This document provides an economically responsible and realistic solution that was ignored in the frenzy of the last actions of an exiting administration.

Mr. Houston and I have first hand knowledge of the banking sectors’ unwillingness to take losses and liquidate their non-performing assets. There have been an innumerable amount of investors standing in line offering to buy billions of non-performing REO assets from the banks holding the properties. These investors are simply seeking to assume the risk and gain any potential profit in converting non-performing assets into fully performing investments.

The greed of the banking sector prevailed as banks were unwilling to liquidate their REO holdings for relatively small realized losses. The banks refused offers by fund managers, portfolio managers and individual investors to purchase both individual properties as well as bulk REO portfolios at 50-75 cents on the dollar. The banks to date have refused to liquidate their losses at any amount below 80-95 cents on the dollar. Thus plunging the credit market into what the banks conveniently and erroneously label “liquidity problems”. Lack of liquidity implies there are no willing buyers for a willing seller. The current “lack of liquidity” in the housing market is simply a result of the banks unwillingness to sell their REO holdings to the market at current market prices. Today’s prices are deemed “too low” by the banks. Selling at the current bid price requires the banks to take a loss on their investment as a result of their poor and irresponsible investment underwriting. Instead of realizing these losses, the banks sought and received a governmental bailout on the backs of the U.S. taxpayer.

The undeniable facts are as follows:

• The banks assumed the U.S. government would deem them “too big to fail” and thus bail them out. As a result, the banks refused to sell off their non-performing assets at reduced prices 2-3 years ago, when today’s crisis first became inevitable.
• By not selling off these assets and taking the corporate loss two years ago, the banks enhanced the catastrophic losses they now face. They knowingly placed the American taxpayer and the financial markets at risk without regard to basic fundamentals of risk and portfolio management.
• The U.S. government is rewarding the banks, and indirectly their share-holders, for breach of fiduciary duties owed by banking executives to the general public, for their lack of prudent financial and investment decision-making, and for refusal to minimize the losses as a result of a history of governmental willingness to intervene and bail out the banking industry.

The Problem

So, let’s assume we all understand what the problem is. (For a more detailed understanding, see Letter from Leo W. Gerard, President of the United Steelworkers Union, to Treasury Secretary Paulsen, dated October 28, 2008) In a nutshell, Mr. Gerard’s argument in his letter to Secretary Paulson is that the Secretary failed to exercise sound judgment in valuing the assets for which he was committing taxpayer dollars. Just twenty days before Goldman announced that it would “accept” Treasury’s investment; Warren Buffett invested $5 billion into Goldman Sachs and acquired the very same type of security – preferred stock – with the very same form of “upside” – warrants to purchase common stock. Per dollar invested, Mr. Buffett received at least seven and perhaps up to fourteen times more warrants than Treasury Paulson did and Mr. Buffett’s warrants have more favorable terms. In addition, Mr. Buffett’s preferred stock has a higher dividend rate and can only be bought away from him at a premium, while Treasury’s investment of taxpayers’ money pays a lower dividend and can be repurchased at par.

Mr. Gerard argues the Treasury paid $125 billion for securities for which a disinterested party would have paid $62.5 billion. This means that we, as taxpayers, gifted the other $62.5 billion to the shareholders of the largest nine banking institutions. Even worse, it is expected that the nearly $25 billion per year that the firms pay out in dividends to their shareholders will continue. At current levels, dividends to shareholders will distribute all of the money we invested in just five years.

Out in the real economy, we need to restore the balance of power between workers and business, rebuild the middle class and curb corporate excesses. We need to get the government OUT of the business of running corporate America and prevent our tax dollars going to pay for the inefficiencies of Washington. Our politicians are freely spending our tax dollars to “bail out” a troubled sector without establishing any sort of “conditions” of acceptance of such financial assistance. The $700 billion dollar taxpayer investment does NOTHING to deal with the causes of the current crisis. In response, I propose a solution…

The Proposed Solution

To solve the problem, we should start by halting any more taxpayer funds paid to any of the banks. We should mandate the banks liquidate a portion of their REO (Real Estate Owned, e.g. foreclosed homes that are now bank held properties) inventory holdings within 180 days.  Any REO that has been on the books of the banks for longer than 200 hundred days must be liquidated within 60 days.

By requiring the banks to liquidate REO holdings, the banks are then forced to eliminate non-performing assets from their balance sheets. Liquidating REO’s will inject the supply of houses back into the market.  The banks are forced to take actual losses on the poor investments they made.  The banks are then placed in the same position as any other investor when a trade goes against their interest. Liquidating REO’s converts a non-performing asset into a performing asset in the capital market.  By doing this there will be a shift of the risk of fluctuating (or further declines) in housing prices from the banks (who traditionally do NOT like assuming risk) to the market and investing public. Traditionally, banks do NOT like to assume undetermined risk. Furthermore, the marketplace exists to shift risk to the investor and has been the most efficient place to control and manage risk.

In addition, by liquidating REO’s and getting them into the hands of willing investors, the banks would recover some of their losses when the purchasers of these homes seek mortgage financing for their newly acquired asset.  This action has a multiplier effect, spurring investment dollars rolling back through the bank and the financial system.  The banks now would be converting non-performing assets into new loan generation profits.  By taking an initial loss, the banks will be rewarded with revenues in the form of interest rate returns on their lending dollars.  This solution prevents the tax payers from being forced to bail out banks who made poor investment decisions. This action also has the added benefit of putting the risky investments back into the hands of those most willing and efficient at handling such risk. The purchase price received on REOs will reflect the increase risk the market must assume as a consequence to increased risk.

Another benefit of my proposed solution is that the taxpayers are actually the catalyst for returning the median housing price to parity.  The “housing bubble” has resulted in unsustainable housing prices over the past 10 years. Increases in home prices typically keep pace with increases in wages. However, the housing price increases of the last ten years have outpaced increases in wages. National median home prices have increased by more than 45 percent in the last decade (when adjusted for inflation). Median wages per worker, on the other hand, have only increased by 10 percent in the same period. As a result, individuals who are making the median household income cannot afford to buy a median priced home. My solution returns parity to the housing market and permits more homebuyers in the market, thus resulting in more mortgage lending dollars. This is another benefit of the multiplier effect of forcing the banks to take immediate losses on their REO’s in an effort to gain long term profits and benefits from the capitalist markets.

What my solution does NOT include is as important as what it does.  Notice, my solution does not require the government to spend money on ANYTHING. The government is merely required to force the banks (e.g. REGULATE) to liquidate their non-performing assets and take the loss on investments that have already been realized on their books. In other words, this solution forces the banks to turn unrealized, paper losses into actual, realized losses. Although the banks are fearful of taking such huge losses, prudent risk management dictates that every investor must first seek self-preservation. Self-preservation means preservation of capital by liquidating losing trades before your trading account is liquidated.

Interestingly, when not subsidized by a large governmental body or bank account, every investor in the world is forced to manage their risk and take losses before losses overtake their capital account.  A general rule of thumb of investing is “take your losses and let your profits run”.  What this adage means is that you should allow your profits to continue to gain, but you must keep your losses to a minimum. This is also known to the layperson as “playing with house money”. The rationale behind it is that you must never allow your small, manageable losses to become large, unmanageable losses that jeopardize your future ability to invest or trade. See the results of large scale trading failures resulting in liquidating entire corporations

Eerily, almost 10 years ago, Kevin Dowd, a professor of economics at the University of Sheffield and an adjunct scholar at the Cato Institute (a Libertarian think tank based on the principles of limited government, free markets, individual liberty, and peace) wrote about the dangers of governmental intervention in a similar financial crisis. (See Too Big to Fail? Long-Term Capital Management and the Federal Reserve, September 23, 1999). In September 1998 the Federal Reserve organized a rescue of Long-Term Capital Management (LTCM), a very large and prominent hedge fund on the brink of failure. The Fed intervened because it was concerned about possible dire consequences for world financial markets if it allowed the hedge fund to fail. In the short run the intervention helped the shareholders and managers of LTCM to get a better deal for them than they would otherwise have obtained. The intervention also had more serious long-term consequences: it encouraged more calls for the regulation of hedge-fund activity, which may drive such activity further offshore; it implied a major open-ended extension of Federal Reserve responsibilities, without any congressional authorization; it implied a return to the discredited doctrine that the Fed should prevent the failure of large financial firms, which encouraged irresponsible risk taking; and it undermined the moral authority of Fed policymakers in their efforts to encourage their counterparts in other countries to persevere with the difficult process of economic liberalization.

History that we fail to understand or keep at the forefront of our memory, is destined to repeat itself. Recently, the Federal Reserve, the Treasure Department and the Executive Branch of our government have deemed certain industry participants as “Too big to fail”, for fear of the larger implications if such industries or corporations are allowed to become non-existent. What is often overlooked is the fact that market capitalism will always fill voids and gaps in the market. One corporations’ failure and subsequent void results in another corporations’ opportunity to step in and replace the failed entity. Where large banks were willing to over-reach their hand in pursuit of never ending greed and profits, and getting that hand cut off in the process, smaller regional banks, some privately held “mom and pop” operations, were forced to be selective and more conservative in their lending practices. These regional niche banks are largely not as negatively affected to of the failed investment decisions of their larger conglomerate competition. It is these smaller banks who are poised to reap the reward of their conservative investment decision-making. Smaller banks will step up to fill the void left by failed conglomerates.

Unfortunately, the banking sector has been erroneously practicing the philosophy of “take your profits and let your losses run”. Add to that “don’t waste the edge with a hedge” and you have a recipe for large scale financial disaster. Unfortunately for the large, ill-advised banks, the losses have become so large, the government has once again deemed them “too big to fail”.  Our government has once again fallen into the trap and repeated the mistakes of a decade ago. We have failed to learn from our mistakes which make us even more likely to repeat them yet again.

By protecting the large institutions from accepting their losses, the banks are permitted to essentially ignore those losses and continue to act as irrational actors in the market. For example, banks facing large inventories of REO’s, inventories which are growing on a monthly basis, have feared the day that they had to liquidate such listings in a fire sale and actually preserve their equity. By stepping in and bailing the banks out of their financial nightmare, the federal government (e.g. you and I as taxpayers) have assumed the risk incurred by the banks. The banks now essentially have not felt any of their losses as they have been alleviated of the necessity to liquidate losing positions. What this means is that REO’s that have been sitting on their books, depreciating every month for the past 11 months of 2008, now have been injected with fresh taxpayer capital. The banks can now continue to hold on to those REO’s in the hope that someone (anyone) will step in a buy them at a price closest to the price in which the bank is holding the note on.

The SOLUTION in Practice

As an example, a bank lends $500,000 for the purchase of a home. The home falls into foreclosure immediately, with the bank holding the note on the home. This home is now worth $400,000 to a willing buyer, but the bank is un-willing to sell at this price. The bank is unwilling to take an immediate $100,000 loss on this home. Instead, the bank is willing to offer this home to a buyer at $475,000 in the hope of minimizing their loss to a mere $25,000. In the meantime, the buyer at $400,000 disappears and the market price (the price at which a willing buyer and seller would exchange goods) drops to $350,000. Unfortunately, the greed and ignorance of the bank keeps its price at $460,000. The bank is only willing to take $40,000 loss for their erroneous initial investment of $500,000. Keep in mind that this is ONE home, and there is another 5 homes hitting their REO inventory holdings every month. The bank simply asks the government to bail them out of this mess rather than take the loss and clear their balance sheets. Thus, the bank has now shifted the risk of loss due to their own poor investment decision to us, the taxpayers, and still maintains their posture of waiting for prices in the housing market to return to the outlandishly high “bubble” period prices. (e.g. “letting their losses run”).

In my proposal, I require the banks to liquidate any home within 60 days if a home has been sitting as an REO inventory listing for more than 200 days. In the above example, this home would be forced to be sold to a willing buyer at $350,000. The bank would take an immediate loss of $150,000 and the buyer would assume the risk of further price declines. The buyer would most likely seek mortgage financing, resulting in profits to the banking sector. Any new REO listing would be forced to be liquidated within 180 days. This would give the banks enough time to establish a fair and reasonable price without having to resort to a fire sale that could be abused by buyers familiar with the restraints on the bank owned property. The government would not spend a cent to bailout a banks’ poor investment decision. The government would simply require the banks to comply with the liquidation time periods.

Capitalism must be permitted to work in good times as well as bad. Capitalism is the only way to solve a problem rooted in capitalism.  Protectionism will never be able to solve a capitalism problem.  We must force the banks to liquidate their REO holdings and put the houses back into the hands of the market participants.  We must allow the market to assume the risk of fluctuating housing prices. We must force large banking institutions to participate in the market as every other investor must. This means the banks should be permitted to revel in their profits, but must also accept and managing their losses appropriately. We must not allow the banks to strong arm the American public with statements generating fear and paranoia by claiming our money is not safe. We must not be forced to believe that a taxpayer funded bailout is mandatory if the public wants to have access to their savings. The market will bring the housing prices back to parity, thus allowing more American’s to be able to purchase a home.

My solution is sound and is based on proven principles of capitalism. It does not favor any one business or sector over another. My solution does not reward the wrongdoers, the greedy, the bureaucrats or the lobbyists who push for governmental protection. My solution does not punish any market participant any differently than any other market participant. My solution has integrity and treats all participants fairly under the code of market capitalism. Reap your rewards on your solid investment decisions. Accept your losses on your poor investment decisions. Do not ask for government intervention when things are going against you unless you were willing to share your exorbitant profits when your financial situation was favorable to you.

Take Action NOW

Now, I request that every reader of this proposed solution write your Congressman and Senator to pass the along this reasonable solution. Today is Election Day. Change is in the process and we need to encourage our incumbent and newly elected leaders to hold appropriate parties accountable and not penalize innocent taxpayers. We need to bring integrity back to our markets and allow market capitalism to work its magic to cure inefficiencies in the marketplace. Market capitalism cannot exist without Democracy and Democracy cannot exist without market capitalism.

Winston Churchill is quoted as saying “America will always do the right thing - but only after having exhausted all other possibilities”. We have exhausted all other possibilities. Let’s do the right thing by allowing market capitalism to work. Let’s avoid governmental intervention except to promote the economic system we have fought so hard to establish.

–end

T. Gabe Houston is a lawyer in Southern California and the Managing Member of Hegemony Capital Group, an international commodities trading and financial services corporation. He can be reached at Gabe@Hegemony-Capital.com, or visit his website at www.HBLawyers.net.

Roy Slater is a real estate broker, mortgage broker, auctioneer and founder of Hathaway Real Estate Services Corp.   Mr. Slater can be reached at rslater@hathaway-realestate.com or by visiting www.hathaway-realestate.com

Thanks,

Roy Slater / www.Hathaway-realestate.com

As a mortgage broker licensed in numerous states and one that has come from direct lending institutions such as GMAC-Ditech.com and LendingTree.com, this issue is one that I could write a book about.  But I will try to keep it simple and to the point.

The reason why the financing contingency gets used so much is because most Realtors do not have access or foreknowledge of the mortgage process nor do they have access to mortgage lender guidelines to know what the reality is with respect to what a qualified borrower really is.    Couple this to the fact that lender pre-approval letters are all conditional until an underwriter reviews and approves.  Moreover, add in the fact that your loan officer is not an underwriter and his pre-approval may be incorrect..  The summation is a recipe for disaster.

So, how do I avoid this mess as a seller?
Well… you need to choose you Realtor wisely.  Selling your home is not just about a Realtor’s fancy marketing plan.  It is about a Realtor’s ability to also identifying quality offers and in scoring buyer risk should you accept an offer.  It is about having the where-with-all to ask a buyer the appropriate questions in the negotiation process in order to score buyer risk and eliminate financing contingencies.

Within minutes a knowledgable mortgage person can know whether or not a buyer is solid or not.   So, if you can ask for the following items in your buyer counter offer it will help tremendously: (related article click here)

• credit report
• ask how the buyers get paid( w2, 1099, or self employed) key questions to score risk. if there is 1099 or self employed income then risk goes thru the roof.  For more info on this drop me a comment and I will go thru why.
• a copy of asset statement showing down payment.
• require loan officer name, phone number and access to all loan information

This information can really help you sore risk and leave a prospective buyer no out with respect to a financing contingency escpecially when this information is used correctly.  Of course this information is useless unless your Realtor knows how mortgages work, current product guidelines and the knowledge of current programs available.

end

Roy Slater
Hathaway Real Estate
- Charlottesville Real Estate
- Southern California Real Estate

Be prepared

Research the housing market in the target area. Once you have information about the general area, focus on the particular property and seller. Look for answers to questions such as:

Why is the homeowner selling? (If they’re moving because they find the area undesirable, you might want to consider this issue.)

How long has the home been on the market? (If it has been on the market for a long time, perhaps there are negative facts about the property that you need to know.)

How much did the seller pay for the home compared to the current asking price? (If the seller paid more, find out why.

Was it a general real estate trend, or did property values in that particular neighborhood go down?)

What is the seller’s time frame for selling and moving? Does it fit within your needs?

Are there any defects in the home or problems with the surrounding neighborhood? (For example, is the roof so old that it will likely leak during the next storm? Is there a new construction project in the area that will lead to major traffic congestion?)

As the potential buyer, you want the advantage. While you want answers to all your questions to the seller, reveal very little about your circumstances. Do not give the seller personal information such as your income, the maximum you are able to pay for a down payment or the home, or when you want to move. Make sure that your agent knows not to reveal any such information to the seller or his/her agent.

Also, do not let the seller see how much you want the property. If you appear desperate or overly enthusiastic, the seller then has the stronger bargaining position. When meeting with the seller or listing agent, keep your emotions in check.

Establish a Timeline

Find out if the seller needs to have the sale closed sooner rather than later. If the seller is feeling pressured to sell, use that to your advantage in negotiating. Even if you, the buyer, are the one with the deadline for purchasing a home, don’t let yourself be rushed into making concessions or a purchase you may regret later.

The home inspection contingency across many states is the easiest way for many buyers to jump ship on a contract.  The home inspection contingency usually allows buyers the perfect exit to a contract at any hint of possible delayed maintenance or construction issues no matter how minor.  Buyers simply counter back unreasonable repair requests, cancel the contract altogether, and goes as far as trying to devalue the home in order  to renegotiate a lower price.  Canceled contracts in a declining market can be a major set back for home sellers.

To minimize these setbacks, it is strongly recommended that sellers have the home inspected before it goes on the market.  Don’t bury your head in the sand and hope nothing is wrong with your home.  Get the issues fixed ahead of time and get top dollar for your home. Use the your home inspection as a tool to lock down prospective buyers.  By heading off problems ahead of time, you can easily avoid contract cancellations and leave buyers with no wiggle room for cancellation with respect to home inspections.

Remember, serious and professional listing agents require home inspections for their clients ahead of time.  In many cases many of the top listing agents will not take a listing without one.  They do not like ticking time Bombs either. Selling homes is a serious responsibility and should not be taken lightly with a wait and see attitude especially in today’s market.  Take the time and effort to neutralize possible contingencies before they come back to haunt you.  Look for the next article on nuetralizing the dreaded financing contingency.

There are 258 active listings under $600,000(detached single family homes). Here are the first 250 since there was just too many to show in one email. Let me know if you need detailed searches and I will send them individually.

Click Here to View

Thanks,
Roy Slater

Link to tax article: Go >>>>

Important:  Always consult a licensed professional if you are not sure about your situation.  Remember, a Realtor is not a CPA or an attorney.  So unless they are, always direct your technical question to a licensed professional.

We are now getting a glimpse of how investors(mortgage providers) will be treating the new Fannie Mae/Freddie Mac conforming loan limits which were part of the national stimulus package. The first of many investors are coming out with general underwriting guidelines. It appears they are moving cautiously. This may speak volumes on their attitudes on the subject of increased loan amounts. Moreover it appears that they will be categorizing these loans in a different conforming product bucket. (Conforming Jumbo Loans)Below is a conforming loan limit calculator as well as some highlights of the guidelines.

Calculate your new mortgage loan limit by Zip Code. Click Here

Although there are increased loan amount provisions for loan amounts with respect to 2-4 unit properties, I have elected to not share the 2-4 unit loan limit increases quite yet as it appears investors will not be offering these products yet. Investors will only be offering a 1 unit/ single family product.

Guideline Highlights

• single family only.. (as of yet)
• no cash out transactions
• purchase and rate and term refinance only

Purchases - Owner Occupied:

• 10% down payment required with 700 credit score or better
• 20% down payment required 660 credit score or higher.. (need a 660 minimum credit score to get this loan)

Purchases 2nd Homes and Rentals:

• 40% down payment and a minimum 660 credit score. No second mortgage can go behind it.

Refinances - Owner Occupied:

• You can only refinance up to 75% of the homes value. No cash out. You may put a second mortgage behind it up to 95% the value of the home. Minimum 660 credit score.

Refinances - 2nd Homes and Rentals:

• Can refinance up to 60% of the homes value and a minimum 660 credit score. No second mortgage can go behind it.(you could not find one anyway)

Declining markets:

• If your purchase or refinance is in a, whats deemed a declining market, expect to put down an additional 5% on a purchase transaction.
• On refinances expect to subtract 5% from the maximum amount financed.

In a follow up article I will discuss what this really means to consumers and the possible impact on the market.

end.

Roy Slater, Hathaway Real Estate Services

The answer is an emphatic yes.
The auction method of sale gives consumers many more options when it comes to selling their home. But before I speak to the advantages let’s clear up some of the misconceptions. The word auction does not always mean foreclosure or short-sale. The auction method of sale is absolutely not always for distressed situations. This method of sale and the psychology behind it generates a tremendous amount of curiosity and interest for home buyers. Just seeing the word Auction on a real estate sign or in the MLS get buyer’s energized. If the auction is marketed correctly and administered ethically by an Auctioneer, the community will recognize this means of sale as a positive and not a negative. Buyers will always want to preview auction properties before traditional real estate listings.

The auction buzz
So now you have the energy and a buzz around your property that is being sold at auction. What are the advantages? The first advantage is flexibility. If you list your home with an auction firm, make sure they are also licensed to carry out traditional real estate sales, too. If the home does not sell at auction then it can immediately come on the market in the traditional sense. This will give you a competitive advantage with respect to a sales strategy. Yes a sales strategy, more tools that can bring an actual signed sales contract in less than 30 days. By coupling the auction method to traditional real estate sales you have created the perfect situation to sell your home.

The pricing dilemma

Traditional real estate wisdom says to price high and slowly come down until you get an offer. In a booming market this is great. However, in a normal or slow market this does not work. By doing this you have increased your sales cycle by months and may not get offers altogether if the property sits too long and becomes stigmatized. As an auctioneer we price low and then go high. We end up at the same fair market price you would of achieved by pricing high right at of the gates. The difference is auctioneers do it in 30 days and not 6 months or even a year. Besides, if you wait 6 months to sell your home, think of what six months of mortgage payments equals when pricing your home. The auction method may make even more sense if you start doing the mortgage math.