Stop the Foreclosure

It's another Tuesday afternoon, slightly overcast. A BMW 650I whizzes by a yellow cab in the financial district of a nondescript metropolitan city. A large man hops out of the cab and throws a Jackson at the cabbie. He heads up to the 16th floor of the high rise. The elevator opens and he heads to suite 316. As he walks in, the man sees pencil neck geeks furiously signing paperwork, flipping through pages and wildly signing more. The man who looks curiously like Arnold, but has the air of the famous lawman Robocop, raises his licensed firearm and yells in his strangely familiar Austrian accent, "STOP THE FOREEEEECLOSURRRRREEEEEE, ASSHOLE!"

No, this isn't the start of a huge action scene in the next blockbuster for Arnold Schwarzenegger. It's probably the day dream of millions of Americans who went through a quasi-legal foreclosure process.

In states all over the country, the investigations process is at different stages. Some are looking to assess penalties and fines, some are busy gathering facts, and, in some states, wrong doing hasn't yet been decided. For a quick rehash, thousands upon thousands of families in the last few years were unceremoniously kicked out of their homes. Many of these situations stemmed from buying more house than they could afford; others were from loans that had enticing teaser rates for a while that would be eventually unsustainable. These unfortunates were in some cases kicked out their homes without due process, or, in some more insidious cases, due process was executed with falsified loan documentation (aka the "Robo signings").

Currently, deals in some states are being negotiated to prevent prosecution and secure a financial settlement. Other states are being aggressive and actively pursuing the breach of public trust with the full force of the law.

In a majority of these situations, the homeowners – some naive and some not – were "shaken down" by the industry. The industry swindled the general public when they were buying homes, and again as they were kicked out of those same homes only to receive property back that was only worth pennies on the dollar and depressing the market further. Very productive indeed.

My hope is that the eyes of the public will be opened as a result of these investigations and possible prosecutions. When dealing with buying a home loan and the entire process associated with it, the people you are working with aren't your friends. They aren't " helping you"; they are business partners, hired hands. Like any good business partner, always keep an eye on them.

-The Inside Associate

P.S. The Inside Associate blog is now reaching over two hemispheres, a few major continents, and a few G-8 Countries. I would love to reach out to the readers in Europe and across the globe to provide feedback. Things you would like to see on the blog, questions you may have, or just general commentary. I'm always grateful for any insight. I'm exceedingly grateful for you giving us some run to your friends in the general public and the industry.

BMW, lending, Robo Signing, RoboCop, Schwarzenegger, zombie foreclosure

Sucker's Rally or Starting Point?

The market as a whole is beginning to see small, positive signs. The private sector is starting to add jobs, even if they are all McDonald's burger-turners. In some areas, where job creation has been brisk and multifamily (MF) is starting to thrive, REIT's involved with MF are starting to push rents aggressively beyond the normal 3% CPI increase. For some, this is signaling that now may be the time to start developing more properties. Sure, this may be a prudent starting point to help capture local markets, or it may be the continuation of an infamous sucker's rally.

At the company where I work, "Davidson," a lead developer recently came to speak with me about the "opportunity" to develop a 300+ unit project. After surveying the market, it all sounds very promising: only one new class-A property built in the last 8-10 years, and a relatively well-off area with high household AGI's, with metro access all over. The only catch is that a competitor's class A property built in the last 3 years is barely meeting industry benchmarks in a time when REIT's are pushing rents to pump up the bottom line.

When confronted with this factoid, the developer told me, "We are trying to capture the market; it's going to be urban and the newest thing out here." I guess nobody informed these developers here and all over the country that the attack of the "zombie" foreclosures is about to happen any minute. Thousands upon thousands of shadow foreclosures are going to continue to depress rents for those MF REIT's trying to capture the class A and hi B dollar. Step into the shoes of the typical double income no kids (DINK) spending $1800-$2400 on a 1,300 square foot apartment, or spend $1,500-$1,900 on a 30 year note (with record low interest rates) on a REO from the bank. Asking for class A rent in a market where class A sites compete with cheap investment property rental rates and very cheap foreclosures doesn't sound like a winning combo.

With the larger economy in focus, is developing property or even buying property a really good idea right now? The federal government's actions in the housing market via the $8,000 tax credit in 2009 might have impelled first time buyers into the market. Coupled with the feds pumping more than 1.5 trillion dollars into the marketplace, they may have created one of the most devastating sucker rallies ever concocted. Do first time home buyers really want to hear that the market has another 20 % loss til they reach bottom? For the REIT developer, having the false confidence of record amounts of liquidity in the market doesn't mean it will be there fifteen months in the future. The people suckered into "Trump University" think developing now is a bad idea. Now that the banks have recorded profits and been exceedingly tight with capital, it doesn't really sound like a time to take a gamble.

Let's remember the cardinal rule of development: "Developers don't get paid unless they develop something." When the smart money is sitting on the sidelines, maybe we should listen.

-The Inside Associate

It's not disney, but it's the circle of life.

I've never been a person who likes to point and say "that's the bad guy" (sorry to disappoint, Tony Montana). I've always tried to look at things and frame them in perspective. After many years, I've realized we all pretty much live in glass houses and it's usually all shades of gray. In this article from the Wall Street Journal, we definitely have a story of vultures devouring an unlucky victim.

What most of us don't understand or want to believe, however, is that the vulture IS important. Yes, you read that right: the vultures of the world, the Gordon Geckos, and others who thrive on the misfortunes of others, are a vital part of the circle of life…and the circle of Wall Street. I do not normally extol the virtues of these piranhas, but they earn their keep.

Companies such as Cerebus Capital Management and Vornado are helping to expedite the process of flushing out the pipeline of these toxic assets. What these firms do is buy up "special servicers" that have one of the first opportunities to acquire distressed assets. What seems to be wrinkling a few noses is that these special servicers are the ones who advertise the properties for auction. That they may try and keep these properties on the down low is extremely possible. I guess the key point is that somebody forgot to tell these mavens of industry that "life isn't fair, never has been, never will be." The companies trying to interject themselves into this drawn-out process are doing us all a favor. These vultures are helping flush out the system in a much quicker, tidier way than would probably be the case otherwise.

Another way to view this new trend: it's an auction (a prim, which means they are paying cash for all these mistakes. The investors more than likely didn't know what they were buying, or they probably wouldn't be investing in a B-level tranche of a Commercial Mortgage Backed Security (CMBS). The harsh reality is that insiders in the industry who were actually "in the know" had knowledge that the loan sector of our industry was running towards a cliff. I can't really sympathize with some well-heeled investors who lost some money in the B "piece" of a CMBS. At some point during the last four years they were probably expecting close to 0% return on such a bad investment. The "B piece" tranches weren't investment grade options then and they sure aren't now with so much uncertainty out there. To be overly concerned that these investors get some returns on these near junk bond investments is silly.

The last piece of this puzzle is the actual property itself. The "real politic" view of the situation is that companies struggling to make their debt service payments, or those who are already delinquent, are not really trying to put more money into these properties. They are more than likely focusing on deferring maintenance and other capital intensive decisions. The quick takeover of properties by these vulture investors via auction may well be the best thing for the property as well as the greater economy. The faster these assets’ values are escalated through capital improvements, the more the investor's balance sheet is helped and new capital is brought to these starved assets, thus improving the overall market situation in its specific locale. In other words, the faster these assets are rehabbed and then put to market, the better off things will be for the rest of us.

This situation isn't ideal for all parties involved. The element of fair play may not be pervading the whole story, but when since Cub Scouts has fair play been on anybody's mind? The fact that these vulture investors have found a way to speed up an arduous and already gut-wrenching process is probably best. For once, maybe it's okay to cheer for the bad guy.

-The Inside Associate