existing homeowners have more incentive to stay with their properties. If less people choose to allow their lenders to foreclose upon them, then less foreclosures means better overall home values for each and every neighborhood nationwide.

    A combination of record low interest rates and more access to government backed mortgage loans such as FHA will also allow more borrowers to qualify for larger loan amounts. Obviously, a borrower who qualifies for a $200,000 mortgage loan today based upon interest rates in the high 3% range might have only qualified for $150,000 at a 5% or 6% rate range in recent years.

    The more borrowers who qualify for larger loan amounts will then drive up home sales prices for the existing homeowners. For the bulk of Americans, their net worth is derived from their ownership of real estate. If home prices increase, then property owners tend to get happier and then spend more money on other consumer items which stimulates the overall U.S. economy.

    “Inflate or Die”
    As I have written before, the Federal Reserve and U.S. government have tried to stimulate the U.S. economy by flooding the markets with cheap money so that they, and U.S. consumers, may invest in more stocks, bonds, real estate (properties and mortgages), and other assets in order to try to inflate our way out of this financial mess, or “Credit Crisis”, which officially began back in the Summer of 2007.

    Since bank savings rates today offer customers effectively NEGATIVE NET RETURNS after one factors in the costs of taxes, inflation, and bank fees, then the higher returns offered in the stock market and real estate properties today seems much more appealing. The recent 14,500+ Dow Jones index levels are a testament to the success of that strategy of “Quantitative Easing” (create money out of thin air in order to buy assets), “Operation Twist” (drive interest rates even lower), and other types of intentional rigging and manipulation of the financial markets.

    Since last year, we have seen how home prices have begun to increase once again due to the combination of record low interest rates, home listing inventory levels down near nineteen (19) year lows, and investors looking to earn decent yields well over their negative net returns offered by their local banks’ savings accounts.

    In many regions of the U.S. such as the “Bubble” states of California, Nevada, and Arizona, home prices have increased between 5% and 20% in just the period of one year due to increasing demand for homes, and a decreasing supply of available homes for sale on the MLS (Multiple Listing Service).

    Nationally, the median U.S. home sales price increased 5.9% between the end of 2011 and the end of 2012. This 5.9% home appreciation figure in 2012 was the largest home price increase since August of 2006. Historically, U.S. homes have increased an average of about 3% per year so the 2012 median price increase was almost double the typical annual home inflation rate.

    Today’s bidding wars on numerous properties for sale, due to the unusually low home listing supply, and continued record low interest rates have continued to drive home prices higher in 2013.

    As long as rates and home listing supplies remain low, then we should hopefully just yet inflate our way out of the financial mess one way or another. Don’t be surprised to see 2013’s home appreciation gains possibly even exceeding 2012’s numbers!!!

    The U.S. economy needs a healthy housing market in order to get back on track so let’s all hope and pray for continued positive news for the real estate and financial markets.

    To read the original published version of this same article on CRE (Creative Real Estate) Online, please click on this link here:
    http://www.creonline.com/blog/investing-in-real-estate-an-exceptional-hedge-against-inflation/

  • The Shadow Inventory vs. Declining Home Listing Inventories

    Posted Under: Home Buying in Los Angeles, Financing in Los Angeles, Investment Properties in Los Angeles  |  April 5, 2013 11:50 AM  |  412 views  |  No comments
    How is it possible that home listing inventories have fallen in many regions by upwards of 30% to 70% in year over year comparison numbers in spite of our ongoing sluggish economy? With the rapid home listing number declines in various regions, then many homes have increased in value by 5% to 17%+ just over the past year as well.
    Are there potentially several million "Shadow Inventory" foreclosure homes which may have been delayed partly due to a wide variety of legal and financial reasons? Are banks trying to artificially suppress listed home inventory levels so that home prices slowly increase once again?
    Are banks more concerned about being sued for their questionable actions rather than offering their “Shadow Inventory” (mortgage loans delinquent more than ninety (90) days) for sale to the General Public? 

    Is it more important to try to drive asset prices higher in order to improve our economy, which may benefit both the lender and the owner in many cases? From my perspective, one of the best ways to try to increase the value of something is to allege that there is a shortage of the product. 
    Why have foreclosure filings been dropping in recent times as opposed to remaining fairly consistent, or even possible increasing as our national job market seems to worsen? Why were foreclosure moratoriums placed by mainly of the largest U.S. banks and mortgage loan servicing companies in order to slow down their own foreclosure filings?

    Why do many lenders take upwards of 2, 3, 4, or 5 years to even begin the foreclosure process? Aren’t banks interested in taking back their assets, and reselling them again for even more profit? I thought that banks were in the business to make money as opposed to letting homeowners stay in their homes “rent free” for upwards of several years.

    It is very interesting that many banks have willingly offered to pay their delinquent banking customers thousands or tens of thousands of dollars in “Relocation Fees” to better motivate the delinquent borrowers to move out of their homes without destroying the property in the process? To me, it seems like the more affordable option for many banks was to offer a settlement or a paid fee in exchange for a waiver of future legal rights and the near term vacating of the homes rather than end up in civil court for several years at a time with an angry homeowner.
    In recent years, there have been an incredible amount of lawsuits by homeowners against many of the largest U.S. banks for a variety of reasons such as defective title problems, and lack of valid mortgage security instruments which may not contain original promissory notes, deeds of trust, and legitimate borrower, lender, and notary signatures.

    MERS Scandal


    The MERS Scandal was a major contributing factor for so many banks to figuratively “slam the brakes” on the foreclosure process due to potential liabilities and numerous lawsuits.  MERS potentially affects upwards of fifty (50) to sixty (60) million U.S. residential mortgages, or the vast majority of all U.S. residential mortgage loans.

    MERS is owned by many of the biggest banks and title insurance companies. MERS (Mortgage Electronic Registration Systems) functions as a centralized electronic registry of mortgages, and tracks their ownership too. MERS allows mortgage ownership to change hands very quickly, and was also created to function as a substitute for local land records.
    In many cases, MERS did not have original promissory notes (the “IOU” for the debt) in their mortgage files. Many savvy homeowners fought their personal foreclosures by alleging that “No Note = No Debt.”  Without the evidence of valid original promissory notes which should have included the note’s interest rate, loan terms, and other very important items, then these mortgage loans owned or serviced by MERS may not be legal instruments of mortgage debt.

    There were also numerous claims of forged signatures (i.e., the “Robo Signing Scandals”) on behalf of the borrowers, lenders, and the notaries which may have invalidated many of their notes and deeds. In one prime example, the name of “Linda Green” was potentially forged thousands of times by mortgage loan servicing companies directly or indirectly affiliated with MERS in order to assign the mortgage loans to other mortgage investments groups and / or to begin the foreclosure process. Once the phony signatures were uncovered, then the transfer of these loans or their foreclosure filings were later stopped.
    Several courts did side with the homeowners as many foreclosures were stopped, or their existing mortgage debt was completely voided and eliminated so then the properties were “free and clear.” In many cases, these mortgage loans may have been sold five or six times to other domestic or foreign investors so there were also potential liabilities for each and every investor in these questionable mortgage securities.

    Numerous financial analysts have alleged that MERS’ method of ownership was defective and illegal, and made these financial instruments (deed of trust, promissory note, etc.) invalid and unsecured liens not backed by any form of real estate. If true, then valid foreclosures may not be legal if these financial instruments were not backed by the same real estate listed in the promissory note.

    How many homeowners experienced illegal foreclosures in recent years, and what action of remedy do they have against the foreclosing banks? If ABC Bank foreclosed on Joe Smith without a valid deed of trust, promissory note, or other financial instruments, then couldn’t Joe Smith possibly sue ABC Bank in order to try to get back his beloved home at a later date? If the same home was already resold by ABC Bank to Jack Jones, then wouldn’t Mr. Jones be hurt as well if he had to give the deed and home back to Joe Smith? What then would be Mr. Jones’ legal remedy against Mr. Smith or the bank?

    As such, there are serious “Chain of Title” implications with the ongoing MERS Scandal which may affect upwards of trillions of dollars of mortgage loans. Possibly every single owner or lender involved in the same property over the period of years or decades may have valid or invalid ownership or beneficial interests in the property.

     “Clouds on Title” and “Chain of Title” concerns affected the ability to unload potentially tens of millions of properties for U.S. banks. This is a major reason why some of the largest banks have sold thousands of their “Shadow Inventory” homes to large investment funds, hedge funds, or other wealthy domestic or foreign investors without ever listing these homes for sale on the MLS (Multiple Listing Service).
    If some of the largest title insurance companies both insured these same homes for clear title, and were part owners of MERS at the same time, then how may a title company insure against their own company’s title defects as opposed to acting like a neutral third party?

    Since so many banks did not want to be sued at a later date by individual homeowners partly due to incomplete mortgage files, then many of these same banks decided to not offer these homes to the General Public as they preferred to sell to large institutions probably after they signed some sort of a “Hold Harmless” agreement too.


    LIBOR Scandal

    The LIBOR (London Interbank Offered Rate) scandal potentially affects between $350 and $800 Trillion of assets worldwide. LIBOR is considered the largest financial and insider trading scandal in world history, and dwarfs the size of all real estate combined worldwide.

    LIBOR is a benchmark interest rate used for many hundreds of other rates which impact fees associated with residential and commercial mortgage loans, credit cards, derivatives (i.e., Credit Default Swaps), and hundreds of other loans worldwide. Since there are approximately $1,600+ Trillion in derivatives worldwide, then the LIBOR Scandal impacts the derivatives markets more than so even real estate.

    LIBOR allegedly involved the rigging and manipulation of interest rates which many of the big banks used to bet on by way of complex derivatives such as “Interest Rate Option Derivatives.” An “Interest Rate Option Derivative” is akin to a form of a glorified bet in that an individual, bank, or an investment firm may bet on the future directions of interest rates.

    A derivative is a hybrid of a financial and an insurance contract which may be backed or insured by a neutral third party. An investor or financial speculator may win or lose upwards of ten (10), twenty (20), thirty (30), or even fifty (50) plus times their original investment amount should they be right or wrong about their investment choices.

    A prime example of an investor betting on the wrong directions of interest rates was Orange County, California’s former County Treasurer named Robert Citron. In 1993, interest rates were near thirty (30) year lows, yet Orange County’s former Treasurer invested some of his county’s surplus funds with Merrill Lynch as they invested in “Interest Rate Option Derivatives.”

    By way of their investments at the time, Mr. Citron and his advisors at Merrill Lynch believed that rates might only head further downward. Sadly for both Orange County and Merrill Lynch, interest rates began increasing in 1994 after a series of interest rate hikes by the Federal Reserve. The financial losses were so significant for Orange County since they were magnified much higher than their original investment amounts that Orange County (the entire county itself) was later forced into bankruptcy protection.

    Why the LIBOR Scandal is potentially the biggest insider trading or financial scandal in the history of the world is that many of the biggest banks allegedly knew what the next day’s benchmark interest rates would be since they had insider information on the future directions of the interest rates.

    For example, if I know that the One Year LIBOR rate will be exactly 1.06% tomorrow, I may place a bet through various derivatives investments that the future direction of the One Year LIBOR rate may increase from today’s 1.01% rate as opposed to decreasing. How can I lose a bet if I know the future outcome? If I may earn gains of ten (10) to thirty (30) + times my original investment of something like $ 1 million, then I may receive profits of $10 to $30 million dollars for just one day’s to one week’s work. How can I lose?

    Many of the largest U.S. banks actually earn the vast majority of their revenues from investing in the derivatives markets much more so than providing business, automobile, credit card, or real estate loans to their customers. In fact, many of the largest banks have tens to hundreds of trillions of dollars invested directly or indirectly in derivatives like Credit Default Swaps and “Interest Rate Option Derivatives.”

    For some borrowers, they ended up paying higher rates at the time than actual market prices. Many of these same borrowers later ended up filing suits against their banks if their mortgage rates were slightly higher (i.e., 4.5% instead of 4.125%) than what the true market rates should have been at the time. In addition, many banks sued other banks for charging them more for their money than what the true market rates should have been at the time. When banks sue each other, you know it is a very serious financial scandal.


    National Mortgage Class Action Lawsuit and Settlement

    These financial and legal scandals noted above then helped lead to a “National Mortgage Settlement’ in early 2012. In February of 2012, forty nine (49) State Attorney Generals and the U.S. federal government collectively announced a $25 billion class action settlement due to the alleged financial and legal fraud and “bad faith” related to improper lending and foreclosure activities. The settlement was paid by lending institutions such as Ally / GMAC, Bank of America, Citi, JP Morgan Chase, and Wells Fargo.
    At the time, it was the largest multi-state class action settlement since the Tobacco Settlement back in 1998. Sadly, only about $1.5 billion of the $25 billion settlement were set aside to help compensate borrowers who lost their homes to foreclosure during the time span of January 1, 2008 to December 31, 2011. At best, many of these homeowners may receive just a few thousand dollars each.
    A large portion of these Class Action Settlement funds were supposed to be used to reduce mortgage principal balances for many of the millions of “upside down” homes nationwide. This is one of the reasons why Short Sales and Loan Modifications have increased in recent times as upwards of $10 billion dollars of this discounted mortgage debt is covered by the National Mortgage Settlement money.


    The “Financialization” of Assets


    According to a report released by the Federal Reserve in early 2012, approximately 1/3 of all homes nationwide were “free and clear”. Of the remaining 2/3s of homes nationwide with existing mortgages, the estimated average LTV (loan to value) range of these mortgage loans based upon 2012’s values were something like 94% LTV. After the seller factors in 6% to 7% potential selling costs, then the average mortgaged home in the USA in 2012 had near zero equity.

    “Financialization” is a process when the government and banks encourage cheaper rates by way of “Quantitative Easing” policies (or “create money out of thin air to buy assets”) in order to drive up asset prices such as stocks (i.e., Dow above 14,000) and real estate prices. Since homeowners are more likely to walk away from an “upside down” property, then increased home values can help both owners and lenders. 
    Since last year, the Federal Reserve has purchased approximately $85 billion PER MONTH of both Treasury Bonds and Mortgage Backed Securities Bonds in order to try to allegedly stimulate the financial and housing markets. Coincidentally, the recent proposed budget cuts by way of “Sequester” were also $85 billion dollars.

    What is “Quantitative Easing”, and how does it affect interest rates, stocks, and real estate values?


    It is the introduction of new money (billions or trillions) into the U.S. economy by a Central Bank like the Federal Reserve. In recent years, the Federal Reserve has been the primary buyer, or one of the main buyers, of U.S. stocks, bonds, and mortgage backed securities.

    Increasing the money supply may also lead to higher rates of inflation partly since the value of the U.S. Dollar declines as partly noted by the high costs of gasoline which is related to the “Petrodollar” (“Oil for Dollars) system. When the U.S. Dollar is strong, then the cost of gasoline and other consumer goods declines (and vice versa).

    Fixed mortgage rates are typically pegged to the 10 year Treasury Bond yields. Increased demand for U.S. treasury debt then leads to much lower interest rates for all of us since they are inverse to one another (or “High Demand = Lower Rates, and Lower Demand = Higher Rates). Without the Fed’s decision to buy more stocks, bonds, and real estate debt in recent years, then interest rates should now be much higher, and the Dow Jones, and other financial indices, could be much lower today.

    Since the housing peak near 2007, approximately five (5) million homes nationally have gone all the way through the entire foreclosure process while ending up with the banks, or with 3rd party investors. Another potential five (5) million homes may have gone through various phases of foreclosure, but did not go all the way to a final foreclosure sale.

    If these numbers are true, then there were potentially upwards of ten (10) million homes nationally which went through some phase of the foreclosure process these past several years. As a comparative number, there are an estimated five (5) million mortgaged homes combined in California.
    In life as well as in real estate, perception typically becomes one's reality. If someone believes there aren’t enough homes for sale, then this will cause that same buyer to jump back into the real estate arena before the existing prices and interest rates rise too rapidly in the near term. As demand increases, then so do home prices.

    In recent years, we are seeing many of the big banks and mortgage servicing companies try to clear up their foreclosure supplies by either selling them off in bulk to large investment banks or even bulldozing them in many cases like in Detroit. Instead of a true “popping” real estate bubble, we have experienced more of a slow leak by gradually releasing more foreclosed “Shadow Inventory” homes to the General Public.

    The brightest real estate investors out there are picking up some great deals with very cheap money, and are “fixing and flipping” these same homes for quick profits while the home listing inventories remain very low today. One must know where are the best regions to find these deals, and how small or large is the true size of the non-performing “Shadow Inventory” homes in their same region.

    Let’s hope that banks decide to lend more of their money to U.S. consumers as opposed to hoarding their cash to save themselves!!! It is the supply of capital that typically drives the future direction of the housing market more so than any other economic factor.

    During easy money time periods of 2001 to 2006, then home sales were quite strong. Since the 2007 financial slowdown, lending requirements have tightened considerably and home sales and prices have declined as compared to the peak 2006 to 2008 price levels in various U.S. regions.

    In any type of crisis like our ongoing “Credit Crisis” (a financial crisis related more to the implosion of the derivatives markets worldwide rather than a “Sub-Prime Mortgage Crisis” as falsely alleged by some people) or challenging period in life, there are many opportunities to learn, grow, evolve, and prosper. One must try to focus on the opportunities out there more so rather than the obstacles which may stand in their way. 
  • What is easier to fund today - residential or commercial loans?

    Posted Under: Home Buying in Los Angeles, Financing in Los Angeles, Investment Properties in Los Angeles  |  March 26, 2013 4:36 PM  |  303 views  |  No comments

    real estate investingAre commercial real estate loans easier to find than residential loans today? Had I asked that question back in 2007, most people would have then said “No way.” Today, many investors and brokers may have to really think about it first prior to giving an answer one way or another.

    Since the last real estate market peak near 2007, both the residential and commercial market sectors have sadly experienced massive price declines. In many cases, homes, retail shopping centers, land, hotels, and other types of properties have had their values cut in half or more.

    Commercial Investment Property & Type of Loans

    As it relates to the commercial property sector’s last market peak near 2007 or 2008, many of the existing 5 year fixed commercial loans may be ballooning or coming all due and payable in 2013. In many cases, commercial loans are fixed for shorter 5, 7, and 10 year terms so they must be refinanced or paid off more often than residential loans.

    Upwards of 4,750+ CMBS (Commercial Mortgage Backed Securities) with loan balances near $55 billion may need to be refinanced in 2013 alone. Sadly, a very high percentage of these same potentially ballooning commercial mortgages may not have sufficient income to service the existing mortgage debt.

    In addition, there may be an additional 6,300+ non-CMBS commercial mortgage loans (according to Bloomberg Financial News) with balances of almost $79 billion that may be coming all due and payable in 2013. Which of these properties may qualify for a new commercial loan though today?

    Banks Attitude Towards Commercial Investors & Loans

    In many situations, the existing commercial mortgage debt may currently exceed the conservative market value today in 2013 based upon the income and expenses for the existing properties. Yet, some mortgage lenders or servicing companies may accept partial payoffs almost akin to a residential “Short Sale” by way or either a sale or a refinance. Property owners may wish to consider trying to remain somewhat optimistic in spite of their challenging financial position today.

    Most banks still don’t want to foreclose on their properties so they may better realize today that a partial payoff may be much better for them than a foreclosure. Many lenders today may agree to some type of a discounted payoff which may be a “Win / Win” for all parties.

    Current Commercial Investing Outlook & Interest Rates

    The most encouraging part of the commercial real estate industry today is that interest rates continue to hover near records low rate ranges (3% to 5%+). With lower interest rates today, then borrowers may lock into this historically low rates and potentially improve their monthly cash flows significantly.

    If lending may hopefully ease up later this year as it relates to both residential and commercial properties, then sales and property values may begin to increase more so than in years past. Once again, it is the availability of capital that may best determine the direction of U.S. property values.

    The combination of housing listing inventory levels near eighteen (18) year lows, near record low interest rates, and pent up housing demand have fueled price gains of between 5% and 20%+ in various U.S. housing regions between 2012 and 2013. Let’s hope that the price appreciation trends continue along with a stronger job market and overall U.S. economy!

    *** To read the original version of this article on the REI (Real Estate Investing) Club website, please click on this link: http://www.reiclub.com/realestateblog/are-commercial-loans-easier-to-fund-than-residential-loans/#comments

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