Posted on November 26, 2007 @ 9:06 am - Written by BawldGuy
So, Jeff, what’s yer take on this whole sub-prime mess? Before I answer, let’s look at not only what I’ve been saying, but what’s actually been happening. Grandma used to say, empirical beats anecdotal every time — and Grandma wouldn’t lie.
All over the country, lenders big and small report sub-prime borrowers are living their lives, paying their payments, and acting like super-prime borrowers. 
They say, when pressed, the sub-prime problem is real, but not the tsunami portrayed at every turn by the ever reliable media.
Anyone who has followed this site for any time at all, knows I’ve been shouting from the mountain tops, the lenders will figure a way not to foreclose on thousands of homeowners. Many of them would be outa business if they did, which violates one of the top three BawldGuy Axioms. We’ll get back to the applicable axiom later.
The empirical?
How ’bout Wall Street has, for the most part already written off their losses — put them on their books. B of A, a giant among giants, has set aside less than $2 Billion as reserve for anticipated losses. That’s kinda like you and I setting aside a few bucks a week for the office donut fund.
Several of the central players on Wall Street have now publicly taken Billion$ in losses. Their profits are now up. My favorite move though, at least so far, is what happened in my state last week. The Governator announced four lenders — Countrywide, GMAC, Litton and HomeEq — who between them now service more than 25% of bad credit sub-prime loans in the state, have agreed to the following.
They’ll allow these borrowers to keep their initial lower interest rates — as long as they live in the home, have made their payments on time, and can prove their inability to make the new, much higher payments. You can read more on this by going here, or here.
Well, Surprise, Surprise, Surprise. Lenders who don’t wanna take back hundreds of homes, proving what failures they are — and saving their own skins. I’m shocked and chagrined — NOT.
In a nutshell, the deal was, according to reports, brokered by the Governor.
Here’s a scenario possibly more believable. In fact, it’s more believable because it’s so plausible. Call me cynical, but I’ve seen the earlier versions of this movie, and think I may know the ending. The story begins somewhat differently than is being reported. Again, this is just my take on things — an opinion. 
The lenders (actually, lenders servicing the loans) called Arnold — not the other way around. They deserve a Best Director Oscar nomination.
Why?
The Governator gives them cover. Also, they gain platinum political points by making Arnold the hero. They make themselves look like very empathetic, reasonable folks, who just wanna do the right thing.
The industry buzz is, it’s gonna be the feel good movie of the year.
See? Everybody wins.
Arnold looks like a hero, a role which,
by now he plays seamlessly. The lenders create an ending reminiscent of It’s A Wonderful Life, and the borrowers, all of whom play the part of Jimmy Stewart, leave the theatre with that familiar warm glow. You know the one — when Hollywood writes the ending we all wanna need to see.
Compare what’s been reported to what I’m suggesting.
Which one makes more sense to you?
Are we to take seriously the scenario, uh script, saying Arnold had to persuade the lenders to volunteer for this happy ending?
Wanna know who’re the only ones panning this movie? The lenders who weren’t included by the casting director. “Hey, we wanna be good guys too!”
Expect to see some pretty sad knock-offs of this classic effort — and probably fairly soon. I’d say before the end of the first quarter of ‘08. You know Hollywood loves to imitate success — no matter how bad it makes them appear. It’s all about the Benjamins. Again, duh.
For Heaven’s sake we’re on Friday The 13th XXXIV aren’t we?
Remember, as so correctly pointed out in the linked posts, foreclosures cost lenders tens of thousands of dollars each. 
Contrary to the belief of most, lenders do not want your property back — period, end of sentence, no argument.
They’d rather eat bugs.
BawldGuy Axiom: Lenders lend.
This is just another example of the lengths to which they will go in order to — here it comes — keep lending sans interruption. Giving borrowers, especially a relatively small minority, a break for a few years, is a huge bargain to them.
They just bought 3-5 years for pennies on the dollar.
They’ve seen this movie before too. Duh. By altering the ending, they’ve enabled themselves to go from a Friday The 13th feel, to well, a Christmas Classic.
Casting the Governator in the starring role? Brilliant in its simplicity and effectiveness.
Even though we’ve all seen this movie a few times before, this version is well done.
The lenders accrue great PR. They secure the best cover possible in the Governator. Arnold gets to save all the borrowers, not exactly a dangerous political move on his part.
And the best part of all? The borrowers can now go about their lives minus the omnipresent mind-numbing anxiety of not knowing if they’ll have a home this time next year.
Two Bawld Thumbs up for this one.
Posted on September 18, 2007 @ 12:34 am - Written by BawldGuy
Then the guy says to me, “What you just don’t get, BawldGuy, is that leverage is the foundation for all that is good in real estate. Why don’t you get that? In fact, the higher the leverage the faster the capital growth, right? Right.”
Where to begin. The depth of ignorance in those statements is staggering. How ’bout the basic definition of leverage in the first place?
I understand most folks view it as the ability to control property with very little of their own money. Fair enough. The lever moves the big bad boulder and all that. I get it. That’s not, however, strictly speaking, what investment leverage is — not even close.
It’s kinda like cash flow. We hear that term and immediately a picture flashes in our mind — green paper with large numbers and pictures of dead presidents — all coming our way.
Extra! Extra! Extra! There’s negative cash flow too. Oops.
Folks, I’m here today to let you in on a little secret: There’s negative leverage too. Sshhhh. Quiet. Don’t say it so loudly. Sorry.
Positive leverage in the strictest sense, is when your return on capital is greater than what you’re paying for the borrowed money you used to acquire the investment.
If your cost of money is 7%, and your return is 6% — you lose.
If on the other hand, your cost is 7%, and your return on capital invested is 10% — you win.
The first is called negative leverage, the second is positive.
If I put 10% down on a rental property with an interest rate of 7%, and my cash flow is negative after taxes, and there’s no appreciation — my so-called leverage is worse than…
The other guy who put 20% down across town, had break even cash flow, and 4% appreciation — his leverage was, by orders of magnitude, superior to my leverage.
Law: Leverage in real estate investing isn’t primarily low down payment. It’s ensuring your cost of borrowed money expressed in terms of interest, is less than the return on invested capital.
Violation of this law will produce consequences analogous to falling off a treadmill. At least while on the real estate treadmill, i.e. 
no appreciation or cash flow, the tax shelter provides a little something of return on which to hang your hat. When the net result however, is that your after tax return is less than the cost of money — next thing you know you’re on the floor wondering what happened.
It’s not a good feeling. I’ve fallen off a treadmill, and in my time experienced some pretty negative leverage. The best thing I can report about both experiences is that I didn’t get hurt too badly. Both experiences were, however, painful — to the extent I have paid much more attention than before the mishaps.
The Myth: As long as your down payment is lower than the other guy, you’ll automatically make more money than they will.
That single belief, held by so many, has been the sand upon which many disasters have been built.
Of all the Laws of Investment Physics, this may be the most abused. The biggest abusers? Those who’ve tasted solid success using it correctly. The problem? The lesson they took from their initial success was — the erroneous conclusion that their use of leverage was the magic wand to riches. And that can be as irritating as this magic wand and hat.
The Paradox: It can be one of the most effective tools in the investor’s tool chest. It can also devour capital faster than you can watch it happen. Which one you experience is almost always dependent upon actually knowing what it is — and maybe more importantly — what it isn’t.
And finally, I feel compelled to remind you of the obvious, but unstated corollary of this, and every other Law of Investment Physics: They’re called Laws and not Suggestions for a reason.
Posted on September 12, 2007 @ 9:24 pm - Written by BawldGuy
A common mistake is to brush off very simple concepts — because they are — simple. Many consistently commit this mistake with what I’ve called The Laws of the Physics of Investing. 
The problem with that is, the laws don’t care if you believe in them, understand them, or even know of their existence. They just work — every single time they’re tried.
The physics of investing are crucial to the success of any retirement plan. In most ways they’re no different than the laws of physics we learned in school.
For instance, jump off a cliff, and you’ll fall down every single time. That’s gravity. It’s absolutely reliable — every single time. There are no exceptions. You will never, for any reason fall up instead of down. Knowing this is true, you can choose to apply gravity to your benefit, or ignore it at your peril.
Let’s take a look at one law of the Physics of Investing.
Investment income, no matter how simple or sophisticated the investment vehicle, is always a result of the same process.
An amount of capital is invested at a known, or at least hoped for yield. That yield is expressed in terms of a percentage. If for example, you put $100 in your bank at a 2% annual yield, your ‘investment income‘ will be $2. On the other hand, if you had deposited $1,000,000 — your income would instead be $20,000.
Same 2%. Remember, I said it was sometimes very simple.
LAW: The amount of investment income, all things being equal, is dictated by the amount of capital invested.
I know, I know — Duh. Where’s Captain Obvious when you need him, right?
Stick with me a bit.
All retirement income is about, is a yield on whatever capital you bring with you at the point of your retirement. Whatever rate your capital will command at that time will be what it will be. You won’t be able to control it.
You can control, however, how much capital you have at that point. That amount will, as I said earlier, determine what your monthly retirement income will be — for the rest of your life.
That amount will be larger or smaller in direct proportion to the wisdom of the investment decisions you made for the 2-4 decades preceding your retirement.
Capital multiplied by % of return = retirement income. How much capital will you have created when it’s time for you to retire?
What have you been doing to grow your capital the last 10 years? How’s it been working for you lately? Are you satisfied with how your decisions have turned out the last decade or so?
The Law Says: The bigger the bag of gold — the more impressive the yield retirement income.
It’s a law you can’t change. You can only choose to use it to your advantage — or not.