COUNTERCOLUMN: All Your Bias Are Belong to Us

One bit of fallout from the recent rash of federal outlays: I think we can kiss goodbye any hopes that the estate tax exemption is going to remain at $2 million. That sucker is back down to $500,000 if Obama wins, before you can say "Patriotic."

And if McCain wins, that's going to be the first bone he throws to a likely Dem congress in order to get even a smidgeon of his agenda passed. Either way, I think it's very unlikely you can bank on a continued $2 million estate tax exemption.

So what does this mean?

Well, like the AMT, it's going to have a disproportionate effect on the blue states...property values in red states (Florida and Arizona excepted) did not inflate as much as properties along the coasts. So to an extent, it's a poison pill for the Dems. But a lot more people are going to need to look long and hard at how their assets are going to be passed on to the next generation.

Incidentally, the increased estate tax burden is going to fall disproportionately on another Democrat constituency: same-sex couples. Why? Because married couples enjoy an unlimited estate tax exemption to the surving spouse. Unless a same-sex couple is legally married, though, even a will is not going to help. Andy Sullivan's long-time companion can pass away (BECAUSE HE WANTS TO!!!!) and even if they own a house jointly that puts them over the 500k exemption, Sully's going to have to find some way to raise enough cash to cover an amount equal to up to 47% of the estate's value over and above the $500k exemption.

It's going to be great for insurance salespeople, of course, since the time-honored way to pay for the estate tax without having to liquidate assets (like a home) is to take out a life insurance policy sufficient to cover the estate tax. The number of people with a new life insurance need is far, FAR higher with an estate tax exemption of $500,000 than it is with an exemption of $2,000,000. Further, I would posit that at the lower exemption amount, the chief asset that will need to be sold to make the exemption is going to be the family home. This is a much bigger deal at a 500k exemption than at the 2 million level, because in many cases, a much larger chunk of the exemption is likely to be the one asset that is most difficult and painful to liquidate in time to pay the estate tax: the home.

Look for a jump in life insurance sales (to cover the increased estate tax liability), annuities (to get money OUT of the estate and convert it to income), and reverse mortgages (to get the house out of the estate).

Now, this is going to be a painful effect for the upper middle class, because they will be forced to weigh the desire to keep a home in the family against the need for retirement income - and they've undersaved to begin with.

I wouldn't rely on pensions for a lot of them. And, quite frankly, unless they've done a terrific job planning ahead, the life insurance premiums it is going to take to cover, say, $300,000 to $1.5 million in increased estate tax liability is not going to be affordable for people in their 50s and 60s, let's say, whose chief asset is in their home, which is not readily convertible to cash to pay a premium.

And this is not even including the cost of providing for their own long-term or nursing home care.

The libtards think they can "soak the rich" by lowering that estate tax exemption back down to $500,000 from $2 million.

I'm here to tell you... they have a funny idea of what "rich" means. The more I learn about family finances, the more I see that this is a pretty ugly development for an awful lot of families.

Splash, out

Jason

Labels: finance, insurance, investing, Real Estate, taxes, The Left

Sorry, WaPo and hyenas of the right.

There's nothing that says politicians shouldn't shop around for the best deal. Obama got a below average mortgage rate. But unlike the case with the Countrywide loans, there's no damning paper trail and no formal VIP loan.

Obama's credit seems solid, and I would imagine if he shopped around enough, someone would have offered him those terms at that time.

Sure, the house was probably overpriced in '05. But bankers are not very smart, and they probably knew that. The broker sure would not have been compensated to point that out. He brought in a healthy commission for a super jumbo loan, even without the points.

It's possible that there was some shenanegans going on. But the article does not dig into the underwriting. It does not dig into the relevant FICO scores. It does not dig into the down payment or LTV rates, if any. So this article was not ready for prime time. If there's a story there, the reporter has not gotten it yet.

This critique gets it right, in my view.

Unless the Washington Post has access to Obama's FICO score -- and unless it has rented an apartment to him, it probably doesn't -- it is missing a pretty important piece of information on what Obama's mortgage rate ought to have been. What was Obama's FICO score? I don't know, but considering that...

* Obama had just gotten a $2.27 million book deal from Random House -- about $1 million more than the value of the mortgage.
* The Obamas each had exceptionally secure jobs that paid them a combined annual salary of about $500,000 per year.
* The Obamas had just sold their condo, on which they had realized a $137,500 profit.
* The Obamas were prominent public figures whose political futures depended in part on maintaining a reputation for responsibility and trustworthiness.
* The Obamas are known to be relatively thrifty and have no credit card debt but substantial savings.

...I would think that the Obamas were exceptionally creditworthy. So indeed, Obama received a "discount" -- the same discount that any borrower in his position would have received.

There's lots of reasons to distrust and oppose Obama. More every day.

But based on what I know so far, this isn't one of them.

Splash, out

Jason

Labels: Obama, Real Estate, The media

If so, your friendly neighborhood VA counselor would like to talk to you.

With thousands of service members and veterans having lost homes or facing foreclosure as the mortgage crisis continues, lawmakers are pushing legislation to raise VA loan ceilings, lower VA funding fees and expand the VA's ability to help veterans to refinance loans they can't afford.

The Department of Veterans Affairs, meanwhil

e, is encouraging military members, veterans and surviving widows with at-risk loans to seek advice from VA loan counselors even if their loans are not VA-guaranteed.

VA loan experts lack authority to restructure or renegotiate loans not backed by VA. But they can advise veterans on their options and on how they might negotiate with mortgage holders to avoid default.

VA's effort to reach mortgage holders in distress now includes a toll free number (1-877-827-3702) that automatically directs callers the nearest of nine VA regional loan centers. VA loan counselors have helped 74,000 homeowners since 2000, including half of all VA loans in serious default last year, thus saving the government nearly $1.5 billion, officials contend.

The VA Loan Guaranty program avoided the subprime loan debacle. While delinquency rates have climbed over the past five years for subprime, FHA and prime mortgages, delinquencies have fallen for VA-backed loans.

Unfortunately, VA won't refinance anything greater than their now archaic refi limit of $144,000, with a 10% equity requirement. Also, acording to the article, Sen. Daniel Akaka (D-HI) has a bill that would raise the VA loan cap to $730,000 as does Rep. Bob Filner (D-CA). That would bring it into line with other federal loan prgrams. VA itself opposes the measure. (It does seem pretty high to me, and I live in an expensive market.)

Splash, out

Jason

Labels: politcs, Real Estate, soldier's issues, veterans

McArdle nails it:

The housing bubble created a powerful illusion: that low income lenders with bad credit were actually quite profitable to lend to. That's because the rising housing prices allowed borrowers in trouble to refinance rather than default. There's no reason to think that the originators were any less deluded about the credit risks than the investors. The no-doc, option and negative amortization ARMS were not a secret; everyone knew what was going on. People bought mortgage bonds anyway in what now looks like a stunning piece of idiocy.

When I try to get people to specify, beyond those four rather anodyne suggestions, we should do, there's a lot of hemming and hawing. Even the left-wing think tankers sort of look at their shoes and whisper "We need a better regulator". At which point even the left-wing journalists in the audience start asking "Where are we going to find regulators who understand this better than the guys at Goldman Sachs--and are willing to work for, say, a GS-13 salary?" The only people who confidently state that they have a surefire master plan to fix the problem are, not to put too fine a point on it, morons with very limited understanding of financial markets. These people generally start by talking about how the Bear Stearns crisis can really be traced back to the repeal of Glass-Steagall, then almost immediately reveal that they know nothing of Glass-Steagall other than its name.

Preach it, sister!

The problem isn't the lack of regulation. Federal Reserve member banks and commercial banks are already heavily regulated. And the people who do the dirty work of regulation are NOT going to be smarter than, or have a superior understanding of markets, than the people who actually run places like Bear Stearns and Lehman Brothers and Wachovia and Wells Fargo and Countrywide, to name a few KINDS of financial institutions caught up in the craze to varying degrees.

The argument for regulation is never that the government is smarter. The more I look at regulation and compliance issues, first as a compliance copywriter for a variety of financial institutions and now as a budding insurance agent, the more I marvel at how stupid regulators are, and how companies bend themselves into absurd contortions in in order to anticipate the idiocy of the dumbest regulators.

Instead, the argument for regulation is that the government provides a hedge against the profit motives of these institutions and their brokers.

But government can ONLY provide such a hedge if the political will exists to do it. Perhaps we could have contained the damage the housing bubble wreaked, for example, on minority communities (obviously favorite markets of subprime mortgage brokers), by repealing red-lining laws and allowing banks more freedom NOT TO LEND.

Yeah. THAT'S going to fly in Congress.

If the Bush Administration had actually pushed to implement regulatory measures that MIGHT have contained the damage, the Demtards in Congress would be SCREAMING.

Or perhaps we could have contained the damage to the nation's dumbest homeowners by prohibiting interest-only mortgages, or balloon loans, or 1% mortgages... thus depriving the lower-middle class family their God-Given Right To Infinitely Expanding House Prices.

But the problem is that each of these products makes a lot of sense for certain buyers. They are not bad products at all. An interest-only loan might be entirely appropriate for someone with a lot of other assets that he expects to earn a superior return on his investment compared to house price appreciation. Zero down might make a lot of sense for someone with the assets to move in a pinch, but who does not wish to incur a capital gains hit on appreciated assets he'd have to sell to reach the down payment.

Someone in a profession that is frequently targeted in lawsuits - say, obstetricians - may have a need for such products from an asset protection point of view and may wish to encumber his house as much as possible to ward off litigants.

The danger now is that politicians will push the Fed and Treasury Departments into ill-advised 'feel-good' regulatory stupidity, out of desperation to be seen doing something. Look to economic and financial chuckleheads like Barney Frank, Hillary Clinton and Barack Obama to lead the charge. But in so doing, stupid regulation will have the opposite effect intended, further restricting liquidity just as we need it most.

Splash, out

Jason

Labels: economy, finance, Politics, Real Estate

Say it ain't so!

The “snooty” attitude of bankers and financiers who thought they were cleverer than everyone else is largely to blame for the global credit squeeze “disaster”, Germany’s finance minister has said.

In an interview with the Financial Times, Peer Steinbrück played down the impact on Europe’s largest economy of the turmoil but said steps had to be taken to raise risk awareness.

German proposals before the squeeze for increasing transparency had been “mocked” and sometimes deliberately misunderstood as an attempt to impose regulation rather than voluntary codes, Mr Steinbrück said, but were now winning support.

In a swipe at finance industry leaders, he said the “quality of managers” had proved a weakness. “The snooty attitude that we have sometimes seen – under the motto of ‘we are cleverer than the others’ – ended in disaster,” he said.

The finance minister said the bankers were "unable to cope with the complexity of the products in which they were investing."

That's ridiculous. There's nothing "complex" about collateralized mortgage pools. Even if you've carved them up into a few tranches, strips, etc., these are very basic investments that any experienced banking professional ought to be expected to understand.

Regardless of how they're tranched off, either the borrowers repay their loans and they are correctly underwritten for risk or they are not.

In an environment where half of new loans originated were interest only loans in some markets, and in which the waiter at the local Longhorn was hawking mortgages when he brought you the side order of broccoli, and X percentage of these loans were "no docs," and/or adjustables sold to people with no assets in an environment where homes had already far outstripped their intrinsic worth based on rental values, these bankers were more than "snooty." You can be prudent and still be snooty. These bankers were negligent.

They applied not the slightest due diligence on behalf of their investors.

And their idiot boards of directors, eager to keep up with the next bunch of idiots on the block, prevented any prescient managers they had from rolling back their exposure to the riskiest loans (though once the money is lent, there is no eliminating that stupidity. It can only be transferred from one institution to another).

Here's a passage from a terrific book called The Warren Buffett Way, by Robert Hagstrom:

"The final justification for the institutional imperative is mindless imitation. If companies A, B, and C are behaving in a similar manner, then, reasons the CEO of company D, it must be all right for our company to behave the same way. It is not venality or stupidity, Buffett claims, that positions these companies to fail. Rather it is the institutional dynamics of the imperative that make it difficult to resist doomed behavior. Speaking before a group of Notre Dame students, Buffett displayed a list of thirty-seven failed investment banking firms. All of these firms, he explained, failed even though the volume of the New York Stock Exchange multiplied fifteenfold. These firms were headed by hard-working individuals with very high IQ's , all of whom had an intense desire to succeed. Buffett paused; his eyes scanned the room. " You think about that, " he said sternly. " How could they get a result like that? I'll tell you how, " he said, "mindless imitation of their peers."


Emphasis added for emphasis.

I might add that military officers, and those responsible for promoting them, should likewise take note.

We need a broad spectrum of military thought and leadership styles. We were not well served while kinetic thinkers ruled the officer corps while counterinsurgent theorists like Nagl and Petraeus were the exceptions and dissidents.

It's likely too easy to go overboard with Petraeusism, too. Petraeus seems like the right man in the right spot for this war.

But we have other wars to fight. And we need a diversity of opinion and approaches as well. Kineticism has not been discredited. We may well need to get uberkinetic on someone's ass very soon.

And what's beyond counterinsurgency? What's the post-Petraeus approach? Do we need to look at retirees from the Clinton era OOTW people? Is that the next phase in Iraq? Do we then gather our kinetics and our counter-I's? Do you pair kinetic commanders with counter-I deputy commanders? Can you synthesize them?

Splash, out

Jason

Labels: business, investing, Leadership, Real Estate

Former Clinton secretary of the Treasury and former Harvard University President Lawrence Summers argues that the cure for the damage that stupid lending has done to our economy is ...

... more stupid lending.

I shit thee not.

" The time for worrying about imprudent lending is past. The priority now has to be maintaining the flow of credit."

What a frigging retard.

In the same breath, within the same column, Summers further simultaneously argues that we must keep demand high. And of course the way to stimulate demand is to keep prices high.

Granted, that's true for fish. Nobody wants to buy fish from the discount shelf. So there are some arguments to be had that, way, waaaaay out on the margins, a high price creates its own demand.

That's a good way to reward the most irresponsible among us at the expense of hard working and prudent young families just starting out who have been squeezed out of the real estate market by rank speculators, corrupt mortgage brokers, and a bunch of colluding real estate brokers and appraisers who were all in on the con.

The entirety of Summers' thesis is bad. He's concentrating on price fixing, but doing nothing to address the underlying fundamental value of the asset class. In essence, he's arguing for a massive bailout of the wealthy on the backs of the renters, when it was the landowning class who were abusing the financial system in the first place, by leveraging their homes to the breaking point to finance their Lexus purchases, then foolishly leveraging them some more by misstating their income, failing to insure properly, and lying...or turning a blind eye while paying others to lie... about the market value of their homes.

The true value of real estate is that which provides a reasonable expected rate of return of capital to property owners and allows for positive cash flow on newly acquired properties at about a 75% debt to equity ratio.

Growth is gravy.

You can quibble about the percentage, and you can make adjustments to account for high-growth vs. low growth and quality of life issues. But any government action that tries to substitute some new and alien metric to try and distract us from the cold, hard analysis of cash flows is counterproductive. It's a shell game. And it will eventually discourage the development of new housing

Splash, out

Jason

Labels: Real Estate

From the Wall Street Journal:

In Granada Hills, Calif., Natalie Brandon is fighting to keep the three-bedroom ranch house she bought in 1985 for $105,000. Mrs. Brandon, 51, does medical billing for doctors; her husband is a dispatcher for a local gas utility. Last year, she got a $625,500 mortgage from Argent, now owned by Citigroup. Her 7.99% interest rate isn't set to rise until next June, but she already is behind on payments.

Over the past five years, she has refinanced her home five times, each time taking out cash and paying prepayment penalties. Last year, all she had to do to refinance was state that she and her husband earned a combined $100,000. She says she used the proceeds to pay off $30,000 owed on her white Lexus.

This year, she says, their income fell after she suffered a short-term disability. Mrs. Brandon figures if she sold her home today, she wouldn't get more than $450,000 -- what a nearby home sold for in foreclosure.

These aren't people to be coddled.

Splash, out

Jason

Labels: investing, Real Estate

CBS, the pride of the American news media, breathlessly reports:

REPORT: Countrywide CEO Cashed Out.

The CBS report is merely following up on a much more detailed LA Times report.

Both fail utterly to get to the root of the story.

The problem isn't that Mozilo cashed out a lot of stock options. That's entirely legitimate, and no one is alleging that he failed to disclose his trading in accordance with company policy and the law.

This is the most widely predicted and predictable bubble in a generation. Mozilo would be a fool not to have lightened up (though he still should have maintained a significant long position out of principle. My issue is that as far as I can tell, he has no long position.)

The real problem is that even as Mozilo was quietly unloading his own shares, Countrywide was loading up the company with debt to buy by back millions of shares at prices management obviously thought were inflated (around 40 bucks).

Actually, that buyback program was initiated almost exactly at the same time that Mozilo began selling.

Oh, and you also read it here on Countercolumn.

I am not long Countrywide, except via Weitz Value.

It's tempting. It trades at 5x official earnings (I mentally adjust that to more like 8 to 9 times "real world" earnings, and trades at 20 to 30 percent off book value. It is less than 10% into subprimes. It is about 40% into adjustables, but those adjustables are spread across the United States, and not concentrated in California (in contrast to someone like Wells, which is a western franchise, and even Washington Mutual, which is overexposed to California, which surprised me to learn.)

Countrywide also recently executed a large buyback of shares around the 40 dollar mark last year. Shares are now trading at around 18.

It's very tempting - with a nice dividend in the meantime to pay me for waiting for a recovery.

But I look at their CEO, and he is selling shares as fast as his options vest. He doesn't seem to be retaining any of them personally, and therefore I distrust him as an owner-manager.

I know. Please. Try not to gush.

What's more, it is this seeming mismatch between the CEO's own trading actions and the COMPANY BUYBACK ITSELF that will expose Mozilo and the directors to legal liability. The buyback is a key option, because it's the buyback, not the insider sales, that arguably represent a violation of fiduciary duty to shareholders.

Both the LA Times and CBS completely miss the story. But it was all in the insider trading filings and the 10K filing with the SEC, clear as day.

It doesn't take a lot of visual acuity to perceive a lightning bolt. Mozilo's stock sales and cashless option exercizes have been a matter of public record since the day they began.

Further, Countrywide's been a staple of financial news for months.

The fact that the LA Times and CBS are just now waking up to the fact that the CEO has been selling like crazy - and STILL somehow blows the real story - ought to be a screaming hint about why you shouldn't trust the drive-by-media for business news.

Splash, out

Jason

Labels: economy, investing, Media, Real Estate

Finance types should know that cheap money, credit on demand, and endless leverage aren't the cure for a hangover caused by too much cheap money, leverage, and credit on demand.

Labels: economy, investing, Real Estate

Patrick.net explains why.

# Mass foreclosures due to the poor lending standards of the last few years. Banks happily loaned whatever amount borrowers wanted as long as the banks could then sell the loan, pushing the risk onto Fannie Mae (ultimately taxpayers) or onto buyers of mortgage backed securities (MBS's). Now that it has become clear that at least a trillion dollars in mortgage loans will not be repaid, Fannie Mae is under pressure not to buy risky loans and investors do not want MBS's. This means that the money available for mortgages is falling, and house prices will keep falling, probably for 5 years or more.

# Prices disconnected from fundamentals. House prices are far beyond any historically known relationship to rents or salaries. Rents are less than half of mortgage payments. Salaries cannot cover mortgages except in the very short term, by using adjustable interest-only loans.

# Interest rates increases. When rates go from 5% to 7%, that's a 40% increase in the amount of interest a buyer has to pay. House prices must drop proportionately to compensate.

For example, if interest rates are 5%, then $1000 per month ($12,000 per year) pays an interest-only loan of $240,000. If interest rates rise to 7%, then that same $1000 per month pays for a loan of only $171,428.

Even if the Fed does not raise rates any more, all those adjustable mortgages will go up anyway, because they will adjust upward from the low initial rate to the current rate.

# A flood of risky adjustable rate "home equity loans" draining equity from existing mortgages. Just like the bad primary ARM loans, these loans do not have fixed interest rates. When the interest rate adjusts upward, it can double monthly payments, forcing owners to sell.

# Extreme use of leverage. Leverage means using debt to amplify gain. Most people forget that losses get amplified as well. If a buyer puts 10% down and the house goes down 10%, he has lost 100% of his money on paper. If he has to sell due to job loss or an interest rate hike, he's bankrupt in the real world.

It's worse than that. House prices do not even have to fall to cause big losses. The cost of selling a house is at least 5%. On a $600,000 house, that's $30,000 lost even if prices just stay flat. So a 5% decline in housing prices bankrupts all those with 10% equity or less.

# Shortage of first-time buyers. According to the California Association of realtors, the percentage of Bay Area buyers who could afford a median-price house in the region plunged from 20 percent in July 2003 to 14 percent in July 2004. Strangely, the CAR then reported that affordability fell another 4 percent in 2005, yet claims affordability is still at 14%.

Again, lots more at the link.

Hat tip: Lee Distad.

Labels: investing, Real Estate