Tuesday, September 30, 2008

Vote For Your Favorite Political Cliche'

Congress Is On Vacation For A Couple Of Days: Let's Take A Vote

Since the Congress is taking a couple of days off, it is the opinion of this blog that we will take this opportunity to take a look at some of our favorite cliches that come out of the mouths of our politicians, and take a poll of which are your favorites.

I have not been able to get my hands on the list of cliches given to each member when they are sworn in (or so it seems), but from watching and reading and listening I have hopefully gotten off to a good start.

Reader Participation

Please let us know which is your favorite (and why if you so desire), and please tell me of any I missed as I do not profess to be an expert on the empty platitudes of D.C. speak. Here we go:
  1. We reached out to our friends across the aisle.
  2. We want this to be a bi-partisan solution.
  3. We do not want the taxpayers left holding the bag.
  4. We cannot afford to repeat the failed policies of the (insert name) over the past (insert number of years).
  5. We could have gotten it done with any support from (insert party)
  6. It's not about getting it done fast, but getting it done right.
  7. We feel the pain of the middle class.
  8. It's not about Wall Street, but Main Street.
  9. This is to important to let fail.
  10. We had the votes, but the (insert party) could not get it done.
  11. My (insert party) friends.
  12. We will resume talks after the (insert holiday break that they take whether there is a huge crisis or not).
  13. We got it done in our caucus, but the (insert party) couldn't.
  14. It's a lack of leadership from this administration.

This is my short list, and I am sure that there are many, many other that I left out. Please vote on this list, and also mention some of your own.

Monday, September 29, 2008

The $1 Trillion Men (and women): The House Of Representatives

The Bailout Bill Goes Down

Apparently Nancy Pelosi, Majority Leader in the House, does not know how to count very well. Leading up to one of the most important votes in recent history, it would seem that she did not know how many in her own party would vote yes, let alone how many in the other party would vote yes. The result; only 205 yes when 217 was needed to pass this bailout bill, a bill that most pundits and industry insiders say is necessary so that we avoid slipping into an even deeper recession or worse.

Because of this surprise ending, you, I and the rest of the country lost over $1 trillion dollars in market value in the stock market, and even worse is the lost credibility around the world. The performance of our leaders during this crisis is nothing short of an embarrassment.

Where Do We Go From Here?

OK. Water under the bridge. It is what it is. Add in any of your own platitudes. We now have a two day hiatus during which negotiations will no doubt take place but no votes will happen. Then what. The Democrats and Republicans that voted against have to be thrown whatever political bones are necessary to get enough on board to reach the magical number of 217.

I heard Nancy Pelosi say that they are going to work as hard and as long as it takes to get this done. As if she and the rest of them are making some sort of a great sacrifice. They usually don't work all that hard, and they want us to appreciate the fact that they are putting in some hours now.

I don't think so. Do what we pay you to do, and what you told us during all of your campaign speeches that you wanted to do. How about just getting this damn thing done before all of your partisan crap sinks us all.

Did You Guys Ever Hear Of The Ted Spread?

These politicians that spend their time in the cocoon of Washington and in the bosom of their districts back home don't have to know about measurements of panic because most of them don't need to panic about much beyond raising campaign funds and the next election cycle.

They might want to tip a glance over to the TED Spread, a measurement of the flight to quality of funds around the world. This morning, the TED Spread which is the difference between the 3 month Treasury Bill and the 3 month LIBOR rate spiked to over 3 which is an excellent indicator of the level of financial terror around the world.

What Are These Guys Thinking? I Hope They Figure It Out Soon!!!

Congress: Do They Really Feel The Pain Of "Main Street"

Do These Guys Really Feel Our Pain?

As a follow-up to the bank bailout resolution for this crisis that may be passed this week, I just wanted to touch on a phrase that is used incessantly by the politicians as they run to the microphones in order to get their piece of face time for the constituents back home.

The phrase that pays is that this bill will not just be good for Wall Street, but will be good to minimize the pain that will be felt by Main Street.

Do Most Of These Guys Really Feel The Pain Of Main Street?

While talk is cheap, how many of these members of the Congress are really being affected by the stresses of the crisis as it wears on. I am not saying that they have not felt some pain as their houses decline in value and their stock portfolios take a hit, but I don't think that the majority feel the pain of being able to pay the mortgage, pay for college, buy a car, etc.

But they are out there talking about what the "average guy" needs and feels.

Now to be clear, I understand that not every member of Congress is a millionaire, and that there are some that I am sure do feel the same pain as you and I. But I think that many do not, and these are very often the ones that say that they do and run for the microphones.

Let's Cut The Rhetoric And Really Get Something Done For The Average Guy And Main Street That They Apparently Know So Much About!!!

Just as a point of interest, Open Secrets.Org has a list of some of the wealthiest Senators and Congressmen and Congresswomen as of 2006.

Reading Between The Lines Of The Mortgage Bailout Plan

Actions Speak Louder Than Words

In moving from the rhetoric coming from Washington and bringing it to the level of Main Street (a term that our politicians love to invoke), and watching the early stock market reaction to the bailout plan as we know it now, actions are speaking louder than words.

Asian and European markets are down in the 2%+ range, and stock index futures in The U.S. indicate a fairly significant lower open. This situation of lower futures happened several times last week, and the market would end up rallying and finishing in positive territory. The rationale then was typically that a bailout plan was on the horizon.

Is today the typical Wall Street "buy the rumor, sell the news" sell-off, or is it something more? Is it Wall Street responding to the Plan with their feet?

The Plan, The Consumer And Small Business

It appears to me that what the market is thinking when doing its' initial analysis of this plan, is that it may be to little, to late, to keep the economy from moving further into a recession. While the plan will hopefully unclog the arteries of the credit markets (a popular term with pundits and market analysts) and help bank balance sheets, does it do anything to increase consumer confidence and give availability to capital in the very near term for those who need it most?

Things like business loans, car loans, home equity loans, student loans and the all important mortgage loans for anyone other than those with the most pristine of credit credentials.

If not, and this plan does not re-ignite the trust between banking institutions to lend to each other and to Mr. and Mrs. Front Porch, then this bailout plan is one more bullet that has been used, with less and less available in the chamber (yet another common phrase to describe our situation) to get us out of this mess and save our economic situation, at least in the short term.

Sunday, September 28, 2008

The Mortgage Crisis: Beginning Of The End And A Look At The Beginning

Looks Like We Are Rounding Third

True to the form in the world of politics (waiting until the final hour), it appears that a consensus between the Democrats and Republicans has been reached, and that a bailout bill in some form has been agreed upon. This will hopefully be the first step in getting the footing back under the banks and will loosen the credit flow that the economy so desperately needs.

As I said about a week and a half ago, hopefully this means that happy days will be here again soon. Problems still very much exist, but this is the critical first step. News of the final details should be out tonight or tomorrow, and we will get an early idea of the reception from the action in the stock markets both overseas and here in the U.S.

How Have I Looked At The Mortgage Crisis?

During this time, I have taken a humorous look at the crisis (Friday, September 19, 2008
The Mortgage Crisis: A Serious Story Viewed In A Very Funny Way), a look at when the seeds of the problem were sown and the fact that it is very much a bi-partisan creation (Saturday, September 27, 2008 A Video On How And When The Mortgage Crisis Really Got Started), but not at the basics of the problem. Now that we are at the point of an initial solution, this is a simple explanation of different mortgage loans and how they work into the process. This article appeared in New York Newsday today:

One of the centerpieces of the prolonged housing slump and the nation's financial crisis is the proliferation and later the implosion of the market for mortgage-backed securities. As the housing market continued booming, investment banks and other institutions began loading up on the securities, reaching full bloom by 2005. But when the housing bubble began to deflate, it created a solvency crisis for those institutions heavily weighted with the securities, leaving them stuck with an investment instrument worth much less - or worth nothing at all - than its face value. A look at what mortgage-backed securities are and how they tanked:

1. A homebuyer takes out a loan. Mortgages are based on different categories of risk:

Prime: For borrowers with stronger financial records; carry lower interest rates. (Prime loans made up 24 percent of mortgage-backed securities in 2005, during their peak.)

Alt-A: Also known as a stated-income or no-doc mortgage, for borrowers with good credit but limited income or ways to document their income through pay stubs and tax returns. (Alt-A loans made up 28 percent.)

Subprime: For borrowers with weak credit histories; carry higher interest rates. (Subprime loans made up 29 percent.)

2. The lender often sells off the loan to either:

The government-sponsored entities of Fannie Mae and Freddie Mac, which pool a group of loans together and turn it into a mortgage-backed security that is then sold to private investment firms on Wall Street or Directly to investment firms, which turn loans into mortgage-backed securities. When a homeowner makes a mortgage payment, it flows through as interest to the holders of the security.

3. Pieces of those securities are sometimes then repackaged into a new type of security, a collateralized debt obligation. This security is sliced into different classes of risk and yield, and sold in pieces to investors. Institutional investors include pension funds, mutual funds and hedge funds. The process allows risky subprime debt to be sold as part of supposedly safer, investment-grade assets:The senior, investment-grade class with the highest credit rating - as high as AAA - is considered the safest but yields a lower interest rate. These investors get paid first.Below that are junior, riskier classes, with a higher rate of return. This group gets the next claim on payments.The lowest, or equity group, carries the highest risk, with below-investment grade credit ratings. They get the highest yield but suffer the first losses.

4. During the housing boom, investors in all the classes made money. And because of the strong housing market, homeowners who defaulted could refinance or sell the property to clear the mortgage, so it didn't cause a serious problem.

5. But when home prices began falling and homebuyers ended up owing more on the mortgage than the home was worth, it became much more difficult to refinance or sell the property. More homebuyers defaulted. The value of the securities plummeted and institutions holding the riskiest pieces of the CDOs were wiped out. The markets for the securities froze because there were essentially no buyers.

Saturday, September 27, 2008

A Video On How And When The Mortgage Crisis Really Got Started (great music too)

How And When Did The Roots Of This Mortgage Crisis Really Get Started?

Watching TV news and commentary on a daily basis, and watching some politicians talk on a daily basis, you would think that this mortgage crisis did not exist until the day that George Bush was sworn in for his first term.

It seems that many politicians would like you to think that the seeds for this whole crisis were planted on the day that Bush took office. There are many hypocritical politicians (is this an oxymoron or the opposite of oxymoron) that would like you to think that they have no hand in the cause, but that they are all about solutions.

Being Fair-Spreading The Blame Around

I am posting this, not to pick one side over the other because all of these politicians have a hand in this mess. I think that it is good though, to present all of the facts and to spread the blame around to all of those involved.

Extemely Good YouTube Video On The Story (with great music)

Watch this video with an open mind, use it as food for thought and debate, and draw your own conclusions. Thanks to The Real Estate Bloggers for writing about it.

After watching it, please come back and post your thoughts.

Friday, September 26, 2008

Quick Response To Senator Harry Reid

Response To Harry Reid

I was driving in my car listening to a press conference that Harry Reid, Democratic Leader in the Senate was conducting. He said that although this entire mortgage and banking crisis was the doing of the current administration, he and the Democrats were willing to work in a bi-partisan way to solve it.

I don't know if that is the case, and while I try and keep my political thoughts to myself in terms of favoring one party over another, I have to respond. While the ultimate "blame" probably stretches back to before the current administration, stories have been told of the fact that members of Senator Reid party have been more that willing to participate in the problem.

This from Portfolio.com on June 12, 2008:

Two U.S. senators, two former Cabinet members, and a former ambassador to the United Nations received loans from Countrywide Financial through a little-known program that waived points, lender fees, and company borrowing rules for prominent people.Senators Christopher Dodd, Democrat from Connecticut and chairman of the Banking Committee, and Kent Conrad, Democrat from North Dakota, chairman of the Budget Committee and a member of the Finance Committee, refinanced properties through Countrywide’s “V.I.P.” program in 2003 and 2004, according to company documents and emails and a former employee familiar with the loans.

Other participants in the V.I.P. program included former Secretary of Housing and Urban Development Alphonso Jackson, former Secretary of Health and Human Services Donna Shalala, and former U.N. ambassador and assistant Secretary of State Richard Holbrooke. Jackson was deputy H.U.D. secretary in the Bush administration when he received the loans in 2003. Shalala, who received two loans in 2002, had by then left the Clinton administration for her current position as president of the University of Miami. She is scheduled to receive a Presidential Medal of Freedom on June 19.

Holbrooke, whose stint as U.N. ambassador ended in 2001, was also working in the private sector when he and his family received V.I.P. loans. He was an adviser to Hillary Clinton’s presidential campaign.

James Johnson, who had been advising presidential candidate Barack Obama on the selection of a running mate, resigned from the Obama campaign Wednesday after the Wall Street Journal reported that he received Countrywide loans at below-market rates.

Not Going To Be A Three Legged Stool

Business As Usual

The calvary coming to the rescue as stated by a congressman yesterday must have been riding lame horses.

I woke up to a picture of Connecticut Senator Chris Dodd saying to the TV cameras that there is no deal because the Democrats will not move forward without bipartisan support. His point is that they will not move forward with this bailout proposal as "a three legged stool." That sounds like some real political courage.

In the meantime Washington Mutual has failed and J.P. Morgan has taken over their assets.

Obama and McCain in their stated wish not to politicize the problem are doing exactly that. The debate tonight will probably feature Obama alone on statge pontificating about the fact that McCain knows nothing about the economy and is at part to blame for the crisis. McCain will be in Washington where he has not been for the past two years while campaigning, because his presence is now required in some way to get some kind of bailout bill passed. Oh Brother!!!

At the end of the day (hopefully not the end of the economy and banking system as we know it) it is my belief that something will get done. It always has in the past. The problem here is that irreparable damage is being done to businesses small and large, to our position in the world and to confidence going forward that once some type of compromise plan is put into effect, more will not be needed.

An Open Letter

Not that my opinion is going to sway anyones thoughts in Washington (although if you know anyone please feel free to pass it along), but this charade called bipartisan politics has got to come to an end. Someone has to have the courage to potentially harm their chance at re-election in the next cycle, and step up and get this horror show resolved.

The longer this is allowed to go on, the longer the dire consequences of nothing being done are discussed, the more the world watches and is affected by the goings on, the deeper and more critical this mess is going to get.

Take the damn politics out of this and do what we sent you to Washington to do. Our business, not your business!!!

I am beginning to think that we have some real big problems here.

Thursday, September 25, 2008

A Bailout Package Is Coming Into View

The Bailout: Where We Stand (and where the mortgage and real estate industry's futures stand)

I was watching CNBC this morning as I have been throughout this whole crisis, and listened to Jack Welch, former Chairman of GE talk about the goings on, when news came out that apparently an agreement had been reached in principle in congress on the bailout plan that has been hotly debated for the past few days.

I can't be sure, but I think I then heard a congressman, who I believe was Paul Kanjorski of Pa. (although I could be wrong about the name), say something along the lines of "the cavalry has come to the rescue." That's like saying I deliberately broke a window but hung around to clean up the mess. I don't know for sure, but I think that this cavalry is somehow complicit in the problem that is hopefully being fixed by the "rescue" that they are working on.

In any event, I then heard that Bill Gross of PIMCO, an incredibly smart guy, has offered to work pro-bono on the process of taking these toxic investments off of the banks books at a fair price. That's some very good news.

What Are The Details

As of when this post went to press, we don't really know the details exactly, except that a final form will have some type of executive compensation limits that have become all the buzz on the campaign trail.

Here is a blurb that was written by Julie Davis of the AP:

"Senior lawmakers and Bush administration officials have cleared away key obstacles to a deal on the unprecedented rescue, agreeing to include widely supported limits on pay packages for executives whose companies benefit.

They're still wrangling over major elements, including how to phase in the eye-popping cost — a measure demanded by Democrats and some Republicans who want stronger congressional control over the bailout — without spooking markets. A plan to let the government take an ownership stake in troubled companies as part of the rescue, rather than just buying bad debt, also was under intense negotiation."

Bottom Line

I am more hopeful that things will get resolved in the best possible way given the magnitude of the problem, and hope that we do get some of the best Wall Street minds involved in the process.

As I continue to reiterate, this is critical for my business and pretty much everyone else's business regardless of the industry. The United States financial leadership and credibility around the world is also at stake.

For all of our sake, let's hope that the cavalry is coming to the rescue, and that they bring all of the right ammunition.

Let's get this done and move on!!!

Wednesday, September 24, 2008

Existing Home Sales: The Chicken or the Egg

The Economic Data

Exisitng home sales dropped from the previous reading, although it was in the neighborhood of the forecasts. My question is this, which goes right along with the current freeze that we have in the banks willingness to make new loans.

While we are in an economic slowdown, and as such new home sales would be expected to decline some, how much of the actual decline is due to the slowdown in economic activity, and how much is due to the fact that potential buyers that would be out there grabbing up this inventory can simply not get a loan?

If we can get back to the point of the banks beginning to trust each others credit worthiness, and we get a bailout package that puts liquidity back onto their balance sheets, perhaps this particular piece of economic data can improve before the next reporting period.

I have To Put My Foot Down

I have been catching little pieces of the testimony on TV by Bernanke and Paulson, and I now have to put my foot down and tell these politicians questioning them that the time has come to do the peoples business, my business, and to end the posturing and bickering that is meant to impress their constituents back home in an election year.

The bottom line is that no one is knowledgeable enough to really understand the depth of the crisis or the potential ramifications. Definitely not most of these guys that are questioning Bernanke and Paulson. These two guys are our best shot.

The bottom line is, according to those that know or at least appear to know, this bailout or government intervention or whatever you want to call it is necessary if we are to avoid something that could be much, much worse. Let's not do what we usually do, which is to wait until we are at the precipice.

It's Not Just The Bailout Plan Out There!

As if we didn't have enough to worry about with this bailout plan that is getting knocked around on Capital Hill this week, this headline came across a little while ago:

N.Korea ousts U.N. monitors, to restart atom bomb plant

We can't forget about them (or Iran).

Also, under the heading of if you want to play you gotta pay, the executives at Fnm, Fre, AIG and Lehman are the subject of a probe by the FBI.

I keep saying that I should stick with ESPN on TV and the comics when I read. Definitely happier stuff.

Tuesday, September 23, 2008

Know Your Lenders That Are Lending and Goldman Sachs

Some Late Breaking News On Goldman Sachs and Warren Buffett

The "Oracle of Omaha", Warren Buffett, has agreed to invest at least $5 billion into Goldman Sachs in the form of perpetual preferred stock that is paying 10%. He is also receiving warrants to buy $5 billion in Goldman Common at a strike price of $115. The fact that Buffett, a conservative investor who only invests where he has a high level of comfort, has this type of confidence in Goldman is a great sign for that stock.

The futures are higher on the news although his confidence in Goldman does not necessarily translate into a bailout plan or improvement in the underlying situation at the other problem financials. We'll be watching for developments on all fronts.

Somebody Knew Something

As a former trader watching the market yesterday afternoon, the news of this deal was more likely than not already in the marketplace before it was announced. Let's take a look at the way Goldman closed and the volume that it traded between 3:50 and 4:00. This with the market not rallying.

At 3:50 Goldman was at $119, and at 4:00 it closed at $125 after trading as high as $125.95. This with a down market not rallying and with a large volume spike in Goldman. Hmmmmm.

What Good Is A Great Loan If You Can't Get It Funded?

As we discussed many weeks ago, one of the keys of the commercial mortgage market is knowing the correct lender to bring your loan to. Once upon a time, the decision making process was relatively easy, particularly if you did not have a lot of experience on this side of the market.
There were many conduit lenders out there that would take your loan that fit their parameters, underwrite it, fund it, package it and sell it to Wall Street. Your rate might not have been fantastic compared to your local S&L, but the loan would get done in a relatively easy manner.

We all know that this type of lender does not exist anymore (although some say they do). We have gotten back to, in most cases, where real estate is once again local, as are the lenders that you will bring a loan to. These local lenders are typically portfolio lenders, which means that they are not selling your paper, but are keeping it on their balance sheet.

Because of this fact, their underwriting was always a little more stringent and careful than the conduit lender that was merely packaging and selling.the loan. That hasn't changed and in this environment has only gotten tougher.

This leads me to a short "know your lender checklist":

-What property types are they partial to? Multifamily, mixed use, special use, etc.
-What loan amounts will they go up to? Don't bring a $2 MM loan to a bank that has a maximum of $1 MM.
-Once an appraisal is completed, what is the maximum LTV they will go to off of it, assuming that the DSCR is good?
-What is the minimum credit score that they will look at? Will they come down to 660 or do they require 700+?
-What geographic areas do they like to lend in? For example a certain local New York lender will draw a 50 mile radius out from their headquarters and not go outside of it.
-Do they like properties that are owner occupied or only those that are investor owned?
-Understand that just about every lender will require an appraisal that is done by someone on their approved list.
-Understand that the days of exceptions are pretty much behind us for now. If the minimum DSCR is 1.25X, your DSCR of 1.15X will probably stop the deal in its' tracks.
-After you do your homework, you will know which lenders require what things on a loan.

As always, you want to impress upon the underwriter that you know what you are doing, and more importantly that you know what they are doing. Whether you are an investor or broker you will hopefully be dealing with this bank many times in the future, and you want them to be happy when you call. They will be happy because they know that you are only going to bring them loans that they can do if all of the due diligence works out.

Things A Lender Might Say

Loans R US
Originally uploaded by GBowen

Monday, September 22, 2008

The Bailout, Real Estate, Mortgages, Economy and the Stock Market. Oh Boy!!!

What's My Prognosis Doctor?

Oh boy!!! Here we go again. We had a great reversal day in the stock market on Thursday which led into a great day on Friday on news of a mortgage market and financial institution bailout plan. This all combined with a massive short squeeze on the 799 financial stocks that the SEC instituted a short sale ban on.

We then had a Monday where Goldman and Morgan became banks, the dollar and bonds got routed, oil exploded (although the rise may have been technical) and apparently some people may have found ways around the short selling ban. The market gave back everything it had picked up on Friday.

What Does This Mean For Me (and you) and the Mortgage Market

Once the final form of the bailout plan is established ( hopefully sooner than later), what is it going to mean for me and you and the mortgage markets.

Good Question.

As a participant in the commercial mortgage and real estate markets, I want to know if it will mean that financial institutions that remain will once again be willing to lend. Once we know that they are willing to lend, the question will become who they are going to be willing to lend to.

If I have a buyer that wants to buy a mixed-use property that has a DSCR of 1.32, the buyer has a credit score of 660 and has the 6 months reserves that most lenders will require today, will they get a loan? Is the liquidity going to come back for a borrower like this, or will everyone remain in protection mode?

Some of the bridge loan lenders I know want to know if the exit strategies that they counted on a year ago, which then evaporated, will once again be plausible.

They have a borrower who borrowed on his income producing building at 50% LTV because he needed to make improvements but his credit score was less than stellar. The exit strategy was to get the credit score up and refinance into a conventional loan. The credit score is up, but will a lender now lend?

Then we have another borrower who has a construction loan to build a single family home, has a 650 score and an appraisal on the finished home that says she needs a 75% LTV. Can't find a lender.

This is a segment of the market that not everyone thinks about, but until the banks begin to lend they cannot close out good loans and make new ones. Worse they will have to begin to foreclose on borrowers who never thought that these expensive loans would be outstanding this long.

Enough of the Negativity!!!

A week or so ago I wrote a piece that said to put the doom and gloom behind us and focus on the task at hand which is a plan to drive business. I said that with all sincerity and still mean it today.

The problem is that the government decision making process and the news flow in general sometimes makes it hard to do. I think the thing to do is to stop watching the financial channels like CNBC, and stick with reruns of All In The Family and MASH.

Sports News

You know what I am going to do? Concentrate on my teams, the Mets and the Jets, to bring my head up and get me focused on the eye of the tiger. Went to Shea last night and left early to come home and watch the Jet game. Oh boy!!!

I think I'll just put CNBC back on.

What Does This Bailout Proposal Mean For The Mortgage Markets?

ATM Cards At Goldman and Free Toasters At Morgan Stanley?

Haven't seen news flow like this in a long, long time. Just when I thought that things were going to get back to normal, capitalism would be secure, banks would resume lending and I would continue to bank at my local S&L, another bombshell hit me. Goldman Sachs and Morgan Stanley, those two remaining, venerable investment banks, are now going to become commercial banks. Seems that they have to in order to survive.

As if the events of the past few months were not incredible enough, this is the topper. The people that work at these two firms do not want to be bankers. These firms don't want to be banks. They want to work for, and be, firms that take risks, and with those risks receive the commensurate reward. Looks like that game is over. Absolute survival is more important. Bring on the ATM cards and the toaster giveaways.

This story continues to be a moving target, and the parameters of this deal will more that likely change as we go forward and it becomes more and more politicized.

But How Would This Proposal Affect The Mortgage Markets?

For today, let's take a look at how all of this might affect the residential mortgage market in terms of new loans and for those that have existing loans.

If all goes according to plan and this proposal reverses the crisis of confidence that exists among the public and between banks, then the liquidity for commercial mortgage lending will hopefully resume as well.

Is this whole plan, should in be approved in some form that resembles the proposal, going to be a panacea for homeowners that are currently buried in their existing loans? Will this be the bailout for individuals that many hoped for and still many others did not want to see happen?

Let's take a look at an excellent piece that appeared at Bankrate.com, written by Holden Lewis.

What is the Treasury asking for?

The Treasury is asking for $700 billion to buy, own and sell mortgages and mortgage-backed securities. Under the Treasury's proposal, the Cabinet department would be able to buy these assets, sell them and use that money to buy more. The Treasury would have a two-year window to buy securities, beginning with the enactment of the law that would grant the Treasury these powers.

Will I still be able to get a mortgage?

It depends upon what type of loan you want.

Mortgages can be broken down into 3 types:

Conforming mortgages. Home loans for $417,000 or less that meet guidelines devised by Fannie Mae and Freddie Mac, the government-controlled housing finance giants. The guidelines require borrowers to have good or excellent credit histories, and to have some equity in their houses -- either by making a down payment (when buying a house) or by having a house that's worth more than the amount borrowed in a refinance.Mortgages are likely to remain available for qualified borrowers who get conforming loans, as long as they have sufficient equity. To qualify for conforming loans, borrowers might need to have equity of at least 5 percent or sometimes 10 percent or even 20 percent. The amount of necessary equity depends on where the home is, whether it's a condominium and other factors (such as credit history).People who need to refinance, but owe more than their houses are worth, will not be helped by the powers the Treasury seeks. The Treasury's proposal isn't designed to bail out upside-down homeowners.

Jumbo mortgages. Home loans of more than the conforming limit. The jumbo limit varies, depending on location. In some places, it's any mortgage of more than $417,000. In expensive markets such as Los Angeles, it's a loan of more than $729,750. In some places, the limit is in between.Lenders say jumbo loans, when available, have high rates and fees. This is a result of the credit crunch. If the Treasury's proposal goes through, jumbo loans might become more available and affordable. There's no guarantee of that, though.

Mortgages insured by the Federal Housing Administration. Loans for people who have so-so credit histories or who have down payments of only 3 percent or so. Those loans remain available for purchasers and for refinancers who can jump through multiple qualifying hoops.

Help! I've fallen behind on my mortgage and I can't get up! Is the Treasury going to help me?


The Treasury plan is a bailout for financial institutions, not for homeowners who are in danger of losing their homes in foreclosure.

However, Treasury Secretary Henry Paulson contends that the plan will help all homeowners in the long run.
"The biggest help we can give to the American people is to stabilize the financial system right now and prevent it from clogging up," Paulson said Sunday in an interview on ABC's "This Week With George Stephanopoulos."

Paulson added: "We've been working to help homeowners for a long time. ... It sure seems to me that, as we buy these mortgage-backed assets, we'll have more leverage in working on the kinds of programs we need to work on. The key question is we want to help those homeowners who want to stay in their home and have the financial ability to stay in their home."

So far, Paulson said, most foreclosures are from people who don't want to stay in their homes or never could afford their homes "as a result of irresponsible lending practices."

My house has been falling in value for more than two years. Will this action reverse that decline?

No, and it's not designed to. In fact, the sooner house prices hit bottom, the quicker the economy will recover from this credit crisis. Some homeowners might not want values to fall more, but lower prices eventually will make houses more affordable for first-time buyers, as well as for some homeowners who want to move up or move down.

What are the limits on the broad power that the Treasury is asking for?

The secretary of the Treasury would be required to submit reports to six congressional committees, twice yearly. The Treasury would have the power to award no-bid contracts without congressional review.

Furthermore, according to the proposal: "Decisions by the Secretary pursuant to the authority of this Act are non- reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."

That means no one could sue the Treasury for causing them economic harm. This ban on lawsuits and administrative actions will affect mortgage investors more directly than it will affect homeowners.

How does the Treasury's proposal differ from the Resolution Trust Corp., which the government set up to sell real estate after the savings-and-loan crisis of the 1980s?

The Resolution Trust Corp., or RTC:

Sold real estate.
Sold the real estate from failed financial institutions.

The Treasury:

Doesn't plan to sell real estate.
Its ultimate aim is to prevent financial institutions from failing.

The Treasury's plan is an entirely different animal from the RTC. People who refer to the Treasury's proposal as an "RTC-style" bailout are mis-characterizing the plan. You should be skeptical of what they say.

Instead of taking and selling real estate, the Treasury plans to buy and sell mortgage-backed securities and possibly mortgages themselves. The goal is to get bad mortgage-related debt off the books of financial institutions all over the world.

That, in turn, is supposed to increase the confidence that financial institutions have in one another so that they'll lend money among themselves. The result is supposed to be a stronger global financial system that freely lends to consumers and businesses.

Sunday, September 21, 2008

The Government Rescue Plan: What Are They Talking About?

What Is This Government Bailout All About?

I gotta be honest. I watch a ton of business news, read all of the trade publications and am still not 100% clear on the US Government bailout plan, and how it will affect the mortgage markets, housing markets and banks ability to resume lending.

It took MIT quants to put these products together, and maybe it will take another one to really explain to me how this is all going to work. I understand the premise: to take bad product off of the books of the banks that own them which will hopefully re-ignite other banks confidence to do business with them.

It's Supposed To Be A Good Thing!

Although it is the regulators and the congress that got us into this mess in the first place, I am going to be optimistic in the fact that they now have a handle on how to get us out of it. From reading and listening over the weekend, it is starting to sound as if approval is less of a sure thing than it looked like in the first place. Partisan bickering and the attempt to insert more than was originally proposed. Let's hope these people in Washington put us first...but it is an election year after all.

In any event, the following is the fact sheet of the Treasury proposal. Please let me know what you think.

Treasury fact sheet on proposed rescue plan

Proposed Treasury authority to purchase troubled assets

The Treasury Department has submitted legislation to the Congress requesting authority to purchase troubled assets from financial institutions in order to promote market stability, and help protect American families and the U.S. economy. This program is intended to fundamentally and comprehensively address the root cause of our financial system's stresses by removing distressed assets from the financial system. When the financial system works as it should, money and capital flow to and from households and businesses to pay for home loans, school loans and investments that create jobs. As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to significantly damage our financial system and our economy, undermining job creation and income growth. The following description reflects Treasury's proposal as of Saturday afternoon.

Scale and timing of asset purchases

Treasury will have authority to issue up to $700 billion of Treasury securities to finance the purchase of troubled assets. The purchases are intended to be residential and commercial mortgage-related assets, which may include mortgage-backed securities and whole loans. The Secretary will have the discretion, in consultation with the Chairman of the Federal Reserve, to purchase other assets, as deemed necessary to effectively stabilize financial markets. Removing troubled assets will begin to restore the strength of our financial system so it can again finance economic growth. The timing and scale of any purchases will be at the discretion of Treasury and its agents, subject to this total cap. The price of assets purchases will be established through market mechanisms where possible, such as reverse auctions. The dollar cap will be measured by the purchase price of the assets. The authority to purchase expires two years from date of enactment.

Asset and institutional eligibility for the program

To qualify for the program, assets must have been originated or issued on or before September 17, 2008. Participating financial institutions must have significant operations in the U.S., unless the Secretary makes a determination, in consultation with the Chairman of the Federal Reserve, that broader eligibility is necessary to effectively stabilize financial markets.
Management and disposition of the assets
The assets will be managed by private asset managers at the direction of Treasury to meet program objectives. Treasury will have full discretion over the management of the assets as well as the exercise of any rights received in connection with the purchase of the assets. Treasury may sell the assets at its discretion or may hold assets to maturity. Cash received from liquidating the assets, including any additional returns, will be returned to Treasury's general fund for the benefit of American taxpayers.


Funding for the program will be provided directly by Treasury from its general fund. Borrowing in support of this program will be subject to the debt limit, which will be increased by $700 billion accordingly. As with other Treasury borrowing, information on any borrowing related to this program will be publicly reported at the end of the following day in the Daily Treasury Statement.


Within three months of the first asset purchases under the program, and semi-annually thereafter, Treasury will provide the appropriate Congressional committees with regular updates on the program.

Friday, September 19, 2008

The Mortgage Crisis: A Serious Story Viewed In A Very Funny Way

Some Quick Current Events

In a week of unprecedented developments, today brings us some more.

The SEC has banned the short selling of 800 financial stocks for a couple of weeks. Not an up-tick rule or needing to be able to borrow and deliver the stock, but a ban. Today will be a short squeeze rally of epic proportions.

There is a proposal to institute insurance on $1 in and $1 out money market funds to avoid the run that was beginning to appear yesterday in this multi-trillion dollar market.

There is a proposal to set up a Resolution Trust like fund to buy troubled mortgage assets.

To The Funny Stuff

The following cartoon depicts in an extremely funny way, the sub-prime mortgage crisis as it might have happened. It takes you from the original making of the mortgage, to the investment banks that packaged and sold them, to the accountants and ratings agencies that blessed them to the investor that bought them. Funny, sad, scary and to a certain extent true.

The series has been around for a while, but with the epic developments this morning concerning a Resolution Trust type fund, a ban on short selling of financial stocks and government insurance for money market funds, now is a good time to take another look at it.

Warning: The comic does include some words that some might find objectionable, so if you think you are one of them email me and I will give the gist.

The link to view the comic frame by frame is http://www.flickr.com/photos/70898289@N00/sets/72157603960390184/ .

To view this as a slide show the link is http://www.flickr.com/photos/70898289@N00/sets/72157603960390184/show/ .

Thanks to flickr.com and gokmop for making it available.

Wednesday, September 17, 2008

Analyze a Commercial Mortgage Loan Plus The Financial Markets

See Me On EzineArticles.com

If you missed the presentation on the process and tools that you need to analyze a commercial mortgage loan on income producing property, please visit http://ezinearticles.com/?expert=Michael_Haltman , and you will be able to read my 4 part series on how to get it done.

In a day or two, you will also be able to read my article, Underwriting Through The Eyes Of An Underwriter, which will teach you the way that you need to deal with underwriters, once the current mess plays out and banks are once again looking to lend.

Da Comrade

When I woke up last week I was pretty sure that I was operating under a capitalist system which says that those that can survive will, and those that can't won't. Darwin's survival of the fittest I think they call it. Not that this is a good thing for any of the players involved on the non-survival side, but the way that it has always worked for me in my life is that I make decisions, take risks if I determine that they will give me the appropriate reward, and pay the price if I am wrong. My neighbor doesn't come in and reimburse me.

The Federal Reserve and Treasury have basically decided which firms will continue on and which ones will not. Bear Stearns was deemed to big to fail, Lehman Brothers wasn't and AIG and Merrill Lynch were. Lehman Brothers most probably could have survived, but was not allowed the time to do so. Merrill may not have but was provided a deal.

At the end of the day it is the employees and common and preferred shareholders that paid the price for the risk and greed of those at the top. Let's hope that the people who have been at the wheel while we got into this mess, will suddenly have the wisdom to get us out of it.

SEC Short Selling Folly

Back months ago the SEC reinstated the rule on a temporary basis that in order to short a stock you needed to be able to borrow and deliver it in an effort to help stem the fall of the financial stocks. It worked as financial stocks staged a strong rally. In the infinite wisdom of the SEC the rule was allowed to expire and financial stocks went back on their downward spiral.

There are certainly a lot of problems with these financial firms that have caused their stock prices to drop, a situation which these firms are completely responsible for. But the "bear raids" that are perpetrated by hedge funds and other institutional investors that drive the stocks down in part because of the rules of not having to borrow the stock, as well as the absence of an uptick rule could have been stemmed by an SEC chairman that noticed the results achieved the first time.

Oh yeah, the rule of having to borrow stock to be able to short it is going back into effect tomorrow. I think that is too little to late. Kind of like trying to put out a warehouse fire by spitting on it.

Time To Start Moving Forward? Back To Basics With Marketing


The meltdown in the financial markets was averted for now as the Federal Government stepped in with an $85 billion bridge loan to AIG. What this shows us after the bailout of Bear Stearns, the willingness to let Lehman Brothers die and the bailout yesterday is that the government has made it clear that they will get involved if in its' estimation a failure would cause catastrophic market results.

While people argue back and forth as to the propriety of them doing this, it will hopefully start the process of healing in the credit markets and allow banks to get back into the business of lending.

As a news junkie I have spent a great deal of time watching how all of this has played out, and the general consensus on the deal is that there is no consensus. Some think the deal should not have been done, some that it should have. Some think there are more shoes to drop and some think we are out of the woods. Definitely a horse race.

The bottom line is that there is none, and we all just have to wait and see. What we do know is that the heads of these companies do not know what is going on with their own businesses, they are terrible crisis managers, and that the government is trying to have our backs and will hopefully succeed.

Back To Basics: Marketing (From http://mymortgagecommunity.com)

The Components of a Marketing Plan

Here are the key components of a marketing plan:

Goals - You cannot plan without goals to guide your actions. Success will not come to those who do not define success because there will be no recognition of what success means.

Actions - Each plan should have four to six separate and distinct actions which are designed to provide diversity. Each action should be responsible for at least 10 percent of your total production goal.

Tools - Your actions will always be using a particular tool(s) to reach the target group. Using more than one tool promotes diversification.

Targets - Each action has one or more specific targets. The identification of targets also provides the opportunity to diversify.
An organizational chart of the company and perhaps sub-charts of major divisions.

Frequency - Each action will be performed at regular intervals. This provides the marketing plan with consistency.

Synergism - The actions must be set up to work together in a way which will magnify the effects of your marketing efforts. In a marketing plan, two-plus-two must equal eight.

Evaluation - The existence of goals makes it possible to consistently evaluate your efforts. If your actions are not moving you closer to your objectives, then an adjustment of any one or more plan components will be warranted

Tuesday, September 16, 2008

Golden Parachutes: Executives Fiddle While Employees, Shareholders and The Economy Get Burned!

What is the deal with Golden Parachutes?

I sit fixated in front of my T.V. and watch as companies go bankrupt, companies appear to be on the edge of bankruptcy and the financial system creaks under the strain.

I see tens of thousands of shareholders lose their investments, 401K's depleted and employees both young and old losing their jobs, retirements and potentially their futures.

Executives Fiddle while employees, shareholders and the economy get burned!

The most incredible thing during this crisis, is that many if not most of the top executives whose feet you can lay much of this at, will be leaving their positions with lucrative payout plans or golden parachutes.

Don't get me wrong, they also are losing money on their investments in their companies stock which we all feel bad about (not that bad). But the engineers of this mess will in many cases also be coming out with paydays based on their failures that most of us can only dream about.

The Wall Of Shame: Let's look at a few examples

2007: Over 2,200,000 foreclosures reported
2007: 12 months of declining home prices

Angelo Mozilo — Countrywide Financial Corp.: It is never fun showing up for work if you’ve been labeled as the man who is responsible for a national crisis. But instead of hiding away in an undisclosed location while his public-relations people apologized, Angelo Mozilo — former CEO of Countrywide Financial — showed up and faced the music with class. As head of one of the nation’s leading mortgage companies, Mozilo was at the forefront of the subprime-mortgage bubble that began to burst in 2007. Mozilo turned his back on $37.5 million in severance pay and perks, as well as a $400,000 annual salary. He instead opted to testify on the whole mess before the Congressional Committee on Oversight and Government Reform in March 2008. After the housing-loan episode, Countrywide Financial agreed to be bought by Bank of America Corp. to the tune of $4.1 billion. Don’t go feeling sorry for our hero though: Mozilo's bare-bones retirement package, which he received for his years with the company, totaled around $23.8 million.

Stanley O'Neal — Merrill Lynch & Co. Inc.: Stanley O’Neal retired with a solid $161.5 million in 2007. His departure was influenced by the company’s loss of $2.3 billion in Q3 of that year, followed closely by a pesky $8.4 million government charge for botching credit and mortgage investments after the U.S.'s subprime mortgage crisis.

Charles Prince — Citigroup Inc.: Charles Prince retired with a $42 million package in 2007, contingent on the company’s stock performance. Add this to his 1.61 million shares of stock, which are currently worth about $53 million, and his nest seems to be fairly feathered.
*Information from http://www.hrworld.com/features/15-astonishing-bonuses-cashouts-061708/

Monday, September 15, 2008

Enough Of All Of This Damn Doom and Gloom

Enough Already!

OK. I think that we have established that there are some big problems out there, and today is going to be very interesting. But you know what? At the end of the day what happens to Lehman and AIG and everyone else does not in actuality put food on my table and send my kids to college.

We will revisit the situation of course since it is going to be extremely dynamic and course setting for our financial system. For now though, lets get back to the task at hand which is the business that we are in, no matter what that business is. In my case it is the commercial mortgage market and commercial mortgage training, but for you it could be anything else.

Focus, Motivation and Direction

These 3 terms are critical on the path to success. It is hard to have one without the other. A friend of mine, David Bush, runs a company called MyMortgageCommunity.com, and is a great blogger as well. The following comes from his Originator Weblog (http://mymortgagecommunity.typepad.com/originatorweblog/) , and is a fantastic piece no matter what you are involved in:

What's your motivating message?

To achieve our financial and career goals and to truly live our dreams, we must have a plan to succeed and we must have a motivating message. Life doesn't always go according to plan and sometimes we veer off the intended course for one reason or another. Therefore, we need to have a motto, message or mission in mind that we can repeat out loud that will help us find our way through difficult times.

A former NAVY SEALS Trainer was once asked in front of a large audience what it was that they did inside their SEALS training that prepared this group of special forces officers to endure such dire circumstances in battle without losing their focus on the job at hand and the trainer responded "We teach them to NEVER QUIT". The audience wouldn't accept his answer. "Come on you must train them using unique psychological techniques or have some special program to train them to endure such things as torture and other near death circumstances" and the NAVY SEALS trainer responded quite firmly "We train them to NEVER QUIT".

The reason why the NAVY SEALS are so highly regarded in their field is because they NEVER QUIT. They have an extremely high success rate of accomplishing goals because of this act of self-discipline. Now let me ask you a question.... What if you decided not to quit on your plans, dreams and goals? Where would you go in the world today? I imagine you'd go as far as you wanted to go.

What's Your Motivating Message?

What is the message that you repeat to yourself when you're tempted to veer off the course of success? Each of us needs a motivating message that brings back our focus and motivation to stay the course to help us achieve our goals and dreams. Let me share a few examples with you....

"My long term commitment is greater than my immediate desire!""I won't quit""I can do this""Failure is not an option""I was created for this moment...I will stay the course!"
By saying a statement like this when you're tempted to give up and/or veer off from your plan, you'll be energized and motivated to accomplish the things you've always dreamed about and you'll live the life you were created to live!

Life in the mortgage industry is tough right now and it will be tougher for those who lack a plan and a motivating message. Now it's up to you to decide how you will handle the difficulties of the day. Will you quit? That's an option. But for those who stay the course, create a plan and memorize a motivating message; there will be riches and opportunity that awaits you.

Sunday, September 14, 2008

Market Events: Pick Your Poison!

I am not happy today

The tone of my blog today is not one of happiness and joy unfortunately. I have spent the weekend watching and listening to the events that are unfolding somewhere down in lower New York City. Another investment bank teeters on the edge of going out of business after being in business since the 1800's. The Fed, the Treasury and the heads of all the other major financial institutions are involved in the talks. These are all of the foxes that are guarding the publics henhouse. Why is this happening, and for those of us in the mortgage and real estate market, and any other market, what does it all mean?

What is going on with wall street and the world?

Lehman Brothers, AIG, Merrill Lynch, global financial markets, oil prices, unemployment, inflation, world conflict, crisis of confidence etc.

I don't want to be a pessimist, but I am certainly a realist. As I wrote previously we are now in a predicament that has been brought on by the greed of companies that made an absolute fortune pedaling products that were not what people thought that they were. Sub prime, Alt-A and others.

Those that bought and sold these now radioactive investments will be OK. They made a great deal of money and more likely than not have some nice golden parachutes that will leave them in good shape. Knowing how wall street works, these guys will probably catch on somewhere else after the dust settles a little bit.

The big guys will be alright

They will not be as good as they were when Bear Stearns was at $150 and Lehman at $80 and so on down the line. I heard a statistic that the employees of Lehman are down about $10 billion due to the drop in the stock. You have to feel for the workers that are not rich and that had a great deal of their 401k money tied up in company stock.

But the big guys that guide the ship and call the shots are probably better off than those of us that are rank and file participants in industries like commercial real estate, real estate, the mortgage markets, retail, restaurants and pretty much any business that relies on the confidence of the individual consumer to go out and buy.

Attitude Readjustment

You know what though? Life is to short to waste my time thinking such negative thoughts. It is definitely not good for my health. I know that a decision pretty much has to be made before the Asian markets open so I am going to hope for the best. The Lehman issue will be resolved in the best way possible, AIG will not have problems and no other shoes will drop going forward. I am not going to be a realist anymore, but I am going to be a blind optimist.

I think that will be better for me. We will watch and wait.

Saturday, September 13, 2008

Network, Network, Network

I wanted to share some websites that if you are serious about mortgages, real estate and networking, you should join.

Each has its' own benefits, but all provide the opportunity to meet people with similar interests, as well as those that can answer questions on just about any topic (LinkedIn in particular).

All provide the opportunity to educate yourself in a variety of areas.

If you are already members please send me an invitation to connect, if not then use my links to join and make me your 1st connection.

Remember that it isn't always what you know, but can you find sources to tell you what you don't know.

LinkedIn: http://www.linkedin.com/in/commercialmortgageandtraining

ActiveRain: http://activerain.com/action/referrals/halthouse1

RealTown: http://www.realtown.com/members/halthouse1

Twitter: http://twitter.com/Halthouse1

The Commercial Mortgage/Real Estate Hotline: http://commercialmortgagehotline.blogspot.com

WannaNetwork: http://www.wannanetwork.com/halthouse1

StumbleUpon: http://halthouse1.stumbleupon.com/

Friday, September 12, 2008

Here We Go Again!!! The Bell Is Tolling For Lehman and AIG

I hate to use this platform that is supposed to be used to discuss the commercial mortgage and real estate markets to discuss specific companies and the stock market, but as a former trader and avid stock market observer, the two are in some way intertwined. Maybe in a large way.

What's Going On?

We have had the recent federal takeover of Fannie Mae and Freddie Mac, and now we have the imminent potential demise or takeover of Lehman Brothers, the apparent serious need for a capital infusion at AIG, and the next potential shoe to drop for our institutions in the Alt-A and commercial real estate markets.

We have the Federal Reserve seeming to draw a line in the sand and say that they are not going to back any more transactions.

What is all of this going to do to the capital markets, to banks ability to lend, to individuals ability to borrow? Stay tuned because it is said that Lehman and perhaps AIG want or need to get something done before the Asian markets open on Monday. It could be a very interesting day.

Here is some commentary on the Lehman situation:

Breaking Commentary: Lehman on the Chopping Block

By Brad Sorensen, Director of Sector Research, Schwab Center for Financial Research

In what is starting to become a far-too-regular occurrence, the market is waiting to hear how the expected sale of Lehman Brothers (LEH) turns out this weekend. There are reports that the
Treasury Department and the Federal Reserve are trying to help bring the appropriate parties
together but are likely resistant to backing any deal with government money or guarantees.

However, a precedent of sorts has been set with the backing of $29 billion in debt by the
government in the deal between JP Morgan and Bear Stearns. Therefore, any potential buyer of
Lehman may balk at proceeding without at least some assistance from Federal authorities.
This could prove to be an important weekend in the development and resolution of the financial
crisis as we could see if the Feds are willing to draw a line in the sand or if they determine they
have no choice but to step in again. If they were to allow the various private-market parties work this out on their own, it could indicate some increased confidence that the financial markets are stabilized to the point that they can handle at least some disruption in the way they do business.

However, if the Feds feel they have no choice but to step in and their hand is forced, it could set
up further expectations of government bailouts going forward. We tend to believe it’s important
for private market to take care of these matters and would likely feel better about the ending of
the current crisis if we are able to get through this Lehman mess without substantial government intervention.

The Lehman situation differs from both of the previous recent instances of government
intervention in relatively substantial ways. First, there really is no comparison between this
situation and the Fannie Mae (FNM) and Freddie Mac (FRE) takeovers. They were government
sponsored and controlled such a large share of the mortgage market that a collapse of either firm
was unthinkable and, we believe, would have undoubtedly caused catastrophic harm to global
financial markets.

As for the Bear Stearns situation, there are some important differences, although it’s not quite as
clear as the GSE situation. That Lehman situation deteriorated in an almost unbelievably rapid
way, surprising the markets both here and around the globe as the financial tentacles of Bear
reportedly spread throughout the financial system to a greater extent than does Lehman.
Additionally, at that time, Bear had no ability to tap the Fed window for loans, limiting their ability to gain additional liquidity, an option now available to Lehman.

Finally, the deterioration of Lehman has been in process for a relatively extended period, taking
away the shock factor that was prevalent during the Bear Stearns crisis. As a result, we think
now is the time for authorities to move such situations back into the private market and act, at
most, as a facilitator rather than an active participant.

Also, it must be noted that, while it appears Lehman is desperate to get a deal finished before the Asian markets open on Sunday evening, there are no assurances that any deal will be able to be completed, especially if the government involvement, as currently expected, is minimal. We will continue to watch this situation carefully as the details of any completed deal—or no deal at all— could be crucial in determining the path of the current financial crisis.

Stay tuned.

Thursday, September 11, 2008

Where Were You?

It sounds very cliche, but I am sitting at my desk and my mind wanders to where I was on September 11, 2001. Also cliche is that this event is compared to where people remember that they were on the day that Pearl Harbor was attacked or the day that John Kennedy was assassinated.

Be Vigilant, Stay Strong

This leads me to think of how we as Americans need to remember this event and not let it fade in our minds as we are known to do. We need to continue to focus on the fact that there are people out there that want to do us harm and that have a great deal of patience. The fact that nothing has happened recently should not cause us to lower our guard and assume that we are completely safe and in the clear. We need to stay vigilant and stay strong.

Where I was

On that morning I was sitting in my office with the TV turned to CNBC as it always was. Sitting next to me was a man about 65 named Dick. A good guy who also happened to have a severe heart condition. When the first plane hit it looked like a toy plane had gone off course and that it hadn't done that much damage. Dick's son worked in the other tower, and he called his son who reassured him that everything was alright.

Extremely relieved, Dick wandered out to get coffee. Before he got back the second plane had hit and we all realized that the unbelievable had happened. Dick's son didn't make it that day, and Dick passed away I think about a year later.

Be vigilant and stay strong.

Wednesday, September 10, 2008

What Goes Up Must Come Dowm (and visa versa)

"Those who cannot remember the past are condemned to repeat it."
George Santayana

Cycles: Seen them before, we'll see them again

We have been through the cycles of the real estate market before , and we will go through them again. Right? We have seen the rise and the fall of the stock market many times, gold, oil ,copper, coal and any number of other markets and will see them again. Right?

When I trained traders on how to handle markets, the lesson was that nothing goes straight up, and nothing goes straight down, but we move and pull back, move and pull back. Everything is cyclical. Right? We have seen the meteoric rise of real estate, and at least in the residential markets a sizable decline. By my reckoning we are now due for a rise. Is that right?

Past Cycles and Fear

We saw it in the late 1980's and early 1990's, when the market pulled back, provided a buying opportunity, and then took off again. Lesson two that I would teach is that you would need to be a buyer when the lump in the pit of your stomach made it the hardest. When fear was the greatest and you were rushing in to buy as the sellers were running past you in the opposite direction. You need to buy when no one else is willing to buy. Is that where we are now?

The Present and The Future

There are some differences this time, primarily that it is not the asset itself that is the problem, but the financing mechanism. In the other real estate recessions we had supply and demand problems: that is to many properties and not enough buyers (although in some geographic areas like Florida and Las Vegas they have both problems). Now what we have is a crisis in the mortgage markets, that have caused even the most credit worthy borrowers to have an extremely diifcult time getting a loan.

We also now have huge institutional investors sitting on the sidelines with a ton of cash at the ready to jump in and buy, when they determine that the time is right. That is a good thing. We are in an extremely news driven environment, where at least at this point in time the news could not be darker. We have financial institutions like Washington Mutual and Lehman Brothers among what will probably be others that are trading as if they appear to be the next in line for a Federal bailout. Is this that time when the bold will jump in? Some may, while other may wait.

The smart money will be buyers, at a time when hindsight says it was the perfect time. Others will get in after they are sure it was a market bottom, while others will be last to the new party and be left holding the bag in this new cycle.

The Moral of the Story

One thing is for certain. We are in the downside of the cycle, that will ultimately bottom at some point, the news cycle will turn suddenly bright, and many "smart" and "bold" people will make a great deal of money. When that is going to be is for smarter minds than me to determine, but one lesson from the past is true.

Real estate is not only location, location, location, but now more than ever it is going to be timing, timing, timing. And "those that cannot remember the past are destined to repeat it."

Monday, September 8, 2008

Politics: Whose Country Is It Anyway?

For anyone that watches ESPN's Jim Rome, this is my burn. I am going to talk politics here, but I am not going to give away my party preference. It is not necessary. This is a commentary against both Democrats and Republicans, and the way that the people's business is conducted.

The reality, unfortunately highlighted by Freddie Mac and Fannie Mae, is that our business is always secondary to the business at hand. That business is the never ending cycle of re-election. The tough decisions are never addressed until we reach crisis mode. Once that point is reached, it turns into a game of partisan finger pointing leading to a decision made out of desperation.

It has been known for some time that there were problems brewing. Accounting irregularities were announced on a fairly regular basis. Fortunately for these two companies, they had a strong and extremely effective lobbying and political contributions team that kept both parties at bay.

By doing nothing to address the problems, these political contributions remained safe, and the end result is what it usually is. You and I are going to bail it all out, there will be a couple of fall guys with beautiful golden parachutes, and no one in government will be held responsible.

Let's hope that this government takeover will relieve the situation, rekindle mortgage liquidity, save the banks and brokers and stabilize housing prices. Without costing the taxpayers a fortune. Watching trading today in some financials leads me to believe there may still be some issues. We'll all keep our fingers crossed on this one.

What could our next big problem be that our politicians will have to "deal" with after this one is "resolved"? Cast a glance over to the partisan bickering that is going on with drilling for oil and our foreign dependency, and get a front row seat to the self serving rhetoric by people who say that they understand the pain at the pump that you and I are going through, but who I suspect have absolutely no idea. It could be a long cold winter.

Sunday, September 7, 2008

Fnm and Fre Takeover: Happy days are here again?

The need for the events of yesterday morning to re-open the mortgage markets for home purchases and refinance was discussed in this blog on August 27th.

This morning an announcement was made by the Secretary Of The Treasury that Fannie Mae and Freddie Mac were being put into conservatorship because they are not capable of operating in a safe and productive manner on their own. The "takeover" of these agencies that have previously acted with an implicit government guarantee will now provide them with the explicit backing of the U.S. Government. This is a huge and unprecedented deal.

It is hoped that these critically important conduits for the mortgage industry can now resume providing the liquidity to the markets that is their lifeblood. Are happy days here again? This development certainly goes a long way towards helping to bring them back. We are not out of the woods, but will hopefully soon be able to see the light at the end of the tunnel.

While I am not sure that I would want to be an owner of Fnm or Fre common stock right now, this takeover should allow mortgage rates to begin to reflect the drop in interest rates that they have not to date. The commentary below gives a full description of what has taken place.

Commentary Provided By Liz Ann Sonders, Senior Vice President, Chief Investment Strategist, Charles Schwab & Co., Inc.

In a bold move to avert potential financial disaster, the U.S. federal government is taking control over the government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. In a just-concluded press conference, Treasury Secretary Henry Paulson said the actions were being taken because the GSEs “are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe. This turmoil would directly and negatively impact household wealth; from family budgets, to home values, to savings for college and retirement. A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance. And a failure would be harmful to economic growth and job creation.”

It comes after the biggest leap in mortgage defaults and delinquencies in over 30 years threatened to bring down the GSEs, which own or guarantee nearly half of the $12 trillion in U.S. home loans. Losses at the mortgage giants began growing late last year with the companies recording nearly $15 billion in combined net losses, eating into their capital. Paulson noted: Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing.”

The plan is to put Fannie and Freddie into conservatorship, reflecting the companies’ inability to “operate safely and soundly and fulfill their critical public mission without significant action to address our concerns,” said Federal Housing Finance Agency (FHFA) Director James Lockhart. The government plans to make periodic injections of funds by buying convertible preferred shares or warrants in the companies as needed, avoiding large up-front taxpayer costs. The Treasury will purchase up to $100 billion of senior-preferred stock in each company as needed to maintain a positive net worth. It will also provide secured short-term funding to the GSEs and 12 federal home-loan banks, and purchase mortgage-backed debt in the open market in order “to broaden access to mortgage funding for current and prospective homeowners.”

It is undoubtedly the biggest step to date in the Bush administration’s efforts to tackle the credit crisis that has resulted in more than $500 billion in writedowns for lenders, eclipsing the Fed-supported financing to prevent Bear Stearns from collapsing. About this latest GSE deal, House Financial Services Committee Chairman Barney Frank said: “This is no bailout, particularly for the shareholders.” The federal government “will be senior to all shareholders, preferred and common.” That said, the Federal Reserve issued a statement today saying that “a limited number of smaller institutions” have significant holdings of common or preferred stock shares in Fannie and Freddie, and that regulators were “prepared to work with these institutions to develop capital-restoration plans.” The two companies had about $36 billion in preferred shares outstanding as of June 30, according to the Securities and Exchange Commission.

Over the weekend, Paulson met with Federal Reserve Chairman Ben Bernanke, Lockhart, Fannie Mae CEO Daniel Mudd and Freddie Mac CEO Richard Syron to discuss the plan. Bernanke participated because the Federal Reserve was given a consultative role in overseeing the GSEs’ capital under legislation approved in July. The GSEs have operated as private shareholder-owned corporations for nearly 40 years.

Morgan Stanley was recently hired to analyze the companies’ financial situation (Bank of America also consulted) and they concluded that both companies (though to a greater degree with Freddie) have been relying on accounting maneuvers to meet their capital requirements. Though it wasn’t illegal, the maneuvers overstated the value of their actual reserves.

The common and preferred stockholders will get the short-end of the stick on the deal while the CEOs of both companies will be departing, after a transition period during which they will consult on the process. Herb Allison, formerly of TIAA-Cref will take over as Fannie’s new CEO, while David Moffett, formerly of U.S. Bancorp will take the reigns at Freddie.

The FHFA will operate the conservatorship, aiming to “preserve and conserve” the companies’ assets and property and put them “in a sound and solvent condition,” according to the Treasury’s fact sheet. There is “no exact time frame” for when the conservatorship will end, the statement said. The decision comes after weeks of comments by Paulson saying he was not likely to use taxpayer money to support the companies.

What Do You Mean The Deal Won't Close This Week (or at all)?

A commercial property presents itself to you for purchase. In this scenario, you can be either the buyer or a mortgage broker. It is a mixed-use property, which we know is commercial on the bottom and residential up. In this case it is a 3 over 1, or 3 residential apartments over a retail store.

The borrower has a 720 credit score, and based on the net operatiing income, the loan desired and the principal and interest payments at the interest rate you think you will get, the loan will have a debt service coverage ratio of 1.32X. The building has curb appeal which you know is critical to your lender, and based on the NOI and cap rate for the area the building is in, you have a pretty good idea of where the appraisal is going to come. The seller is motivated to sell and you are reasonably sure that there will not be any title problems.

Remember that in one of our 1st blogs we discussed that after you determine the viability of a loan, there are things that can come up down the road once the due dilligence process begins. For today we are going to look at something that comes up once and a while.

We have a beautiful property that the lender likes, a great borrower and great debt service coverage.

Unfortunately, when we get our title report back, we find out that the certificate of occupancy reads that we don't have a 3 over 1. What we really have is a 2 over 1. Now instead of 3 apartments worth of income, what we have are 2 apartments worth of income. Instead of a DSCR of 1.32X, what we have now is a DSCR of 1.1X and a loan that won't close, at least now. If zoning can accomodate it, the current owner can file for a new C of O. If not, then what the owner has is a building that is worth less than they thought it was because the income is going to be less than they thought it was.

Ultimately the deal may get done, but not on the timeline that anyone thought. As they say in the gambling game (legal of course), and it also applies to commercial deals, the only locks are on doors. Be confident in your deals because the details that you know are good, but always be prepared for a wrench in the works that you have to overcome.

Some deals are a slam dunk where everything goes smoothly, but certainly not all.

Thursday, September 4, 2008

I Need Tools And I Need Them Now!!!!

Optimization, key words, Google Search, SEO are all terms that we have heard used in the past to describe the tools that we need to use in order to maximize our reach and penetration for our websites and businesses. I use them myself and find them to be invaluable.

But, what tools do I use in my everyday business to maximize my reach and optimize my business. MBO is mortgage business optimization (this is necessary for industry participants as well as investors), and I use all of the tools at my disposal. Let's take a look at some key websites that allows you to get out there and mingle at parties around the country, and not just the ones in your town.

While it is true that real estate tends to be local, you never know what opportunities you will find and who you will meet by putting yourself out there. This goes for industry professionals as well as investors or those who just have an interest. The ones that I am going to mention cost nothing, although there are some excellent organizations that are well worth the price that they charge. These are the three top ones that I use, although there are many more.

LinkedIn (http://www.linkedin.com/in/commercialmortgageandtraining ): This networking website allows you to reconnect with people from your personal and business past, but more importantly increases your potential network through the connections that your own connections have. When you are in a room speaking to a group of people, it is not only them that you are speaking to. It is the 100 other people that they know as well. This is the concept behind LinkedIn, and I would highly recommend it. It also provides you an outlet to ask questions on any topics you need answers to, and the people with that expertise will answer. I had a question about computer IP addresses, and got about 20 responses. Definitely check this out. You can click on the logo on this website and make me your first connection.

ActiveRain (http://activerain.com/action/referrals/halthouse1 ): ActiveRain is a free online community for real estate professionals designed to help you promote and grow their business. There is also an area called Localism which is for investors. There are specific groups, one of which at least that will be of great help.

RealTown (http://www.realtown.com/): Another fantastic resource for reaching out and meeting people, but also for gaining information and knowledge on areas within the real estate markets that you would like to learn, or that you would like to learn more about.

If anyone has other groups that they feel would be of benefit to the readers of The Commercial Mortgage/Real Estate Hotline, please share them.

Wednesday, September 3, 2008

Commercial Appraisals: How Come So Much?

Once a loan scenario has been submitted and determined to have a high probability of getting funded, the LOI is issued and the potential borrower signs and returns it. It is now time to move on to the next step, which is the underwriting of the loan. A key aspect of this will be the appraisal of the property, typically done by an appraiser on the lenders approved list (do not have an appraisal done until the likely lender instructs you to do so). It will also typically be the lender that chooses the one that they want to use, not the borrower or mortgage broker if one is involved.

The next question that will typically be asked is, how come this appraisal costs so much? I had my house appraised and it was a fraction of this.

Commercial appraisals usually cost anywhere from $1,500 and up depending on certain factors. Appraisers that are on a banks approved list will typically have an MAI designation, representing years of education and experience. A residential appraisal will be 2 or 3 pages of analysis, plus pictures and boilerplate, a commercial appraisal runs 60-100 pages and has considerable analysis of sales comparables, reproduction costs, market rents, and economic and geographic research of the general area. An appraiser, when determining value, will use three approaches, cost, sales comparison and income:

Cost Approach - The current cost of replacing a property less losses in value from deterioration and functional and economic obsolescence (accrued depreciation).

Sales Comparison Approach - The value indicated by recent sales of comparable properties in the marketplace.

Income Capitalization Approach - The market value that the property's net earning power will support based upon a capitalization of net income, stabilization, and residual equity buildup.

Because, as we learned in the analysis of commercial property, it is the income that the property earns on the bottom line that is one of the critical factors in determining value, it is this valuation approach that holds the most credence.

Since the commercial property can be less liquid than residential, greater care and analysis of the property is made in the event the lender must take over managing the property, foreclose and sell it.

Is There Hope For The CMBS Market Going Forward?

Once upon a time, commercial mortgage lending as a conduit was a thriving and vibrant market, providing fantastic liquidity for financing commercial purchases and refinances. Once upon a time you would have "strict" underwriting criteria that needed to be met in order to make sure that the loans that you were trying to make would conform to the mold and be able to be packaged with like loans and sold to the hungry appetites in the Wall Street and institutional crowd. Those days are long gone, and portfolio lending is more of the rule.

That said, is there ANY hope that this market, this pariah, may one day make a comeback in some form. Politically speaking, when you look at the meltdown on Wall Street there is probably no single culprit like the residential CMO's that were created from mortgages that were made to people that had no business getting them. With the bad taste that people have in their mouths, I ask again, is there a place for this market in the future?

The Fitch Rating Agency recently did an analysis of CMBS classes, and found that even under severe conditions of recession no losses in AAA tranches were expected. Of course lower rated classes would certainly not fair as well. Moody's, during the first half of 2008 had a majority of it's decisions ratings affirmations with upgrades outnumbering downgrades.

CAVEAT: It was these ratings agencies that were asleep at the wheel prior to the crisis with ratings in place that perhaps should not have been. Reactive instead of proactive. Therefore these ratings moves need to be taken with a grain of salt.

The point is, however, there is a place for this market within the commercial mortgage market, and given the proper oversight, stringent underwriting standards, reduction of greed and transparency the market should one day come back.

Let's hope that it does.