All Forum Posts by: Account Closed

Don't forget about Mongolia. Very beautiful but also very poor. Not sure how it has changed since I was there in 01, but it is so interesting to see the rubble that the Soviet Union left behind and the stark contrast between it and its wealthy neighbors.

The author also writes:

"But it is unclear to me why borrowers should bear any special moral burden to carry the cost of these sorts of systemic externalities. And it seems ironic to me that entities like Fannie Mae, which are as responsible as any for creating the systemic risks that the default wave poses to the larger economy, are often as not the ones pushing the “strategic default†moral narrative."

Morality is highly subjective and should not be a consideration. If a contract allows this type of an exit and a home owner has no choice than they should do whatever suits them best. Companies often breach contacts and often must pay penalties. Even real estate loans have "prepayment" penalties. Considering that this whole crisis is largely because of paper origination, sub prime mortgage sales and the MBS packages and other structured products, that the penalties have already been incurred on the homeowner. In this regard it wasn't really the homeowners fault for getting tricked by loan office, which led to our issues today. Loss of equity is huge for the home owner, though banks get bailed out by the government. I don't know of any individuals getting bailed out. I say screw the banks, give the homeowners a break they have been gouged enough.

Vikram your comments are very interesting to me.

Another reason some banks (in the US) wish to develop relationships is that in my recent experience they are looking to become more friendly with clients they know can buy their paper and REOs. A banker would much rather call a client that is likely to know a deal when he sees it, he knows has money and can close, than to spin it out through a broker. Bankers are very commission adverse. If he has a rolodex of ppl he can call, there is no need to list on the MLS but can actually move it out of their books by the end of the week.

Becareful of tax considerations

I found an interesting article about basis risk especially for consumer debt. It seems the article was written mostly for structured finance and ABS markets. But it does have a few interesting points about spreads between prime rate and LIBOR, for example.

http://www.securitization.net/pdf/Fitch/BasisRisk_15Sept06.pdf

Selling Eurodollar futures to hedge against LIBOR should work. What about TBill futures? There basis risk you mention could also be an opportunity for arbitrage between spot prices and futures prices that you should consider.

A lot depends on what you purchased the house for. If you bought a house for 125k that has comps on the same street for 325k, you could put more into a renovation than just paint and carpet. If you visit the other houses for sale and find that they are actually very nice, sometimes paint and carpet won't cut it. To compete in this market you must at the same time be the cheapest house for sale on the block, but usually also the nicest.

In addition to the issuance of risky mortgage products, the Fed also had a hand in their demise.

After the 2001 crash, the rise in the issuance of subprime mortgages did allow people to buy homes at incredibly low rates, with low monthly payments because of the need of some loans to pay interest only. Or even Alt A loans that give you a variety of options on payment. From 2004 to 2007 the Fed raised the interest rate something like 15 or 16 time straight. So in 01 the prime rate (which is 3% higher than the Fed Funds rate - why it is set like that is a totally different post) was dropped to like 5% and in 03 it was as low as 4%. Skip ahead to 06 and the prime rate is 8%.

Most of the best real estate borrowers are given prime +2% from commercial banks, and many loan products are based off of the prime rate. I think most commercial loan products use the prime rate in their offerings. As we all know, many if not all loan products, not just including but especially on ARMs on HELOCs, home loans, credit cards etc are all based the prime rate when they adjust.

So of course people are going to default!!! This is a seriously dramatic increase in the interest rate in such short of a time. The Fed seeks to contain the economy from inflation. In the mean time, it looks like they over raised the interest rate and all of a sudden anyone who was comfortably making their mortgage was all of a sudden having a more difficult time. Those who were already having a difficult time were then unable to pay. Pop! First give out the easy loans, then squeeze it out of them - thanks a lot Fed!

Here is a nice sheet with basic prime rate history:
http://www.wsjprimerate.us/wall_street_journal_prime_rate_history.htm

I would love to hear everyone's thoughts on the matter of interest rate increases directly affecting the integrity of the real estate market!

I think that at the auction you might very well be able to purchase a condo unit for the lowered price. In a similar style condo building developer sale here in Chicago, final sales at the auction were still much as 50% the original list price.

Here is a good page detailing the auction for 1400 N Lake Shore Drive, which took place in April 2010, including a detailed spreadsheet showing each units list price and final price.

http://yochicago.com/1400-lake-shore-drive-auction-brings-in-almost-3-5-million-with-20-sales/14915/

This is quite a nice old building that had been rehabbed and condoed out. It is not super newly rehabbed and the flats are kindof little (old buildings), but the location is tremendous. Looking at the 1400 Lake Shr Dr auction, it looks like on that transaction everyone got a pretty good deal - especially the guy that bought the $481,900 for $146,000... oh I think this person bought 6 units at the auction - smart!

I am inspired by books that seek to solve the great problems of poverty and economy. I have recently been inspired by Development as Freedom by Amartya Sen, and The Way the World Works by Jude Wanninski (I think that is how you spell his name). These are two very different books from differing ideologies of economy but both basically discussing development.