Nov 25 2009

The Season of Gratitude

“Gratitude unlocks the fullness of life.  It turns what we have into enough, and more.  It turns denial into acceptance, chaos to order, confusion to clarity.  It can turn a meal into a feast, a house into a home, a stranger into a friend.  Gratitude makes sense of our past, brings peace for today and creates a vision for tomorrow.”  – Melody Beattie


From now until the New Year we are expected to contemplate the good things in our lives and hopefully bring some happiness to those we care about.  If this is not on your agenda then you are certainly missing out.  There is plenty of time for striving and dissatisfaction – so make the most of this gift.  Be grateful and generous every chance you get.


Much has changed since the financial meltdown began in September 2008, just over a year ago.  And while it remains less than rosy, I think most will agree that recovery has come sooner than expected.  This is not to suggest that the millions of people around the world that are unemployed, bankrupt, or both are feeling good right now – but it could easily be far worse.  I predict it will be a long time before we get back to an easy time of prosperity for nearly all.  In fact, I seriously doubt real estate will be the same in my lifetime – but overall it will be better for most.  In the meantime (especially during this Season), I suggest you thank God for the good things in your life and be a source of encouragement for others.

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May 25 2009

You Can’t Lose in Real Estate – Hmm…

“Real Estate cannot be lost or stolen, nor can it be carried away.  Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.” – Frankin D. Roosevelt


The economy of the Southeastern U.S., where I live, has been fueled largely by real estate transactions for the past ten-plus years.  From my travels throughout the U.S., I believe this to be the case in most regions.  Just about every individual, company, or organization has derived income or at least some degree of financial gain from the sale of residential or commercial real estate.  In addition to the agents, bankers, attorneys, architects, engineers, contractors, suppliers, truck drivers, etc. who are reeling because of the crash, now city, county, state and federal governments along with hospitals, schools, development authorities and everyone in between is feeling the pain.


Even worse, countless people who financed the purchase of a house over the past two to four years now sit on an upside-down mortgage.  This of course means that they owe the bank or mortgage company more than the house is worth in the market place.  This is a problem for the individual and the bank and it highlights another problem.  Not only have the banks loaned money for single-family residential real estate, but many have also loaned billions of dollars for luxury multi-story condos and residential developments that are now worth a fraction of what they were valued at just a few years ago.


I mention all this not to depress anyone further, but because I believe real estate can be a good place to invest once again (eventually), but not if speculation continues to be as prevalent in the future as it was over the past five years.  Real estate will only gradually increase in value if a large percentage of the purchasers intend to occupy or utilize the properties and can legitimately afford to meet the loan requirements.  When it seems like everyone you meet is flipping real estate for a profit, you better stay clear because it is only a matter of time before the bubble will burst.


Along with real estate, the broader global economy is in shambles too, and this is largely because we ignored basic business fundamentals – namely real value creation.  Over the past 10 to 15 years, many of the brightest minds rejected careers in science, engineering and corporate business and instead chose finance for a shot at the big time on Wall Street.  They learned quickly and helped develop extremely innovative and complex derivatives and financial models (see for more insight).  Mostly what they did was manipulate and game for their own significant gain – instead of contributing to the process of creating value.  There is certainly a place for finance, but real value creation comes from the goods being manufactured or the services being provided – not super complex derivatives that hedge or leverage and make a few individuals extremely wealthy while wiping everyone else out.


So once again – we have the opportunity to rise from the ashes.  Hopefully we can learn from our foolish greed and “irrational exuberance” and avoid another global economic disaster for the next fifty years or so.


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Oct 19 2008

What Have We Done!?

“Derivatives are financial weapons of mass destruction carrying dangers that, while now latent, are potentially lethal.” – Warren Buffett (2002)


Clearly we are now in the grasp of a financial catastrophe of epic proportion.  Most people sensed the real estate bubble had been going on too long, but few could have predicted the storm we are now experiencing would reach nearly every developed nation in the world.  The fallout is certainly global and it is high time to focus on solutions, but in the U.S., thanks to the pending presidential election, it has become quite the political finger pointing exercise.  The Republicans are blaming initiatives supported by former President Clinton and other Democrates which made it easier for people of lesser means to obtain mortgage loans.  The Democrats are furiously pointing towards the efforts of Republican Phil Graham who pushed through a law that exempted financial derivatives from federal regulation.  There should be little argument that it became far too easy to qualify for mortgage loans, but without credit derivatives we would never have reached the global meltdown that will ultimately reshape our financial future.


So who is really to blame?  A whole lot of highly intelligent and clever financial wizards…and everyone else in a position to challenge what they came up with.  In other words, there is plenty of blame to go around.  The focal point, however, should probably be directed at former Fed Chief Alan Greenspan.  He was central in first creating the “easy credit” environment and then allowing the credit derivative to become such a popular form of “insurance” against borrowers defaulting on their debts.


I wrote the following in an essay on financial derivatives for a masters course I was taking in February 2006: “Ultimately there is a single major risk to be concerned about when dealing with financial derivatives.  There is the potential to lose a great deal of money over a short period of time on a “wrong” position.  As in the case of Barings, if adequate reserves are not available, this could result in bankruptcy.  Derivatives-related losses can typically be traced to an overly speculative investment strategy, a misunderstanding of how derivatives reallocate risk, an ineffective risk-management audit function and an absence of systems that simulate adverse market movements and help develop contingency solutions.”  I would argue that our current predicament confirms that relaxed mortgage loan requirements combined with the widespread use of credit derivatives was a poison pill the size of Manhatten.  Now we must hope the apparent antidote (which is closer to the size of Great Britain) works in a big fat hurry.

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Jul 31 2008

Mortgages, Subprime Mortgages, Mortgage Bailout

If you are like me, you have read and heard these words so many times recently you could scream!  That being said, there is clearly a good reason for this.  Most of us have a mortgage on the house we live in – unless we rent.  When I was in the process of buying my first house, the financial institution I dealt with required verification on nearly every detail I self-reported to determine if I was a worthwhile credit risk.  I didn’t necessarily appreciate being challenged in this manner at the time but I understood why it was necessary.  This was just the way it was and if it had been my money that I was considering loaning to someone else, I certainly would have done the same or possibly I would have been even tougher.


Between five and ten years ago, a whole bunch of brilliant people (that just happen to occupy positions of great influence) decided that it should be much easier for people with a less-than-satisfactory credit history to qualify for a mortgage.  This was apparently important because home values were shooting towards the stars in many markets and potential buyers needed bigger loans to buy these homes.  Fast forward to present day and guess what we have…you guessed it…all this easy money has resulted in an international mortgage meltdown – and desperate times call for desperate measures!


So President Bush and Congress just signed off on a mortgage bailout at the tax payers’ expense.  According to Congressman John Hall from New York, “The Centerpiece will help many homeowners refinance their mortgages into lower-cost government-insured mortgages that they can afford to repay, preventing the economic pain that further foreclosures would inflict.  The law will also give states and municipalities access to resources they can use to buy and rehabilitate foreclosed properties so they will not depress property values and destabilize neighborhoods.”  This bailout will not undo the hundreds of thousands of foreclosures that have already occurred, nor will it help ease the billions of dollars in losses that many banks are dealing with.


In the United Kingdom, the Treasury is considering giving “a taxpayer guarantee to billions of pounds of bonds known as mortgage-backed securities created by banks out of high quality mortgages, in a radical attempt to revive Britain’s rapidly shrinking mortgage market” according to Robert Preston of BBC News (see Treasury’s mortgage rescue plan).


As individuals, what do we need to know?  Hopefully you are sitting pretty with a nice 30-year (or less) fixed mortgage and you have no trouble making your monthly payment.  If you are struggling to meet your financial commitments, and have some form of exotic adjustable rate mortgage, contact your mortgage company as soon as possible to find out what your options will be once the bailout is implemented.  Until you know the options, you should do everything you can to stay current on your mortgage payments to avoid foreclosure.


If you will soon be applying for your first mortgage, I strongly recommend you consider a fixed-rate mortgage before anything else.  You should compare offers from several lenders, including banks, credit unions, and mortgage companies before selecting one.  Compare and consider the following features: interest rates and points; interest rate lock-ins; required down payments; mortgage insurance requirement; prepayment penalties; and estimated closing costs.  If you do decide to go with an adjustable rate mortgage (ARM), you should know what financial index is used and the lender’s margin (% markup) over the index.  You will also want to know the rate caps and payment caps – and of course any provisions and fees for conversion to a fixed-rate loan.  The good news about the mortgage meltdown (if there is any good news) is that you are less likely to be approved for a mortgage you can’t afford.  These are interesting times…aren’t they?

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