In Jim Cramer’s Mad Money lightening round on Friday June 27 he said, “In the end, people aren’t spending… they are on the Interstate and you just don’t feel rich anymore when you’re on the Interstate, unless you’re driving a Mini Cooper.”
Meet DB, my mini-cooper . . .
I don’t feel rich on the Interstate, but I’m not bleeding money for gas anymore. I went from $95 a week for the truck I was driving to about $40 every other week. The savings almost equals the car payment AND it is a kick to drive!
Came across an interesting reference to The Black Swan (see my earlier entry) on MSN/Newsweek (Posted August 15)
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.
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.
I read that headline today in an email from Rich Workman, President of the Florida Mortgage Brokers Association.
He goes on to say: Car dealers sell the cars the automakers engineer and manufacture. If it were not for the car dealer then there would be no car emissions. Therefore, it is clear if we simply eliminate the car dealer we can solve global warming. His point being that Mortgage Brokers are taking the hit for the subprime melt-down in the news and from politicians everywhere.
I, for one, am really tired of hearing remarks like these: The Bush administration is pressuring the Department of Housing and Urban Development to speed up the issuance of a Real Estate Settlement Procedures Act proposal to improve good-faith estimate disclosures of mortgage broker fees and settlement costs. Why, when mortgage fees are discussed in the press, and by elected officials, are they always referred to as Broker Fees? It is as if a loan can’t be completed by a Mortgage Banker, or a Mortgage Lender, only a Mortgage Broker. . . and that is not the case.
AND, what brokers make, or lenders make, or mortgage bankers make is already on the Settlement Statement. That’s the law. It isn’t as if we have secret incomes. Whatever we make from the borrower or the lender is on the Settlement Statement.
From the website of Senator Charles Schumer from New York: “Up to 80 percent of subprime loans originated in 2006—the year that lax underwriting seems to have been the most problematic—were adjustable rate mortgages with low “teaser rates” that reset to higher rates that induce payment shock on the borrowers.”
How shocked can they be when they knew it was coming for two years? I have an arm. It adjusted in August. Not only did I know that was going to happen, I got at least ten pieces of mail a week from people trying to refinance my house. And in the last month before it adjusted, the lender called three to four times a day! There was no avoiding the knowledge that my arm would adjust UPWARDS during the month of August. Those high risk, high loan-to-value loans that were generated from the Sub-Prime industry were designed to help people get into homes.
There is not a lender in this country who would just as soon have your house as get the monthly payment. They would all rather get paid than foreclose. I’ve had borrowers who couldn’t qualify for a loan of any kind ask ‘why not? The lender will get the house if I don’t make the payments’ . . . As if in making a loan the lender becomes part of a quiet side agreement to “buy” the house by default.
That’s not how it works. Borrowers who take a two year arm or a three year arm do so based on their plans to sell or refinance in two or three years. In an increasing real estate market, this plan works. BUT, if the property values go down, or even stay the same, there is no refinance to be had, and in a declining market, there is no selling the house to get out of it either.
Paraphrasing Rich Workman again, here: ‘When the real estate market pulled back from a 24-month unsustainable growth spurt, people couldn’t refinance a house that was worth less than the mortgage, and couldn’t make the payment, the Sub-Prime market was left with mortgages that were in default. Then market reacted and the Sub-Prime guidelines got tighter.’
And they got tighter without legislation. They got tighter because the market demanded it. Long before a politician decided to make a to-do about it. AND, 2/28 and 3/27 arms don’t have teaser rates. They are fixed for two years or fixed for three years. After that they adjust, up or down, with caps on how high they can go. I can’t believe that none of the people who got an arm for two years or three years didn’t know that payment was going up. In addition to a loan originator’s verbal disclosure, there are written disclosures at the application process, and at closing, there is a real estate attorney or title company responsible for explaining every document that is signed by the borrower. Arm Riders are separate and distinct documents in the closing package.
If I didn’t understand what I was signing at a closing, I’d ask the guy who was handing me the papers. My pen would hit the paper when I understood what I was signing and I was okay with it. Teaser rates are those 2% payment rates you see advertised that have nothing to do with interest rates. Totally different animal, but people who aren’t in the mortgage business, like politicians don’t know the difference and seemingly don’t care to learn.