TACT Program – Solving the Real Estate and Banking Crises is Simple

There have been numerous articles and books written on the theories or reasons behind the residential real estate bubble and its bursting in 2006, which led to what will likely be remembered as the Great Recession. I can add that I am not one of the parties that share the blame. I was living in Europe from 1994 – 2007 and did not even own real estate in the US during most of that time period! Chalk that up to luck, not prescience.

I would like to focus on what can be done to get out of this mess. The answer is surprisingly simple, although as so many things in life that are simple, it will not be so easy to implement due to the number of banks and organizations involved. They need to change or eliminate the policies, guidelines, and artificial barriers these organizations created to stop the free market from correcting the situation.

The easiest way to understand the solution, is to realize that a bank’s balance sheet is far stronger when it has a performing mortgage loan, rather than a bank owned (REO) property on its books. A REO property is in reality a liability to the bank, inhibiting its ability to borrow and lend. A performing mortgage loan is an asset that can be sold in the secondary market, or used to borrow against to make more loans. The situation is similar when a bank has a performing mortgage loan (even at a lower face value), rather than having a non-performing loan that exceeds the value of the real estate backing it.

In the simplest terms, the solution is for the banking industry to use some of the same strategies as real estate investors currently use since bank loans are not available. Investors whose livelihood depends on the returns they earn on their invested capital, do not wait until a buyer comes along with the ability to get financing. With few mortgage loans being made, there are very few such buyers. The investors package financing in with the property sale to have a competitive advantage. The only step the banking industry took in this direction over the last year was their proposal to allow former owners to stay in their homes as renters. The banking industry lacks property management skills, so they picked the worst strategy to try. The banking industry needs to focus on providing financing to sell the homes, not to get into the rental business.

I have been working on this solution for 18 months and so many naysayers told me it could not be done, that I initially believed them. Fortunately I heard about a gentleman across the country that had been working on the same concept. He had sufficient success acquiring bank owned properties from small local banks, that he started holding seminars on the topic. He coined the phrase “Bank Seller Financing” and pitches it as a great way to acquire properties. He appropriately cautioned that this was not a phrase that would get a positive reception within the banking industry, since “seller financing” was viewed as competition by mortgage lenders. I am indebted to Michael P. Watson and his seminar for rebuilding my determination to expand this simple solution to resolve a massive problem – the US housing market crisis.

Let me summarize the US residential real estate market issues, as if there was a US real estate market. In reality there are many sub-markets with varying degrees of these problems and opportunities. Detroit, Cleveland and Buffalo (where I was born & raised) are very different real estate markets than Las Vegas, Los Angeles, Phoenix (where now I live and invest), or most metro areas in Florida. The key issues are:

- property values have declined, in some markets precipitously,
- many homes are now below their mortgaged value, and far below their “market value” during the bubble,
- banks have too many properties they own due to foreclosure,
- banks are faced with many non-performing loans and the prospect of even more foreclosures,
- some counties (like Maricopa County where I invest) are sending out ridiculously low assessments for 2011 and scaring more homeowners into turning their keys over to their lenders, and
- with the current high unemployment rate the majority of people believe that real estate prices will continue to decline, despite evidence to the contrary.

As a case in point, I was shocked when investors at a recent meeting of the Arizona Real Estate Investors Association (AZREIA) were polled about whether they believed housing prices would fall further, are near bottom, or are rising. Approximately 75% felt they would decline, 14% said it was at or near bottom, and 1% (including me) felt they were rising. All of those investors have access to the same very detailed market data, so I was shocked how differently we each filter that data based on what the media and the gurus are saying.

Back to the issues, there is one key issue which is both the crux of the problem, and the crux of the solution. There is not enough money available to make mortgage loans to meet demand. Ask your friendly bank executive if money is available for mortgages and they will give you the party line – “yes, we are lending every day and have plenty of funds available”. Publicly available data on lending, current underwriting requirements, and government issued guidelines give a totally different answer. The truth is banks do not have sufficient reserves to make enough loans.

Since banks are not lending, hard money lenders and private mortgage lenders (like my company) cannot even meet 20% of the investor demand for loans, despite charging annual rates of 12-18%. If plenty of mortgage money is available, why do I get daily requests, far exceeding our capacity, for Private Mortgage Loans, Transactional Funding, Seller Financing, Contracts for Deed, and our Lease-to-Own program? Trust me, it is neither because of my good looks, nor because I offer rates below government subsidized bank loans.

Many people believe that demand for real estate is low, and that is depressing the market. The opposite is true in many markets. In the Phoenix market, sales in 2009 and so far in 2010 were on par with the peak years of 2004-2006. Pending sales are now at levels that make those earlier years look like slow periods. Incidentally, during the peak years the Town of Buckeye, where I live, was the fastest growing housing market in the US. By 2008 the bubble burst and about 90% of the properties for sale were distressed sales. Like the rest of the Phoenix market, sales now exceed the peak years, and I have prospective buyers asking for our financing help daily since they can’t get bank financing.

The solution to the real estate and mortgage crises is simple, and it is not new and stronger regulation. To the contrary, the more the government meddles the worse things will likely get. The banking industry, and I include the mother hens in FHA, Fannie Mae, and Freddie Mac along with the banks, need to eliminate the self inflicted policies they imposed and barriers they constructed after the real estate market collapsed. These policies are analogous to locking the doors once all the horses escaped.

I recently submitted a number of purchase contracts on bank owned (REO) and short sale properties (with non-performing loans). So to those that say there is no demand – I am ready and willing to buy hundreds of properties that meet my cash flow requirements, if the financing is available. There are another 100 investors like me in the Phoenix area flocking to the auctions, bidding on REO listings and on short sales. If financing were available, prices would be rising even faster than the 13% year-over-year increase we saw in April. That was not a misprint; Phoenix area prices rose 13% since April 2009!

Here are a few of the barriers to mortgage financing:

- REO properties require high reserves, inhibiting lending,
- non-performing loans require accruals and reserves, further inhibiting lending,
- bank REO, short sale and mortgage modification departments are understaffed,
- lending departments have policies to inhibit financing the sale of their own bank’s REO’s and short sales (notice the Catch-22),
- most mortgage loans help the bank selling the REO more than the one issuing the new loan (not a great incentive for issuing new loans),
- few investors and homeowners have FICO credit scores exceeding 720 (the new underwriting norm),
- individual investors, even those at the top of the Forbes 400 list are restricted to 10 mortgage loans in their name, regardless of assets, net worth and income,
- entities whether corporations or LLCs, as most investment funds are structured, cannot get mortgage loans regardless of their assets, profitability or book value, since those loans cannot be sold on the secondary market,
- bank executives are not aware of the conflicting policies they have put in place,
- too many separate governmental organizations regulate and “try to fix” the mortgage and banking industries, and
- there is intense pressure from the US Treasury for banks to buy T-Bills to finance the deficit.

To me it is very obvious from this list – banks do not have the money to lend due to their weakened balance sheets and reserve requirements. When distressed homeowners face this same dilemma, they reach into the bag of tricks investors use, selling their homes with seller financing, on a lease-to-own contract, contract for deed, or even turning over the deed “subject to” the investor taking over the payments.

Banking industry, meet the enemy – look in the mirror. It is time to heal thyself by implementing the TACT (Toxic Asset Conversion and Transfer) Program. Learn from and work with real estate investors and buyers to sell off your REO and short sale properties. You will strengthen your balance sheets and income statements, property values will continue to rise, fewer people will hand over their keys, and the real estate market will return to normal. This can be done in months, not in decades. For more detailed description of the TACT Program review other articles in this series.

Banking Industry: We have met the enemy, The enemy is us.

The Easiest Home Loan on the Planet – Period

What banks or mortgage companies offer no income verification loans or stated income loans today? The short answer is none. So where are these loans? Actually there are hundreds of thousands, if not millions of them. What I’m talking about is owner financing and it’s amazingly easy to get.

So how do I know this? Because as a private mortgage buyer, I have a birds eye view of the owner-financed mortgages out in the market and many of the loans provided by home sellers (and businesses) in order to sell a home are mind-boggling. Just to name a few, zero interest on the loan, 3% interest, interest only loans, no credit check loans (pretty common), no income documentation mortgage loans and so on.

So how does someone wanting to buy a home find such loans? Actually, many are easy to find but others require a bit of work to find. The easy ones are either advertised as “owner financing available” in their ad or the real estate agent’s ad. For the others you can go about finding them either through the tax office or through a real estate agent. You are looking for homes for sale where there is no mortgage or only a small mortgage on the home. These are prime candidates for owner financing. Most real estate agents know if there is a mortgage on the property. For the tax office, you would need to search for properties that you know are for sale to see if they have a mortgage lien on them. You can estimate the mortgage balance by looking at the terms and initial loan date.

Lastly, your chances of getting a private seller financed loan will go up significantly if you have at least a 10% down payment. Actually, the higher your down payment the better the chances the seller will not want to see a copy of your credit report. And for those wanting to see your credit report, they may really not care if your credit is below what most traditional mortgage lenders require today. However, it might be a good idea to have a copy of your report just in case but if you have low scores; you might want to be prepared to explain what happened to cause them. Most home sellers will listen to a good story and may just ignore your credit completely.

So there you have it, a way to get a great home loan without all the hassles of traditional mortgages.

How to Finance Your Boat

As Australians, we’re born water babies. Our pristine beaches and waterways beckon us year round. For most people, however, boats to enjoy the deep blue are considered a luxury reserved for the wealthy. But owning a boat can be as simple as owning a car, because there are a range of financing options available to regular Australians. Your dream of owning a boat could be within easier reach than imagined. Don’t have enough money to fund the entire cost? Most boat finance options available work in a similar way to car finance and are available from a variety of banks and finance brokers. If you’re a business owner considering adding a water vessel to your business operations or fleet, remember that many options are also applicable, or especially for, business boat ownership. Here is a description of the most popular products available.

- Secured boat loan. A secured boat loan allows the borrower to borrow the money for the specific purchase of a boat. In this sense, the vessel acts as security, or collateral, for the lender. If you fall behind on payments, it can be seized. With the loan secured against the boat, however, interest rates are significantly lower than regular loans.

- Chattel Mortgage for a boat. As a boat financing option, chattel mortgages are reserved for businesses, and allow a company – whether as a sole trader or a larger corporation – to secure a loan against a boat. With a chattel mortgage, the business owns the vessel from the beginning and then pays it off monthly. Usually, the terms of the loan can be suited to a business’s requirements, and allows the business to operate the boat at a profit while paying off the mortgage. To be eligible for a chattel mortgage, the boat must be used for predominantly business purposes, such as a tour operator or fishing operation.

- Commercial Hire Purchase for boats. A commercial hire purchase is where a finance company buys the boat for a customer, who is then granted use and custody of the vessel on a contractual basis while making repayments. The borrower or business will gain ownership at the end of the contract term when the price of the vehicle, plus interest, has been paid in full.

- Boat leasing. When leasing a boat, a financier will buy the boat on your or your business’s behalf, and then lease it to you over an agreed period of time, usually at a fixed cost. If you choose to lease, you won’t own the boat until the end of the leasing period, at which stage you will usually be required to pay the residual cost remaining. The residual is usually predetermined and reflective of the depreciated value of the vessel. Boat leasing is often a popular option for businesses since they don’t technically own the boat while leasing, it doesn’t have to be included on their balance sheet.

If the vessel of your dreams always seemed financially unfeasible, consider these financing options, which will allow you to enjoy the pleasures of boating in Australia without having to shell out a lump sum of capital or savings. Wherever you’re looking for boat finance – WA, NSW, Victoria, Queensland or SA – financiers will be able to provide more details and information and help you enjoying the amazing waterways of your home town.