All of the discussion about a new Resolution Trust Corporation (RTC) is extremely speculatory in nature since there is currently no legislation to support this notion. However, something in the model of a new RTC seems likely to happen since it’s a model with which the government is familiar and comfortable.
The key to watch for is the government’s guidelines for which assets (houses) they will take over, and the standards which the current lenders will need to meet in order to qualify.
There are three really big issues you should pay attention to:
- Property Valuation: How will the government assess the value of properties they take over? What safeguards will be involved to prevent appraisal fraud?
- Exchange Valuation: Related to but different than property value, exchange value will be the actual amount of money that lenders will receive from the government for their distressed properties.
- Buyer Restrictions: Who can buy these properties and what are the limitations?
For the record, I am opposed to the bailout program. Nevertheless, it’s prudent to prepare.
Property Valuation
I have no idea how the government will go about establishing property value for all of the distressed properties. In all probability, properties will be sold to the government by the failed lenders as “packages” and not individually, but that does not negate the need to have a good grasp of the value of each property since virtually all of them are valued in the 6-digit range, and therefore financially significant on an individual basis.
One thing I know for sure: It is not safe to rely on the appraisers that have worked with the lenders who are being bailed out. Very little action has been taken against unscrupulous appraisers, even though they are as complicit in this problem as unscrupulous mortgage brokers. And let’s be clear: If a lender is responsible for their own property valuations, those valuations will in all probability be skewed highly in favor of the lenders, even if the lender’s properties are appraised by theoretically “independent” appraisers.
Bryan’s Suggestion: At the very least, the government must be responsible for establishing property values for itself, and appraisers who have been directly or indirectly involved with the lender who owns a specific property should be disallowed from being involved in appraisal for that property. This is merely a starting point, as there are few businesses with as much room for manipulation as the real estate appraisal business.
Exchange Valuation
Once the value of a property is established as “X”, how much of that value will the government have to pay the lenders to take over those properties? For example: Will the government have to pay 90% of the value, or will they pay 40% of the value?
I hope that the government extracts a HUGE pound of flesh from the lenders. Frankly, these lenders are getting off easily and they need to suffer for their incredibly poor decision making. A great way to make that happen would be to make sure that the government pays only a small percentage of the value of the property so that the lenders still take a beating.
Serious, intense financial pain for the lenders is the only thing that will prevent this from happening again.
Bryan’s Suggestion: The government should pay no more than 60% of the value of the property, and maybe less for properties in very illiquid areas/circumstances. Additionally, the mortgage companies should not be able to completely push off their losses on mortgage insurers. At the very least, the mortgage companies must share the burden of their poor decisions.
Buyer Restrictions
The original RTC made it very difficult for small investors to get involved in the bidding/buying process after the first round of RTC transactions completed, and this is not reasonable. The goal here should be to facilitate the resale of these properties to U.S. citizens who need a place to live or provide housing to others, and any policy which slows that process - for either owner-occupied or investor-owned property - should be prevented.
Bryan’s Suggestion: At no time should any company who sells property to the RTC be allowed to be a buyer of any other RTC-owned property. It would be shameful for a mortgage company to sell off billions of dollars of real estate, only to be able to go back and repurchase other properties at favorable prices. Additionally, the bidding/buying procedures should be favorable to individuals and small investors at all times. After all, the problem we face is because of horrible government policy and terrible corporate management, not because of the activity of individual investors.
That’s enough for now. Your thoughts are welcomed here on FreeRealEstateTraining.com
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14 Comments So Far»
Bryan
You make perfect sense. Actually the homeowner whose loan is being sold (not investor loans) should receive the discount to their outstanding balance. That would be fair, bailing the bank in the way it will probably work is not fair to the individual. This time the government should help the homeowner/tax payer directly, not the corporate banking system directly.
Jim Hough
When FDR got the government to stick it’s nose in a recession, we got the Great Depression, and only got out of it because of WW II. I see the same thing happening, thanks to the less-than-conservative,politicing George Bush and the rest of the beltway elitist socialists. If my taxes are going to be wasted this way and if the government buys at a low price, then I expect a fire sale for investors so that profits can be made and the money made back. This should only be a one-time-only deal, and those(democrats)responsible for this need to be taken to task.
Bryan,
I agree with you. The government, who is using my money to do this, should make these lenders hurt and they should not be allowed to buy back any of these properties. While more and more states are putting laws in place to make doing business more difficult for the small investor just trying to make a living, they need to put more restrictions on these lending practices that got us into this mess. Why is it always that they go after the little guy for their scape goat. I know that we do have some investors that take advantage of people, especially in the mess we have now, but the majority are investors that have very high ethics and truly want to help people.
the government needs to start looking at the people such as the ceo’s of these company’s that are raking in the millions while they watch their company and investors go down in flames. let’s hold them accountable. Where is the accountability here. By our government continuing to bail out these company’s without any accountability then this will continue to happen.
Our country will never be defeated militarily but we can be taken down economically. China already owns a big part of the U.S. We need to hold people accountable for the way they do business and then when their company fails they take their millions and skate. I don’t have answers but we all need to be aware of what is going on in the U.S. before its too late
** For the record, I am opposed to the bailout program. **
My response is always the same. “Then what do you propose?” And don’t say, “Let market forces run their course,” because that would result in complete bankruptcy of the United States as we know it.
Based on what evidence? Allowing for a free market would CERTAINLY result in the bankruptcy of many lenders. That does not translate into bankruptcy for the federal government. Pain, yes. Bankruptcy, no. — Bryan Ellis
** Very little action has been taken against unscrupulous appraisers, even though they are as complicit in this problem as unscrupulous mortgage brokers.**
Unscrupulous REAL ESTATE AGENTS were the genesis of the problem of over-valuation. Period.
That may be the most simplistic summary of this issue I’ve ever seen. I guess the oversupply of cheap money resulting from horrible fiscal policy had nothing to do with it? — Bryan Ellis
** It would be shameful for a mortgage company to sell off billions of dollars of real estate, only to be able to go back and repurchase other properties at favorable prices. **
Lenders aren’t in the business of buying/selling houses–at any price. They didn’t participate in that way during RTC; why would they do so now?
That’s fair. I was actually thinking of hedge funds and other real estate investment funds who may also benefit from this circumstance. The bigger point is that we have to prevent any type of double-dipping. — Bryan Ellis
** After all, the problem we face is because of horrible government policy and terrible corporate management, not because of the activity of individual investors. **
Speculative buying by small investors was at the heart of the run-up of real estate values..
Again, that’s an inaccurate oversimplification. This is, at its heart, a function of bad fiscal policy from the government which was then overplayed. — Bryan Ellis
There’s plenty of blame to pass around, so to say that the problem is because of “horrible government policy and terrible corporate management” is specious.
Really? I’d have laid the same charge against these statements:
– Bryan Ellis
Bryan, you said that, WHEN IT CAME TO VALUATION, crooked appraisers and mortgage brokers were to blame. But before those two parties get involved, a REAL ESTATE AGENT must bring a buyer and seller together. THAT’S where the VALUATION trouble starts. The oversupply of cheap money is a separate issue.
The pressure that a REAL ESTATE AGENT brings to both the appraiser and mortgage broker to “meet a price” is well known.
As to speculative buying by small investors being at the heart of the run-up in real estate…that was the subject of an analysis I read. It was wrong of me to make such a statement without backing it up with a credible citation. I’ll try to locate it and post it here. Absent that, my statement is, as you pointed out, specious.
As to whether a hands-off policy would result in the demise of the United States, well, that’s a gamble that it appears the government is not prepared to make.
Regarding this statement–”Allowing for a free market would CERTAINLY result in the bankruptcy of many lenders. That does not translate into bankruptcy for the federal government. Pain, yes. Bankruptcy, no.”–you can’t predict the future. Bush made the following statement today in a press conference. For once, he’s absolutely right.
[quote] There are a lot of interlinks throughout the financial system. The system had grown to a point where a lot of people were dependent upon each other, and that the collapse of one part of the system wouldn’t just affect just the financial markets; it would affect the average citizen. How? Well, it affects their capacity to borrow money to buy a house or to finance a college loan. It affects the ability of a small business to get credit. In other words, the SYSTEM RISK was significant, and it required a significant response, and Congress understands that. [end quote]
If it was just a matter of letting 158-year-old Lehman Brothers go belly up, or Bear Stearns or even, heaven forbid, AIG, I’d agree with you. But that’s not the case.
And therein lies the simplicity of those who resist the free market answer to this problem. It is certainly not the case that those companies would cease to exist or that their assets would disappear. Distress causes opportunities for the wise and well prepared. That’s why, for example, Warren Buffett has been on an aggressive buying binge in the past year. Surely, of all people, individual real estate investors should understand that distress causes opportunity. — Bryan Ellis
Caitlyn you have an amazing knack for only reading the cover of the book. To state that small investors were the reason for the run-up in RE values is not just oversimplification but really very ignorant. On the one hand small investors like my neighbor who bought three over valued properties as investments then ended up losing them to forclosure were certainly part of the problem but the forces behind her decisions were the true culprit. It was absolutely ridiculous that a single mother and small business owner of modest means was able to get damn near a million bucks in loans on houses that needed work. It was also criminal in my opinion how she was essentially tricked into believing that everything would work out fine once she rented the properties to cover the mortgages which were all arms that reset in 2 years . She believed like many new homeowners that prices would continue to go up indefinately and she would be able to refinance because thats what her broker told her. There were other factors involved but the bottom line is that if it wasnt for the unscrupulous lending practices that became the norm a few years ago she would have been turned away at the bank because she just couldnt afford it. Lending to everybody and anybody that could sign their name was what caused the run-up not small investors .
Well, Eddie, it’s like Henry Paulson said: “Irresponsible lending and irresponsible borrowing.” I consider them equal.
Sorry, but that’s ridiculous on the face of it. Widespread irresponsible borrowing can not exist without the presence of systemic irresponsible lending. And systemic irresponsible lending can not be funded without an over-supply of aggressive credit terms, courtesy of the federal government. — Bryan Ellis
No one held a gun to anyone’s head to accept an Option ARM that would reset in two years. What did the borrower think he was going to do in the 25th month? Yet in the hands of a responsible borrower (adequate reserves, etc.), there’s nothing wrong with an Option ARM.
You’re right. Nobody, least of all me, is saying that the folks facing foreclosure now should be able to avoid responsibility for it. — Bryan Ellis
Michael Bloomberg was on Meet the Press this morning. An “I want it now” society that refuses to live within its means is partly responsible for the subprime-mortgage crisis, Mayor Bloomberg said. It’s a tool, like options or commodities.
“I think you just can’t blame the banks,” he said, taking borrowers to task.
If Bloomberg had said “you can’t just blame the banks”, he’d be right. But he said “you just can’t blame the banks.” He’s dead wrong about that. To say that banks have no culpability in this is sheer idiocy. In fact, all you have to do is look at one example of a bank that refused to get involved in the subprime lending market to begin with: Hudson City Bankcorp. During this horrible market for lenders, their stock has INCREASED by over 26% in the past year. Why? They made the CHOICE not to get involved in subprime lending. Now they have a much larger market value than the formerly huge Washington Mutual, and the future outlook for this year’s profit at HCB is very strong.
So I beg to differ with Bloomberg, but if other lenders had made the same choice HCB made, they’d be in a better position, just like HCB is. Therefore, one can blame the lenders for a major part of this problem, and the proof is undeniable. — Bryan Ellis
“They say, ‘I want the great American dream. I want it now and I’m not going to wait until I put some money in the bank.’ . . That’s where we lost the moral compass of saying no to people who did not have the earning capacity to support a mortgage.”
That is correct - and the lenders should never have allowed it. It is the American DREAM, not the American ENTITLEMENT. If one is honest, you can look back to the 90’s and see that one of the roots of this problem is POLITICAL CORRECTNESS. The Clinton administration drove Fannie & Freddie to give loans aggressively and without regard to traditional qualifications so that more people could experience home ownership. And just like so many other things done during that time in our history, this country is now paying the price. — Bryan Ellis
If you’re a responsible borrower, and an untenable loan is presented to you, you just say no.
You’ve proven my point Caitlyn. While it’s certainly true that a borrower becomes responsible once they accept responsibility for a loan, it’s no less true that prudence on the part of the lending business should have prevented most such borrowers from ever receiving a loan in the first place. And to take it a step further, the imprudence of lenders would never have been such a huge factor if not for horrible fiscal policy from the government which washed the financial system in mounds of cash at artificially low interest rates. — Bryan Ellis
** If Bloomberg had said, “you can’t just blame the banks”, he’d be right. But he said “you just can’t blame the banks.” **
What he actually said was, “you can’t just blame the banks.”
That’s good to know. I was simply relying on the quote you entered previously, my response to which continues to be a brilliantly crafted dissertation on the responsibility of lenders in this mess
— Bryan Ellis
The thing is, for consumers who utilized those loans (tools) properly, and with the right timing, they were tools for wealth. They’re not complaining. Many of them were my customers whom I put into ARMs with .75-1.125 margins. They’re loving those loans even now.
That’s great for them. I don’t deny that ARMs can be a good tool. My question is: Is there any way for underwriters to assess the appropriateness of an ARM to prospective borrowers? Of course there is. The lenders were stupid enough to give ARMs to borrowers without considering the ramifications of how the borrowers would be able to withstand the interest rate resets that everyone knew would happen. Therefore, the lenders and borrowers are each at fault for the same reason: Using any entirely inappropriate loan product for the wrong audience. Therefore, borrowers should suffer the negative credit and other ramifications and lenders should suffer from the financial setbacks that they have caused themselves. But that’s not going to be what happens like it should, because the socialist contingent of this country - including many people calling themselves “conservatives” - are intent upon this bailout idea, even though simple logic pokes holes in that idea all day long. — Bryan Ellis
Bryan,
Good RTC2 points. I hope that the government put aside its interests long enough to attempt to do RTC2 correctly from a fairness and efficiency angle.
As to how we got to this point…
After years of anti-free market activity or partially deregulated activity a crisis always seems inevitable. It always seems a bit humorous to me that we then hear “the question”, “OK all you smart free market guys how ya gonna fix this one?” Cute, but it smacks of insincerity and lack of a full understanding of how we got stuck in oncoming traffic. A legitimate free market where parties know there is no such fiction as “too big to fail” eliminates a lot of stupid behavior. While free markets are not perfect it is my estimation that it would likely prevent a multi-trillion dollar crisis.
It is my understanding that the California electricity crisis came from deregulating one side of the supply/demand equation. I heard suggestions that the CA crisis was proof that “deregulation” doesn’t work. Seems more like our elected officials don’t work but I suppose they have a lot of us convinced it is truly “rocket science”. If we are talking about successful central planning by the government I would agree it is truly “rocket science” and we need some benevolent geniuses. Or we could give actual free markets a try.
Should GSEs be a taxpayer liability while not permitting the taxpayer to share in the profits? It appears our elected believe so. I am not so sure that “for the common good” is working well in our time of need.
Here’s hoping the government takes advantages of the readily available free-market resources to help resolve the crisis. I believe Investors can and should play a significant role in getting us back to some feeling of market comfort.
I think that Bryan and his readers all should be commended for insightful coverage and discourse of this lamentable situation.
Bravo/a.
While I too am fundamentally opposed to the bailouts, (many of which, if we’re totally honest, would more aptly be called “takeovers,”" it doesn’t seem to me that in the eleventh hour of the crisis, there was much alternative.
While the earlier post about FDR’s approach to economic crisis in his presidency was insightful, Hoover’s initial, laissez-faire approach to the crash is widely thought to have made a bad situation worse — and not just for the bankers and speculators — but for the entire nation.
At the time, FDR was called a socialist for his reforms, but in retrospect, do we regard him as such? Doesn’t the socialist model require redistribution of profits as well as risks and losses? Does anyone see the taxpayers — or the masses — receiving any sort of redistribution of wealth as a result of this crisis? In terms of historic paradigms, this falls closer to the definition of fascism to me.
Given our protections under the U.S. Constitution, I lack confidence that some of these seemingly arbitrary, last-ditch efforts on the part of the Fed to stem Wall Street’s bleeding are legal because they appear to exceed the Fed’s Constitutional authority, however “necessary.”
Where was the Fed before last week? Sleeping off a regulatory coma? How can we expect meaningful reforms when the rules and regs we have, however antiquated they may be, aren’t enforced?
By taking over these businesses, the Fed is becoming a player in fields it knows nothing about. Once the Fed warehouses all the bad paper, its attempts to sell off trillions in debt likely will be so mired in red tape that it’ll take a financial eternity to get it all sorted out. And what will happen to the dollar in the meantime? As the dollar declines, consumer prices rise and the job markets shrink, it seems likely that foreclosures could continue at a disruptive pace.
I’ve followed many of the recent developments in state legislative policy that are designed to curtail the businesses of real estate investors. Some of the changes are reasonable, but others seem to target us as scapegoats for the crisis. In the wake of all this economic hardship, state and federal legislators, who clearly lack a solid understanding of how this business works, are likely to proffer even more restrictions at a time when the nation and the economy really need us most to expedite the recovery process.
At the same time, who’s going to get the leading role in squeezing some liquid out of this financial dung heap?
No one can yet say for certain. But on March 24, I blogged about an interesting development we’ve heard little about since the initial press release announcement. Here is a :
“Money management firm BlackRock Inc., and hedge fund Highfields Capital Management are backing a new firm that will buy up distressed mortgages, betting that investors are ready to snap up bargains in the beaten down sector.
“The new company, Private National Mortgage Acceptance Company, which will be known as PennyMac, plans to raise capital from private investors and will help borrowers restructure loans to avoid foreclosure. Penny Mac will star Stanford Kurland, who spent 27 years at mortgage giant Countrywide Financial Corp., as its chief executive officer and Morgan Stanley global residential mortgage veteran David Spector as its chief investment officer.”
The next update on Penny Mac came from Housing wire and a blurb in the Wall Street Journal I covered on July 9:
“Penny Mac currently has $2 billion in its “war chest” to buy discounted, distressed mortgages, and will fund its own in-house servicing platform. in May, Penny Mac backer Black Rock reportedly negotiated a deal to buy $15 billion in subprime mortgage exposure from UBS, the Swiss bank that has been floundering since its boom-time tango with Countrywide Financial and other problematic U.S. lenders.”
It’ll be interesting, to see what role Penny Mac plays in the migation of losses its leaders worked so hard to generate before either loosing their jobs or moving on their own volition to even greener pastures.
As FDR said, “All we have to fear is fear itself.” Indeed.
Bryan even though Im a Democrat which seems to be somewhat taboo on most investing blogs I agree that we should just let these institutions fail. This bailout mess just continues the path this country is on where nobody is to blame for their own actions. Now the clowns in my party are wanting to add credit card relief to Bush’s bailout plan .
Everyone wants to lay blame on one party or the other but we are all to blame for this debacle. Without a doubt the beginnings of this mess started during the Clinton administration when derivitives became the rage on wall street and congress chose to let this new investment vehicle be self regulated , but remember it was Newt Gingrichs group who swept into congress and created a Republican majority that chose not to regulate this new investment vehicle. They also advocated deregulation in most all other areas which created the California energy crisis and an 80 percent increase in my energy costs in Maryland. Free markets only work when there is somebody watching otherwise greed takes over . Both parties and their constituents got fat watching the boom in the RE market and like any boom we all knew that there would be a bust , but now our government has decided to save everybody no matter how stupid your financial decisions were.
For all you folks who think Obama wants to make this a socialist country if he gets elected you can stop worrying about that now because with all these government bailouts we have already jumped the broom with socialism so you better get used to the government running your affairs for you.
** A legitimate free market where parties know there is no such fiction as “too big to fail” eliminates a lot of stupid behavior. **
Someone said on Larry King Live tonight that a guiding principle should be, “if you’re too big to fail, you’re too big to exist.” Makes sense to me.
Stockbrokers have a regulation called the “Know Your Customer” rule, which is the principle of understanding the client’s situation before advice is given. Once the client’s actual financial situation is known, a set of prescriptions are provided by the financial adviser [or underwriter] to solve those client’s problems that are uncovered. This principle could easily be applied to lending, whether certain thresholds of safety/risk must be met before a potentially risky loan is approved.
Mortgage brokers already have a rule called “tangible net benefit,” meaning that a loan cannot be made that doesn’t provide a tangible net benefit to the borrower. Said benefit, however, cannot be made permanent, meaning that no matter what happens to the borrower, his loan will always be beneficial.
** I believe Investors can and should play a significant role in getting us back to some feeling of market comfort. **
Why do you think that investor loans cost more than loans for a primary residence? Because in a crisis (personal or corporate), investor loans default first, which is exactly what’s happening now.
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