Traci Gregory, Financier

COMMITTEE PASSES H.R. 3915 45 - 19

GOES TO FULL HOUSE NEXT WEEK

So, Senator Bradley Miller's bill has the approval of 45 of his peers.  It moves on to the House, and then President Bush has the choice to sign it or veto it.  My Republican friends don't think he will ever let government take over the market in such a gross fashion, but my Democrat friends think he may throw this bone to the Dems because he has taken such a hard line on other things.

Read the final mark up of the bill as it passed.

Whatever happens, the face of the mortgage industry is changing, and on the surface it appears that "Big Brother" is taking care of consumers who can't take care of themselves . . . Yeah, you can read into that remark that I don't think "BB" needs to interfere with our lives anymore, AND that consumers should be responsible for the things they do.  Particularly when they make a commitment for 30 years and a lot of money.

I know there are loan officers who made loans with no thought to the consequences for the borrower and made a lot of money doing it.  I'm not one of them, and I don't think all of them worked for broker shops. 

I also know that what the politicians are ignoring is that America has a "hunger" for credit, and expects to get everything on a signature, not with the exchange of cold hard cash.  Theoretically, they know they'll pay for using other people's money, but most don't look at it as realistically as, say, Dave Ramsey or Suze Orman.

They are also ignoring the fact that Wall Street fed that hunger with loan programs that created a lot of profit, because selling money makes money.

Two Wall Street firms moved directly into the sub prime market with their own mortgage companies to feed the greed:

Merrill-Lynch bought First Franklin (a company specializing in sub-prime loans) for $1.3 billion on Dec. 30, 2006.  Why?  Because the money was great!

Bear Stearns opened Bear Stearns Residential in 2005.  This from Business Wire "Bear Stearns Residential will focus on non-conforming loans which are included in the private label MBS market."  Read non-conforming: sub prime loans.

"The addition of a wholesale unit complements our presence as the largest underwriter of mortgage-backed securities," said Warren Spector, President and Co-Chief Operating Officer of Bear Stearns. "The business allows us to round out our mortgage franchise and provides us with an additional way to serve our clients. By employing the latest technology, we are enabling brokers to come directly to Wall Street for financing."

Loan Officers are sales people.  Face it.  They sell a product.  Money.  They do a lot of other things, the good ones consider long term goals of the borrowers, and real life circumstances, along with usually un-meet able expectations of the uninitiated.  And they give advice, answer endless questions about credit, pricing, payments, programs.  But it isn't a charity.  They do it, like I do, for pay.  We have families to support, we can't do it for nothing!

Then there are loan officers who for whatever reason, be it greed, ignorance or lack of support from their company,  will put a loan where ever it will close fastest and pay the most.  And sometimes, they place loans that way because the borrower wants it that way - "I don't care what it costs, it has to close in 7 days!"  They don't care before it closes, but they will after it closes . . .

So, my take on this is-

• The way America works will change with this bill.  Mortgages won't be easy to get (that has already happened, and will worsen)
• Where America gets mortgages will change - Brokers will disappear, maybe not all of them, but a lot of them will do something else.  They might work for a Bank or a lender, or they might change industries.  (Something I've thought seriously about for a couple of years.  This is hard work, not easy money, and there is a tremendous amount of stress involved.  If the stress increases and the money decreases, there comes a time when it just doesn't work anymore.)
• We all know that when there isn't money to buy houses, there isn't money to build houses, and that means there isn't money to pay people in the real estate industry, or the construction industry, and that will trickle down to manufacturers.  That is a lot of people who aren't making money like they were.
• When there isn't any homequity money to use for debt consolidation, there are no credit cards being paid off, because we all know most people in this country aren't making huge payments on credit card debt out of their paychecks. 

While I do believe that most things politicians do is primarily motivated by votes, and they leap to causes that will generate attention that they are concerned with their constituents' well being, these guys are offering some positive changes.  Training and licensing requirements for loan officers is a very good thing.  I've worked for a lot of companies in my 20 years in this business, and mostly, it is self-taught.  Loan Officers learn a lot from the lenders they sell too, also. So, if the only reps calling on your company were from New Century Mortgage, or First Franklin, you got a lot of influence from the sub-prime mindset.  Remember, they were selling too.

Attempting to change the way the market works by outlawing yield spread, and regulating underwriting guidelines is probably not such a great idea.  I'm sure none of these lawmakers learned all the nuances of underwriting and risk management in the months since the sub-prime meltdown, but they want to redo the way the country runs.  Impressive, isn't it?

The market would, if left alone, correct itself.  Stated income loan guidelines are being changed every day.  Stricter reasonableness tests of income have become standard with every lender I work with.  The orchids of the mortgage world, the exotica, like Elvis, have mostly left the building.  If they aren't gone, they are stripped down, and unappealing, so that borrowers don't qualify, or don't want them.

Everyone needs to remember that lenders don't want houses, they want the money.  Since they are stuck with the foreclosures, they are doing everything they can to ensure that they don't write any more loans that fail. 

I'm lately reading Mobs, Messiahs, and Markets, a really GREAT book by William Bonner and Lila Rajiva.  It is hysterically funny, packed with good information, and well written; not like other dry, overly intellectual books on finance and politics. 

There is a line in the Chapter "The Devil Made Them Do It" that reminds me of all the people behind H.R.3915:

"It was not what people did not know that proved their undoing: it was what they thought they knew that wasn't so."

Peace.

Daniel Gross talks about Hedge Funds and the Black Swan

Came across  an interesting reference to The Black Swan (see my earlier entry) on MSN/Newsweek  (Posted August 15)

Daniel Gross writes on "Speaking Hedgie
Translating the strange dialect of hedge-fund managers who are trying to explain big losses."

Hedge-Fund Phrase: Unprecedented, unique circumstances
Translation: Stuff happens. But we had no clue.

Anyone who read the best seller The Black Swan  [I did, and highly recommend it] knows that random geopolitical, financial, and economic events can cause the prices of assets to move in ways that defy history and sophisticated computer models. But it comes as a shock to the brightest minds on Wall Street, especially those who run quantitative-based funds.

"Wednesday is the type of day people will remember in quant-land for a very long time," Matthew Rothman, head of quantitative equity strategies for Lehman Brothers told the Wall Street Journal last week.

"Events that models only predicted would happen once in 10,000 years happened every day for three days."

Strangely, these same models failed to predict the once-in-10,000-year events that roiled the markets in 1997, 1998, 2001, and 2002.

Daniel Gross writes for Newsweek and Slate, and has a book on economic bubbles, one of my new favorite subjects:

The Black Swan: The Impact of the Highly Improbable

Nassim Nicholas Taleb (essayist and mathematical trader) writes in a sometimes stilted and perhaps condescending fashion - but his book is entertaining, and for the most part interesting.  He truly rakes over the coals the experts  on Wall Street who make predictions based on historical data (perhaps this could include the buying and selling of mortgage backed securities?) because they use trends, and ignore the improbable.

His outlook is to first acknowledge the black swan; and then employ it, to his advantage.  His belief is that we neither make huge gains nor have huge losses through the historical, only through the improbable, or unthinkable.

The name "The Black Swan . . ." is taken from the fact that for years the world knew there were NO black swans; using the metaphor "black swan" meant nonexistent.  Then Black Swans  were discovered in Australia. 

Taleb's black swan is " . . .  a large-impact, hard-to-predict, and rare event beyond the realm of normal expectations."  September 11, 2001 is referred to as a "black swan".

Real Estate investors know that now is the perfect time to buy real estate with the foreclosure market being what it is, but it is a dreadful time to get a loan for real estate.  As a large-impact, unpredicted and rare event, it seems to qualify as a black swan.  So, if we acknowledge it, how to use it?

Borrowers are certainly being given every opportunity to get refinanced on loans in default in ways that no one would have ever thought possible - the FHA Secure program will allow a refinance to people ONLY IN DEFAULT and allow them to keep the second mortgage they have now.  Lenders are developing programs that will allow a cltv of 125%; refinancing what was an 80% first mortgage up to 100% value and allowing the second to stay, increasing the loan to 120% of the value of the property.  I wouldn't want to owe 25% more than my house was worth, but it beats foreclosure.

For real estate investors (and I'm not recommending speculation here . . . take note) there are properties that were manipulated by developers and builders that could present a powerful black swan advantage in the price they're getting now, and the equity they afford.  I've seen condos in Atlanta that were listed for $1,000,000 sell for $250,000 in bank sales in the last month.  They're a bargain at $250K even if the market takes a couple of years to recover.

This is the time to think outside the box - and stay on the lookout for the black swan.

Rock Czar of Real Estate, Frank McKinney

I've recently discovered Frank McKinney, named by the WSJ as the Rock Czar of Real Estate, and I must say, I've fallen for him.

He has shoulder length blonde hair, and for me, that's a great start, but as a businessman, he is someone to be reckoned with and I have a great admiration for what he has done in his life, and the way he has done it.

He started out with a $50,000 bungalow in South Florida and now builds $100 million estate homes that are sold by Sotheby's . . . What a difference 20 years will make, huh?

I'd guess the reason more of us haven't heard of him is because his market is limited to a small percentage of the world population, but I highly recommend a) reading his book Frank McKinney's Maverick Approach to Real Estate Success and b) putting his principles to work in your life!

Buy it used, get it from the library, or get it from Amazon, but if you're a real estate investor, there is something in that book for you.