Three Tips to Help You Avoid Stepping Face First into Real Estate Risk 

Limiting risk in real-estate investments substantially increases your chances of earning high returns.  A solid risk assessment prevents you from getting burned, losing your initial investment or much worse. Investors pick real estate for three main reasons: Earn positive cash flow, take advantage of tax benefits or gain the satisfaction of impacting the lives of others. No matter which combination of these reasons attracted you to the idea of investing in real estate, the following three tips can help you reduce risk and maximize your benefits.

1. The first tip is simple, but often disregarded: Avoid speculation. In my book, “Standing in the Rain,” I describe speculation as “financial Russian roulette.” The odds can appear to be in your favor and the risk can often be downplayed in relation to the potential reward. Investors are seduced by speculation. They succumb to hearsay and promises of quick returns with little effort.  Speculation is a short-term investment ploy and it minimizes real estate’s incredible potential as a long-term investment.  Long-term investors look to retain their real-estate assets despite modest market fluctuations, short-term speculative investors become finicky when their asset does anything besides rise in value. Speculation is usually fueled by misinformation, greed or pseudo demand, and it does not have its place in the real-estate market. Forget about all things “get rich quick.” Wise real-estate investing requires thorough due diligence and I suggest you never let anyone convince you otherwise.
2. Do your best to ensure positive cash flow. Being ill-prepared for a property that swallows cash every month can quickly reduce the amount of capital you have to work. Remember, cash is king, queen, prince and duke of Real Estate City. When possible, consider the benefits of a substantial down payment.  It gives you instant equity, helps reduce your interest rate and lowers your monthly payments.  Predicting constant appreciation is never easy. But, with experience or the assistance of a seasoned professional, you can take the necessary steps in an educated attempt to ensure positive cash flow. Lack of due diligence places a painful strain on your cash flow and forces you to sell your investment property before the benefits are realized.
3. Narrow your focus. Which is the better choice for you, commercial or residential real estate?  Investing in real estate carries a great potential for creating substantial wealth. Such wealth rarely comes without making a number of difficult decisions. Before investing, consider your options. Ask yourself if you are qualified, or even willing, to handle evictions, time management, repairs, reinvesting money back into the property, documentation and necessary inspections. Real estate can be mostly “hands off.” You can hire professionals to handle every part of the process, but the appeal of real-estate investing is often its “hands-on” nature. Narrowing your focus and choosing which type of real estate you want to invest in requires your careful consideration.

In “Real Estate Risk and Retirement Planning Part One,” I have included a section that details different options you have when investing in real estate. Watch for “Real Estate Risk and Retirement Planning Part Two” it in the next few weeks.  I will discuss market trends and weeding through cumbersome rules and regulations. 

All My Best,

Thomas J. Powell

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Tags: capital, commercial real estate, documentation, due diligence, economics, ELP Capital, evictions, foreclosure, investment advice, ira, land lord, las vegas, long-term investments, markets, necessary inspection, Nevada real estate, options, property, Real estate, reinvesting money, reno, repairs, residential real estate, ria, speculation, strategy, thomas powell, time management, TIPS

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Reasonable Regulation: That’s Allstate’s Stand

            Many companies involved in financial services cower when an official of any stature mentions the threat of national regulation, but Allstate has decided to embrace it. Since late April, Allstate has been pushing an advertising campaign that is rooted in support for creating a national regulation agency for all players in the financial industry, including insurance companies. Each ad in the four-part series, which runs in major magazines such as The Atlantic, touts the common theme of calling on “Congress to act boldly and quickly in drafting strong, comprehensive and clear federal regulation.”[1]

             Under the current system, insurance companies are regulated on a state-by-state basis, something that Allstate CEO Tom Wilson thinks needs be changed. In a national press release, Wilson argued:

 The American consumer is burdened with a patchwork of insurance regulatory systems that are cumbersome and ineffective in managing risks in an era of rapid change and innovation. American families need better protection from systemic risks and access to products and services that will help better manage their financial futures.[2]

            Allstate’s push for a national regulation system is bold. The campaign appears to be having an impact as the Obama administration has started tackling a number of vital decisions that could ultimately lead to national regulation for all financial services. President Obama himself may not have been directly affected by Allstate’s campaign, but according to PRnewswire.com at least one Congressperson has received more than $20,000 in campaign contributions from Allstate over the past four years. Clearly Allstate has identified the potential benefits that would come bundled with national regulation.

            One group that stands to be trapped and bound by the regulatory net of a national system is the stock brokers on Wall Street. The Obama administration has proposed a plan that would hold brokers to the stricter fiduciary standards of registered investment advisors. Under this plan, brokers would be required by law to act in their clients’ best interests, not their own. Also, with each piece of investment advice, brokers would be obligated to disclose what they stand to gain personally. A plan to implement a complete regulation overhaul is sure to be cumbersome and will take time to be implemented effectively. The Obama administration would be wise to have patience with this reform and comb through all of the complexities before attempting to have anything signed into law.

 At the end of the day, the federal regulatory overhaul will aim to force those in the financial system to be more transparent, something the Allstate campaign clearly addresses: “Only when there is transparency around valuing the risk in the financial system—including the role of insurance to help mitigate that risk—will we regain confidence in the economy.”[3]           

To view all of the Allstate advertisements in their entirety, visit allstate.com/fedreg.

Commercial Real Estate’s Role in the Next Bailout

            Banks have had little to celebrate over the past 20 plus months. Still dizzy from the debacle caused by residential real estate, banks nationwide fear the devastation that could soon be unleashed by the rising number of foreclosures in commercial real estate.

            The banks which provided the money to build endless numbers of commercial buildings originally did so because they, like so many others, believed occupancy and rent rates would always consistently rise. But, many owners of commercial buildings are now fueling another wave of foreclosures because they are not able to generate enough cash from tenants to cover their principal and interest payments. Because the loans have also been bundled and sold on Wall Street as commercial-backed mortgage securities (CMBS), the foreclosed buildings spark a ripple effect. Anticipating the severe consequences this could have on our economy, the Federal Reserve is struggling to contain the situation and prevent the need for a second wave of bank bailouts.

            According to Deutsche Bank, about $153 billion in loans that make up CMBS will come due by the end of 2012. The vast majority of these will not be eligible for refinancing through their lenders because the values of the properties have dropped so dramatically.[4] The losses will potentially cripple not only the owners of the commercial properties, but also anyone holding CMBS. Furthermore, because CMBS typically help drive pension and hedge funds, the pain will be widely spread.

            The only positive side of this mess will be the number of affordable investment opportunities for those looking to get into commercial real estate. Commercial real estate does perform in the long haul. But, because of the onslaught of new commercial buildings that sprouted in recent years, we are now experiencing an uncomfortable rebalancing of the industry. Loans that were made on loose credit and then bundled by Wall Street into dicey investment vehicles are all being exposed. However, the underlying properties are not rotten; they still make for sound investments.

            Like the residential market, the commercial real-estate industry was saturated with quick deals that turned sour because they were not thought through. Now, because the consequences stretched so far, the commercial real-estate industry has to be turned upside down and untangled. Although the untangling process will be turbulent, it will also be exposing an array of investment possibilities. Commercial real estate provides the venues for consumer spending. As the economy slowly recovers, so too will the demand for prime commercial real estate—something that will be readily available and reasonably priced in the immediate future.  

Keep Health Care in Our “Best Interest”

            I have been reluctant to bring the argument of national health-care reform to the Powell Perspective because it does not necessarily pertain to real estate, finance or investing. But, national health-care reform has the potential to have drastic impact on our economy, and for this reason I believe it deserves attention here.

            I have been convinced to raise this issue after overhearing a 20-something at the gas pump discuss the issue with someone of similar age. “Man, the whole thing is no big deal, I mean how often do we really go to the doctor anyway?” he said. As I drove off, I realized that the young man, healthy and probably feeling somewhat resilient, was simply not interested in the topic. He wanted to be able to disregard the topic so he could have more attention to focus on the issues that had a more immediate impact on him.

            This week will bring an important turn in the debate over national health-care reform. The Obama administration has committed itself to rethinking the plan before the President is scheduled to address Congress on September 9^th. President Obama is now going to be leading the arguments that he has been able to mostly sidestep thus far. What has me concerned is that the administration will recognize what I did while pumping my gas: The youth do not care. If the Obama administration addresses this and rebrands the issue to somehow get the youth behind it, then the approval rating for health-care reform could skyrocket. The same demographic that helped the President win the office, could now help direct a national issue that they may not be truly interested in for another 20 years. On the other hand, maybe it is time to address the demographic who will still be paying for this change long after we are gone. After all, the people that currently have a vested interest are at a standstill after becoming equally heated on both sides of the issue.

            Since its appearance in the Obama administration’s limelight, health-care reform has done nothing but become more complex. The plan is unclear. No one knows what it will look like, we only know what the media reports: We’re currently 37^th in the world in health-care quality. Death panels will dictate how long we live. The President will personally pull the plug on our grandma. If there are details to this administration’s plan, then they have all been shadowed by heated talk show hosts’ attempts to get the public screaming about something no one knows about.

            On September 9^th President Obama is going to be forced to add some structure to his administration’s plan. Thus far, no one has been able to dissect and discredit the plan because it has only taken shape through various town hall meetings and informal gatherings. In his first address to Congress since February, President Obama will be talking exclusively about health care. This national issue is going to take rigid leadership from the President. If he wants to make any progress he is going to have to involve the nation by getting the young to care and the old to stop shouting at one another and listen.

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Stats Won’t Save Us

Every day, and every minute somewhere on the Web, another statistic that hints at an economic recovery is reported, copied, translated, manipulated and reevaluated. It seems for every positive up tick in economic numbers, there is also a negative. We have been experiencing shaky times for the past 20 months. Every sector is not going to at once join together on an all-knowing graph somewhere and move together as one gradually-rising black arrow.

Stats are meant to give us market indication. “Experts” on the economy make sense of the stats by attaching other positive attributes to them without any solid proof. In social psychology, it is similar to how the halo effect works: If I see Bob Somebody helping an old lady cross a busy intersection, then I automatically believe Bob to be a good person; without having any solid proof. Helping the elderly in dangerous situations is good, I saw Bob do that, so Bob must be good. Similarly, the media tells us recessions are scary and bad, positive things do not happen in recessions; therefore a positive up tick in one sector must mean we are out of the bad recession and into the good recovery. Experts link good news with other good news without any solid proof.

Earlier this month, Newsweek ran a cover that pictured a big red balloon which read “The Recession is Over!” The cover and its related story caused a small uproar that resulted in criticism from President Obama. Although the cover story was meant primarily to sell magazines, the author did make a solid point: “… when economists proclaim a recession over, they’re celebrating a technicality: they mean economic output has stopped contracting.”[1] When the economy stops contracting, it does not simultaneously return to the rising rates we experienced in the years prior to this recession.

The reporting of numbers, percentages, graphs and ratios should only be taken for face value. We use them as indicators, as ways to gauge where we are and the possibilities of where we could be heading. Be aware that we are approaching a period that is sure to be overflowing with economists eager to be the first to accurately predict the recovery by accident. Statistics will punctuate every news story you ingest. A small increase over a quarter is no reason to speculate and sink loads of savings into any financial market. The recovery will come. As we work towards it, I encourage you to stick with the basics. Own stocks that make sense. Consider incorporating alternative investments such as real estate into your portfolio not only because of their soundness, but also because they work as a wonderful hedge against inflation. Pay off debt. Adapt to the times. And, most importantly, focus on those things in your life that you care about the most.

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Cash for Clunkers Part II: Dealers Have Clunkers, No Cash

            In last week’s first Cash for Clunkers installment, Cash for Clunkers Part I: Good for Businesses?, I discussed the potential threat the program poses for small businesses. This week I am presenting Part II.

            Auto dealers across the country have been accepting qualified jalopies from consumers in exchange for up to $4,500 off of a new ride. Under the guidelines of the program, the federal government promised to repay auto dealers if they submitted the appropriate rebate forms. This week, the Department of Transportation (DOT) reported that 411,624 rebates have been submitted, totaling over $1.7 billion—more than half of the $3 billion that the government dedicated to the program.[1] Then yesterday U.S. Transportation Secretary Ray LaHood announced the program would be shut down Monday August 24^th because the $3 billion had dried up.

            The concern underlying the delayed payments is two-fold. For one, this is another commitment the government volunteered American tax dollars to without being adequately prepared to efficiently follow through. With every new government-sponsored program, we are losing loads of money to inefficiency. The second concern is that dealers typically purchase new cars from the manufacturers through finance programs. Often times, such financed deals cannot be paid off if the dealers are waiting on money from the government. Therefore, the dealers continue to pay substantial interest charges, which cut their profits on the vehicle sales. Interest fees could be difficult for many dealerships to swallow during what has so far been a dismal year for the auto industry.

            According to the National Highway Traffic Safety Administration (NHTSA), the federal agency in charge of overseeing Cash for Clunkers, it is racing to dedicate more staff to deal with the current massive backlog of rebate applications. The DOT reported that the NHTSA Cash for Clunkers staff “will hit 1,100 by the end of this week.”[2] In order to reach this high number of staff members, Citigroup and federal employees are being taken away from their current duties to help clean up the program.

            The ideas behind recent government-sponsored programs are rushed through Washington only to reach the general public with great inefficiencies. It is true, as Warren Buffet recently wrote in a New York Times opinion article, that “Our immediate problem is to get our country back on its feet and flourishing – ‘whatever it takes’ still makes sense.”[3] However, “whatever it takes” does not always need to translate into sacrificing preparation for the sake of immediate action. The amount of money the government wastes trying to clean up these programs after they are implemented could be dramatically slashed if officials took more time to think them through.

Short-Term Investments Clash with Long-Term Goals

            While investors who armed their portfolios for the long-term still experienced massive losses, they are better suited to ride out the turbulence than those who speculated for the short term. Stocks prices have jumped 40 percent higher than recession lows back in March, but investors should still be prepared for market pullback, which appears to be inevitable. With many experts predicting a bumpy recovery, long-term investments are getting more and more attention.

            Hoards of investors panicked and pulled their long-term capital from equities as the stock market deteriorated. Now, many of them are attempting to patch up their battered portfolios with stable, productive long-term investments. As investors’ emotions are calming and they are again taking action with their life goals in mind, the hunt for smart investments with long-term perspective is becoming more appealing. The media reports daily that we are amidst a buyers’ market, but the majority of the opportunities are suited for short-term investors looking to reclaim their loses overnight. After experiencing record losses, individuals are less cautious of risk. They are more willing to take on greater risk if it comes with the slight chance that they can quickly heal their deep financial wounds. However, wise investors are curbing the need to speculate in the short term and are once again assessing their long-term goals in order to help them guide their financial decisions.

            If your overall goal is to have the money you have earned make you enough money to live on after you retire, then you need to be looking beyond the stock market. A balanced portfolio with a dose of long-term investments, such as owning real estate, hedge funds, venture capital-related projects and REITs, is much more likely to help you achieve your life goals. Plus, short-term investments tend to carry headaches and heavy price tags, while longer-term investments tend to ride out turbulent markets and be priced more appropriately. Whatever the amount of financial losses you have recently experienced, remember to let your life goals play a part in your investment decisions.

Gradual Recovery, Not a Quickbound

            Many economists who hypothesized a steep, booming recovery have now changed their predictions. Historically, dramatic plummets have frequently resulted in steep recoveries. However, the current recession has the characteristics that are likely to breed either a slow, gradual rebound or a slight rebound followed by a new slump.

            The numbers for key indicators of economic growth this summer have been, at best, mixed. On the bright side, stock prices have climbed more than they have fallen, our gross domestic product is declining at a duller rate and job losses have slowed slightly. But, our unemployment rate still teeters around the highest levels reported since the early 1980s, consumer confidence fell in June and July, and homeowner vacancy remains well above the long-term average.

            Statistics aside, what we are likely to see is the emergence of a slight rebound, being fueled partially by consumer spending that cannot be sustained. Customers have been momentarily lured to the big-ticket-item marketplace because of juicy incentives such as the $4,500 Cash for Clunkers rebate and the $8,000 federal tax credit for first-time home buyers. Federal stimulus money will continue to help rejuvenate the economy for the remainder of the year, and likely on into 2010. But, when the money tanks get low, the recovery is going to once again become reliant on natural factors, such as consumer spending and successful businesses.  

            Consumers are likely to make large purchases less frequently because of new tendencies to save instead of charge. Households are saving much more than they have at any other point this decade. This is putting a muzzle on consumer spending, which accounts for around 70 percent of our GDP. Frugal customers are forcing businesses to reevaluate their business strategies. Furthermore, businesses are being required to implement money-producing techniques not reliant on excessive borrowing, which is and will continue to be rare. If consumers and businesses cannot sustain the momentum achieved by the stimulus money, then another slump will inevitably develop.

            The main initiative for the stimulus money is to breathe life back into significant economic driving forces like consumer spending or business investing. Currently, our major driving force, which is just barely keeping the economy idling, is the federal stimulus money. Throughout the end of 2009 and into 2010, we are all going to be responsible for building solid, long-term strategies that will be stable long after the federal stimulus tanks run dry. The government’s spending programs may have helped us avoid a financial apocalypse. But, without taking on the responsibility to continue moving our economy in a positive direction when the funds run out, we will soon find ourselves in another dire slump.

Tags: Add new tag, Bank, Bernanke, Billion, Credit, due diligence, economy, Finance, Geithner, Harvard Real Estate, Money, Paulson, President Barack Obama, Putting Money to Work, Retirement, Short Sales, Standing In The Rain, Stimulus, The Powell Perspective, Thomas J. Powell, Trillion

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Once Bitten: Learning to Trust Real Estate Again

The housing bust burned real-estate investors. Even more frightening, many investors were blindsided by the bust because “credible” officials as high up as then -Federal Reserve Chairman Alan Greenspan were convincing them housing was immune to speculative bubbling. At some point, however, investors will be wise to forgive the real-estate market and reintroduce real-estate assets into their investment portfolio. Many signs are starting to strongly suggest that the time to do so may be right around the corner.

The housing bubble was the beginning of a lot of hardship, but it also sparked an onslaught of once-in-a-lifetime investment opportunities. Historically, real estate has acted as a hedge against the erratic actions of portfolios overloaded with stocks and bonds. But, which real-estate investment option has the best chance of performing well as our economy fights through a recovery? This question brings up a key point: Those who will capitalize on the upcoming real-estate investment opportunities will be those who are knowledgeable, current and responsive.

One market that is looking to explode with investment possibilities is that of commercial real estate. According to Foresight Analytics, a total of $1.4 trillion in commercial real-estate loans on U.S. properties will be coming due over the next five years. Therefore, troubled commercial real estate is and will continue to be actively searching for responsive investors. Those with the wherewithal to complete their due diligence and supply the capital are likely to be well compensated. However, getting involved in commercial real estate can be complicated.

The easiest way to break into the asset class is to do so through a real estate investment trust (REIT). According to a recent cover story in Forbes:

The highest-yielding stocks in the real estate universe are property-owning REITs, which are in business to collect rent and pass the money along to shareholders. … All REITs have the same basic objective: buy property and put it to ‘higher and better use.’[i]

Over the next five years an abundance of low-cost mortgages issued earlier in the decade will be expiring and owners of commercial properties will be actively searching for fresh capital. Anticipating a market soon to be filled with distressed commercial properties, many REITs across the country have started to raise new equity. In order to conserve money, many REITs have cut dividends, but investors wise enough to get involved are still currently soaking up average dividend yields of 7.3 percent.[ii]

With the previously mentioned $1.4 trillion in commercial real-estate loans coming due in the next five years, investors with available capital will be faced with enormous investment opportunities. The banks that created the loans do not appear to have the means to refinance them. This will leave the owners of the commercial loans anxious to attract new capital or sell at close-out prices. The REIT industry, which is currently active in purchasing and improving distressed commercial properties, offers educated investors a relatively easy way into the world of commercial real-estate investing. Plus, REITs usually own dozens of commercial properties, which often enables them to weather turbulent economic times. But remember, commercial real-estate investing can be complicated, no matter which flavor you choose. So always analyze your risk. Also, be weary of “experts” trying to convince you that any market is invincible or immune to any investing fundamental.

Not a Bank, an Ally

As far away from banks as Ally tries to position itself, the truth it, it is still a bank. Built up from the ashes of GMAC Bank, Ally is striving to push banking “in a new direction.” With transparency as its crutch, Ally is an online banking institution pleading for the public to see right through it.

In May, with General Motors seeking to file Chapter 11 bankruptcy, GMAC Financial Services hurriedly changed the name of its bank from GMAC Bank to Ally. Not wishing to be linked to the failing auto company, GMAC Financial Services underwent an intense marketing makeover to create a banking image that people could trust. Although potential customers may still be furious with the government bank bailout, Ally promises to take other frustrations out of banking.

One of Ally’s many advertising messages boasts, “No monthly fees. No minimums. No sneaky disclosures. No kidding.” Another asks, “What is your bank trying to sneak by you?” Ally’s mission statement claims it is a bank “that values integrity as much as deposits.” But, is this accountability too little, too late?

In an effort to prove to customers that it is not just a product of a high-priced marketing effort, Ally is heavily promoting a no-penalty certificate of deposit. The CD, which touts a two-percent, one-year annual percentage yield, is one of the most competitive currently in the market.

In times when the economy is bringing honesty to the surface of nearly every business, is it better to go with one that overtly claims to be straightforward or one that was all along? Obviously, the latter is much more difficult to find. Ally claims it is “always going to give it to you straight,” but will what they are giving amount to more than round-the-clock customer service, straightforward language and clever TV commercials?

A Spotlight the Size of California

Lately, the nation has looked to California to witness the opening of the worst wounds this recession has to offer. Being the epicenter of the housing collapse intensified California’s existing problems and brought its house of cards down to a heaping mess. The Golden State’s unemployment rate is more than two percentage points higher than the national average of 9.5 percent. The state government has issued IOUs in place of tax returns, student grants and payments to creditors. Governor Schwarzenegger is constantly involved in seemingly-endless negotiations with legislative leaders. Credit agencies have started to downgrade the rating on the state’s debt. The state’s student-teacher ratio is more than 30 percent above the national average and appears to be rising. And, grimmest of all, the state faces an estimated $26 billion-dollar budget gap for the current fiscal year.

The entire country was hit by the current recession, but California was mauled. While 48 states face budget deficits, none of them are as severe as California’s. The state was hit from nearly all directions, but, from my view, California appears to have two major hurdles to overcome.

First, the state is unfriendly to business. Last month, CNBC released results from a survey it conducted concerning the best states in which to operate a business. California ranked second to last in business friendliness, cost of business and cost of living. In this year’s survey, even Hawaii passed California in terms of business friendliness. In fact, the only state with harsher legal and regulatory framework was West Virginia, for the second year in a row. Overall, California ranked 32^nd. The state was pulled higher up because of its superiority in technology and innovation. Also, the state that makes up one-eighth of our economy did rank first in something else: access to capital, something that certainly cannot continue.[iii]

The second major obstacle I see is Californians expect a plethora of government-funded services but they are unwilling to sustain the tax threshold required to keep them running. This obstacle also faces our country as a whole. Our aging population requires an increase in Medicare and Social Security spending, yet no one wants to foot the bill. In May of this year, the California Legislature left tax increases in the hands of the voters and, not surprisingly, the voters rejected them. After all, the state’s income tax rates and motor vehicle registration fees are already among the highest in the country. With California already drowning deeply beneath its own problems, budget cuts were the only other viable possibility. The spending cuts approved this year “equal almost 30 percent of the general revenue fund and will affect schools, prisons, colleges and welfare.”[iv]

California’s appealing creative environment has caused inventive people to flock there for decades. But, with California’s system in shambles, residents may find it easier to relocate than to restructure. California’s ideal weather may not prove to be enough to attract the creative people needed to pull the state from its current slump.

Tags: Bank, Bernanke, Billion, Credit, due diligence, economy, Finance, Geithner, Harvard Real Estate, Money, Paulson, President Barack Obama, Putting Money to Work, Reset, Retirement, Short Sales, Standing In Rain, Stimulus, The Powell Perspective, Thomas J. Powell, Trillion

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Yeah, There’s a Czar for That

It is beginning to appear that the job of high-up elected officials is simply to hire others to oversee the issues we elected them to solve. President Obama has appointed a czar for nearly every significant issue that faces his administration. According to a recent article in the Chicago Tribune, “Republican Sen. John McCain has joked that President Barack Obama has ‘more czars than the Romanovs,’ the dynasty of czars that ruled Russia for three centuries.”

While the President is unquestionably overwhelmed with responsibility, the answer cannot always be to appoint a new position, which often means a new hefty salary. These new positions help keep one pair of eyes dedicated to an issue, which adds focus to important problems that need quick solutions. But, we elect individuals we feel can handle certain responsibilities and, in turn, we hold them accountable. Eventually the government will be overrun by managers instead of employees. Responsibilities will be thinly outlined, feet will be stepped on and too many cooks will be in the kitchen.

According to Reuters.com, the Obama administration has appointed:

a drug czar, a U.S. border czar, an urban czar, a regulatory czar, a stimulus accountability czar, an Iran czar, a Middle East czar, and a czar for both Afghanistan and Pakistan, which in Washington-speak has been lumped together into a policy area called Af-Pak. There are upward of 20 such top officials, all with lengthy official titles but known in the media as czars …

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Tags: Bank, Bernanke, Billion, Credit, due diligence, economy, Finance, Geithner, Harvard Real Estate, Money, Paulson, President Barack Obama, Putting Money to Work, Reset, Retirement, Short Sales, Standing In Rain, Stimulus, The Powell Perspective, Thomas J. Powell, Trillion

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Subprime Lenders, Transformed

With shady subprime-lending practices behind us, former subprime lenders have been forced to put their devious skills to work elsewhere. The complexities of loan modifications have attracted many ex-lending predators and provided them a vehicle to employ their corruption.

Now no one is saying that each and every person involved in loan modification is corrupt. In that same vein, no one is saying that each and every person who ever approved a subprime loan is guilty of being a swindler. A select few did truly believe they were helping their customers to fulfill the dream of home ownership. But, many of the lenders did thrive through corrupt practices in the subprime arena and have now adapted their skills and applied them to loan modifications. With many of the exotic mortgages they once approved sliding into foreclosure, the former subprime lenders are essentially scamming the same audience. Only now they are promising to modify the quirky loans.

Many businesses that formerly operated as mortgage brokers are now offering loan modifications to customers that are desperate to retain ownership of their homes. Dozens of such loan-modification companies have been accused by authorities of fraudulent business practices. The success rate for significant loan modification is low. Loan modifiers attract their customers by advertising that they can negotiate with lenders to lower payments on delinquent mortgages, which would in turn allow borrowers to stay in their homes. Of course, loan-modification businesses require upfront costs, sometimes exceeding $3,000. Customers, strapped for cash and desperate to hold onto their homes, are filing formal complaints against companies that take their money and make no progress with lowering their loan payments.

According to a recent New York Times article, “Since October, the California Department of Real Estate has ordered 210 businesses and individuals to stop offering loan modification or foreclosure prevention services, because they lacked a real estate license, as required by the state.”[i] In order to sidestep the rules in California, many loan-modification businesses have brought on a lawyer. This allows them to market their company as a law firm and, in turn, collect the upfront fees that keep them salivating. The lawyer will often act as a silent partner and have nothing to do with the process of modifying loans.

With the fees being paid upfront, the loan modifiers have no motivation to see that the paper work actually goes through to the lender for processing. Many loan-modification businesses have sprouted up hoping to make a quick buck, but few are genuinely concerned with helping clients lower their mortgage payments. So what measures are being taken to prevent loan-modification fraud? In California, the Federal Trade Commission has a lawsuit against a major loan-modification business and has prompted credit card companies to freeze the business’ accounts. In Florida, the country’s only privately-funded loan-modification investigative firm, MFI-Mod Squad, LLC, is committed to exposing illegally-operated loan-modification companies and the people behind them. To report loan-modification fraud or to learn more about the issue, visit http://www.mfi-modsquad.com.

Do These Pants Make Me Look Recession Proof?

Historically, a select number of industries have been considered so necessary that they have been labeled “recession-proof.” However, over the past 18 months the magnitude of this downturn has exposed nearly every industry, except for possibly the booming field of producing “foreclosure” and “for-sale” signs.

From gambling halls to hospitals, many facets of our economy have been referred to as recession-proof. They have been placed on special pedestals where recessionary floods cannot reach them to wipe them out. But, this current flood has raged long enough to erode those pedestals and expose the specialized industries to the same damage as the rest of the economy.

The health industry may be still growing, but it is at the pace of continental divide. According to some of the most recent research, a survey by the American Hospital Association, hospital employment grew by just 0.1 percent in January and February and was stagnant in March. Furthermore, nearly 50 percent of hospitals have cut staff in order to save money, and almost 60 percent reported a substantial decrease in their operating margins from last year.[ii]

The health industry is damaged and has handfuls of concerns, but not nearly as many as casinos, which have long been referred to as recession proof. With dented investment portfolios and non-existent job security, most people are not willing to let it all ride on red. According to an article posted by usnews.com:

Atlantic City casinos reported that revenues fell almost 20 percent this March from a year before, the largest year-on-year decline in the resort’s 31-year history. And on the Las Vegas strip, February revenues from table games plunged more than 35 percent from a year earlier.[iii]

Conventional wisdom has always suggested that the rich have a free pass to escape the pains of a recession. However, the rich have cut back on spending and the luxury market is dwindling. According to a June report from global business consulting firm Bain and Company, the luxury market is forecast to drop an unprecedented 10 percent and not fully recover until 2012.

This downturn has revealed a number of myths concerning even our strongest and most essential industries. Through layoffs, poor investment performance and frugal consumer spending, this recession has truly affected all sectors, even those once thought to be recession proof.

Recovery Doesn’t Go “Boom!”

Those opposed to the American Recovery and Reinvestment Act have persistently criticized the Obama administration’s heavy spending. Because the unemployment rate has continued to rise, critics are quick to argue that the entire stimulus package was a mistake. This week, Peter Orszag, President Obama’s top budget czar, traveled to New York to, once again, plead for patience.

Speaking to the council on foreign relations, Orszag reiterated that the Recovery Act is on the right track:

The economic situation we inherited was so severe that we needed to assure producers and consumers that aggregate demand would be boosted not just for a few months, but for a sustained period. That is why we envisioned a Recovery Act that would ramp up rapidly in 2009, have its peak impact in 2010, and lay the groundwork for further growth thereafter.[iv]

Patience is not something a lot of us have when we are in pain. However, the problems required to cause a recession of this duration took years to develop and it is going to take years to resolve them. We all forget that we are not going to wake up in the morning to find everything is back the way it was pre-recession. It is going to take time and effort to recover. The other side of this is not going to look like 2006. Some of the characteristics will be similar, but things are going to be different. We are all going to have to reset our mindset in order to move in a new, positive direction. We have tremendous opportunities to build a stronger, more efficient economy. None of us will ever forget these troubled times, but we can all learn from them and do our part to be better prepared for them in the future. This will not be the last time we experience a down economy, but with some preparation this will be the last time we experience one this painful.

President Obama rode his promise of change all the way into the presidency and that is exactly what we are going to experience over the next few quarters.

Tags: Bank, Bernanke, Billion, Credit, due diligence, economy, Finance, Geithner, Harvard Real Estate, Money, Paulson, President Barack Obama, Putting Money to Work, Reset, Retirement, Short Sales, Standing In Rain, Stimulus, The Powell Perspective, Thomas J. Powell, Trillion

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The New “R” Word: Reset

Over the past 18 months, we have been inundated with bleak tales of economic strife. Inevitably, the media has worn us all thin with their never-ending string of bad news. Yes, we are stuck in the thick of a very painful recession. Unemployment rates are flirting with double digits, fears of inflation are beginning to handcuff the government and their financial actions, political parties are torn and bulls are all but extinct on Wall Street. Instead of sitting on the sidelines and waiting for struggling newspapers to drop good news on our porch, I argue it is time for us to stop fearing our economy. I argue it is time for a reset.

After someone has a disease that is critical, but not terminal, they take a reset of their life and gauge what they have to work with. Although this would classify as more of an emotional reset, the same principle can be applied to our current financial struggles in terms of an economic reset. This is where we are right now, both here in the United States and in many parts of the world. Prices have reset. The sooner we realize this and the sooner we gauge what we have to move forward with, the faster we will regain the confidence our capital needs to move forward.

Our economy will recover, but it will not sporadically jump to pre-recessionary levels. Our core growth will be more conservative. Cheap credit will become a thing of the past. The availability of extreme financial leverage will be nonexistent. Instead of returning to business as usual, we will work to create a new world. One with regulations that help our economy, not inhibit it. We will all return to spending, but accountability will be involved. We will assess what tools we have and what tools we need. At that time, we will be able to help our economy grow responsibly. It is not something to fear, but something to embrace. And there is no time better than now to begin.

Much more on resetting our economy in future Powell Perspectives.

Start Your Own Business, Just Don’t Expect to Buy a House

Unable to find steady employment, many Americans are starting their own businesses out of necessity. Small businesses help create new jobs. Nationally, small businesses comprise half of all private-sector employment and they have created about 70 percent of new jobs each year over the last 10 years. Simply put, entrepreneurs drive our economy. But, when it comes to acquiring a home loan, self-employed business owners might as well be lepers.

The qualifications for obtaining a home loan through the Federal Housing Administration (FHA) require that self-employed borrowers have two years of self-employment experience in the same field. However, if a small-business owner has been self-employed for more than two years, then lenders need to see a consistent increase in the business owner’s earnings. If the borrower has been self-employed for less than two years, then past W-2 information is often considered irrelevant unless they still hold their W-2 job. And, since underwriters rely on tax returns as proof of a borrower’s income, year-to-date income is worthless until it is filed with the IRS. Many times, the self-employed borrower is out of luck, especially when banks are tight with lending.

Banks view the self employed as “risky” because their job security is wobbly and their incomes can vary widely from month to month. Because of this unfavorable view, self-employed persons are forced to explore other non-traditional options to purchase a home. The most-feasible of these options include owner financing and lease-to-own properties.

Looking for a faster sale or attempting to move a property that is otherwise difficult to sell, owners will sometimes offer financing themselves. Owner financing can help keep the banks out of the picture and get self-employed individuals on their way to home ownership more swiftly. While owner financing may offer easier qualification requirements and less paperwork, it is crucial to not get swept away in a sour deal. Having a real-estate attorney help to complete the transaction is crucial and will keep both parties informed about the details of the deal.

Another option for self-employed individuals is to find a lease-to-own property. With a lack of buyers, many condo complexes are offering lease-to-own options on their units. After the renter has agreed on a purchase price with the seller, the renter is allowed to move into the property and make monthly rent payments to the owner. This option allows the renter to build equity every time they pay their monthly rent. At the end of the lease, the renter can apply the funds that have accrued toward the purchase price of the property. Plus, by that time, the self-employed renter has had time to acquire the two years of tax returns needed to acquire a conventional loan.

Patience is often the best tool for someone who is self employed and looking to obtain a home loan. Although they may miss out on timely investment opportunities, a self-employed individual can use their waiting time to explore their home-buying options. This way, they will be well-versed in the home-buying process by the time they meet the requirements set forth by loan underwriters.

The way the system is set up, it makes more sense to be a W-2 employee for a number of years, then purchase a house and then risk it all to start your own business. But, entrepreneurs are a spontaneous and confident bunch. They do not always fit into the confines of structured systems. Therefore, we will continue to allow them to fuel the driving force behind our economy, we just will not help them purchase a place to live.

Mortgage Fraud Burns

Last week, the FBI released its 2008 Mortgage Fraud Report. The aim of the study was to provide insight into mortgage fraud crimes perpetrated during 2008. The Mortgage Fraud Report addressed “current mortgage fraud projections, issues, and the identification of mortgage fraud hot spots.”[i] Not to anyone’s surprise, the report suggested that mortgage fraud continued to be an elevating problem throughout 2008. Practically all of the findings indicated an increase in mortgage-fraud activities.

Although a single, precise instrument to determine mortgage fraud does not exist, there appears to be a positive correlation between mortgage-fraud activity and distressed real-estate markets. Therefore, mortgage fraud thrived in the stumbling housing market of 2008. According to the report, mortgage fraud is defined as “a material misstatement, misrepresentation, or omissions relied upon by an underwriter or lender to fund, purchase, or insure a loan.”[ii] Suspicious-activity reports (SARs), which are one of the government’s main weapons against financial crimes, increased 36 percent to 63,713 during the 2008 fiscal year, up from 46,717 in 2007.

Among the most popular mortgage-fraud scams are deceitful short sales, unnecessary bankruptcy filings, reverse-mortgage schemes and unlawful loan modifications. According to the FBI’s website, mortgage fraud is categorized under two main labels: fraud for profit and fraud for housing. Fraud for housing is typified by a borrower who provides false information in order to qualify for a loan. As long as borrowers are clear and honest throughout the loan acquisition process, they should have no worries of being a victim of fraud for housing. However, the FBI cautions borrowers of deceitful professionals who try to coerce them into reporting false information on their documentation. Even though you may be following the advice of a “professional,” you could still be held accountable for the crime.

The second category of mortgage fraud, fraud for profit, is committed by industry insiders who take advantage of borrowers for their own financial gain. Fraud-for-profit schemes include motives to revolve equity, falsely inflate property values or issue loans based on fictitious properties. Existing investigations suggest that “80 percent of all reported fraud losses involve collaboration or collusion by industry insiders.”[iii]

In order to avoid becoming a victim of a fraud-for-profit scheme, the FBI offers the following tips:

* Choose your mortgage broker/banker carefully

* Arm yourself with basic mortgage knowledge

* If something is too good to be true, it probably is

* Never sign a blank document or a document containing blank lines

* Never sign over the house deed “temporarily” for a fee to anyone[iv]

Tags: Bank, Bernanke, Billion, Credit, due diligence, economy, Finance, Geithner, Harvard Real Estate, Money, Paulson, President Barack Obama, Putting Money to Work, Reset, Retirement, Short Sales, Standing In Rain, Stimulus, The Powell Perspective, Thomas J. Powell, Trillion

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Mr Money – Unemployed

A Slice of Real Estate Pie

            Investors know that building a solid portfolio involves striking a balance between producing high returns and protecting the portfolio’s assets. The underlying factor in both of these is risk. However, our desire to manage risk does not mean we need to sacrifice high returns, and that is the beauty and strategy behind having a well-diversified portfolio.

            The idea backing proper asset allocation is to have investments divided among different asset classes, such as cash, stocks, bonds and real estate. Returns from different asset classes do not regularly move up and down together, which is the reason diversification is so important and valuable. One asset class that has started to be widely considered as a necessary slice for a balanced investment portfolio is that of alternative investments.          

            Alternative investments include any investments that are not considered traditional or of the “main stream.” While traditional investments include stocks, bonds, treasuries and certificates of deposit (CDs); alternative investments include private equity, hedge funds, commodities and real estate. Alternative investments are typically most productive when they are treated as long-term investments. On their own, alternative investments can carry high risks, but as part of a diversified portfolio, they tend to reduce risk. This is because alternative investments often times have lower correlation with publicly traded securities, causing them to add much-needed balance when traditional markets are volatile.

            The size of the returns produced by a portfolio is obviously based on the types of assets included. But, the size of the returns is also largely impacted by how much capital is invested in each asset class. There is no fool-proof formula for how much money to invest in each asset class. Experts recommend that investors consider the time horizon of the investment and their tolerance for risk.

            A well-diversified portfolio can by no means guarantee a specific rate of return; that is impossible. Anyone that claims they can do this for you is lying, and I advise you to take your money and run. However, by managing a well-diversified portfolio with adequate amounts of traditional and alternative investments, you can significantly improve your chances for obtaining high returns. Long-term objectives, such as saving for retirement, can more easily be accomplished by putting your money to work in a balanced portfolio with a slot dedicated to alternative investments.

The Retirement Minefield

            The federal entitlement programs that help provide retirement security were among the many somewhat-stable programs to unravel throughout the course of this recession. Projections released May 11th by the trustees of the Social Security and Medicare trust funds indicate that both funds will run dry sooner than estimated in last year’s report.

            The Social Security trust fund’s revenues still exceed benefits by an ample amount, making it the better off of the two funds. Unfortunately, the onslaught of baby boomer retirees will certainly change that. The new report predicts the supply will continue until 2015 but quickly move into deficit thereafter. Medicare is in critical condition compared to the Social Security trust fund. The Medicare Hospital Insurance fund is already running a deficit, and the trust fund is set to run dry in 2017. However, these Medicare estimates are harder to predict because they depend on forecasts of health-care costs.

            Shrinking federal-entitlement programs coupled with a growing elderly population result in a problem that demands our attention. Plus, throw in the skyrocketing number of bankruptcy claims among the elderly and you have a complete recipe for disaster. According to the Associated Press:

The world’s 65-and-older population will triple by mid-century to make up one in six people. Census estimates released (last) Tuesday show the number of senior citizens has already increased 23 percent since 2000 to 516 million, more than double the growth rate for the general population. The fastest-growing age group, seniors now comprise just under eight percent of the world’s 6.8 billion people. By 2050, the senior group will increase to 1.53 billion.[1]

Furthermore, elderly Americans have been seeking bankruptcy-court protection at drastically faster rates than any other age group. According to the AARP, the rate of personal bankruptcy filings among those ages 65 or older jumped by 150 percent from 1991 to 2007.[2] Rising debt and health-care costs are the two main factors contributing to the spike in claims.

            With all the obstacles to negotiate within the world of obtaining a comfortable retirement, now is the time to prepare for the worst. One of the most beneficial investment vehicles for retirement planning is the Roth IRA, in which nearly all income growth and withdrawals are tax-free. Plus, new tax rules are making it easier to convert traditional IRAs and employer-sponsored retirement plans into Roth IRAs. The majority of employers are no longer offering retirement plans that are sufficient for their employees. Plus, with major government programs becoming depleted at rapid rates, it is time to become proactive in your retirement planning. Putting your money to work now will help to create substantial income flow that will allow you to enjoy your retirement. It is up to you to create an opulent nest egg in spite of all the crumbling entitlement programs that are looking to crack it.

The Skinny Behind Short Sales

            While we have all become keenly familiar with foreclosures and their impact on the real estate market, their nearly-as-popular cousin, the short sale, is somewhat less understood. With an unprecedented number of property owners upside down with their mortgages, the Obama administration has implemented incentives in its housing-rescue plan to persuade lenders and sellers to choose short sales over foreclosures. 

            On the surface, short sales are easy to comprehend. Simply put, a short sale is when a lender agrees to accept a mortgage payoff that is less than the full amount from a borrower. When an owner of a property is financially distressed, the option of foreclosing becomes more and more realistic. But, the process of foreclosing is a lengthy and costly one. Although short sales can also be very time consuming, they are often times preferred by lenders, investors, buyers and sellers for a number of reasons.

            According to the National Association of Realtors, short sales have accounted for 15 to 20 percent of sales of existing homes in 2009.[3] Sellers prefer short sales because a short sale is likely to not damage their credit as badly as a foreclosure. Buyers are attracted to short sales because they have the opportunity to purchase property for less than its current market value. If any investments are backed by the property, investors prefer short sales because they will lose less than they would in the event of a foreclosure. A short sale is a better option for banks and lenders because, typically, short sales result in about a 20 percent loan loss, whereas homes sold after foreclosures result in about a 40 percent loan loss.[4]

            Although short sales are appealing to buyers and can prove to be an incredible investment opportunity, these are not do-it-yourself projects. In a short sale you will need help from an experienced real-estate agent or attorney. Not all agents know their way around a short sale, so make sure you consult with one who has a good track record with short sales. As a seller in a short sale, the difference between the actual loan amount and the acquired amount is sometimes considered income for which the selling homeowner can be taxed. Therefore, it is important to include a tax professional in the deal.

            The Obama administration’s short sale incentives allow homeowners who agree to short sale the opportunity to receive up to $1,500 in closing costs. In May, “the government also announced it would make it simpler for borrowers to voluntarily transfer ownership of properties to mortgage companies through a “deed in lieu” of foreclosure.”[5] Lenders can also receive $1,000 for accepting a deed-in-lieu transaction, making them even more responsive to sellers wishing to avoid going into foreclosure.

            Often times, short sales can be a better option than foreclosures, but there are still many risks and stipulations that come to the buyers, sellers and lenders involved. Understanding short sales and the incentives that come with them can help sellers get out of a financial rut by avoiding foreclosure. For buyers, hunting for short sales can be time consuming, but the investment potential can prove to be worth the extra effort. For all of the investors that are sitting on the fence and looking to put their money back to work, short sales should be a considerable option.

Tags: Bank, Bernanke, Billion, Credit, due diligence, economy, Finance, Geithner, Harvard Real Estate, Money, Paulson, President Barack Obama, Putting Money to Work, Retirement, Short Sales, Standing In Rain, Stimulus, The Powell Perspective, Thomas J. Powell, Trillion

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Informative book by Jason Scharfman on, well, pretty much everything you need to run a hedge fund, from risk management to disaster recovery, all need-to-know material for both investors and hedge fund analysts.

Included are examples of past hedge fund management mistakes, showing exactly where the managers went wrong, and how to avoid downfalls such as the ‘but everyone is doing it’ excuse, among others.

Technical though understandable, Scharfman also expains the reliance on technology that is becoming ever more apparent in hedge funds, the dangers of phantomware, and questions that should be asked before commiting to any new technology.

I liked this book for the simple reason that it explains just about everything, almost like a handbook, the index makes an excellent resource.

Available at Amazon.

Since writing the book he has left his position at Morgan Stanley and now runs an operational due diligence consulting firm called Corgentum Consulting. Corgentum works with hedge funds and investors to diagnose and mitigate operational risk at hedge funds and improve upon the of the operational due diligence process.

Tags: book review, due diligence, Not Categorized

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