Some Thoughts As We Enter The Weekend
Posted @ 7:16 pm - Filed under Communication, Sez Me, Weekend Thoughts
The first quarter isn’t over yet, and banks lending to each other and/or to business is trending slightly up. I make a distinction between ‘trending’ and calling it a definite trend. It’s not a trend yet, just encouraging.
Our portfolio lender in Texas is coming through, closing loans Fannie Mae wouldn’t give a sniff to. That’s great news for you too, as it shows they’ve assessed the risk and decided the interest charged (low 6’s) is appropriate. This means pressure will now begin to build on Fannie/Freddie from lenders who will be losing more and more loans to portfolio lenders — and guys like me who advise investors. I have a client now able to purchase 3 duplexes, who’d be limited to 2 if he were to use a Fannie Mae lender. This is due to what I call the ’successful investor penalty’ inflicted via down payment on those owning more than 4 properties. In this client’s case, it’s empirically impossible to acquire that 3rd property without using the portfolio lender exclusively. That’s five figures of income the Fannie Mae lender will never see — times how many investors nationwide one wonders.
Over the next 25 years that extra property will mean at least an extra $2-4,000 in monthly retirement income. See? It is such a big deal.
Had an interesting discussion with my good friend Tom Vanderwell today. He’s among the very small group of lenders for whom I hold the ultimate respect. He lives in Grand Rapids, which these days is spelled H-E-L-L as far as micro-economics goes. He’s also a fellow BloodhoundBlog contributor, one of the best moves that blog’s owner, Greg Swann ever made.
Anywho, we were having a spur of the moment give and take on the ‘Mark to Market’ accounting rule. You learn early on not to run willy nilly when debating with him, ‘cuz you’ll find out quickly your apparent gains are really a prelude to becoming outflanked by your own impetuosity. Bottom line, he’s for keeping it the way it is, and I’m with the crowd wanting at least a meaningful modification.
For those still tryin’ to figure out exactly what it is, I used an analogy with Tom that I thought was illustrative of the fiction perpetuated by MM’s accounting. In real estate, depreciation is a phantom loss which acts as an offset to income from both property investments, and in the case of those earning $100,000 or less from their job, paycheck income. Imagine going to the bank for a loan, any kinda loan. You make $76,000 a year, saving over $10,000 annually after taxes. Your credit score exceeds 750.
Using the concept of MM, i.e. a loss never incurred, your banker says you only make $51,000 on your job ‘cuz of the $25,000 ‘loss’ shown on your tax return via depreciation from your real estate investments. You both realize you didn’t lose a dime. In fact, due directly to the depreciation you were able to avoid paying almost $10,000 in state/fed income taxes. Still, you’re denied the loan — you don’t make enough money to qualify. Now, how silly does that sound to you?
Yeah, me too.
Tom made some great points, one for which I simply don’t have an answer, but surely on which will affect any compromise reached by the SEC’s efforts next month. Though the loss inflicted by the practice never happened, the value of the asset in question is more or less correctly identified. In other words, if the house indeed has a current vlaue of $XX when it used to be worth $XXX, it is what it is. And if the bank needs to liquidate assets today, there very well could be a loss, depending upon the loan’s balance.
Though Tom disagreed with me, I think I can safely predict he’d like living in a world free of Mark to Market. Both real estate and Wall Street would be positively impacted almost immediately. The psychological influence will more likely than not be very positive, no doubt reflected in the very next day’s DOW/S&P numbers.
OK, that’s enough for a Friday. Enjoy your weekend.
By the way, this site will be undergoing an upgrade shortly after midnight PST. My web guy says I’m ready to eat at WordPresses cool table. 
So if you come here and I’m not here, you now know why. It’s only supposed to take 10 minutes or so, but we all know how it can go sometimes.
This entry was posted on Friday, March 13th, 2009 at 7:16 pm and is filed under Communication, Sez Me, Weekend Thoughts. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
