Better Days Ahead

Hopefully this will be the last of my prose on the Credit Crunch. You all know that I have been upbeat throughout this historical economic shift and market correction. I know that it has been challenging for all in the real estate industry. The good news is that the markets are settling. While the throngs of Wall Street analyst decried Fed Chairman Bernanke for being to slow to add liquidity to the market and for letting the markets correct themselves, it turns out he and his Federal Reserve cohorts were wise in taking a deliberative approach to solving the problems created by the mortgage industry’s and investor’s insatiable appetite for mortgage backed investments.

In the last several weeks a few key events caused the correction to accelerate and then settle into a new calming pattern. In short they were;
Foreign governments and their central banks added hundreds of billions of dollars in liquidity to the market. Yes, that’s billions with a B! Of course, this did very little to help the situation and only served to devalue currencies and confirm to skittish investors that there must be a real problem.
The Federal Reserve adds some liquidity to the market. In the great scheme of things it wasn’t much. Barely more than fifty to sixty billion dollars were added to the market. This again did very little, but it did show that the Fed was going to move very deliberately to test what should be done in order to rectify the problem.
The so-called ‘market experts’ begin a cacophonous cry for the Federal Reserve to lower the Fed Funds rate.
Countrywide, the nation’s largest issuer of residential mortgages, fends off a story that it is ripe for bankruptcy. Adding to this fear, Countrywide taps ALL of an estimated $11.5 billion short-term line of credit to maintain liquidity
Bernanke one-ups the experts. In a very thoughtful and judicious move, the Fed Chairman lowers the Discount Window Rate from 6.25 to 5.75. This key financial instrument gives banks the ability to borrow money from the Federal Government on 30-day terms. Typically these loans must be collateralized by some sort of commercial property, commercial transaction or commercial loan pool. The Fed has never allowed these loans to be secured with residential mortgaged back securities or residential mortgage bond pools. But this time he allowed banks to come to the window and collateralize the loans with these pools. Furthermore, he allowed the banks to have unlimited renewals of the 30-day loans until the pools could be sold off at a reasonable market rate to repay the loans. This is essentially seen by the market as the U.S. Government saying that they have full faith in the investment instruments made up entirely of residential mortgages on American soil.
The final nail in the coffin for the Credit Crunch happened several days after the Discount Window Rate was lowered. Bank of America in a move that some experts say is on par with what J.P. Morgan did when he stemmed the Panic of 1907, went to the ‘Window’ borrowed $2 billion. They then turned around and invested that money in convertible, non-voting shares of Countrywide….the aforementioned troubled and largest purveyor of mortgages in these great United States.

The upshot of all this is that Bank of America’s action combined with a bold and well timed move from the Fed served to send notice to investors at home and abroad that the American financial system has the support and the confidence of our Federal government and one of the world’s largest banks. The next day the entire market began to settle and things have been calming on a daily basis. It appears from the number of underwriting approvals that we are seeing that things are beginning to relax somewhat. While we may never see the days of ‘free money’ again, I’m not sure that I will mourn that loss.

As we move forward I will continue to give you updates. At this juncture I see good old fashioned lending coming back into vogue. If your clients have some money and have proven that they have an ability to pay their bills one time and can save some money in the process, lenders will give them a loan. However, for those that don’t pay their bills on time….or ever, in some cases……then they can forget about finding anyone to take a risk and give them a loan. Borrower/Buyers must exhibit an ability, willingness and understanding of financial obligations through their credit report and the spending/saving habits or they will not be able to purchase a home. In these coming months don’t just focus on the Credit Score, but think about the catch phrase ‘Credit Worthiness’.

Stay tuned for more upbeat reports. I will begin to give you some guidance on who’s buying and why! Also, we’ll begin to discuss what Credit Worthiness means and how important it is to the lending process. As always, if you have any questions about the markets or the different loans available please don’t hesitate to call. We have survived this market correction and are growing stronger through our long-time partnerships! Thanks to everyone for your continued support and referrals.

Credit Crunch! Making It Big In A Tight Market

There is one overwhelming truth about real estate. No matter how many times you hear the ‘no money down, no credit needed’ mantra, it takes money and credit to make it big in real estate. For those investors that have a buy and hold strategy and/or a lease purchase strategy, now is the time to make a move. If you look around you will find that those investors that make the most money and eventually become wealthy are those that buy and control real estate. Look at many of the teachers and gurus of our day and you will see that the truth of their success and wealth belie the facts they tout in their seminars, books, CDs and DVDs. They made their money and are currently wealthy because they bought and or currently buy and control real estate.

In the heady, fast paced market of the recent past where Hard Money and Private Money lenders handed out loans like candy and conventional lenders would provide 100% purchase financing to any human being that could fog a mirror, being a buy and hold specialist was a risky game. No one was renting because everybody could buy. Rents were declining and making a positive cash flow on property was a zero sum game. However the past 90 days have changed the game! It’s a buyer’s market now. The average home sits on the market for 120 days or more, and the glut of foreclosures on the market are dragging home prices down. Add to these facts the glaring reality that almost 50% of people that qualified for a home 90 days ago don’t qualify today and you’ll see that being a quick-turn specialist with an all flip strategy is a dangerous business model.

Hard Money lenders have taken huge losses and are holding large portfolios of homes with rehab projects that are half finished. Non-performing loan portfolios are causing conventional lenders to close their doors daily and large national companies are going bankrupt. The 100% loans of the past have virtually disappeared. There is a true Credit Crunch! And it is here right now!

So how does an investor stay ahead of the curve? You must know the rules and you must be informed about what is going on in the market. Rule one is to know your credit rating and credit worthiness. It is not enough any more to just have a good score, you must have decent scores and a little jingle in your pocket. Cash is king, whether that’s money in savings or your willingness to leave equity in the property. In today’s lending environment, whether the lender is a traditional lender or an alternative money supplier, they want to know that you have the ability to repay the loan or that they have equity in the property if you decide to bail out. Rule two is simple. You must be willing to buy and control property for the long-term. Lenders of all types want to know that you aren’t a quick-turn artist looking for the fast buck. You must be willing to show that you understand that real wealth in real estate is generated over the time and that you have a plan to create a more traditional business. Rule three; show the lender that you have multiple strategies and that all will be successful.

Hard money lenders want to know that you have qualified for conventional financing first so that they can be taken out when the rehab is complete. Furthermore, the conventional lender wants to know that you will own the property for at least a year before you liquidate it. Lease purchase strategies are the best for this market. With a combination of financing from Non-Traditional and Traditional lenders investors can receive some money now from a cash-out finance and some money later from the tenant buyer when they purchase the home. Real cash-flow can be created if investors are willing to hold and control real estate and eschew the quick-turn philosophy. Call and speak with competent professionals and use lenders that have coordinated relationships. You want your conventional lender and your private lenders to work together and have a solid business relationship, communication is the key. Staying ahead of the lending curve in this era of the Credit Crunch is not difficult. It just takes the correct strategy and the right professionals on your team.