Tag Archives: mortgage notes

Guessing Housing’s Next Steps – Buy Mortgage Notes

Using the word “guessing” is not something that you see among writers and commentators these days.  Most of them, using data confirming their theory and ignoring all other facts, state with conviction what will happen next with the general economy, the housing market, or most anything else.  After all, the general public doesn’t want wishy-washy “what-if” discussions – they want concrete statements that they can either agree with or else wave off as a disagreeable political statement.  Investors, in particular, want to hear the opinions of gurus so that they can grab that stock, buy mortgage notes, or purchase a house with a high degree of confidence that such actions will be profitable.

What has become apparent over the past few years is that forecasting short-term and long-term trends has become doubly difficult when the government is involved.  Using past trends to predict future occurrences is unhelpful when sailing in to uncharted territory.  From my viewpoint, Wall Street firms have done well over the past few years due largely to their close ties with D.C. politicians and their allies.  The so-called recovery has been due almost in whole by the Fed dropping loads of money into the country and U.S. politicians pretending that the country is fiscally sound.

In few cases has this been as apparent as with housing, which is particularly relevant to me as a buyer of mortgage notes.  Nationwide, housing prices are about 1/3 lower than they were at the peak.  However, real estate news over the past 2-3 years has been quite positive.  At its worst, nearly half of all home sales were foreclosure-related.  Now, that figure is down to 21% — less than one in five houses (though add another 15% for short sales).  Home prices across the country have been going up, with skyrocketing being the more descriptive word for cities like Phoenix and Las Vegas, along with much of California.  Prices in many those cities are up over 20% in the past year.  According to CEPR (5/29/13), most of those price increases are in the bottom-third of the market.  During the last three months, prices for that lower third have risen at an annual rate of 70% in Las Vegas and 50% in Phoenix.  In Los Angeles, overall housing prices are up 10% in the past year even while unemployment remains above 10% and real income has gone down.  Clearly, these types of increase are not sustainable.Arizona house

There are other concerns about housing to consider:

  • 11 million homeowners are still underwater
  • The credit-rating agency, Fitch, warns that higher interest rates and credit concerns means that gains in some markets are outpacing fundamentals
  • Housing supply is artificially low due to recent foreclosure regulations and the large number of underwater borrowers
  • A few hedge funds and investment companies, which bought a huge number of properties in recent years, are giving indications that they will start pulling back some of their cash.  If this happens on a large scale, housing prices would take a hit.

So, what to do if you’re considering buying a house either to live in or to use as an investment?  If you’re looking at price-volatile areas like those mentioned above, my advice is to stay on the sidelines due to the likelihood of a near-term stall or drop.  However, in most of the rest of the country, which has less drastic swings in in price, buying a house is still a good investment.  Yes, there are still risks but I believe them to be less than investing in the stock market, buying gold, or having them lose value in a bank savings account as inflation outpaces rates.  If you are going to buy, you may want to do it soon, as mortgage rates look like they will continue to creep up.

Fake Recovery Means Little Reform — Mortgage Notes

Over the past several years, the U.S. has emerged from the depths of a recession to a full-fledged fake recovery.  On the housing side, real estate investors, buyers of mortgage notes, and Wall Street have seen the good ‘ol days return as home prices zoom once again.  In earlier articles in this space, I’ve discussed at length why this recovery is not real and has been orchestrated by huge amounts of government spending.  This spending and poor financial leadership at the highest levels seems to be leading to an entirely new bubble.

However, there is another big downside to this fake recovery, and that is the near total lack of reform of the institutions that were big players in the last collapse.  As a note buyer and business owner, if I have a lousy couple of quarters where I buy only a few mortgage notes, then I know that I need to try something different in my marketing, operations, or elsewhere.  Similarly, a family that has had the misfortune of experiencing a foreclosure or bankruptcy is most likely going to make some big changes to their budgeting and spending next time around.

mortgage notesThis has clearly not happened with our government and its Wall Street allies.  Big banks are bigger than ever and executives continue to rake in huge bonuses.  Real reform of the housing and banking industries has simply not occurred and does not look like it will happen.  A good example of this is what has happened with Fannie Mae and Freddie Mac, which buy mortgages from lenders and repackage them into securities.  These nearly bankrupt entities were placed into conservatorship by regulators in 2008 and have together sucked nearly $200 billion out of taxpayer wallets (per Bloomberg).  These companies deserved to be shut down or at the very least heavily restructured a long time ago.  Instead, they continue to function in much the same way as before and still dominate the mortgage landscape.  The fact that each is now generating small profits nearly guarantees that minimal change will ever happen.  Quite likely is that they will be largely responsible, along with the FHA, for the next housing crisis.  Sigh … some things never change.

Planning in the New Year – Is It The Right Time To Sell A Mortgage Note?

It wasn’t long ago that we celebrated the coming of new year –  we watched the ball fall, made some resolutions and some noise, and toasted to 2013.

Starting fresh is what the new year is all about. While we do reflect on the past, for example how we capped off 2012 with a tumultuous presidential election and concerns about the fiscal cliff, the new year is really more about planning for the future. As we look ahead and consider changes to come, it’s a good time to review finances and consider the best use for our investments.

The decision whether to sell all or part of a mortgage note (also often called a real estate note, deed of trust or promissory note) usually boils down to two main categories.

First: Simplifying Life

While holding a mortgage note can be a good investment and receiving monthly payments beneficial, managing the responsibilities and risks inherent to holding a mortgage note can feel burdensome at times. If you find any of the below to be stressors, it may be a good time to consider selling your mortgage note:

  1. Managing payments, insurance, and taxes for your mortgage note.
  2. Planning your estate for heirs.
  3. Settling finances in the event of a divorce.
  4. Assuming the risk of non-payment of a mortgage note or bankruptcy of the payer.
  5. Unexpected changes due to the divorce or death of the payer.
  6. Worrying about default and foreclosure.
  7. Concerns with the real estate property becoming devalued.

 Second: Cash Requirement

There is no question that life changes, planned or not, often come with expenses. Selling a mortgage note is a fairly simple way to raise a lump sum of cash quickly, and can be significant depending on the value of your mortgage note. Types of life events that may warrant selling a mortgage note are not limited to, but include the list below:

  1. Covering medical expenses
  2. Paying for college tuition.
  3. Planning a wedding and/or starting a family.
  4. Buying new real estate.
  5. Making a career change and/or investing in a new business.
  6. Transitioning into other investments or reinvesting at a higher interest rate.
  7. Purchasing a vehicle and other high cost items.
  8. Funding travel plans.
  9. Managing retirement expenses.

If you are in the process of deciding if selling a mortgage note makes sense for you, you may want to contact a  reputable mortgage note buyer for further advice and information.


The Rising Cost of Government

A few weeks ago in this space, I made the case for why real estate will perform poorly in the medium-term, driven by a variety of factors.  This trend will affect homebuyers, mortgage buyers, investors, banks, and anyone else with a financial interest in real estate.  Mortgage buyers like me need to be especially aware lest our mortgage notes go from having lots of equity to suddenly being underwater.  Fitch, a well-known international credit rating agency, believes that real estate values are overvalued now by at least 10% (per Housing Watch, 1/4/13), and there are good arguments for why it is overvalued more than that.

However, in the short-term, which I define as the next two years, housing should do well.  Certainly, real estate values improved significantly in many regions during 2012, and I expect the trend to continue through 2014.  A combination of low interest rates, limited housing inventory, and Wall Street and an influx of foreigners jumping in as investors have made near-term prospects look good.  Because the Feds have their mitts all over this change and have succeeded only in artificially propping up housing temporarily, another precipitous drop in property values is still in our future.

Interest rates have been kept low by the Federal Reserve, which has promised to keep them low for another couple of years.  Housing inventory is constrained by banks still holding shadow inventory, by Wall Street firms buying huge portfolios of properties, and because many underwater homeowners are unable to move.  Of course, once interest rates move up, Wall Street types get panicky, or any number of other events occurs, housing will return to its slide.  High unemployment, higher taxes, and economic uncertainly all suggest that the housing recovery has no legs.  The current economic mess is almost entirely caused by partisan bickering over the debt and related policy decisions, and shows no sign of changing.  The politicians know that any changes to spending and programs will infuriate some special interest group, which directly affects their chances of being reelected.

Congress and the President have shown no inclination to make any spending cuts, so seem destined to continue deficit spending well into the future.  The Democrats refuse to cut entitlement spending while the Republicans won’t consider reducing defense spending – both areas will need to be slashed to significantly reduce the debt.  The entitlement side is especially pressing, as CNS News reported that Social Security ran a $47.8 billion deficit in fiscal year 2012.  The number of workers collecting disability benefits hit a record of 8.8 million people in December – apparently, not having a job is quite detrimental to one’s health.  The ratio of workers to beneficiaries peaked in 1999 at 2.93 to 1, and now stands at 2.36 to 1.  Social security, like Medicare, is on an unsustainable exponential growth path of misery.

The federal government has greatly increased spending from 2000 to 2012.  Here are just a few examples of the percentage increase during that time (per Mish, 12/21/12):

Dept. of Defense                                          194%
Dept. of Education                                    160%
Dept. of Energy                                         160%
Dept. of Health & Human Services    128%

Meanwhile, Medicare and Medicaid have each risen about 140% during that time.  While there are certainly opportunities to increase revenues, by far the biggest problem is the greatly increased expenses and government infrastructure that goes with it.

Japan had a crisis with some similarities to ours over twenty years ago and is still a mess.  They were slower to throw money at the problem than has been the U.S., but their results have still been dismal.  The U.S. has a much larger economy than Japan and has certain advantages (like still having the world’s reserve currency) that will probably keep our fall from being as severe, but it is still interesting to see how Japanese real estate (per Dr. Housing Bubble) and its stock market (Nikkei 225 on the right, per tradingeconomics.com) did over the past few decades.

japan real estate land pricesHistorical Data Chart

This is what unconstrained spending and a dismal economy will do for you, and the U.S. is following the same path.  Keep this in mind when certain politicians and economists start yapping about how the government needs to spend more to get the economy healthy.


Brown and Gray in California

Although this article does not deal directly with real estate, mortgage notes, or mortgage note buyers, overall economic conditions and state regulations affect all of these areas and more.  I share the information below to make the readers aware of what is happening in California and the path that we are heading down. 

Leading up to the election a few weeks ago, Californians experienced a barrage of TV advertising and seemingly signs on every street corner telling us to vote for Proposition 30, which would raise the sales tax ¼ percent-point and increase the income tax for anyone making over $250,000 per year.  Failure to pass the proposition, we were told, would mean massive budget cuts, especially to schools.  The implied message was that “if you care about children, you have to vote for this law.”  A majority of under-informed voters bought that argument, and the proposition easily passed.

Shortly thereafter, the legislative budget analyst assured Californians that the budget would soon be balanced.  “Yeah, we’re saved,” cheered the masses.

The problecalifornia-BANKRUPTm is that higher taxes do not lead to higher revenues, especially for a poorly managed, economic basket case like California.  According to the state controller and Mish, November’s tax receipts were $807 million below expectations, and overall revenues are below target since the fiscal year started in July.  Meanwhile, actual expenditures were $2.2 billion higher than expected.  Throughout the first five months of the fiscal year, the state has already put itself in a financial hole.  The higher taxes kicking in next month will only hurt economic growth and drive investments to other states.

Bloomberg has started running a series of articles about how California got to be such a fiscal mess.  It started when Jerry Brown granted collective-bargaining rights to state workers during his first term as governor more than thirty years ago.  Gray Davis, who was recalled by voters in 2003, made a further mess of things by giving public unions nearly everything they asked for.  Not coincidentally, the unions were exceedingly generous in their donations to his political campaign.  Jerry Brown, elected again a couple of years ago for another term as governor, is continuing down that path.

The list of despicable actions by Brown and Gray Davis is long, but here a few examples comparing California to the next 11 most populous states, courtesy of Bloomberg:

* California public employees earned more than their counterparts in nearly every type of compensation – wages, overtime, extra duty, and one-time lump sum payments.
* Brown has chosen not to curb overtime expenses or limit payments for accumulated vacation time despite the state’s budget problems.
* The per-worker costs of delivering services in California vastly exceed even those in other collective bargaining states like New York, New Jersey, Illinois, and Ohio.
* Californians have suffered through ongoing budget deficits over the past decade, and now face the country’s highest debt and Standard & Poor’s lowest credit rating for a state.
* 240 California state employees received at least $100,000 in accrued leave payouts last year, compared with 42 for all of the other 11 states combined.  Chris Christie, the governor of New Jersey, calls such payments “boat checks” because they can be large enough to buy a yacht.
* When Davis took over as governor in 1999, he unwound curbs put on pensions, leading California’s annual payment to pension obligations to go from $300 million that year to $3.7 billion in the current fiscal year.

Prison guards, highway patrol troopers, prison guards and nurses, and other public employee unions have made out like pigs at the trough of taxpayer money.  Despite the escalating financial crisis in the state, public employee unions have made only minor concessions.  The governor and Democratic legislature continue to insist that the state has a revenue problem instead of recognizing that it is entirely a spending problem.  Since that philosophy is unlikely to change, I’m confident in predicting more propositions for higher taxes within the next four years.