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Direct Lending


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2008 Nov 21, 1:36am   38,251 views  286 comments

by Patrick   ➕follow (55)   💰tip   ignore  

house I'd live in

With CD's paying 4%, and Wells Fargo charging 8.8% for a jumbo 30-year fixed, maybe I should finance someone's jumbo mortgage -- but only for a house that I'd actually want to live in. Either I get direct interest payments up around 8%, or, if the user defaults, I get the house. The trick would be to lend only the amount that I'd be willing to pay for the house in the first place.

Is it evil? Is it risky?

#housing

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1   Peter P   2008 Nov 21, 2:02am  

It is not evil but it is risky.

If the borrower defaults, the foreclosure process can take months. You will not get paid in that period of time. He may trash the place, further depressing value.

2   Duke   2008 Nov 21, 2:14am  

Weird idea. Normally direct lending gets big when Interest rates are really high and you want to sell your current home.
In this scenario you would have enough cash on hand to buy a house outirght that would require a jumbo loan. Then you would be selling it at a slight discount to the Wells Rate of 8.8% so you could have your cash work harder.
Hmm.
Standard risk applies here. You would want a down-payment large enough so that person does not walk away, and you would then have to hope that the new owner you are carrying is not just a flipper so that your cash is not paid back at the time they sell (in a few months) - I mean 8% for a couple of months and large fixed costs is kinda yikes.
In general I would have to say the market is pricing risk pretty well and that if you think you can do better you are probably missing a lot of factors.

3   sa   2008 Nov 21, 2:57am  

8.8% sounds good in deflationary environment, what happens when things turn around and becomes inflationary. Wells can play with fed/people's money, we can't afford that option. You may not be able to sell the loan. Fed has shown they will throw money like crazy and when people start to get their share, it could be inflationary. look at longer term, In 30 years most people will be millionaires. Although, millions wouldn't buy much.

4   Lost Cause   2008 Nov 21, 4:00am  

Why would you want to tie up all of your money in real estate, which is not a liquid asset? Especially when assets are falling. It seems that you would have to own the house outright in order to sell it as owner finaced. Otherwise, you would have to get the bank to sign off on a wrap. And there might be regulations as to who can provide a mortgage otherwise. I am not sure about any of this, but it does not look good to me. I am sure there might be cases where it pencils out.

5   EBGuy   2008 Nov 21, 4:22am  

Sold a litttle GLD today (slight profit) and bought some banks. Dividends are north of 6% (no guarantee, of course, that they will stay there).

6   justme   2008 Nov 21, 5:16am  

Here's how I look at it:

Banks make money by being the professional middleman between small savers and house buyers.

If you already have a large enough sum that you can buy a house, and the price is right, then I think you should rather buy the house (if you need it) instead of trying to be a professional middleman.

7   Peter P   2008 Nov 21, 5:27am  

look at longer term, In 30 years most people will be millionaires. Although, millions wouldn’t buy much.

In the mid-1990's, most Yugoslavians were trillionaires.

8   EBGuy   2008 Nov 21, 5:52am  

Looks like OO got his PM orders in on time. I guess "secure" now means the toilet tank or a hole in the ground (wouldn't want the US govt seizing it from a safety deposit box.)
With retail and wholesale clients around the world stocking up on the precious metal, the Perth Mint has been forced to suspend orders.
As the World Gold Council reported that the dollar demand for gold reached a quarterly record of $US32 billion ($50.73 billion) in the third quarter, industry insiders said the race to secure physical gold had reached an intensity that had never been witnessed before.
Perth Mint sales and marketing director Ron Currie said the unprecedented demand had forced the Mint to cease orders until January, with staff working seven days a week, 24-hour days, over three shifts to meet orders.

9   kewp   2008 Nov 21, 7:30am  

I'm reasonably certain that is due to the tin-foil hat crowd making a run on gold coins.

Good arbitrage opportunity for our government to buy gold futures now and then charge a premium on the coins they mint for private-sector consumption.

Once the next bubble pulls us out of the recession the institutional investors will sell their gold and start chasing the next big thing. Its just being used a temporary story of value and hedge against the chance that BoomBoom fires up the helicopters.

10   StuckInBA   2008 Nov 21, 8:43am  

kewp and EBGuy :

I am no gold bug, but I am bullish on GLD. Mish has a post up today on it. I got in way too early - cost basis around 85.

I have no idea about long term future of gold. I was lucky to get out of all anti-dollar bets in time. Now after this strong USD rally I am once again looking for another dollar bearish trade. But I do not like any other currency. USD may not fall much against other currencies. Hence GLD.

I think the only hedges against USD are now gold and oil. Forget other currencies. I am very mildly bullish on oil, made small bets on big oil stocks. Oil may rise, but the recessionary forces will keep the price in check. Gold is a bet against all fiat currencies.

NOT AN INVESTMENT ADVICE. My 401K is half of what it was 2 months ago. So you know what might happen if you follow my advice :-)

11   Brand165   2008 Nov 21, 8:59am  

You'd have to be very careful about who might become a lienholder ahead of you. Also carry a supplemental insurance policy, etc.

12   SP   2008 Nov 21, 9:05am  

@StuckInBA
What timeframe are you looking to hold GLD? The reason I ask is that a large component of gold's value is as an insurance against disaster - in which case will an SPDR or other ETF really be reliable?

It will serve well as a hedge against severe dollar devaluation, but if the sh*t really hits the fan, it is still just paper and you end up exchanging devaluation risk for counterparty risk.

Just IMO, and not a criticism - I am trying to figure out how much exposure to ETF is prudent.

13   StuckInBA   2008 Nov 21, 9:45am  

SP :

Here is a nice informative but long article that explains if GLD is doing its job as an ETF.

http://tinyurl.com/6m6joe

Bottom line : This ETF had managed to track the underlying asset rather well.

Will it continue to do so ? Who knows. But if a doomsday scenario really comes true, GLD is no match for physical gold.

In the meanwhile it can help generate good short to medium term trades. There are options available on GLD, with nice premiums and highly liquid. Writing covered calls on GLD can also help reduce the cost basis. The availability of options attracts me to GLD.

It's getting tough to buy physical gold here in US. But for those having relatives in India - it is still easy to buy gold bullion from banks like ICICI and nationalized banks.

14   EBGuy   2008 Nov 21, 9:46am  

My 401K is half of what it was 2 months ago.
Stuck, Good to have you back. I feel your pain -- snuck a peek at my mutual fund 401k portfolio and had the same experience (half off -- this would be comical if it weren't my retirement). I did have another portfolio about the same size which I had dumped over a year ago and put into PMs. Had some buy in below 800 but also some BS panic buying at 800+ (and lets not forget the silver -- yikes!), but it held up much better than stocks and mutual funds.
Bid to cover for TAF and TSLF auctions were less than 1 for the past couple of auctions. This is either a good sign, or , perhaps, an indication that deflation has taken hold and they're pushing on the proverbial string... At any rate, the Fed collateral is the place (if any) where "covert printing" will happen. As banks don't renew TAF/TSLF loans (which is happening to a VERY small extent this past week), there is less possibility for monetary inflation. Hedge at your own risk...

15   EBGuy   2008 Nov 21, 10:01am  

Wow, check out the "non-borrowed reserves" in this weeks H.3 release from the Fed. Deposits are coming home to the mothership...

16   Malcolm   2008 Nov 21, 10:20am  

Patrick, that kind of loan actually pays 12% or more. There are hard money brokers I have told you about who do these loans. Yes, it is risky, you have to be very careful about the appraisal and working with a broker you trust. That is not meant to be a joke, you have to find someone reputable to work with. Also, realize that someone's residence is different than say a commercial project. I have seen people get very protective of their home and threatened to sue for such things as usury. Even if the claim is bogus it still scares people. If you have money burning a hole in your pocket and want to lend or invest in real estate get in touch with me and I'll show you how. I am working on some things on foreclosures back east that you will find interesting. You could get in with less than $15,000.

17   Malcolm   2008 Nov 21, 10:21am  

Yes, what Brand says, don't take a second position on someone's house as a rule of thumb.

18   justme   2008 Nov 21, 10:46am  

Bank Failure Friday: (where is Paul :-))

Community Bank of Loganville, Ga., is 20th bank to fail this year.

20   Paul189   2008 Nov 21, 10:50am  

I was wondering if Citi would be there tonight. Ah well, guess it's wait til next bank failure Friday for that.

21   SP   2008 Nov 21, 10:55am  

StuckInBA, thanks for the analysis. Good points.

22   Paul189   2008 Nov 21, 10:58am  

http://tinyurl.com/5g9j55

The money at the banks is gone and now so is the gold!

23   justme   2008 Nov 21, 10:59am  

Here's my take on Geithner as Treasury Secretary:

Obama wants better control of the (NY) Fed, hence kick Geithner upstairs, get rid of Bernanke, make Volcker the Fed chairman, and place a puppet at the NY Fed. Play ball.

Could be wrong, just a thought that popped into my head.

24   justme   2008 Nov 21, 11:06am  

Oh, and it may also defuse the big Fed we-should-be-the regulator-of-everything power grab, once Bernanke is also gone.

25   Paul189   2008 Nov 21, 11:18am  

Can someone enlighten me on how our new President changes the FRB Chairman?

"Appointments to the Board
The seven members of the Board of Governors are appointed by the President and confirmed by the Senate to serve 14-year terms of office. Members may serve only one full term, but a member who has been appointed to complete an unexpired term may be reappointed to a full term. The President designates, and the Senate confirms, two members of the Board to be Chairman and Vice Chairman, for four-year terms."

I have not found where the 14 year term or 4 years as Chairman can be cut short.

http://www.federalreserve.gov/pubs/frseries/frseri.htm

http://www.federalreserve.gov/aboutthefed/default.htm

26   B.A.C.A.H.   2008 Nov 21, 11:37am  

I've been building physical bullion position in 1K+ purchases (sales tax threshold) one month at a time, for several years. Only sold once, ironically at a price of $911 to pay for plane tickets for the family. Never been skunked, been able to trade every time, about once a month, on slightly random dates.

The premiums have gone up since I started buying in 2003, but they seem to be competitive based on what I read in the business section.

So I keep reading the mania articles on financialsense.com and other web sites but it's not what I've been seeing.

27   kewp   2008 Nov 21, 2:13pm  

Will it continue to do so ? Who knows. But if a doomsday scenario really comes true, GLD is no match for physical gold.

Um, except that the largest holder of physical gold in the world is the United States Government. Ever heard of Fort Knox?

What doomsday scenario are you exactly thinking of? If the world goes back to a gold standard we already have more of the stuff than anyone else.

The only larger store of gold is at the Federal Reserve in NYC. Which we can take by force if push comes to shove.

I think your tinfoil hat is on too tight.

28   justme   2008 Nov 21, 3:03pm  

Paul,

That is an interesting question.

If Geithner becomes S of TT, then he will resign from the Fed,and Obama gets to appoint a replacement. Check.

As of 2009/01/13, Bernanke has 1 year left in his appointment. Perhaps he can be talked into resigning, too. Or he just might not be re-appointed in 2010.
Even Greenspan did not serve an integer number of 4-year terms. Half-a-check.

I dunno, my thought is perhaps a bit far-fetched, but it could be that Obama is trying to reign in the Fed. It is pretty crazy that members of the most powerful board in the nation serves 14-year terms. It is almost like having the supreme monetary court.

Time will tell. I think it will become interesting.

29   OO   2008 Nov 21, 3:31pm  

Stuck,

you are Indian, Indians know gold, and Indians like physical, same as Chinese.

If you really want to guard against TSHF situation, get some physical, ETF is not the real thing, it is great for building a position or trading, but when SHTF, it is still paper.

Justme,

stop dreaming, Volcker is 81, and this Fed Chairman job is HARD WORK (in Bush's voice), he won't last more than a couple of years even IF Obama appoints him. Spare that old man please.

The Occam's Razor answer of this all is, we are going to reflate, everyone on board is ready to reflate, and Ben has till 2010 to raw print in big scale. The fact that they place a long-time Fed/banker/IMF Geithner to the position means we want more coordination and integration between the Fed and the Treasury to pursue the current path, which is to reflate.

I just hope that there will be an orderly revaluation of USD in the next year or so, no more these violent yoyos, or I will need a defibrillator soon.

30   justme   2008 Nov 21, 3:36pm  

>>stop dreaming, Volcker is 81, and this Fed Chairman job is HARD WORK (in Bush’s voice),

You're doing one heck of a job, Benny!

31   OO   2008 Nov 21, 3:36pm  

My best performance this year is shorting BIDU.

That mofo was so anti-gravity for most of the year that I almost lost hope but I knew all along it was a POS, so I just persisted for it to break down. With China in implosion, that POS is a $30 stock, so I am going to wait for that beautiful $30 moment.

32   OO   2008 Nov 21, 3:47pm  

I actually like the Hillary appointment. She has too much attitude to be the President, but she is way more qualified than Rice, who is probably the sharpest knife in the current Bush's rotten drawer (which doesn't say much). Clinton has a very esteemed reputation globally because the world was booming under his watch, so people around the world have a very favorable opinion of him and his wife.

Hillary will do quite well as the ambassador to the world.

33   Michael Holliday   2008 Nov 21, 10:29pm  

HAIKU: ECONOMIC REALITY SETS IN FOR THE BUSTED BOOMER

Hope is a good com-
panion, but a bad guide. Please
pass the Viagra.

34   justme   2008 Nov 22, 2:12am  

Obama and the Fed, take two:

Looks like certain news outlets are thinking along the same lines I mentioned above, but with Summers and not Volcker being the person groomed for Fed chairmanship vacancy in 2010.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a6UEGcgjYF.c&refer=home

I still think Geithner is going to the Treasury Department to take him out of the running for the Fed chairmanship, and that he is smart enough to realize it himself.

35   OO   2008 Nov 22, 2:25am  

Summers is a printer. I listened to two public speeches by him recently, he is definitely a printer.

36   justme   2008 Nov 22, 4:12am  

OO,

Could be, but I also think Summers is a strong and fair regulator, which the part of the job that the FED has not been doing well at all in the last 25 years.

40   StuckInBA   2008 Nov 23, 2:49am  

Kewp :

You misunderstood my comment. I do not have any tinfoil hat. I am in GLD for a trade.

The doomsday scenario ? I have no clue what it would be. I was only comparing physical gold with the ETF. The point is, even thought the ETF has done well in tracking the value of gold bullion - it is not the same as physical gold. For some it is an important point.

I am far more optimistic about US economy that most here. I was extremely pessimistic till end of last year. Because everyone (outside housing blogs) refused to admit the severity of the problem. Now even CNBC gets it. Ok, maybe except Dennis Kneale.

We will muddle through a variety of bad solutions. But the new administration will at least try an economic policy solution than attempting to bomb another country. Some of the massive infrastructure spending might even have some positive impact. Eventually passage of a long time and slow rebuilding will clear the rampant overcapacity we have everywhere.

So no tin foil hat here. I just expect the result of all this to be devaluation of our paper currency. Against what ? I think other paper currencies are in a worse shape. Hence my bet is on the non-paper currency of gold and other hard assets. And we don't have to go back to gold standard to do that.

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