Archive for 2010

The banks blew it. We all know that, and now we are all being asked to pay the bills for their catastrophic mistakes. I didn't cast the first stone, but I hope my writing about this issue has left a lasting impression. I also hope we can all learn something from this are avoid the mistakes again in the future. I have my doubts. We can all see the problem and the solution, but we all know the government is likely to blow it. Excessive debt is the problem Ever since the Great Housing Bubble began to deflate, everyone has incorrectly identified the problem as foreclosure. The real problem is not foreclosure, the real problem is that borrowers have excessive debts…[READ MORE]

Most people purchase real estate in California because they believe they will get rich. Few want to spend money to provide a home for their family as most expect their home to provide money for the family. Houses are the new wage earners, not through rental cashflow but through appreciation. Life doesn't work that way. Real estate can be a profitable cashflow investment, and it can make people rich -- not through speculation on buying and selling, but through owning for positive cashflow. Cash value of real property Establishing the cash value of real property requires an understanding of risk and relative rates of investment return. Today, we will review these basics and apply a little simple math to show how to value real estate based on…[READ MORE]

Borrowers are done paying, and their hanging up on lenders. The lenders are still hesitating, waiting for borrowers to pay. Lenders will wake up one day and start the foreclosure process in earnest. Will it be too late? The Lender Decision Tree When lenders make loans, they far prefer borrowers to repay those loans; in fact, their entire business plan relies on it. As long as borrowers are current with their payments, lenders are happy and making money. When borrowers don't make their payments, the end result is a distressed sale. If there are enough of these, market prices are reduced dramatically which causes significant lender losses. Below is the lender decision tree for delinquent borrowers. Today we will explore this diagram in some…[READ MORE]

Do loan owners really want to spend a decade or more under water? It will be difficult to send their children off to college when they make too much for their kids to get aid, but they haven't saved anything because they are paying on a bloated mortgage. At some point, they may decide they don't want to stay, but then they can't move because they can't sell. They spend the rest of their lives quietly fading away. Many in California will stay because they believe the next housing bubble is right around the corner. Like gamblers at the craps table who were just wiped out, everyone places their bets and hopes for another long run. At least with HELOCs, you never have to…[READ MORE]

The banking cartel has tied up most of the inventory in California. A third to half of homeowners are now underwater and unable to sell without lender approval. Many more borrowers are facing foreclosure as about 15% of homeowners are not paying their mortgages. The lenders already own many properties. Between what they own and what they control, lenders have withheld inventory and kept much of the air in the real estate bubble.   I think this is shameful. I want to see the lending cartel crushed. Californian's have too much of their incomes going to debt service so Goldman Sachs' investors can make a few more pennies. I have a better idea. Short Sellers are reviled Many people have a negative view of short sellers. They feel…[READ MORE]

The indulgent lives of the Great Housing Bubble were last seen during the Roaring Twenties, another era notable for its sequence of financial bubbles. First came the Florida land boom (from Wikipedia): The Florida land boom of the 1920s was Florida's first real estate bubble, which burst in 1925, leaving behind entire new cities and the remains of failed development projects such as Isola di Lolando in north Biscayne Bay. The preceding land boom shaped Florida's future for decades and created entire new cities out of the Everglades land that remain today. The story includes many parallels to the modern real estate boom, including the forces of outside speculators, easy credit access for buyers, and rapidly-appreciating property values. That massive bubble…[READ MORE]

Everyone who loses their home in the deflation of the Great Housing Bubble will be counting the days until they are back in the saddle again riding their cash cows. Thanks to recent policy changes, those borrowers ready to play in the next Ponzi scheme won't have to wait too long. Fannie Mae is changing its policy in a way that will encourage strategic default. The resulting walkaways will increase delinquency and foreclosure rates, lower home values, and cause billions of dollars in losses for the US taxpayer. Fannie Mae wants to help some troubled borrowers get back into home market Kenneth R. Harney Saturday, April 24, 2010 Here's some good news for people who had to give the deed on their house back…[READ MORE]

Did anyone who participated in the Great Housing Bubble stop to consider what was the right thing to do? As long as the money flowed in a river to homeowner's doors, few cared. The river of free money isn't flowing any more, and now we have to examine why this happened, or we risk doing it again. In yesterday's post on Walking Away from a Mortgage to Secure Their Children’s Future, I presented the argument that people should walk away from their mortgages if they are facing the choice between defaulting or paying on an underwater mortgage when renting is less expensive. The astute observations from that post are among the most interesting in recent memory at the IHB. Today, I want to recap some…[READ MORE]

Lenders are pressuring owners to repay their underwater loans by appealing to morality. As people strategically default and their lives improve, they tell their friends which triggers the next wave of strategic defaults. The pressure of morality gets less and less effective, particularly when borrowers realize the false morality to lenders is superseding their real moral obligations to their families.   Homeowners Who 'Strategically Default' Are Under Moral Pressure By Charlotte Cuthbertson Walking away from a mortgage seemed like a crazy idea to Chris Schreur, a financial adviser, and his wife Valerie thought he had gone mad when he mentioned it. It wasn’t just the financial hit, but the shame of defaulting. “I think it is the number one reason, by far, that more people aren’t doing…[READ MORE]

Peace of mind is an underrated and undervalued emotional state. Most people choose lives of speculation, competition, and make believe. They erroneously believe if they arrive at some destination known as "being rich," they will have everything they ever wanted, and that will make them happy. It won't. There is a peace of mind that comes with wealth, but this emanates not from the pile of money, but the cashflow that pile of money gives off. The size of the pile may get bigger or smaller depending on the market winds, but if the cashflow is stable, the size of the money pile is irrelevant. The real wealth is in the income stream. I last wrote about this subject in Real Estate, Cashflow Investment and Retirement, but…[READ MORE]

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