patrick.net

SFWoman,

I didn't want to be the one to have to say it. You're right. Many of these "newbie" MB's may have never actually seen one. Again this speaks volumes about the lending industry getting the general home buying public comfortable with the idea that;

a. Homes only appreciate

b. They're never really paid off so why worry about it.

c. You'll be trading up in a few years anyway so why not let some other schmuck pay off your credit cards and kids education!

d. Only losers and financial illiterates stay in a home for the life of the loan (assuring them plenty of repeat business).

DS,

Sure, during the re-fi mania it was easy money. Now? A lot of my clients home answering machines say "If you're a mortgage broker we JUST re-fi'd so PLEASE don't leave a message and take us off your list". Seriously.

Many of my buddies tell me that people are backing out at the last minute or finding all kinds of reasons NOT to go through with a deal. A lot are simply washing out of the business.

Davis_Renter,

Yes, I read that article. Totally MSM source. Almost sounds like the author just regurgitated what's been bandied about on this board, Ben's blog, and others for the last year or two.

Frify:

Thanks for the Krugman article (subscription required). In the article, Krugman references Nouriel Roubini, an economist who has predicted a nasty recession in 2007.

Is anyone else thinking this may be a good time to sell other investments (besides houses)? Speaking of fear, I am getting nervous about my 401K and IRAs which are mostly in stocks (US and international) with a little cash and commodities exposure thrown in.

What would be the best way to invest conservatively for a recession + dollar crash environment? The new swiss krona ETF? My guess is that a recession would be bad for stocks and commodities, but I am also nervous about holding cash if we have a real dollar crash. Then again, the old saying goes that the stock market climbs a "wall of worry," so I don't want to overreact.

Any ideas on what might make sense if Roubini is right? I will of course not hold anyone to their predictions... Anyone have ideas/theories/plans for this? Randy? Conor? Dinor?

SFWoman,

Now, I believe that young couples in Des Moines, IA are putting 20% down on a 30 yr. FRM!

It's all about setting a new standard. Question is, once it becomes glaringly apparent that outrageous appreciation is no longer the norm will the folly of these new "financial products" be exposed for what they are? Or will they prove to be the bubbles salvation? My guess is that it's already too late.

Anyone here able to verify the 5% mortgage broker fees quoted by DS? That sounds incredibly high. I thought $1000-5000 was the norm, and the mortgage broker's take is more like 1-2% of the total.

DS, also note that your friend is an experienced mortgage broker with her own office, so she would be expected to make more money. That's quite different from a 22 year old high school graduate, who probably works by himself and must share his fees with his head broker.

On a side note, monopolies are still alive and well in Amerika: wsj article.
WASHINGTON -- Federal regulators have prepared formal inquiries asking Verizon Communications Inc. and BellSouth Corp., for more information about their decision to keep money high-speed Internet customers would have otherwise gotten back following a government decision that broadband subscribers no longer have to pay into a federal subsidy program.

The letters, which sources said could be sent as early as today, are the first step toward a formal Federal Communications Commission investigation. The inquiry is particularly unwelcome for BellSouth, whose $67 billion acquisition by AT&T Inc. is still pending before the agency. It's somewhat unlikely the issue would have any significant impact on the merger, which is still being reviewed by staff. But FCC Chairman Kevin Martin was "very upset" by Verizon and BellSouth's decision to keep the money, an FCC official said.

"The commission takes its obligation to protect consumers very seriously," said FCC spokesman David Fiske. "Consumers must be provided with clear and non-misleading information so they make accurately access the services for which they are being charged and the costs associated with those services."

Last year, the FCC decided that digital subscriber line, or DSL, subscribers no longer have to pay into the federal Universal Service Fund, which subsidizes phone service in rural areas and for low-income residents. Theoretically, that meant that DSL subscribers would have seen their monthly Internet bills drop a dollar or two in September.

Last weekend, Verizon began emailing its roughly six million high-speed Internet subscribers, informing them that they would no longer be charged a USF fee -- which was $1.25 or $2.83 a month, depending on speed of service. However, their bills would not drop more than a few pennies because the company said a new "supplier surcharge" of $1.20 or $2.70 a month would be tacked onto bills beginning Aug. 26.

When contacted by a reporter, BellSouth said it would continue to charge all of its 3.2 million Internet subscribers the same $2.97 "regulatory cost recovery fee," even though it no longer has to use some of that money to pay into the federal USF fund.

Verizon strongly disputed the idea that it had not been upfront with consumers about the new charge and said its timing was designed to minimize the impact on consumers, who won't see their bills change significantly. "We increased prices but the impact was less because the government was removing this [charge]," said Eric Rabe, a Verizon spokesman. "We're not keeping that money. We're charging more for things we need to cover."

Representatives for AT&T and Qwest Communications International Inc. said the companies had discontinued USF charges earlier in the month and had no plans to impose new surcharges. Another Qwest spokesman said Wednesday, however, that the company had not yet decided what to do.

Earlier this week, a Verizon spokeswoman said the company decided to impose the new fee on all Internet subscribers because of increased costs of providing service to customers who only buy high-speed Internet, instead of a bundled package of phone services. A BellSouth spokesman said the company wanted to recover more regulatory costs than it had previously been able to do. Neither company said they had received anything yet, according to spokesmen for both companies, and neither had any immediate comment.

According to people who have been briefed on the matter, the "letter of inquiry" being prepared ask for documentation about how the surcharges are consistent with federal Truth-in-Billing laws as well as how the underlying costs of providing high-speed Internet services are supported by the surcharges. Additionally, the FCC wants information on why the companies are imposing the surcharges on all Internet customers, both those who buy bundled packages and those who subscribe only to high-speed Internet.

SFWoman, I looked at the MLS for the Vallejo 12M house. It did not mention central A/C. Is it just something to obvious to mention or it it something uncommon in San Francisco. I can imagine there are at least a few warm (80+ degrees) days in SF.

Glen,

Don't take this as investment advice, but forex and commodities (esp gold and agriculture plays) are periodically talked about on this board. Depending on inflation/interest rates, it might be advisable to hold a large cash reserve and watch for opportunities in bonds.

Different Sean Says:

> My broker mate in DC pays herself $250K out of the business,
> works from home, employs loan officers and takes 40%
> of their commissions as well.
> brokers in Oz only make 0.7% on a transaction, whereas in
> US it’s flexible, but around 5% (!). That’s about 7x the pay
> for doing the same work, i.e. filling out a few forms.

The only brokers that make 5% (five points) are the hard money guys who get money for people with bad credit.

Most people pay one point 1% for a personal home loan in the US. Flippers pay more since it is harder to get a little or no money down loan on an investment property.

People pay more for 2nd TDs since they are harder to find, but since they are usually small brokers don't make a lot of money on them.

Peter P Says:

> I looked at the MLS for the Vallejo 12M house.
> It did not mention central A/C. Is it just something
> to obvious to mention or it it something uncommon
> in San Francisco. I can imagine there are at least a
> few warm (80+ degrees) days in SF.

Very few homes in SF have (or need A/C).

I lived in a newer apartment in the Marina that has central A/C for a couple years and never got warm enough to turn it on (I really never needed it and was not just trying to save money)...

Astrid,

Thanks... don't worry, I won't take anything as investment advice...just brainstorming.

I have been thinking the same thing about commodities for a few years now since reading Jim Rogers' "Adventure Capitalist" and then, later "Hot Commodities."

I bought a little bit of the GLD ETF when it first came out in 2004 and also have had a position in QRAAX, which is a commodity mutual fund (mostly energy), but I have not found an easy way to invest in agricultural commodities, even though I think the investment case for them is pretty compelling. At this point, though, I have to wonder if the easy money has been made on commodities. In a recession, my guess is that commodity prices could easily go down. Then again, if Rogers is right, we could have another 5-10 year bull market in commodities. Wish I understood this stuff better.

I am mulling over the idea of taking a big chunk of cash and sticking it in the Lehman 1-3 year bond ETF (SHY). If BB needs to start lowering rates next year, the 1-3s should do ok, I think. Other than that, I'm fresh out of ideas.

Glen,

One of the best "all weather" managers in the business is Steve Lehman. He works for Federated Investors in Pittsburgh, PA. I don't believe he's EVER had a negative quarter. His mix includes every thing from New Zealand gov. paper to oil futures. Right now he's over 35% in cash. If you go to their web-site it will break it down for you in more detail.

This should give you an idea as to what to brace for. Steve's just a bearish guy and he definitely sees the upside since Oct. 2002 as a bear market rally (not to be confused with a bull market). He's pretty clear on that and has been one of AG most vocal critics. If your 401K doesn't offer anything remotely like this you can own it outside and emulate it inside. Not to plug for this guy but my more bearish clients love his take on reality.

*Not a plug for Federated.

DinOR,

Thanks, I will check it out. My 401k is pretty lame (selection of about 12 Oppenheimer funds, which is how I ended up with QRAAX). But the bulk of money is in IRAs, so I can move that money around more easily.

Glen,

Just one additional thing about Steve. He's been on board with the HB almost from it's inception. He has said on numerous occasions that he thought it was completely ridiculous and WILL end badly. He won't need to "adjust" his mind set or expectations. Hell, he's already there. Because he basically runs a "bear fund" he is free to speak his mind when others must toe the company line. Not a real popular guy.

Glen,

Claire and I have despaired over the lack of ETF options in company sponsored plans. It's just plain wrong. They make so much more sense for so many people. Especially that lifetime employment is no longer a given. PLEASE bring it up at every opportunity!

"But Glen, we're here to discuss our health benefits, not retirement benefits!"

Well, yeah I know but I just wanted to let you know how we felt about ETF's!

If we all keep plugging away we can make a dent in this thing!

DinOR,

Side deals which are in consideration for a deal constitute various forms of fraud if not properly reported and accounted for. This could be very bad for any companies selling homes. Even for private folks selling & buying, they may be committing tax evasion & fraud, sometimes unknowingly. For example, if you get a car as an incentive for buying a home, that has to be fairly valued and included in the basis, or else the seller is under reporting the sales price and the buyer will under report the cost basis when she sells later. The IRS may not be capable of catching most of this fraud currently.

I fully expect there to be some scandals related to this within the next year or so. Probably from the direction of some big public home builder not properly recognizing revenues & expenses properly vis-a-vis GAAP. But who knows, maybe they are keeping track of all these HDTVs and accounting for them correctly, even if they know the buyer won't.

Glen,

I'm of two minds when it comes to managing tax-deferred retirement portfolio. Folks like DinOR do this for a living and are probably more help.

For me, I do a little bit of a kind of "macro sentiment timing". That is, if I feel that emerging markets are becoming overvalued and not factoring in risk, then I'll pull some out of there.

But the basis of my strategy is a very long-term, patient global diversification. I let the diversification hedge the recessions and booms. I won't retire with that extra 30% this way, but I will still retire with plenty and be able to sleep at night.

This is not investment advice and should not be taken as such. I can't emphasize this enough -- I'm poor!

DinOR,

Thanks for the tip. There's much to be said for holding cash, even in a period of high inflation. Right now I'm just so paranoid. The US market looks bad, I refuse to touch the emerging markets, and Euro/OZ/Canada already ran up a lot. I'm tempted to go with cash, commodities, and ETF in equal proportions until the dust settles a bit.

That's why I'd be against buying RE right now, even if we go through a period of high inflation. Even in that scenario, there will still be a lot of people squeezed out at the margins in the short and medium run, and provide good entry points for a cash flush home buyer.

Conor,

The only way the US government can prop up the homeowners is if they start printing a lot more money and create 10-15% inflation for a number of years. Anything short of that will not solve the underlying problem of overleveraged RE purchases. As it is, we're lucky that much of the mortgage bonds are held by foreign hands.

Restricting sales operates better as a break on the way up than on the way down.

Randy H,

Thanks for the input. It's a fairly recent development so we will have to wait to see how this plays out. I'd once heard that the IRS had gone after people that qualified for frequent flyer miles. Their interpretation was that it was "income". It was a real stink as I recall but I just can't see myself walking away from a real estate closing with more prizes than "The Price is Right" and believing in my heart that they are gratuities and mine to keep without consequence?

I give out clients the "Stock Traders Almanac" (cost? about $15) when ordered in bulk. Somehow I'm too worried about that. I guess I never thought about giving away big screen TV's and timeshares though?

DinOR,

$15 gifts would fall under de minimis exception for gifts, you're probably in the clear.

Randy,

The whole gift idea is just so idiotic from both an economic perspective and a tax perspective. The builders do this so they can pretend like the prices have not dropped, so they won't have angry former buyers or potential buyers with cold feet from a real price drop.

I predict it'll all go away once people move out of denial about the RE bubble burst. For anyone who buys homes for their usage value, the contract price should be the only thing to matter.

DinOR,

Believe me, I'm pushing. Even if ETFs are not available, I would settle for a better fund company with decent no-load options like Vanguard or Fidelity. Hopefully we will implement a change before '07. (By the way, it looks like Lehman's fund, FMAAX, is a decent fund but I'm allergic to loads. I'll need to read more to see if I could replicate his strategy.)

Randy,

Not a bad way to go. If I was smart, I would probably just put 60% in global stock index fund, 40% in a global bond index and stop worrying about it. Anybody know a good global bond index fund or ETF (preferably with no dollar hedging)?

DinOR

The IRS is quirky. Predicting what they'll go after is dangerous.

I'd guess that little, inconsequential stuff included in home-deals no one cares about. That might include things like a free toaster, or maybe even a HDTV. But big things worth tens of thousands they might start to notice.

I'm thinking more about the public home builders. I don't know the actual structure of how these homes are legally transferred, but if the home builders directly are selling to buyers, and there is consideration in those deals, then there is a library of FASB rules for recognizing revenues and expenses. It's highly likley they're not following those rules. In fact, it's very hard for even honest companies (not that homebuilders aren't honest) to follow those rules at times.

One last thought that comes to mind is about the obligation to report. Do either homebuilders or existing home sellers have an obligation to report the side deal as a 1099, etc? They might be on the hook for unpaid taxes if the IRS decides they failed to properly report the txn so that the IRS knows about the receiver.

Glen,

I use http://www.financialengines.com and have recommended it to some friends and family. (I have no connection or interest in this company). There are others. They can do good old fashioned mean-variance opt and Monte Carlo sim to create a nice risk-adjusted portfolio from your available products.

I don't understand the motivation for these side deals from the buyer's perspective... It is kind of like a negative down payment (and we thought they couldn't do better than "$0 down!")

So your house is worth $350K, but you "pay" $400K and get $50K in cash and incentives. So at the end of the day, you have a $400K mortgage and a $350K asset. Negative equity from day one. I don't get it. Unless, of course, you can use the $50K in cash to flip 5 more LV condos, since real estate always goes up.

I've wondered this also. I get the psychological candy that a free car offers. Lots of people go for the "but wait, there's more..." ploy.

But the cash should flow the other direction, no? Taxes are high enough with bubble valuations that many folks should be willing to brave tax evasion to wiggle out of thousands a year in property taxes.

Since we've already established that there enough sleazy sophisticated debtor FB's out there that "buy" a new home before their former (and now in arrears) home is sold how big a leap is it to the "Price is Right" fandango?

So; if I'm an FB (already flailing to keep just a few months behind) and somone offers me a big screen, pre-paid car lease, timeshare AND cash, well who am I to refuse? What a country!

Imagine further that FB NEVER makes payment one, keeps Bob Barker's goodies and skips town. I realize I've worded this to the extreme but to the boys up in Jackson Hole this situation has GOT to be embarrassing!

One last thought that comes to mind is about the obligation to report. Do either homebuilders or existing home sellers have an obligation to report the side deal as a 1099, etc? They might be on the hook for unpaid taxes if the IRS decides they failed to properly report the txn so that the IRS knows about the receiver.

I think the public homebuilders have tended to offer incentives like pools and upgrades, which I don't think would need to be separately reported. I have noticed some much fishier deals on Craigslist, like $50K cash back from the seller. Not sure why deals are structured this way, but here is my best guess of a possible scenario:

Flipper: Flipper bought house in 2003 for $200K, now appraised at $400K, but can only be sold for $350K. Wants to cash out $200K in gain using the cap gains exemption for home sales. The cap gains offset flipper's loss on three other flips. Knows that buyer can get an appraisal for $400K on POS house, even though house won't sell for more than $350K. Knows lender will lend FB the money. If he lowers his price, then he must report a $150K gain, not enough to offset the $200K in losses on his other flips. He will have $50K in losses, which will need to be written off over a 17 year period. Instead, decides to offer buyer $50K under the table, report a $200K gain to offset his $200K losses. Walks away and hopes the IRS doesn't notice that he really sold his house for $350K.

Buyer: Duh, free money! I'm gonna get me an H2! Buyer is penalized by getting a higher tax basis ($400K instead of $350K), but is none the wiser. When he eventually goes into foreclosure and the house is sold for $250K, Buyer will owe taxes on $150K (instead of $100K) of debt forgiveness income.

What should the tax treatment be if the IRS recharacterizes? Should be a sale for $350K. Flipper should not be able to offset his losses and Buyer should get a lower tax basis.

It will take a long time and a lot of accountants and attorneys to unwind all of these shenanigans.

Glen,

I think the homebuilder/seller industry needs to experience their own SOP 97-2, FAS 48 scrutiny.

So; if I’m an FB (already flailing to keep just a few months behind) and somone offers me a big screen, pre-paid car lease, timeshare AND cash, well who am I to refuse? What a country!

Imagine further that FB NEVER makes payment one, keeps Bob Barker’s goodies and skips town. I realize I’ve worded this to the extreme but to the boys up in Jackson Hole this situation has GOT to be embarrassing!

Seems plausible. Especially if the FB doesn't already own any real estate. If the FB is a renter FB who has credit cards, car debt, etc. up the wazoo, he/she can rationalize the purchase by saying "wow....now I paid off all my debts and I'm a homeowner!" In a weird way, this might even make sense (leaving aside the fraud aspect). If the buyer has $50K of credit card debt at 22%, which can be rolled into a first mortgage at 6.5% and a second at 9%, why not?

Yes, this is clearly mortgage fraud. The first lender, who supposedly has an $80K equity cushion, actually has only a $30K cushion. The second lender is virtually unsecured, and should be getting 22% instead of 9%.

A follow up to my last post....

A lot of flippers and other FBs will be in for a rude awakening when they finally head to bankruptcy court. If a lender can prove fraud, you can not discharge your debt to them. Ouch. Time to make a living from something more respectable that you can hide from the IRS...like prostitution... or dealing drugs.

spike66,

Well I for ONE think you're a financial genius!

This is a solid path you're on, take some pride in it. You're starting a "vulture fund" for one! With cash in hand, sterling credit and unbelievable DTI ratio you're going to be smelling pretty good to any rational lender when the chips are down.

If your stock positions are troubling you that much either put in a stop loss order or move to cash. All of us are going to have to be a lot more "nimble" over the next two quarters but you're up to it.

We've looked at what's at the opposite end of the spectrum and decided we'd rather hang out with you!

From BayBear:

You say your life is and will continue to be disrupted, however there is absolutely no benefit to us and you are asking to be compensated for infringement on your privacy. I see no reason for compensation. Is this situation less than ideal? Yes. Inconvenient? Absolutely. You mentioned on the phone that he refuses to pay $600 grand for a 1400 sf dump in a shithole of a neighborhood. I can certainly see your point and can relate fully, but in making a life decision to rent rather than own, for whatever reason, you then unfortunately have to live your life under the terms of a lease. You made the choice to rent.

This amuses me. Why would your landlord be willing to piss you off and burn that bridge at this point? What if he can't sell and decides to continue renting for whatever reason? What if the rental market cools off again at that time? What if you, out of spite, refuse to renew and leave him high and dry? Some people are idiots. Good luck to you, though, and keep us posted on the outcome!

Argh! italics, again!

From BayBear:

You say your life is and will continue to be disrupted, however there is absolutely no benefit to us and you are asking to be compensated for infringement on your privacy. I see no reason for compensation. Is this situation less than ideal? Yes. Inconvenient? Absolutely. You mentioned on the phone that he refuses to pay $600 grand for a 1400 sf dump in a shithole of a neighborhood. I can certainly see your point and can relate fully, but in making a life decision to rent rather than own, for whatever reason, you then unfortunately have to live your life under the terms of a lease. You made the choice to rent.

BayBear,

This amuses me. Why would your landlord be willing to piss you off and burn that bridge at this point? What if he can’t sell and decides to continue renting for whatever reason? What if the rental market cools off again at that time? What if you, out of spite, refuse to renew and leave him high and dry? Some people are idiots. Good luck to you, though, and keep us posted on the outcome!

After the dot com bubble burst daytrading restrictions were put into effect — accounts with less than $25k couldn’t execute more than 3 daytrades every 5 days (the rule is still in effect). What will the comparable rule be for the housing market?

It is a silly rule anyway. Small-time daytraders should be allowed to emty their wallets if they choose to.

Glen,

Actually being a flipper had several advantages over the other trades you mentioned.

Tax free money every 24 mos.

Write off all your expenses.

Walk away from closing with cash. (I've never heard of any flipper getting "whacked" walking out of the title office!)

I am not joking here! This is the very system we've allowed to perpetuate itself. Please to notice all of the sleazy types that were drawn to this. The qualifications were remarkably similar. HS Diploma not req. ESL? No probalo! Shaky credit and sketchy job history? We'll get you qualified!

I was watching one flipper show where the job site had been getting ripped off so the flippers hung out in a truck drinking beer waiting for the perps with a baseball bat! Classy.

George,

Interesting to note (as always) the "investment group" get their money out of the deal on the front end! Of course if it's easy, take it twice!

That's why I just love the C/L ads that tout 50K in FREE equity to you! You keep the equity! This is priced 50K below market value!

(Well, dickhead, if this is such a lay-up why don't you.......... OH, you know what? just never mind!)

George,

Interesting story. Reminds me of the real estate version of "pump and dump" using straw buyers:

1. Buyer A buys house worth $300K for $400K from his cousin's best friend, B. Gets appraisal from "Phony Appraisals 'R' Us."
2. B sells house to his aunt's friend for $500K, C. Gets another phony appraisal.
3. C sells house to A's friend, D for $600K. Yup, another phony appraisal.
4. D skates back to his home country with ruined credit, leaving lender holding the bag. Discreetly funnels ill-gotten proceeds back to A, B and C via offshore accounts.

You have to wonder how much of this kind of fraud contributed to inflated reported sales prices, which pumped up the expectations of the average homedebtor and struck fear into the hearts of buyers.

I should have said "C" (the last seller) funnels proceeds to A, B and D.

George Says:

> Regarding matters of fraud….
> Without naming names, I can relate to you this
> insider’s story.

The real estate “investment” groups have also been active in multi-tenant investment and commercial property.

To get started they find long time SF apartment owners that are getting $500 per month per tenant under rent control.

They will buy a couple triplexs from the owners for say $750K then do about $10K of work to each unit and sell them to TIC suckers (I mean buyers) for $500K.

The real estate “investment” groups then get the two triplex owners to do a 1031 exchange with their $1.4mm in equity in to a $3mm office building (that the “investment” group usually just bought for $2mm).

At the end of the day you have six idiots owning units with crappy stainless steel clad appliaces in a crappy 100 year old building in San Francisco that have no idea that they will loose everythign if one of their fellow TICs runs in to financial problems.

You have two families that had super low LTV SF apartments that now "think" they have a low LTV office building (because they put 50% cash down) and are making just a little more than they were with the rent control apartments after paying a management fee to the "investment" group...

The real estate “investment” group makes:
3% Commission on the 6 TIC apartments $180K
Profit on the sale 6 TIC sales $1.4mm
3% Commission to buy the $2mm office $60K
Profit selling to the TIC group $1mm
6% Commission on the $3mm sale to the TIC Group $180K
Total Profit $2.82mm + 6% management fee every month until the office owners sell and are forced to use the "investment" group as the listing broker paying another 3% on the sale...