OUTLOOK 2010

I wish everyone a very happy and successful New Year. I am excited about the potential for some very juicy acquisition opportunities coming our way in the residential real estate markets.

Here are my top 3 factors contributing to the BUY opportunity in 2010.

1. Short Sales will become even more opportunistic with the prospects of actually closing deals better than ever as Banks choose the path of a kinder, gentler approach with their troubled borrowers.
2. (2) major contributing factors to increased foreclosure activity will be Unemployment and a large volume of  “reset” or “recast” activity on existing ARM and Pay Option mortgages.
3. Feds squeezing banks by upping the ante on capital reserves will push more REO inventory out onto the marketplace.

Our portfolio for Market Advisors Real Estate Fund LP  is anticipating acquisitions with upwards of 18% cash on cash ROI. For January I am releasing only 20 units to Investors at $25,000 each. These won’t last long, reserve yours today. You may contact me by e-mail john@mymarketadvisors.com

Thank You Mr. Obama! Both Freddie Mac and Fannie Mae Receive an Early Christmas!

Last Thursday the Treasury Department and the Administration announced that they would back both of these beleaguered government sponsored agencies for the next three years no matter how big their losses.  Wow, so our Government stands ready to take over all segments of the economy that are in trouble because of previous government intervention!  Corbett Daly reported on this announcement in Reuters last Thursday December 24th – an early Christmas present for sure.  It makes you wonder if the $200 Billion line of credit already established for these two agencies will be enough.  They have already used over $111 Billion of that and according to Corbett each company currently holds assets in the high $700 Billion range.  Here’s how Corbett describes the function of these two agencies:  Fannie Mae and Freddie Mac are congressionally chartered companies that buy up mortgages from banks and other originators to keep mortgage markets liquid.  Some of the debt is repackaged as securities and sold off to investors, and the government has been buying an increasing share. That’s where most of the $111 Billion has gone so far.

The bottom line is that housing in this country still needs a life-line and will this new policy be enough to provide it?  This reprieve was designed in part to avoid putting an added strain on the housing sector as the Treasury and Federal Reserve wrap up programs to purchase mortgage-related debt.  Will it work?  Who knows and as long as government keeps trying to manipulate recovery we might not ever know.

And right on the heals of this great news both Freddie Mac and Fannie Mae  announced $6 Million and $4 Million bonuses respectively for their illustrious CEO’s!  So, how was your Christmas?  I know I’m being a bit sarcastic here but can you blame me?  I suggest you hang onto your hat because we are in for a wild ride in 2010.  Check out all of Corbett’s article here.

Paul Davis, Market Advisors, LLC

TARP Money is Being Paid Back Early!

First it was Bank of America and then both Citi Bank and Well’s jumped onto the band wagon.  Now the latest among the list of TARP repayment companies is GM (yes, that’s Government Motors!).  Does this make any of you wonder what’s really going on here.  From my perspective this story has the smell of fish!  Where will these firms get that much money?  It will not likely come from eager investors.  Is it possible that the Fed is “buying” the new securities with taxpayers’ money?  If so, it is a bookkeeping trick to take the heat off Congress and the banks. You see the legislators want all this money for new spending projects instead of returning it to taxpayers.

This week I came across and excellent article by Kevin Hall in the Miami Herald entitles “GM Joins Rush to Repay Bailout Funds”.  Hall does a nice job of summarizing what all of these repayments mean and believe me it doesn’t mean that banks will now be lending more money.  In fact Hall points out that it probably means they will actually be lending less.  Here is an except from this article – it should give you pause to think:

So if companies are repaying TARP money, does it mean all is well and that lending will resume soon?

“I don’t view the TARP repayment as evidence that banks are healthier and now can do it,” said Vincent Reinhart, a former top economist at the Federal Reserve. “It’s rather that banks have an incentive to do it now because they see the stigma associated as even more significant than they had thought previously.”

Banks are still under severe stress, he said.

And what about those “toxic Assets” that the TARP Funds were supposed to resolve?  Well as Hall explains, they are still on the banks books but because of a relaxation of accounting rules (can we change the accounting rules in our businesses?) banks can now value those assets at their “expected future value” (what ever value they want!!) so they don’t have to book any loss based on current value.  This makes their balance sheets look a lot better and guess what – they are using their balance sheets, in part, to pay off this TARP money.  Are they healthier for it…….it’s not likely.  Stay tuned because we are going to keep following this process to see just how much it ends up helping (or hurting) the average citizen.

Paul Davis, Market Advisors LLC

Holiday Cheer ?

I always enjoy keeping in touch with Diana Olick’s Blog (CNBC Realty Check). This time Diana offers a right-on perspective of Big Bank foreclosure activity for the Holidays and 1st Qtr 2010.

“Beware Holiday Foreclosure Moratoria”

Check it out here.

Short Sales Beginning To Make Sense?

It seems that I am reading that the volume in successful short sale transactions are picking up in volume. I certainly hope that this is the case, as the portfolio manager for Market Advisors Real Estate Fund LP, I am particularly interested in negotiating short sale transactions.

Apparently, Banks are becoming more responsive and have finally “seen the light” that short sales can be a win win for everyone involved. Part of this development is the pressure that the Obama administration is putting on Lenders to workout their defaulted assets , rather than foreclose, therefore short sales are a remedy that satisfies the Feds.

I like short sale deals…what is your opinion?

How Many Homeowners are Still At-Risk of Default?

As 2009 draws to a close it’s eye-opening to look back on this year and try to make sense of what has been happening in the foreclosure market.  It’s important for us in the real estate industry to try and understand all of the driving forces behind this mortgage melt-down in order to understand what to expect in the future.  This week I read another excellent article by Mark Hanson that does a fantastic  job of walking its readers through time, step by step, to paint a very clear picture of just what drove us to this point of collapse!

Hanson, as always, does an incredible job of pulling a lot of complex information together in such a way that it makes a lot of sense.  Here’s how he opens his article:

“Most look to loan type and equity position as two of the most important factors when forecasting loan default. In fact, I believe that epidemic negative-equity is the overarching reason that the default, foreclosure and housing crisis remains in the early innings. But…negative-equity with a caveat.”

“While negative equity is a threat in and of itself, being in an over-leveraged household debt position is the true default catalyst for most in a negative-equity position. And being over-leveraged is also the primary default catalyst for those in a positive equity position. Being in a negative-equity position with lots of top line and disposable income each month is generally more of a mental burden than a reason to fly the coop.”

According to Hanson it all started when lenders began messing with time -tested debt to income (DTI) ratios in order to write more loans.  You see it was at about this same time (~2002) that Investment Banks, non-Agency lending and securitization began to really heat up.  Hey, if the loan was being packaged and sold off in a few months, it wouldn’t show up on the books anyway.  So, who cared how over-leveraged the borrower was!  And thus the bubble began.

Hanson then moves on through all of the other changes that were spawned by these dramatic changes in the DTI ratios which in turn created this huge “default monster” we are dealing with today.  This included everything from dramatic changes in underwriting guidelines, to developing a culture of fraud in the GSE loan environment, to “stated everything” loan programs.  The bottom line is, we still have a long ways to go before we will be able to clear all of these failing mortgages and their related properties through the system.  According to Hanson we are still facing another 13 to 15 million at-risk loans that will somehow have to be worked through the system.

Take a look at  this article for yourself and I think you will agree that we still have a ways to go!  Consequently, plenty of great buying opportunities will be hitting the market this next year.  Don’t miss out.

Paul Davis, Market Advisors LLC

Do you know who Meredith Whitney is? You should…

Meredith Whitney is the CEO Of Meredith Whitney Advisory Group, and is considered “The Analyst” to call the banking debacle before the meltdown in September 2008. If you don’t know her, you should, and take stock in her opinion and analysis of the direction of our nation’s banking system.

Check out her latest comments here.

I applaud Meredith, her astute and forthright analysis that the current Big Bank system and its business behavior is counter productive to a meaningful recovery. Just more evidence that 2010 will be “the best year ever” for buying real estate. After all one should be buying low and selling high…right?

If You Think the Housing Meltdown Was Bad…………

I recently read an article by Doug Hornig entitled “If You Thought the Housing Meltdown Was Bad……wait until you see what’s in the cards for commercial real estate”.  Now I’ve written about the pending commercial foreclosure crisis before but I’ll have to admit, I’ve been so caught up in the residential crisis and all of its permutations that I kind of let the commercial issue slip to the back of my mind.  So, Doug’s article definitely “snapped me to attention” again.  The breadth and depth of our current economic “upheaval” is more then just a bit too complicated for most of us to understand.  But, I think we can all agree that the mortgage lending industry is at the heart of the problem.  The failures in that market segment have extended their tentacles out and have touched every other segment of our economy – impacting building, manufacturing, professional services, consumerism, and ………….

According to Hornig, the next big problem is commercial real estate.  Here are the opening couple of lines in his article: “That’s right, the next train wreck will be in commercial real estate. Couldn’t be worse than last year’s residential market crash? That remains to be seen. But it’s coming soon, probably as early as the second quarter of next year, and there’s nothing that can prevent it.” Hornig derives a lot of his information from one of the most knowledgeable commercial real estate professionals in the industry, Andy Miller.

Miller, of the Miller Fishman Group of Denver, reports that two years ago commercial real estate carried a value of about $6.5 Trillion and that real estate was supported by about $3.3 Trillion in loans.  Well today the loan amount hasn’t changed much but the value has been estimated to be about half of what it was two years ago!  Oops!  The commercial market is “under water”.  That means writing down about half to two-thirds of these loans.  Now if the banks were to have to take that hit all at once, then, according to Miller, “there won’t be any banks”.

Adding to the problem is the fact that, like residential loans, these commercial loans were also bundled into exotic financial vehicles, called commercial mortgage-backed securities, which were sold and resold on Wall Street for great profits.  And who do you think purchased most of these exotic securities?  You guessed it – the banks!

So, here is the situation as it is described by Miller:”What happens to a property when its value drops way below the loan, a seller can’t get enough money to get out, a buyer can’t raise enough money to get in, and the bank can’t afford to foreclose? Simple. It just sits there, carried along on the bank’s books at some inflated “mark to fantasy” price that makes the institution’s balance sheet look passable.”

The bottom line is our financial economy is in for another major hit that –in turn – will effect all of us.  As this commercial crisis escalates the banks will do the same thing they did last year: “run to the government palms outstretched”.  Who knows how long it will take us to recover from this new set of pressures.  One thing is for sure, you can expect real estate prices to continue to drop for the near future.  Check out this article and see what you think.

Paul Davis, Market Advisors

Real Estate Speculators Getting A Bum Rap?

During a Market Advisors live seminar last night an interesting topic was discussed. Are speculators (flip investors) getting a bum rap as more and more lending constraints are impairing the ability to flip properties effectively…

The short answer YES!

Speculators contribute to the process of “working our distressed inventory” and also contribute to the cause of “increasing property values”. There should be a concerted effort on the part of Big Banking to assist all types of Buyers, including Investors, to bring distressed properties back to livable condition, as well as, moving these non-performing assets off the balance sheet of the big banks.

Constraining Buyers of any type or investment style is just plain stupid, and goes against “free market” principals.