Wednesday, December 30, 2009

New Federal Short Sale Rules Once Again Stiff Lenders

The Obama Administration's widely touted but proven unsuccessful foreclosure rescue plan has been a complete unmitigated disaster.

1,000,000 applicants have applied for relief

Only 31,000 new loans written.

Less than 3% of homeowners in foreclosure actually qualify for the program.

So now, to snatch shameful victory from the jaws of defeat, the Administration has decided to pressure lenders to rewrite lots and lots of mortgage loans instead of actually taking steps that might raise real estate values and boost the economy.

On Christmas Eve 2009 the U.S. Treasury announced new regulations where borrowers who LIE on their applications and understate their income to qualify for mortgage relief still are eligible for the program.

These rules come right after yet another revision on November 30, 2009.

These new HAFA rules announced while most people were still digesting Thanksgiving dinner give lenders only TEN DAYS to approve or deny a short sale application.

The current time is between THREE TO SIX MONTHS.

Did anyone at Treasury ask WHY IT TAKES SO LONG for applications to be processed and approved before enacting yet another rule that attempts to stiff lenders and investors in mortgage paper?

The National Association of Realtors says that short sales now represent 10% of all real estate transactions. Lenders are FLOODED with applications, many of them fraudulent. This area has become the latest real estate get-rich-quick scheme with good reason.

And now, lenders only have TEN DAYS to decide how much equity in their paper to surrender or face Federal penalties. And even during those ten days if they discover that applicants are lying on their applications they still must be approved for relief!

As one of my mortgage lender friends said this morning when I discussed these new Treasury rules with her, and I quote:


These new rules don't go into effect until April 2010 and are designed to expire December 2011.

Yeah, sure. Just like rent control was designed to expire at the end of World War II. By the way, how is the war going these days? Are the Japanese still losing in the Pacific?

Robert J. Abalos, Esq.

Sunday, December 27, 2009

Obama Administration Says Lying Borrowers Should Still Get Loan Modifications

The article reprinted below from the Washington Post is yet another illustration that the Obama Administration really does not understand the real estate industry or how it has come to be crippled these days. Given the simple fact that no one within the Administration actually worked in real estate makes all this comical---if it wasn't so sad.

Letting borrowers who misrepresent their income on loan modification applications actually get them is the height of absurdity. Why not just tell homeowners they can write down whatever income figures they want?

How about this idea? Tell applicants for payment modifications they can invent their income numbers. Just make them up. Pull whatever arithmetic comes into your head and write it down. Encourage creativity at the expense of accuracy and truth. Let the imagination run wild, statistically speaking.

In fact, why not throw a contest to see which mortgagor can misrepresent their income the most and give them a prize? Say a $25 gift certificate to Bed Bath & Beyond---as well as their mortgage modification, of course.

Excuse me, but wasn't part of the whole subprime mortgage meltdown mess caused by mortgagors getting loans they could not afford? Isn't that the real reason most loans go into foreclosure? Borrowers can't afford the payments? So now instead of inflating income to get a home, borrowers are intentionally underestimating their income to keep it. And getting a nice gift from Uncle Sam and the shareholders of banks who need to forgive loan interest or equity in mortgage debt in the process.

The Administration's foreclosure rescue program is a dismal failure and this is just one way the government is attempting to prop up a doomed public relations effort that is going nowhere fast.

Couple this boondoggle with the Obama Administration's Christmas Eve(!!!) decision to cover UNLIMITED losses at Freddie Mac and Fannie Mae and give each of these dinosaurs hundreds of billions of dollars of new capital to invest when they just lost hundreds of billions of dollars of old capital is stunning.

It is clear in Washington the inmates are not only running the asylum but have sold it to a timeshare developer.

Robert J. Abalos, Esq.


No consequences for lying borrowers

The Associated Press
Friday, December 25, 2009; 11:30 AM

NEW YORK -- The government shouldn't reward liars. But that's the effect of changes to the Obama administration's failing program to help homeowners modify their mortgages.

Until recently the rules were clear: if you grossly understated your income to qualify for the program, you had to restart the loan modification process. It made sense. After all, we got into this housing mess partly because too many people were dishonest about how much they made.

Fast forward to today. The federally funded Home Affordable Modification Program was aimed at getting banks to rework mortgages for homeowners in order to slow the pace of foreclosures. The government set a goal of modifying up to 4 million mortgages over the next three years.

The program isn't working like it's supposed to. Since March, just 31,000 homeowners have won permanent relief. One big reason why is that lenders are doing what they should have been doing all along - requiring things like proof of income.

How's the government responding? By letting homeowners who fudge their income numbers off the hook with little more than a wink and a nod.

"This isn't the kind of person the government should want to help," said Dean Baker, co-director of the Center for Economic and Policy Research, a left-leaning Washington think tank.

Under the $75 billion program, lenders are paid by the government to alter mortgages in hopes that cheaper loans will lead to fewer defaults. In most cases, modifications lower interest rates on home loans. Lenders also offer grace periods, longer repayment schedules or lower loan balances.

Borrowers say lenders are permitting trial modifications, but few are being made permanent. Lenders say borrowers aren't providing all the necessary paperwork to get loans permanently altered. Many lenders don't require documentation of income upfront. First, they'll make a verbal agreement with a borrower for a modification, and then verify the income once the trial period starts.

The government needs this program to work - and fast. That's the only way to explain the Treasury Department's waiver of a requirement punishing borrowers who understate their income by 25 percent or more when trying to get a modification.

That means a borrower who had told a lender he made $75,000 but was found to make $100,000 doesn't have to restart the modification process. Under the waiver announced Dec. 16, that person now gets to continue the trial period instead of being rejected immediately.

"During the housing boom, borrowers had every incentive to overstate their income to get a bigger mortgage," said Larry Doyle, who spent more than 20 years working in the mortgage business on Wall Street and now writes the financial blog Sense on Cents. "Now, they have every incentive to understate their income to get a bigger modification."

Treasury Department spokeswoman Meg Reilly says that discrepancies could be the result of mistakes or changes in someone's job or income during the trial phase. She also noted none of the eligibility, documentation and verification requirements for a permanent modification change under the new waiver.

Still, a difference in income of 25 percent or more is not a rounding error. The government should err on the side of caution with these people, not give them a free pass.

Doyle thinks that allowing dishonest borrowers to stay in the program sets a bad precedent. It also shows that lessons from the housing bust haven't been learned.

The housing market's collapse wasn't just caused by lenders issuing risky loans to borrowers who couldn't afford them. More than a third, or 4.3 million, of the home loans issued from 2004 through 2007 were for borrowers who provided no or little documentation of their income, according to real-estate data company First American CoreLogic.

When housing prices were rising, homeowners who couldn't afford their mortgages for whatever reason - lost jobs, wage cuts or a pileup of medical bills - could often sell their homes for a profit to get out of trouble.

It's a much different story today. About one in four homeowners are considered underwater, meaning their mortgage exceeds their home value.

That has led to a dramatic rise in foreclosures. About 2.2 million homes since July 2006 have completed foreclosure, according to foreclosure listing service RealtyTrac Inc.

The government knows that reducing foreclosures could go a long way toward stabilizing property values, which would help reverse the housing slump and ultimately aid the broader economic recovery.

Dishonesty fed the housing bust. Let's not let it ruin the chances for its repair.

Thursday, December 24, 2009

Home Sales Data Virtually Worthless for Investors

The data on new and existing home sales these days is so flawed the numbers are virtually worthless. I literally am laughing at how out of touch the reported data really is---and why.

Of course, this is all intentional. It's better for industries and the government to report good news than bad so anything that can be done to make Joan Rivers look like Megan Fox must be done so people can keep their jobs and make money without the annoyance of actually doing anything productive or useful.

If you want to know how silly these statistics have become just look at the November 2009 numbers.

The U.S. Census Bureau reported that new homes sales fell 11.3% in November over the previous month

At the same time the National Association of Realtors ("NAR") reported that existing home sales rose 7.4% in the same month.


Are we to believe that home buyers preferred existing homes over new ones by a spread of nearly 20% of all home sales?

The basic reason the existing home sales figure looks so good is that foreclosure and short sales are counted in the existing home sales figures as "sales" compiled by the NAR.

These represent a full one-third (33%!!!) of all existing home sales. Factor these forced sales out of the statistic and what do you have?

Still declining sales volume, just like the new home sales numbers suggest.

So why not include forced sales as part of the existing sales data? For one obvious reason.

Forced sales are not voluntary sales. How can you judge home buyer and investor sentiment when a third of all sales are, so to speak, conducted with a gun at the seller's head?

A simple illustration demonstrates this point, reductio ad absurdum. Say all homes in the United States went into foreclosure tomorrow. In ninety days when all these properties started hitting the courthouse steps the NAR would report a massive, even astronomical, increase in existing home sales, just like they did when reporting the November 2009 numbers. ("A 44% increase over last years' sales! WOW!") But would this stratospheric jump in existing home sales REALLY be a good sign for the U.S. residential real estate market? Think about it. If all the homes in your town were in foreclosure would your local economy be doing great? So imagine all the homes in the United States the same way.

All the new and existing home sales numbers are also saddled with the economic distortion of the Obama tax credits for home buyers which merely shift sales from one quarter to the next. Look at the "Cash for Clunkers" fiasco if you want recent empirical evidence from the Obama Administration. The artificial and temporary stimulus of tax credits for buying a home, any home, will end and with it many of these sales. So you can't measure a trend when the stats are juiced from one month or quarter to the next.

The new and existing home sales figures being reported are just about worthless for investors. I read them and discount them faster than an Olympic sprinter on a amphetamine high.

What I see with my own eyes in my hometown of Seattle and hear with my own ears from other investors all around the United States on a daily basis are my guiding forces. The U.S. residential real estate market is weak and still has not found a bottom. Yes, there are pockets of strength due to microeconomic and local factors which the mainstream media will certainly highlight to prove the Moses-like wisdom of President Obama and his Seven Dwarfs and the genius of his economic program.

But in reality, I see MASSIVE, and I mean MASSIVE in 500 point type, hidden inventories of properties waiting to hit the market. I see desperate owners who wanted to flip and are now landlords eager to leave the business the moment the market rises. I see YEARS and YEARS of excess inventory still lingering, still haunting this market like Michael Myers in the HALLOWEEN movies. Just when you think he's dead and gone, sorry.

Read the home sales data. Then feel free to ignore them. Or better still realize if you run out of toilet paper you have an alternative.

Robert J. Abalos, Esq.

Wednesday, December 23, 2009

Tax Extenders Act of 2009 Doubles Tax on Carried Interest

Good old Charlie Rangel, the Chairman of the House Ways and Means Committee, has given all investors in real estate partnerships and hedge funds a nice Christmas gift.

By his reputation, you guessed it.

A tax increase.

But not just a little one. A 100%+ tax increase.

The Tax Extenders Act of 2009 (HR 4213) is an amendment to the Internal Revenue Code that would more than DOUBLE the tax rate on carried interest received by general partners in real estate partnerships, hedge funds, and all types of investment partnerships.

Carried interest is currently taxed at capital gains rates of 15%.

The new rule would tax the carry at ordinary income rates which can be as high as 35%.

Mr. Rangel is not alone here. 241 of his associates in Congress also voted to support this nonsense.

The good news is that the bill is now in the Senate. It hasn't passed yet.

The bad news is that it is almost certain it will.

Everyone knows about the turmoil in commercial real estate and how this segment is still deteriorating. So how is doubling the taxes on the carry going to help?

HINT: It won't.

The U.S. Treasury doesn't think about such mundane matters as putting yet another financial burden on an industry buckling from bad debt, foreclosures, rising vacancy rates, and excess inventory when it dreams up new things to tax. It acts likes like a spoiled brat that wants a lollipop in a candy store.

With allies like Mr. Rangel in the House, I'm sure Uncle Sam will get lots of sweets in 2010.

By the way, Charlie Rangel should know something about real estate investment. He's currently under investigation by the House Ethics Committee for, among other things, failing to report hundreds of thousands of dollars on rental income he received on a beach property in the Dominican Republic, living in multiple rent controlled apartments in New York City while claiming a home in Washington DC as his primary residence for income tax purposes, using his Congressional letterhead stationary to solicit donations for a policy institute named after him at City College in New York, and many other "oversights."

Robert J. Abalos, Esq.

Tuesday, December 22, 2009

Capital and Operating Leases from an Investment Perspective

I received a very insightful (and lengthy, WHEW!) email from Josh in Louisville about the distinction between capital and operating leases and how investors should distinguish between the two.

Josh, as promised, here is your answer.

Accountants draw distinctions between capital and operating leases because of FASB rules, especially SFAS No. 13 (1976). To oversimplify the analysis it all comes down to whether an asset is "leased" or really is actually "sold" in some sort of delayed way, such as an installment sale or through a very cheap option price at the end of the lease term.

CEOs and CFOs of large companies also split hairs about the differences between the two types of leases, mostly because assets controlled under operating leases are not featured on the balance sheet and there is no corresponding liability attached. This allows for lots of accounting games, in other words, you can actually buy assets but not show any corresponding liabilities for the purchase on the balance sheet. These so-called "off-balance sheet liabilities" can often mean the difference between a positive or negative earnings per share number.

Many investors (like me) don't really care too much about the difference between capital and operating leases. Yes, there are certainly times when you need to capitalize the operating leases to get a better notion of how much a company really is earning and how much it is worth. After all, liabilities off the balance sheet do distort the genuine value of a company. A good example of this would be a company that leases many retail store locations for a very short period of time, such as only during the Christmas season.

But for me, in most circumstances, I really don't care.

The analysis here is easy.

Take, for example, a company that needs a machine or some property and is paying $5,000 a month to use it. Does it really matter that this $5,000 is an operating lease payment or essentially a disguised capital obligation? It is still the same $5,000 each month being deducted from earnings and cash flow. If you are measuring EPS or FCF per share does it really matter how the company spent this $5,000? It is still a cost of doing business no matter how you slice (or characterize) it.

For me, the distinction between operating and capital leases really becomes more of a credibility issue than an accounting one. When companies play lots of off-balance sheet liability games, such as through immediate sale/leasebacks of key assets, I get nervous. Why is it so important to keep all these liabilities off the balance sheet? What's really going on here? I like to see strong and clean balance sheets, not weak ones that just look strong and pretty.

This entire area of accounting involves lots of math, lots of rules, and lots of billable hours for accountants and lawyers. It is far more complex than it really needs to be and quite frankly, amounts to a hill of beans in most cases.

Fundamentally, I believe that all owners, CEOs, and CFOs should present the clearest and simplest picture of their company possible and generally this means if you lease an asset, you also have bought yourself a liability that should be disclosed on the balance sheet and not just as a footnote to the financial statements as is currently done with operating leases.

Robert J. Abalos, Esq.

Sunday, December 20, 2009

Creative Real Estate Gurus are Suffering Financially

Despite all their whooping and preening about their million dollar real estate fortunes and their genius in creating wealth from nothing, I have it on VERY good authority that a number of major creative get-rich-quick real estate gurus are next to bankruptcy.

Broke, these fools still struggle to maintain the facade they are great financial wizards.

In reality, one guru can't even pay their printer bill.

The public has really begun to see behind the curtain and realize these phonies aren't wearing any pants. Real Estate Investment Association ("REIA") members and other newbie real estate investors, the target victim market for these scammers, are just sick and tired of the endless parade of slick gurus pitching yet another home study course or seminar event at their REIA meetings. People don't have the money now to buy them, and quite frankly they are just bored with attending a 90 minute event that has about four seconds of actual useful knowledge.

The rest of the time is just BUY BUY BUY from me.

Blah blah blah.

The REIA backlash against the get-rich-quick gurus is a welcome development. REIAs were not created as captive pools of prospective buyers so a shameless guru can invite two dozen of his guru friends to pitch courses to the shackled fools dumb enough to attend (and often pay money to hear!) worthless "lectures" so the gurus all can split the cash spoils later in some back room like thieves after a jewel heist.

REIAs were designed as places for investors to network and learn.

People join REIAs to MAKE money, not SPEND it.

You can be sure I will be reporting on each and every guru as they fall, much like trees in the forest, although you can be sure when these degenerates hit the dirt there will be a very big sound, amplified by me and many others with megaphones the size of skyscrapers and football stadiums.

Robert J. Abalos, Esq.

Saturday, December 19, 2009

Book Review: 5 Big Lies About American Business by Michael Medved

I saw author and radio talk show host
Michael Medved speak on Thursday night in downtown Seattle at an event promoting his latest book, THE 5 BIG LIES ABOUT AMERICAN BUSINESS.

I am a huge fan of Mr. Medved's work and thoroughly enjoy his radio show and his books so this review starts with some inherent bias. Nevertheless, I did appreciate his latest book, although not as much as his previous ones, especially RIGHT TURNS and HOLLYWOOD v. AMERICA, which are just magnificent.

Medved's new book accurately makes the case that the mainstream media and Hollywood are certainly biased against business and the concept of making money. Non-profit work is given higher status in society than for-profit work. Small business is more "American and Apple Pie" than big business. Wealth is somehow "dirty" and those that accumulate it are evil. Remember Balzac's famous quip that "Behind every great fortune is a great crime"? Many take for granted the false perception that the "rich get rich and the poor get poorer" as if wealth creation in the world was a zero sum game.

There is certainly a great deal of analysis and research in this book. Michael Medved never fails if you are looking for substantiation on what he claims. But fundamentally there is not much original thinking or new ground broken here. After reading this book I was left with the conclusion that yes, there are five big lies about American business, but I knew what they were already and I don't have much new evidence to refute them, although I do have a nifty new resource to access when I need to.

Nevertheless, this is still a fun book I completely recommend to you. Michael Medved likes to entertain his readers and not just educate them. If you are looking for a solid treatise on HOW the American left hates American business and does its best to sabotage and undermine the success of American industry and entrepreneurship, this is your book.

If you want to know WHY, well, that's another book I guess. Mr. Medved, please start writing.

Overall, I can't recommend Michael Medved and his work more highly. His daily radio show is lots of fun regardless of your political ideology. You may disagree with him but you can't deny he's a smart, articulate, and funny guy.

Robert J. Abalos, Esq.

Friday, December 18, 2009

Life Insurance Premiums Rising Due to Bad Real Estate Investments

For generations the life insurance industry was one of the largest single investors in real estate. The relationship for policy beneficiaries was almost perfect. Insurance companies needed a place to securely stash insurance premiums for years, even decades, awaiting the ultimate day when a death occurred and a payoff needed to be made. Investing in real estate provided an ideal vehicle.

Not anymore.

The slow-but-steady-and-predictable growth model of insurance companies investing in real estate long-term through purchases of properties or mortgages gave rise to the get-rich-faster model of real estate speculation. Buy and flip, instead of buy-and-hold.

Now, life insurance companies are looking at hundreds of billions of still unrealized real estate losses on their investment portfolios. Look at the list of companies and numbers below from Bloomberg.

You may be asking so what? Who cares? Unless you are a shareholder of these companies why pay attention to their losses?

Simple. Life insurance companies need to get the money they pay policy holders with from somewhere. If they are losing tens of billions on their investments, money they counted on through their actuarial tables to pay their policy holders when they all finally meet their Heavenly Reward, where do you think the money comes from to pay all the widows and orphans?

Easy answer.

From you, silly.

Life insurance rates are rising. Dramatically. Individuals will be paying hundreds of dollars more per year for a new term life policy, for example.

It also means that many insurance companies that looked solid on paper when you trusted them to pay your heirs may be not so solid anymore. If I was you I'd check my insurance company through the rating agency A.M. Best and really see how safe your money is.

As if death wasn't trouble enough....

Robert J. Abalos, Esq.


Insurers May Lose $10 Billion on Commercial Property
By Andrew Frye

Dec. 16 (Bloomberg) -- U.S. life insurers, a group led by MetLife Inc. and Prudential Financial Inc., may post $10 billion in losses tied to commercial real estate over the next three years, Moody’s Investors Service said.

Defaults on property loans and declines in commercial mortgage-backed securities will “dampen earnings,” the ratings firm said in a statement. The loss estimate was increased from $7 billion earlier in the year, Robert Riegel, managing director at Moody’s, said in an interview today.

Life insurers use policyholder premiums to lend to property owners and buy commercial mortgage-backed securities. MetLife, which has about $50 billion of its $338 billion portfolio in commercial property loans and CMBS, and Prudential are bracing for losses as declining real estate values and occupancy strain borrowers. Life insurers have reduced their commercial property holdings and will record fewer losses than banks, Moody’s said.

“This is one of the key areas of concern going forward,” Riegel said.

North American insurers led by American International Group Inc. have posted more than $190 billion of writedowns and unrealized losses since 2007 tied to investments including securities linked to home loans and debt issued by builders and banks. Commercial mortgage losses tend to occur after homeowner defaults, MetLife and Prudential have said.

Allianz, Sun Life

Insurers based outside the U.S. are seeking to expand in commercial property and lending, and say distressed owners and lenders may lead to opportunities. Canada’s Sun Life Financial Inc. said last month was lifting its moratorium and may invest in commercial mortgages. Allianz SE, Germany’s biggest insurer, expects to find bargains in U.S. commercial property, finance head, Paul Achleitner, said in October.

The commercial mortgage default rate on loans held by U.S. banks more than doubled to 3.4 percent in the third quarter as vacancies rose and rents declined, Real Estate Econometrics LLC said Dec. 1.

Third-quarter defaults climbed from 1.37 percent a year earlier and 2.88 percent in the second quarter, the New York- based property research firm said. Default rates in the first three quarters of 2009 have been the highest since 1993, the firm said.

Insurance companies have been more conservative than other firms in their commercial property investments because they lost money during the market decline about 20 years ago, said Jamie Woodwell, vice president of commercial real estate research for the Washington-based Mortgage Bankers Association.

Lessons Learned

“They have learned from past missteps dealing with commercial real estate,” Moody’s Senior Vice President Jeffrey Berg said in the statement. Expected losses of $10 billion will be “manageable” and are unlikely to lead to many credit downgrades, he said.

Under a worst-case scenario, which Berg considers remote, losses may exceed $40 billion, which would lead to insurers having their grades cut by multiple levels.

Commercial real estate prices may fall as much as 55 percent from October 2007’s peak, Moody’s said last month.

Monday, December 14, 2009

Liquidate the Farmers

When times get tough, people always look towards their roots for answers.

They look to the Bible or the advice of their childhood teachers or their parents, one of those "birds-and-the-bees" speeches that took place over a kitchen table where some tidbit of truth long ago heard but now almost forgotten needs to be summoned up.

When economic times get tough, economists always look towards their roots for answers too.

WWKD. (What Would Keynes Do?)

Or Adam Smith or Milton Friedman or fill-in-the-blank. Orthodoxy and its preconceived ideas and neatly crafted solutions based on social ideologies never before seen is convenient in times of crisis. As a modern day Kipling might have written, if you can keep your head when all around you are losing theirs you can become a highly paid consultant or a corporate philosophy guru or even a central banker.

People want answers, solutions NOW, when times are tough. So they flock, often like lemmings, to those who THINK they have the answers.

Of course, these leaders are often wrong, blind, and corrupt---and all three at the same time. Often their flocks are not for leading, but shearing.

When the last big bubble burst in 1929, everyone scrambled for economic answers too, just like today. Congress, the President and his men, and the angry and suffering public all searched for answers.

How can we fix the broken economy, the high unemployment rate, all the foreclosures and bankruptcies? How can we end the suffering, and do it quickly, and cheaply, and as conveniently as possible? (Sound familiar?)

Labor unions and the left looked towards the then beaming Soviet Union. Larger and more intrusive government was the answer along with its partner, collective bargaining agreements. Government jobs, large industrial projects owned and operated by the government, Federal and state mandates on business, higher taxes, more de facto ownership of the private sector.

Capitalism was a crippled cow that needed to be milked to feed the masses that had made it fat.

Big business and the right, on the other hand, looked to their market roots for answers when the stock market imploded. Secretary of the Treasury Andrew Mellon's famous advice to President Herbert Hoover just about explained his position and that of the business class:

"Liquidate labor, liquidate stocks, liquidate the farmers, liquidate the real estate, until the rottenness has been purged from the system."

Thomas Malthas would have been proud.

Capitalism was a healthy cow that had just stumbled and now the masses should be quiet and stop complaining and just help get it back on its feet.

Right now, times are tough and people are desperate for answers and they are seeking roots, even if they aren't their own.

They turn to God, to CNN, to Jim Cramer, and the megachurch pastors on late night TV. Insomniacs scour the Internet seeking a cure from all the stress, the pressure, the loneliness, the fear of being one paycheck away from homelessness or a month away from foreclosure or seeing packs of homeless men and women sleeping in doorways and eating garbage in alleys when we were taught we lived in the Greatest Nation in the World that could solve any problem, tackle any crisis, and outwit any enemy.

This isn't the American Dream our parents lived.

It's not the promise of each generation living better than the last that we all saw before our eyes as children. Our grandparents lived in poverty, our parents solidly in the middle class, and us, now, the next dynasty to take that blind step forward into the vapor with nothing but faith as a parachute....

Economists too, right now this very minute, are scrambling back to their roots. Unfortunately most right now, especially those with flocks in Washington and Congress, are looking towards Europe and its quirky brand of socialism for answers. Value added taxes, higher fees on just about everything that moves or breathes, and more regulation via Orwellian conceived "private public partnerships" which literally means you supply all the capital, labor, and ideas and then give me most of the profits for letting you do your business in the first place.

Al Capone would be proud.

Capitalism is a dispensable cow that should be milked to death with the firm belief there will be another cow just around the corner.

I'll be honest. I'm looking towards my roots too for answers. I see immense poverty and suffering every day just walking the streets in downtown Seattle. Cold, starving people looking for food to survive and suffer just one more day are everywhere. Desperate drug addicts doing deals in plain view, right out in the open in front of everyone, especially all the tourists, paints a grim picture of society and how it treats its unhappiness.

Lectures on personal responsibility or resume writing down solve these problem. You can't pick yourself up from your bootstraps when you don't have any. Unlimited handouts don't work. Police crackdowns aren't the answer.

Orthodoxy doesn't work here. Black and white thinking fails. It's easy to be academic and detached at 20,000 feet but not when you see the carnage at sea level literally on your doorstep and on your way to work every day.

I understand what Andrew Mellon was saying in 1929 about "liquidating the farmers" and basically he was right. His advice would have been best for the market and for business.

Just not for people.

Economists, just like historians, need to resist the priestly teachings of their particular denomination and remember that no "ism" has all the answers, and some "isms" have no answers at all. It's okay to be a Keynesian or a Friedmanite when you are sitting in a bar downing some decent adult beverages and debating with friends, not when you are running a central bank or voting on legislation in Congress or, heaven forbid, teaching freshman Economics 101.

Robert J. Abalos, Esq.

Saturday, December 12, 2009

Book Review: The Origin of Financial Crises by George Cooper

I just finished the truly great book THE ORIGIN OF FINANCIAL CRISES by author George Cooper.

This is a MUST READ for all investors.

The importance of this book is obvious. If you can't recognize the causes and symptoms of financial panics how can you profit from them?

For many years before Mr. Bernanke finally noticed it, I told you a real estate crash of monumental proportions was coming. Starting as early as 2004 I was sounding the horn and riding like Paul Revere through the Internet countryside proclaiming "The Bubble is Coming."

So how did I know this when so many others in the real estate industry pretended everything was rosy and sunny and peachy-keen in Swellsville?


Mr. Cooper's work is exceptional on many levels, especially because of its brevity and common sense on a stunning number of crucial financial points.

For example, the analysis put forth by Mr. Cooper against the Efficient Market Theory is the best I have ever seen anywhere. I don't believe in it, by the way. I never have. You shouldn't either---and won't after reading what he has to say about it.

Do you know Hyman Minsky's Financial Instability Hypthesis? You should. The world is currently living through the proof that he is right and this is no mere theory. You'll read about it in this book.

The subtitle of The Origin of Financial Crises says it all:

"Central Banks, Credit Bubbles, and the Efficient Market Fallacy"

Yes, there were financial panics and monetary crises many times before the idea of a "central bank" came into being, such as in the United States via the Federal Reserve Act of 1913.

But the consequences of the Federal Reserve System since World War I, or nearly 100 years, has been an endless cycle of booms-and-busts all precipitated by the central banks of the world either flooding the market with ultra-cheap money which fuels unlimited lending and the most rank speculation imaginable (think NASDAQ 1999 or Miami 2006) or excessive tightening and "credit crunches" designed to fight inflation brought about by the last bubble market (think the United States circa 1979).

If the Fed was to eliminate financial panics, why is it causing them? This is much like using a birth control device that increases the chance of pregnancy.

Unless the Congress and the President do the right thing and abolish the corrupt and worthless Federal Reserve System (not likely) the best you can hope for as an investor is knowing the causes of financial panics and crises and being ready for the day that the Fed hands you one.

With THE ORIGIN OF FINANCIAL CRISES you can profit from the Fed's grotesque largess.

I'm not sure author George Cooper intended his book to be primer for investment profits. He seems more revolutionary theoretician than practical hedge fund advisor. Nevertheless, I found his book fascinating, a tight and concise analysis of financial markets, how they are supposed to work, and unfortunately how they really do.

The only real issue presented for me after reading this book is whether or not you profit from the mistakes of others. In a capitalist society, you not only should but do the system a service by doing so.

Robert J. Abalos, Esq.

Friday, December 11, 2009

Compare Foreclosure Rescue Fraud Schemes Against What the Gurus Teach You

It is insightful to go back to the past, and realize how important and prescient the National Consumer Law Center ("NCLC") really was on the subject of foreclosure rescue fraud when it released its now influential report, "Dreams Foreclosed" in June 2005.

The subtitle of this report says it all and why you need to read it.

"The Rampant Theft of Americans' Homes Through Equity Stripping Foreclosure Rescue Scams."

This document is MUST READING for anyone in the real estate business. I championed this report when it was first released in 2005, much to the anger of some in the creative real estate business.

And of course they were upset, with the NCLC report and with me.

The NCLC and its investigators exposed the scams that foreclosure rescue fraud specialists use to STEAL THE EQUITY of distressed homeowners and then realized that many creative real estate gurus who preach instant riches and unlimited fortunes through their home study courses and mentoring programs really just teach foreclosure rescue fraud.

The report compares what the gurus teach and how the scammers scam.


Bandit signs sold by the gurus with bandit signs used by the scammers.

Same techniques, same approaches, same marketing and mailing postcards and brochures, same kitchen table closings, same quitclaim deeds, subject-to buying under duress, same everything down to the targeting for exploitation of the most desperate of homeowners, those facing foreclosure due to medical bills, unemployment, death of a spouse, or some of the disaster.

Please read the NCLC report. To paraphrase Groucho Marx:

"Do you believe me or your own eyes?"

There are a number of creative real estate gurus mentioned in the report, and one in particular who squealed like a stuck pig when featured by the NCLC. Actually I thought the NCLC let him off easily, but that's another story....

This report by the NCLC, condemned and hated by the creative real estate gurus who denounced the organization as "communists" (exact word), has become part of history, an influential part of foreclosure rescue fraud reform laws that have swept the nation since 2005. I know that this NCLC report was specially mentioned in at least five state legislative debates when enacting new tougher laws to limit the damage of foreclosure rescue scammers and the creative real estate gurus who not only teach them how to commit foreclosure rescue fraud but actually sell them the documents to do it.

I hope the NCLC updates its report. The "pandemic" of foreclosure rescue fraud mentioned in 2005 was just the beginning.

Robert J. Abalos, Esq.

Wednesday, December 9, 2009

Divorcing Couples and their Real Estate Options

It is tough enough to go through a divorce.

Join that problem with a real estate bust that destroys the value of the married couple's most value asset, their home, and you have the makings of real catastrophe.

This article below from offers some excellent advice for couples going their own separate ways.

There are no easy answers here. The best advice I know was told to me by an really ancient divorce lawyer many years ago who I worked with on a commercial real estate valuation issue. He told his own client and her attorney point blank "If you can cooperate for the sake of the kids, you can cooperate for the sake of your personal portfolio."

Good advice.

What is REALLY more important?

Past infidelity or future (and maybe substantial) capital gains?

Robert J. Abalos, Esq.


Attorney Richard D. Vetstein.writes today on another ugly reality of the recession: divorce. Here's what divorcing couples can do, legally, in regard to their real estate.

When a recession hits, divorce rates spike. Divorce often plays a major role in real estate transactions and decisions. The question posed today is what to do if you are getting a divorce and the marital home is “underwater” – that is, when the balance on the mortgage is more than the fair market value of the house.
Well, here are your choices:
1. You stay in the house with your divorced spouse until either one of you can afford to move out or refinance. Seriously!? Yes! More and more people are doing so in this new economy because there is simply not enough money to go around. I know of divorcing spouses creating separate living quarters in a house, akin to an in-law suite with separate entrances, etc.
2. You and your spouse continue to co-own the house together until someone can refinance the property. Either you live in the house or your spouse lives in the house. You could have a situation where only the person who’s living in the house pays for everything or everything is split 50/50. Either way, the couple will still own the house together.
3. Refinance. If you try to refinance, you will have to put up the money to make up the difference between what you owe and what your house is worth. That would be tens of thousands of dollars if not more. Some people have that kind of money but most do not.
4. Short sale. A short sale is when you get the permission of your mortgage lender to sell the house for less than what you owe on the mortgage and you get released from the balanced owed. With the enactment of the new Obama short sale regulations, which I wrote about previously, a short sale may be a good option for divorcing couples who are “under water.” The new regulations require that the lender agree to waive the outstanding loan balance on an approved short sale, so both spouses can wipe their credits clean of the mortgage obligations and move on with their lives.
5. You let the home go into foreclosure. This is not an ideal situation and it’s not generally recommended.
6. Loan modification. This is very difficult and very lender specific. Some will let you modify the loan or do an assumption whereby you don’t have to refinance the house and yet be allowed to remove a spouse’s name off the mortgage. It’s worth a try.

From a real estate perspective, preserving the value of the property is paramount and in the best financial interests of both spouses. The options are tough for those in the unfortunate predicament of divorcing in this recessionary economy.

Sunday, December 6, 2009

Negotiate Over Real Estate Commissions and Save Thousands of Dollars

Below is an excellent article from the LA Times on how to save money by bargaining with your broker on real estate sales commissions.

Such deals happen all the time, especially if you have an established relationship with a sales office. Competition amongst sales agents and their brokers is fierce these days so if you have a quality property for sale you stand a good chance of getting a rate cut, even if you are represented by a discount firm.

As they say, it never hurts to ask. And ask many and ask often. BARGAIN HARD.

Robert J. Abalos, Esq.


Shaving real estate commissions can save sellers thousands

Some brokers are willing to lower their fees or help their clients save in other ways. But you have to ask.

By Mark Yemma

December 6, 2009

David Herron doesn't consider himself a particularly hard-nosed negotiator. After all, Herron works as a technical service specialist for the Fantasmic show at Disneyland, and that happiest-place-on-Earth attitude tends to rub off.

But when Herron decided to sell his Lake Forest home last year, he was determined to find a real estate agent who was willing to cut a deal on the usual 6% commission -- the fee traditionally paid by home sellers to the listing agent who quarterbacks the complex transaction. That agent, in a system akin to "The Sopranos" but handled more tidily in escrow, must hand over cuts of the cash to the buyer's agent and other brokers involved in the transaction.

And who could blame Herron? In a year that finds frugal Californians pinching pennies at Wal-Mart or opting to regift their way through Christmas, why leave thousands of dollars on the table?

Herron obtained a discount of roughly half off the customary fee to sell the $660,000 house by using the same agents to help him purchase a bank-owned property in Rancho Santa Margarita.

"I knew from the Realtor's flier that I could negotiate," Herron said.

Sales commissions amount to serious money, but many sellers don't know they can dicker over the fees.

A Los Angeles County seller of a median-priced house of $325,000 would shell out $19,500 of his proceeds by paying his sales agent a traditional 6% commission. Such a seller might find himself outraged over having to pay out a few hundred dollars in surprise repair expenses as he navigates escrow with a difficult buyer, yet that same seller could have saved $3,250 just by persuading his agent to lower the commission to 5%.

Agents resist

As with the rest of the American workforce, real estate professionals are scrambling to find work -- seemingly good news for consumers. Although thousands of discouraged agents have dropped out of the business, California still fields an army of more than half a million licensed agents, many of whom signed up during the stampede for riches earlier this decade.

While consumers appear to have the upper hand in the current market, those agents lucky enough to get listings have to work harder to sell houses these days, making some recalcitrant about parting with their wages.

"You'd be foolish to give part of your salary away. I'm worth what I get paid," said Elizabeth Weintraub, a Sacramento broker. Weintraub, author of "The Short Sale Savior," laments that frequently the first thing potential clients ask about is paying less commission.

"I expect them to ask me. And then I tell them why I'm not going to do it," she said.

Kellie Jones, a licensed broker working for Century 21 Beachside in Orange County, said agents in her area "are really digging in their heels because they aren't selling as many homes." During the bubble, they could lower their commissions and make it up on volume, she said.

But Jones expressed amazement that many potential clients don't bother to request a break on the commission. "We're timid; we just don't want to ask," she said of some sellers. Jones, a pragmatist, said she would cut her commission "if I think I am not going to get the listing unless I do so."

Do the math

In hopes of negotiating a lower sales commission, Marsha Boutelle -- a self-described "serious shopper" -- interviewed three agents to sell her home this fall in the Northern California town of Carmichael.

"Of course I would rather pay less commission, and I would always try to negotiate," Boutelle said. "I do a lot of research."

Her experience, however, offers a cautionary lesson.

One agent she interviewed offered a 1-percentage-point discount "without even being asked," but also suggested a sales price that was about $40,000 less than the house eventually sold for.

Though Boutelle paid a full 6% commission on the $385,000 sale, she walked away with tens of thousands of dollars more than she would have reaped had she employed the discounting agent pushing a much lower sales price. Boutelle expressed suspicions that the discounting agent was simply after a quick sale.

Not surprisingly, real estate agents love to hear such stories.

"Sometimes, you get what you pay for," said Elaine Stark, a Realtor who runs her own business with her husband, Don, a licensed broker.

The couple, who specialize in areas of Irvine and Lake Forest, advertise commissions as low as 3.5% if they can sign up a seller and also represent that same seller in buying another home -- thus earning the buyer-agent cut of the second, piggyback deal.

Jones explained another type of deal she's found herself in, known as dual agency, when the sellers could have paid a lower commission -- if only they bothered to ask for a price break.

Listing agents, when they manage to bring their own buyer into a transaction, can perform as a dual agent, legal in California when fully disclosed to all parties, though rife with potential conflicts of interest.

In such a deal, known in the business as "double-ending," one agent or broker gets to keep the whole pot of cash. A consumer-friendly agent could then cut the customer a rebate.

"But if the seller doesn't request it, they won't get it," Jones said, noting that in the mounds of paperwork involved in a home sale, many sellers aren't paying attention to the fine print of a dual-agency disclosure -- and many agents are perfectly fine with pocketing the whole commission.

Creative discounts

Arnold Applebaum, a La Mirada aerospace contractor, found another way to save cash when selling his La Habra Heights home several years ago.

Applebaum had agreed to pay a full 6% commission "because at the time there was only one real producer in the area." The chief executive of Solid State Devices Inc. has bought and sold numerous homes and views realty fees philosophically -- a cost of doing business. "I always figure that people have factored in the commission when setting the price of the house."

Then the sale of his La Habra Heights home began to bog down in escrow.

Although the transaction occurred well before last year's credit freeze, "the buyer was having some difficulties -- but I didn't want to go any lower on the price," he said.

Applebaum pressured his broker, who agreed to placate the buyer and then rebate him part of her commission -- a creative solution to push the deal through.

In the current lending environment, navigating a sale through escrow can be a nightmare, agents say. But consumers can benefit, as Applebaum did, as agents are forced to stitch deals together and sometimes dip into their own pockets to save them.

In one intractable escrow, Weintraub shelled out several thousand dollars to pay a buyer's lien and save the deal. In another near-meltdown, her seller was on the verge of foreclosure and too broke to make the home presentable for sale. With the clock ticking on the crisis, Weintraub called in a favor from a colleague: "I pleaded with a home stager to discount her price to the seller. She agreed to stage the home." The house then sold quickly.

Sweat investment

Savvy home sellers can boost their bottom line in other ways.

Martin Lambert sold his Newport Beach condominium in June and moved to Elk Grove, near Sacramento. The condo had languished on the market with the first agent he employed.

Lambert, a retired manufacturing plant manager, crossed paths with Stark. She undertook the listing and her husband-broker-handyman agreed to make some repairs to the condo so it would sell.

Lambert walked away with more cash because of the free repairs and a discount on the commission from the Starks, an independent team that doesn't have to kick overhead money up to a large real estate brokerage.

"It's always an advantage dealing with one person," said Lambert, who has bought and sold numerous properties. "If you deal with a non-chain group you might get a better deal."

First impressions

One money-saving strategy may be so obvious that it frequently is overlooked: Make a good impression on your agent by "pre-staging" your house.

Agents are only human. "If I walk into a sad place, my whole attitude changes," Jones admitted. "Some people don't understand that their house is a wreck. I tell them to go look at model homes."

A seller who invites a professional into his unkempt house -- dirty dishes everywhere, general clutter or filth -- may convey a message that the house will be difficult to sell. The longer a place takes to sell, the more an agent's cost per hour goes up -- and the likelihood of the agent offering a discount diminishes. Sellers in today's difficult market demand sophisticated marketing strategies, all of which are financed by the agent's commission.

Jones said she sometimes can tell immediately whether a home is likely to sell quickly or languish. Sellers who fix their places up to make a good first impression on agents are more likely to get a double payoff: top dollar on their property, plus a discount on the commission they pay.

Wednesday, December 2, 2009

U.S. Commercial Property Loan Defaults Soar

More evidence from Reuters of the brilliant economic turnaround underway courtesy of Messrs Bernanke and Geithner.

It is time for the Obama Administration to stop blaming President Bush for the still deteriorating U.S. economy. Read this excellent blog post by someone who agrees with me on this.

Plus, I don't get the criticism of Bush here either. Remember that both Geithner and Bernanke were part of the Bush Administration too. It seems Mr. Obama just hired the same second string quarterbacks to run his economic plays and has really no one else to blame here but himself.

It was President Bush who appointed Timothy Geithner to run the Fed bank in New York in October 2003. It was Geithner in 2008 who "saved" Bear Sterns, "rescued" AIG, and let Lehman Brothers "die."

Benjamin Bernanke was President George Bush's Chairman of the President's Council of Economic Advisors from June 2005 to January 2006. It was also Mr. Bush who appointed Bernanke to the top spotat the Fed.

Robert J. Abalos, Esq.

US commercial property loan defaults soar-reports

Mon Nov 30, 2009 11:59pm EST

* Commercial real estate bank-loan defaults hit 3.4 pct

* Real estate bank loan defaults may peak at 5.3 pct

* CMBS defaults reach 4.01 pct in October

* CMBS defaults could top 8 pct in 2010

By Ilaina Jonas

NEW YORK, Nov 30 (Reuters) - The default rate for commercial real estate loans held by banks reached the highest in 16 years and the outlook looks worse, according to a report by a research firm released on Monday.

The picture for loans underlying commercial mortgage-backed securities looks as bleak, according to another report.

The national default rate for commercial real estate mortgages held by banks and other depository institutions reached 3.4 percent in the third quarter, up 0.52 percentage point from the second quarter, according to research firm Real Estate Econometrics.

It was the largest one-quarter increase since quarterly data became available in 2003.

At 3.4 percent, the U.S. default rate for commercial real estate mortgages -- on office, industrial, hotel and retail properties -- held by banks, thrifts and other depository institutions was the highest since 1993, when the default rate was 4.1 percent.

The default rate is the percentage of loans on a dollar basis that are past due 90 days or more or that are in non-accrual status, meaning lenders don't expect to be repaid in full, according to Real Estate Econometrics.

For apartment buildings, the default rate was reached 3.58 percent, up from 3.14 percent in the second quarter. The default rate on multifamily mortgages also has more than doubled over the last year.

Real Estate Econometrics Chief Economist Sam Chandan said commercial real estate lending should not be generalized.

"Don't say it's a regional bank problem," he said. "The conditions of each bank need to be evaluated on their own merit."

Some banks that had large exposure to commercial real estate are not suffering because they had strong risk management practices, conservatively analyzed loans and had in-place structures that hold someone accountable for the loan.

The balance of bank-held commercial mortgage loans 90 days or more past due rose to $4.4 billion in the third quarter from $3.5 billion in the second.

Real Estate Econometrics sees the default rate for commercial real estate mortgages held by depository institutions hitting 4.0 percent in the fourth quarter of 2009, about 5.2 percent by the end of 2010, and peaking at 5.3 percent in 2011.

For CMBS loans, delinquent unpaid balances rose 2.6 percent in October from September to $32.55 billion, a whopping 504 percent increase over last year and 14 times higher than the low point of $2.21 billion in March 2007 -- the height of the U.S. commercial real estate boom, according to rating agency Realpoint.

The delinquency ratio for October 2009 reached 4.01 percent, up from 3.94 percent in September and more than six times the 0.54 percent a year earlier.

Realpoint sees delinquent unpaid CMBS balances continuing along the current trend, reaching $40 billion to $50 billion before the end the first quarter of 2010. It sees the delinquency percentage growing to between 5 percent and 6 percent through the first quarter of 2010.

It could potentially surpass 7 percent to 8 percent in 2010, as several large loans issued in 2006 and 2007 continue to show signs of stress and older loans mature without prospects of being refinanced. (Editing by Steve Orlofsky) (( ; +1 646 223 6193; Reuters Messaging: ))

Tuesday, December 1, 2009

Reserve Bank of Australia Lifts Interest Rates for Third Straight Month

RBA lifts rates for 3rd straight month

17:05 AEST Tue Dec 1 2009
The Reserve Bank
The Reserve Bank raised the cash rate to 3.75 per cent, for an unprecedented third month in a row.

The Reserve Bank of Australia (RBA) has raised interest rates for a third consecutive month, and more increases are expected in 2010 as the economy continues to strengthen, keep inflation under control, economists say.

The RBA on Tuesday raised the overnight cash rate by a quarter of a percentage point to 3.75 per cent, after similar moves in October and November, as it seeks to keep inflation under control during the recovery.

It is the first time the RBA has lifted the cash rate three months in a row since it began announcing its decisions on monetary policy in January 1990.

RBA governor Glenn Stevens said the huge monetary policy stimulus put in place during the global economic downturn - when the cash rate was lowered to three per cent - was being wound back.

"With the risk of serious economic contraction in Australia having passed, the board has moved at recent meetings to lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker," Mr Stevens said in a statement.

"These material adjustments to the stance of monetary policy will, in the board's view, work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead."

JP Morgan chief economist Stephen Walters said the RBA was removing the emergency monetary stimulus because the local economy had performed better-than-expected.

"The RBA, therefore, is removing the emergency, or insurance, component of policy accommodation now that the downside risks to the economy have receded," he said.

"Policy remains supportive, and will be for some time.

"RBA officials, though, are pushing the cash rate back towards neutral to mitigate against the emergence of problems, like a house price bubble or credit binge, that could grow larger if the cash rate is left "low for long"."

Mr Stevens said households had gained from recent improvements in equity and housing markets.

"Share markets have recovered significant ground, which, together with higher dwelling prices, has meant a noticeable recovery in household wealth," he said.

RBC Capital Markets senior economist Su-Lin Ong said one of the key differences in Tuesday's statement from the previous one in November was the mention of a recovery in household wealth.

"That is quite key in underpinning activity in going forward," she said.

Ms Ong said the central bank was likely to lift again in the first quarter of 2010 if the economy continued to improve as the RBA expects.

Financial markets are pricing in a 40 per cent chance of the RBA lifting the cash rate by 25 basis points at its next board meeting on February 2. The RBA board does not meet in January.

"We do have another hike pencilled in (February or March 2010) but it is really dependant on the data," Ms Ong said.

Mr Walters expects the RBA to lift the cash rate again in February.

"With little new information revealed by today's commentary, we continue to look for a fourth straight rate hike in early February, and a cash rate target of five per cent by the end of next year," he said.

Nomura Australia chief economist Stephen Roberts said the RBA might wait until March or April.

"It is hinting at a more extensive pause," he said.

"They may go past February and it's looking like March or April now before they (raise rates again)."

All the major banks were reviewing their standard variable mortgage interest rates on Tuesday after Westpac Banking Corporation shocked the market by deciding on a 45 basis point rise in its rate.

Westpac's standard rate will rise to 6.76 per cent from Friday 4.