New Plan for Freddie / Fannie

found this fantastic video by reading this post in Noah Rosenblatt’s Urban Diggs blog (great blog about NYC real estate that I read quite a bit). Bill Ackman is proposing a new plan to solve the Freddy / Fannie problem and bring liquidity back to the market. This solution is not via a government bailout, but rather proposes a balance sheet restructuring (basically converting their debt to equity, in order to affect the crazy D/E ratio – currently at 129:1 – Yikes!!!).  I am not going to rehash Noah’s post and the video – they both do a great job explaining it. Check it out!

Video: http://www.cnbc.com/id/15840232?video=793726867

Mortgage Mess and Real Estate Investing

I bet it would be impossible to find a real estate blog that didn’t post anything about the mortgage mess today / over the weekend. It’s not that the credit crunch / mortgage industry collapse hasn’t been on everyone’s mind since a year ago. But a new wave of panic is sweeping us today, after IndyMac failed on Friday, and Freddy and Fannie are so unstable (after a precipitous slide in their stock price) that they need to be propped up by the government. So naturally, I ponder what that means for the real estate investor.

First of all, let’s take a step back. Why did IndyMac fail? Well, because like other banks in a similar situation, a large portion of their business was subprime loans. If you make loans to people who can’t afford the house, as long as they say they can and state that they make enough money to buy it, which part of this approach is sound strategy, exactly? Unfortunately, the mortgage markets weren’t too concerned with the future.

So as the market started crumbling and the bottom fell out from under, why did the banks still refuse to do short sales?  (A short sale, for those who don’t know, is a deal that a buyer (retail buyer / investor / etc) negotiates with the bank, for a sale of the property for less than what’s owed on the property).  This was a very necessary step, in my opinion, as values had dipped under the amounts that were owed.  If only banks worked with these buyers to do these short sales, along with mortgage workouts, it would have largely mitigated the mess, and banks would be straddled with a lesser inventory of houses. And as we all know, banks need liquidity, not houses, to exist. The idiotic thing is that these same properties, if no one buys them, get foreclosed on (huge expense for the bank), get seized and get auctioned off for less money than the proposed short sale. If I have an outstanding loan of $10, wouldn’t I rather take $7 from a buyer today, than sell it for $5 tomorrow?  Duh! Instead the banks made it so difficult for an investor to do these short sales, with the process dragging on for months. With such an abundance of foreclosures and deals to be had, no wonder so many properties end up going to auction. From my personal interaction with real estate investors, the frustration with the banks’ loss mitigation departments (those who end up working out the short sale deals) has been palpable. I spent some time perusing blogs and blog comments written by investors, who lamented that IndyMac exhibited many of the same behaviors. IndyMac had a chance to recoup some of the money they ended up losing due to the bad paper, and they squandered it. I am not, in any way, suggesting that short sales are a cure-all. I believe that it was important to pursue all avenues, one of which is short sales, one is mortgage workouts / loan modifications, and other steps. Hopefully, the next bank straddled with foreclosing properties, will be a bit better at short sales.

So now that IndyMac failed, and other banks with similar patterns are likely to fail, for the same reasons as stated above, the credit problem is only going to get worse, and the panic is going to get out of control.  Which concerns me as an investor and as a technology entrepreneur building a web-based resource for investors. If there are no funds available for investors to buy investment properties, the investment industry is going to go the way of the mortgage industry.  But not so fast! Investors, the good ones at least, are extremely creative, nimble and entrepreneurial ; they find opportunities at times when everyone runs and screams that the sky is falling. The deals are abundant. And yes, prices will likely keep decreasing, especially as the mortgage mess shrinks demand (many homebuyers who were in the market for a house, now will have to go back to renting, because they can’t get a loan). However, an investor who is good at doing the short sales, and other such strategies, can max out the deal anyway by getting it at very low prices. To finance these properties, a creative investor will look to non-traditional avenues, such as seller financing and private money. As far as my business, MeetMOJ,O is concerned, we are going to do just fine, as we extend our matching model to private money lenders and other alternative sources of capital.

So next time someone asks me what I am doing, and I answer “I am building a web-based community for real estate investors”, and that person looks at me like I am insane, I am going to insist that this is a great time to be an investor. If you know what you are doing, of course.

The Bear, the Condo and the Luxury Rental

No blog post of today would be complete without a reference to the Bear Stearns buyout last night. (JPMorgan had purchased the crumbling financial giant at $2.00 per share, even though it was trading at $4.81 per share right before). This is an astounding event, which brings the already-started carnage of Wall Street appear more and more real. Bear Stearns is a financial giant, a symbol of strength and longevity! And it was brought to its knees by the panic in the credit markets. Things just got a lot more scary and a lot more real. How many other banks will tumble? If the huge Bear was laying growling on its side, what about the smaller banks??

All of this made me wonder about the impact that Wall Street turmoil would have on the City of New York and especially its real estate. Just yesterday afternoon, my boyfriend and I were discussing the current downturn in real estate, and how Manhattan has been largely spared so far (even though property prices have appreciated quite steadily over the years, they still appear steady today, as there is no inventory oversupply). We attempted to answer the following questions: “Is Manhattan headed southward eventually, as business prospects all over the country deteriorate? As we slip further into recession, will Manhattan become an undesirable place to be, as jobs are cut but cost of living takes a while to head south? How long will it take Manhattan real estate prices (sales as well as rentals) to catch up to reality? The very rich will be largely unaffected, most likely. But what about the rest of Manhattan and the other boroughs? Will there be a time in the near future when people will afford to buy / lock in lower rents in Manhattan? Should we head to Florida until this shakes out and then come back and pick up some Manhattan real estate?” We were trying to understand Manhattan real estate cycles, which are a unique animal, very unlike the rest of the country, due to very skewed supply/demand relationships.

Funny thing, the Bear Stearns announcement comes on the heels of this discussion. In my mind the debacle is symbolic of the Wall Street troubles, which are only just starting. During this massacre, what will happen to a city, whose wealth is so closely intertwined with the wealth of Wall Street? So far, it’s been mostly decreases in bonuses on the Street, with some layoffs. But many more layoffs are near. As Bear Stearn employees get laid off, followed by other banks’ employees, what will happen? Will these folks downgrade to cheaper apartments, or will they move to the ‘burbs? Already there was a guy hawking cheaper apartments in front of Bear Stearns today! Will the Street employees sell their Manhattan condos, while prices are still high, and demand from foreign buyers is still strong in Manhattan? Will they rent after they sell? Will they rent in the city or in the ‘burbs? Or will they rent in the other boroughs and Jersey City / Hoboken across the river? And speaking of foreign investors… If New Yorkers’ demand for NYC real estate cools, will the foreign demand be enough to keep it afloat?

As I ponder real estate issues, I read other blogs and articles. So I had come across this video while reading Curbed. An interesting watch, as it gives views for both sides of the coin: Wall St affecting Manhattan real estate vs. not affecting. Arguments are presented by Dolly Lenz of Prudential Douglas Elliman, that the Wall St problems are already built-in to the real estate market, as bonus cuts were anticipated. Hmmm… A collapse of a major financial giant was built-in? The panic that is sure to ensue as a result was built in? I have a hard time believing that all of this will have no impact on the city’s economy and well-being. If much of the City’s growth and economic strength has been driven by Wall Street, wouldn’t it make sense for the Street to take down the City’s real estate premiums? Seems like Dolly is practicing the “hide your head in the sand and enter into denial” approach.

But then again… real estate prices, just like all prices, are a product of supply and demand. And since Manhattan is an island, we can’t build out and increase the supply, except for building upwards. So supply is somewhat fixed. Demand will mostly likely cool down (for rentals and retail sales), due to all the factors discussed above. But will it cool to the levels where it equals supply? Will it cool equally for rentals and sales?

Several major banks are releasing their earnings tomorrow. What gets released tomorrow will help guide my understanding and will help me confirm / rebuff the “many more Bears” theory.