Tag Archives: note investor

The Worst Kind of Rescuer — Note investor

Since the beginning of the financial crisis, politicians and bureaucrats trying to rescue it have consistently done nothing but fall over their own feet.  We would be hard pressed to point to a single true success story among the multitude of programs and regulations that have been proffered during the last five years.  All the while, the national debt has increased by trillions of dollars and the housing market remains comatose.

Having now seen transcripts from Federal Reserve monetary policy meetings of 2006, it is abundantly clear that the Fed had no clue about the coming housing market meltdown and ensuing crisis.  The warning signs were there, but either incompetence or arrogance prevented the leadership from recognizing the obvious.  Ben Bernanke described the cooling housing boom as healthy and said “so far we are seeing, at worst, an orderly decline in the housing market”.  Tim Geithner complained that Alan Greenspan had not received the credit that he deserved, a view that is shared among very few people these days.

Today, the continuation of previous policies and the introduction of new ones have run up the federal debt to an amount equal to the country’s entire gross domestic product.  If we add in future obligations related to an aging population, throwing more money to Fannie and Freddie, pensions, etc., the total rises to levels that are difficult to imagine and nearly impossible to pay back.  Taxpayers are in no condition to help with revenues, given that unemployment remains high and household debt is increasing (up 9.9% in November for installment debt, the fastest rise since November 2001).  As the financial industry gets even more opaque and complex, we’re more likely to see additional problems than solutions from that sector.

Where does the country go from here to address its overwhelming debt?  Really, there are four ways to get the country out of its current debt predicament.  The first two – growth and default – are highly unlikely.  As consumers and state/local governments pare down their debt, there will be little overall growth though select sectors will prosper.  As deep as the country’s debt problems have been and continue to be, a default by the federal government has a very low probability of happening.  If it did occur, borrowing costs would go up and there are additional ramifications too scary to consider.

The other two avenues are austerity (spending less money) or inflating our way out of the problem.  Austerity would be the better way to go, but causes pain and unrest during the short term.  Since most of the population has no grasp of the enormity of the country’s financial situation, politicians have talked a lot about lowering expenses but taken few actions to tackle the problem.  While some cost savings have been put in place, they will have minimal real impact.  That is why the administration has requested (and will get) the debt ceiling raised by another $1.2 trillion during the coming weeks.

That leaves inflation as the most likely course of action.  Holders of U.S. debt and any other dollar-denominated financial instrument (including stocks, bonds, real estate, etc.) will get burned as the dollar loses value, but the government will care little as they will see no other politically viable course of action.  When this all hits the fan, holders of precious metals like gold and silver, as well as those owning more stable currencies, will be rewarded.

Alan Noblitt is the owner of Seascape Capital and a note investor.  As a note investor for all 50 states and on most property types, he can help mortgage note holders in nearly any any situation.

Your Government at Work — Note investor

The government and media shell games on public employees, debt, and evaluation of past programs continue.  Over the past couple of years, we have increasingly been reading about wide scale reduction of public employees in the press.  The Bureau of Labor Statistics (BLS) claims that state and local governments shed 221,000 jobs between December 2007 and December 2010, with another 234,000 jobs lost so far this year.  Meanwhile, a Census Bureau study shows that full time state and local employment climbed 200,000 between 2007 and 2010 (per www.investors.com).  Clearly, the two departments were using different methodologies and we don’t know which is actually true.  It doesn’t really matter, as even the BLS figure of a 2.3% decline in the public sector is dwarfed by the 5.4% drop in the private sector.  Businesses are getting leaner much faster than are governments.

You may have seen that the highest average income in the U.S. belongs to Washington D.C.  Not in Silicon Valley, where new technologies are constantly being introduced, nor in Texas where so many energy companies proliferate, and certainly not in the farm belt or any center of manufacturing.  Washington D.C., a city of lobbyists, attorneys, and similar types who add zero value to society is where the big bucks are being pulled in.

This activity is part of a broader pattern in our country’s expanding debt problem.  Treasury Department statistics show that federal spending in the first 9 months of this year is $120 billion (5%) higher than last year, and that deficits are $23.5 billion higher.  Overall state spending rose almost 10% from 2008 to 2010, while general fund spending is expected to rise 5.2% this year and 2.6% next year.

From where does this money magically appear – from nowhere, of course.  More specifically, it comes from the future, as taxpayers and government bond holders get hit, and the Feds  inflate their way through the rest of the debt.  Political infighting and even the government “super-committee” — which is supposed to provide some substantial debt reductions by November 23 —  are only making things worse.

Speaking of more spending, the Federal Reserve is looking into buying more mortgage-backed securities in order to lower mortgage rates.  The fact that rates recently hit historical lows with no discernible impact on sales or values does not seem to have entered into the conversation.  The national median price for existing homes fell 3.5% in September from a year earlier to $165,400 (Wall St. Journal, 10/21/2011).  Let’s say that Betty Buyer purchases a house at that price and gets a 30-year FHA mortgage loan at 96.5% of the value.  At a 4% interest rate, Betty’s monthly payment would be $762.01.  If the Fed is fabulously successful at lowering the rate to 3.5%, then Betty’s monthly payment goes to $716.72.  Does anyone really think that a decline in the monthly payment amount of just over $45 will affect home sales at all?

Mortgage defaults and foreclosures are rising again now that the robo-signing scandal has been put to bed.  Expect foreclosures to continue climbing and home prices to continue falling for another couple of years – much longer if the feds continue to meddle.

Alan Noblitt is a mortgage note investor in California.  As a note investor, he keeps an eye on real estate and economic trends to help himself and his readers know what is going on.