Boomer’s Blog

There certainly has been no shortage of sad news about real estate lending’s havoc on the economy lately. Once-shocking news articles about soaring foreclosure rates, dramatic price drops and the Fed’s efforts to treat Wall Street’s apparent hemophilia ebb and flow with tide-like rhythms, occasionally seeming slapstick in their essence.

News stories about the bloodletting on Wall Street can permeate the real estate investor’s consciousness like a Bob Dole TV ad for Viagra: You respect the fact that it may help your operation some day … but mostly you just want Bob Dole to resume his position as a war hero, self-made millionaire, Senate powerhouse and third-person presidential candidate. Only if there were a little blue pill to cure Wall Street’s performance issues however, could the beleaguered U.S. economy rebound any time soon.

Just as surreal as the esteemed American political icon’s widely publicized bout with erectile dysfunction are this week’s musings in Fortune magazine about the economic “Doomsday” it predicts would follow the all-too-possible failures of Fannie Mae and Freddie Mac. This government-sponsored duo owns or guarantees about $5.2 trillion in home mortgages, comprising approximately half of all outstanding U.S. home loans.

Fannie and Freddie Falter
Fannie and Freddie made a face plant on Wall Street this week, prompting the New York Times to discuss how they’ve managed to squander more than 60 percent of their market value this year and how the current mortgage bailout plan under consideration in Congress, if passed, would up the ante for taxpayers should either institution fail.

IndyMac Hits the Chop Shop
In the meantime, the Wall Street Journal reports that Countrywide’s spawn, Indy Mac has begun dismantling its operation. The mortgage lender and savings bank has announced plans to cut its workforce in half and sell 60 percent of its branches to Prospect Mortgage Co. Just last year, IndyMac was the 9th largest mortgage lender in the U.S.

These folks get objective, if not gentle coverage of their business practices in the news media. But when it comes to the real estate entrepreneurs who dare to attempt to make a living cleaning up the mess that the mortgage industry made, even some of the most widely respected news outlets too often resort to inaccurate depictions of our business, scorn and now, even metaphors that seek to identify us in the Wild Kingdom.

REI’s Proud Scavengers Run Circles Around the Competition
This week, CNN had the nerve to call real estate investors “vultures.” Frankly, I resent that. Not only because, unlike the bald bird of prey with keen vision, I have hair on my head and am slightly myopic. But also because real vultures mostly prey on carcasses, and I believe that the real estate market still contains a great deal of life. Come on CNN, it’s not as though we created the problems that have led to widespread foreclosure blight in the real estate markets hardest hit by the lending industry’s lapses in sane business practices.

if we’re the economy’s birds of prey, what does that make the folks who wrote billions in bad loans that have plagued once-mighty housing markets and jeopardized the stability of the U.S., if not the global economy?

A real estate investor featured in CNN’s story had to explain to the reporter that our industry actually helps neighborhoods and property values to recover from the devastation associated with high-density foreclosures. You’ll find this paragraph near the bottom of the lengthy CNN article.

When real estate owned (REO) homes sit vacant and are neglected for extended periods of time, the investor explains, they often become havens for squatters, drug dealers and the dangerous sorts of criminal activity that prompts most qualified buyers to flee a real estate deal with Blair Witch Project-like frantic abandon.

Navigate your Real Estate Business through the Economic Abyss
Clearly, the real estate deals are out there. But in tough economic times, it is more important than ever that we make the right decisions about our businesses. A timely Inman News poll posed the following eternal question: “Which of these items are the most vital to an agent in surviving a real estate market downturn?”

The following answers may surprise you, though they confirm what I’ve been saying all along: Marketing is everything in this business. (For more information, register for a free copy of “Secret Handbook of the Direct Marketing Revolution: Strategies to Guaranteed Success for Real Estate Entrepreneurs,” the report I wrote with Dan Doran to address obstacles faced by investors in today’s often cloudy markets.) To prove my point, here are the results of Inman’s poll:

• 0% Figuring out where to distribute data for for-sale properties I have listed.
• 32% Deciding how to spend my marketing dollars.
• 25% Knocking on doors, picking up the telephone.
• 11% Investing in new technology, communications tools.
• 32% Keeping in touch with past clients.

Is REI is the Little Blue Pill for Wall Street’s “Problem”?
So, while CNN calls us “vultures” one may wonder what other investment opportunity out there is part of the solution, rather than an endorsement of our great nation’s institutional failures? With so many economic indicators pointing down, what have any of the major players in the mortgage debacle done to help neighborhoods, families and local tax bases to recover from the mortgage crisis?

Ponzi Moves on to Greener Pastures
In March, we reported that money management firm Black Rock Inc., and hedge fund Highfields Capital Management were backing a new firm to buy distressed mortgages, betting that investors would snap up bargains in the beaten-down sector. The new company, Private National Mortgage Acceptance Company, or Penny Mac, has quietly been raising capital from private investors to help borrowers restructure loans to avoid foreclosure.

Penny Mac stars 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.

Housing Wire recently reported that 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. (Here’s an awesome article in the Wall Street Journal that touches on this issue.)

Hey CNN: If we’re vultures, what do you call the evil geniuses behind that flip?! Oh wait, CNN’s intrepid staff of crack reporters hasn’t really covered that story in much detail. Sometimes I wonder if we all wouldn’t be more in-the-loop if we got our financial news from Animal Planet.

As the number of U.S. home foreclosures topped one million this month, cities in the states hardest hit by foreclosure: Arizona, California, Florida and Nevada were named by Fortune magazine as the hottest markets for real estate investment. In addition, emerging reports of real estate market overhang are not surprising. Especially in light of the mid-decade building frenzy in Arizona, California, Florida and Nevada that was spurred by gravity-defiant home prices and easy money loans.

During the Boom
Back then CNNMoney says, dramatic price surges were fueled by investors who used risky mortgages to cash in on hot market activity, Today, these four states combined hold one-third of the nation’s foreclosures, with nearly 400,000 homes hanging in the balance.

According to the Mortgage Bankers Association Q1 report, Arizona, California, Florida, and Nevada combined represent:

• 62 percent of all foreclosures started on prime ARM loans, and 84 percent of the increase in prime ARM foreclosures;
• 49 percent of all of the subprime ARM foreclosures started in the country during the Q1, and were responsible for 93 percent of the increase in subprime ARM foreclosures
• 29 percent of prime fixed-rate foreclosures and 60 percent of the increase in those foreclosures; and
• 25 percent of subprime fixed-rate foreclosures and 53 percent of the increase in those foreclosures.

Fortune’s Five Hottest REI Markets
Especially now that the chips appear to be down, it seems that everyone wants in on the real estate game, and Fortune magazine has named five cities as ideal for real estate investing. These markets are generally the hardest hit in the foreclosure epidemic:

1. Miami
   According to the S&P/Case Shiller index, prices and sales here appear to be circling the drain. Miami house prices have dropped a whopping 21.7 percent in the past year, and dwindling median condo prices. Miami condo and home sales have plunged 40 over last year, and market activity has slowed dramatically. Fortune recommends that the following markets are ripe for real estate investment: Aventura, Bal Harbour, Sunny Isles Beach and Coral Gables
2. Tampa
   The Case-Shiller index reports that in the past year, real estate values have fallen 17.5 percent. Still, Fortune predicts a rebound is in the forecast for Tampa because of its strong local economy and other market forces. Currently, the median home price is $222,000, down from $275,000 last year, and the National Association of Realtors (NAR) predicts 20 percent or greater appreciation value over the next five years. Today, home prices are 50 percent lower than they were during the boom. Those surges may be attributed primarily to speculators flipping houses for quick profits, Fortune says. When the deals began to recede and the investors started started pulling out in 2006, the prices began their free fall. Now, Fortune says, this market is ripe for high-end real estate investment: Gulf-front luxury condos in Clearwater or St. Petersburg, are down from the $1 million a few years ago, to around $600,000 today.
3. Las Vegas
   Here, the real estate bubble swelled with annual price increases of up to 50 percent, making for today’s dramatic price drops and hot bargains. According to the Case-Shiller index, Las Vegas is the hardest-hit locale nationally, with prices dropping nearly 23 percent in one year, and one in 44 homes hitting foreclosure Q1 alone. In this market, with the third-highest rate of foreclosure in the U.S., Fortune predicts that the sun-drenched climate, proximity to pleasure, and glut of luxury homes, combined with the absence of state income tax will attract droves of retirees — and a speedy market recovery. Here, Fortune recommends investing in new construction in outlying areas like Summerlin and Providence, or in high-rise condos, especially in light of their 10 percent price drops since last year.
4. San Diego
   Prices here have plunged nearly 10 percent and foreclosures have surged in the past year, according to Moody’s Economy.com. Despite the fact that the Council for Community and Economic Research deems San Diego County’s cost of living 47 percent higher than the national average, the area’s natural beauty and beach-front locations give it the strength to conquer adversity and recover quickly from the mortgage crisis. Again, Fortune’s forecast is growth in the high-end property appreciation, as these properties have been the slowest to move in the inventory glut.
5. Phoenix
   Although Moody’s Economy.com shows its real estate values plummeting by 8 percent over the past year, and RealtyTrac reports its foreclosure rate has tripled since 2007, Phoenix, like Las Vegas will continue to attract retirees. Here, Fortune says, the planned communities that surround the metropolitan area offer hidden bargains. Also, amenities such as golf, shopping and luxurious recreation centers add additional value for the retirement crowd. Fortune suggests that here, areas like Sun City Anthem, Palm Valley, and Avondale are great places to find housing bargains that’ll likely offer healthy returns as the markets continue their recovery.

CNNMoney: Home Prices in a Downward Spiral
While existing home sales recently have seen modest market boosts, analysts say that residential real estate prices have posted record drops in the past year. The S&P Case/Shiller Home Price index of 20 key markets finds that home prices plunged 11 percent in a 12-month period that ended in January. These findings mark the lowest levels ever reported for the index, which debuted in 2000.

Marketwatch: Emerging Bargains in REO New Construction
With falling home prices and changing lending practices, a growing number of foreclosures are now available in up-scale areas at at lower price points. In one new Sacramento, Calif. suburb, changing markets mean changing demographics in once-hot sellers’ markets. The greatest deals often are found in new-construction areas that were hot in 2005-2006 when they were priced well above the median price for the greater area.

Associated Press: Fed Auctions $50 Billion in Short Term Loans
Hoping to ease the economic turmoil for credit-crunched banks, the Fed has so far offered a total of $260 billion in short-term loans via eight auctions since December. The central bank has posted results of its latest such auction where commercial banks bid for their share of $50 billion in short-term loans. Reports say this is a continuing effort to minimize the impact of the recession on the vulnerable economy.

Forbes.com: Wall Street Chaos Ups Ante on Countrywide Buy-out Rumors
Rumors about Bank of America’s latest plan to acquire Countrywide Financial hit today, indicating that Countrywide might get a better takeover deal than the $4 billion offered by the bank in January. Even then, the deal was lauded by the Fed and other regulators hoping it would stop a liquidity-constrained Countrywide from causing more trouble in markets already cramping from the credit squeeze.  Speculators today may be counting on the Fed continue bailing out financial firms who are heavily vested in subprime markets.

Forbes.com: PennyMac to Profit from Contrywide’s Blunders
As the largest mortgage lender in the United States, many believe that Countrywide Financial helped to trigger the subprime mortgage disaster with its uninhibited lending practices. Countrywide currently is under FBI scrutiny for possible securities fraud and regulatory violations. Now, a group of former Countrywide executives are looking to capitalize on their wealth of experience by purchasing distressed mortgages at low prices and re-selling them for profit. Led by former Countrywide talent, the newly formed Private National Mortgage, or PennyMac, will use private capital to invest in and service residential mortgages; it also will acquire loans from institutions seeking to reduce mortgage exposure risks. Critics claim that Countrywide executives should not be empowered to profit from the mortgage crisis they may have helped to create.

Los Angeles Times: Equity Strippers to Bear All in Court
Federal prosecutors have so far charged 19 people, mostly from Southern California, with defrauding cash-strapped homeowners using “foreclosure rescue pitches” and an equity-draining technique called “equity stripping.” Two indictments have so far been issued in relation to the $12.6 million scam. Prosecutors say that defendants could get more than 20 years in prison, if convicted.