I recently took a "personal finance" course. We spent a week talking about stocks; two weeks talking about mutual funds; and the equivalent of one day on real estate. Suffice it to say, the book made mutual funds out to be a pretty sweet deal. It's a crying shame that I know better. What follows is my rant on the class message board shortly after the conclusion of class. Enjoy!
In his books "One Up On Wall Street" and "Beating The Street", the great Investor Peter Lynch admitted that a mutual fund is basically flawed, but for different reasons that you might expect. Let me give you an example.
The fundamental flaw of mutual funds
Two rich guys are playing golf, and they talk about how their mutual funds are doing. Mr. A brags that he made $20,000 last month. Mr. B, however, only made $10,000. The trouble is: they have the same mutual fund manager. Different funds, same manager. The first thing that Mr. B does is call the broker. He demands satisfaction. The broker carefully explains that while his is under-performing right now it will-- "NO!" shouts Mr. B , "I want to be making as much as Mr. A!" So the broker does what Mr. B wants and buys the same thing for both Mr. A and Mr. B.
The problem is: ALL of the managers do this. Why? Because every time they make a decision, they have 60 phone calls from people asking why. If something isn't doing as well as another fund, there are more phone calls. So very, very many phone calls. Mr. Lynch states that a very large portion of a manager's time is spent merely explaining the decisions that they've made. In order to keep from going insane, the mutual fund manager acts like an exhausted mother: "Alright, everyone gets one cookie!" That is, instead of everyone getting something different, they all get the same, "safe" investments that most of the other managers are buying for their clients.
What does this mean? It means that mutual funds are a lot more similar than anyone is willing to admit. This also makes them FAR more susceptible to panics (which LOSE you money) since all the eggs are in essentially the same basket.
The experts are not even very good
The "experts" don't do as well as the charts would have you believe. I would like to direct you all to this little number, studying the The "Dartboard" Column of the Wall Street Journal, that pits the "experts" against throwing darts to pick stocks:
Stock Dartboard. Here is an excerpt from the Abstract:
"...abnormal returns and trading volumes following the announcement date are driven by noise trading from naive investors. The bootstrapping results indicate that the performance of the pros' stocks is indistinguishable from that of the dartboard stocks for 90% of the contests. Overall, pros can neither outperform the darts nor the market."
Huh, so the professional mutual fund managers, the ones that you are paying to invest your money for you, can be bested by throwing darts. Good to know.
Mutual funds are just so hard to understand
Lastly, there's the fact that you need a Master's degree in mathematics to understand this stuff. Unless, of course, you want to be one of those "naive investors" who ends up actually losing rather than making money. Beta? Alpha? R-squared? Moving average? Yikes. How are you supposed to pick a good mutual fund? From the charts? Statistics? Does doing better than the industry necessarily mean that you're getting a good return on your money? (Hint: no). Should you go with Large-Value? Small-Growth? Aaaaah!
So what is a good place to put your money? Well, I might be a little biased, but I think real estate is a pretty darn good vehicle. Sure, it may hard work, but you don't have to be the one doing the work.
What follows are my reactions to the HAFA (Home Affordable Foreclosure Alternative program) documentation, and when I say "documentation" I mean the whole darn thing: the program, the "standard agreements", everything. Forty five (45) pages of Supplemental Directive 09-09 are now burned into my brain. I thought that I should pass along some of my thoughts to everyone out there. These are DIRECT quotes from the various documents (in bold) followed by my reactions. Some of the things are bad for investors, but the majority of the problems will be for the poor homeowners. You know, the people that they're trying to save?
I was unable to get any answers from the HOPE hotline, the number that all documents tell you to call for more information on the HAFA program. Well, they don't know anything about it, not yet, anyway. As of this writing, half of the people didn't even know what "HAFA" was. Promising! I did, after much waiting and asking, manage to speak with a policy maker at the U.S. Treasury Department. Some of the questions that I pose are given answers (paraphrased), but not all of them are clear. The points are ordered by the occurrences in the official documents. I become a bit belligerent after a while, and I think I died little inside as a result of reading this. Enjoy!
Supplemental Directive 09-09
Revised March 26, 2010
"The servicer’s willingness to approve and accept a DIL is contingent upon the borrower’s ability to provide marketable title, free and clear of mortgages, liens and encumbrances."
It's up to you to satisfy the secondary lien holders.p>
Question: If you automatically agree to a DIL, but can't provide clear title, what options does that leave you?
Treasury: [Your loan] would not be eligible for the program.
"Pre-approved short sale terms prior to the property listing."
Hey, did you know that there's water damage, and the dishwasher is gone, and half of the electrical outlets don't work, and the deck is a safety hazard? No? That isn't reflected in your required net proceeds? Huh...
"Each participating servicer must develop a written policy, consistent with investor guidelines, that describes the basis on which the servicer will offer the HAFA program to borrowers."
Question: Do we get to see these guidelines? As in: prove that they actually exist?
Treasury: No, you do not get to see the guidelines. However, the written guidelines are submitted to the government. It's up to you to determine if a bank has broken those guidelines, [the very same guidelines that you can't know about].p>
"Servicers may not solicit a borrower for HAFA until the borrower has been evaluated for a HAMP modification"
You have to wait until you are kicked out of HAMP to tryout for the HAFA. The only way to get this to speed up is to specifically ask for a short sale.p>
"Though not a HAFA requirement, it is expected that servicers will, in accordance with investor guidelines, perform a financial analysis to determine if a short sale or DIL is in the best interest of the investor, guarantor and/or mortgage insurer."
It is stating that the bank will act in their best interest. At least they're up front about it. But if it was in their best interest to do a short sale, why are we giving them money?p>
"The results of any analysis must be retained in the servicing file."
Can we see this file?
"The HAMP base NPV model does not project investor cash flows from either a short sale or DIL and should be used only to determine borrower eligibility for a HAMP modification."
I have a feeling that this will come up. Maybe not often, but when it does, make sure to quote this to the bank.p>
"If financial and hardship information is documented and verified, [from HAMP] no additional financial or hardship assessment is required by HAFA."
>Hooray...
"However, in accordance with investor guidelines, the servicer may request updated financial information to evaluate the borrower."
...Dang it! That basically negates the first point! That's what they're doing now.p>
"The servicer must, independent of the borrower and any other parties to the transaction, assess the current value of the property in accordance with the investor’s guidelines."
It all comes down to the "investor’s guidelines"! I wonder if those "investors" (more like speculators, burn!) will be completely rational and logical.p>
[If they're rejected] "The notice must explain why a short sale or DIL under HAFA cannot be offered, provide a toll free telephone number that the customer may call to discuss the decision..."
Well that's nice, at least. I wonder how knowledgeable the minimum-wage right-out-of-high-school employees will be at the toll free number. I also wonder if those same kids will have any power over the situation whatsoever.p>
"Prior to approving a borrower to participate in a HAFA short sale, the servicer must determine the minimum acceptable net proceeds (minimum net) that the investor will accept from the transaction."
My apologies to the policy writers, consultants, and government employees who helped draft this. I'm sure you have our best interest at heart, but I have to say: That might be the dumbest sentence I have ever read in my life, and I've been on the Internet. Without even going inside, without knowing what it would truly sell for, without even looking at it, the bank is going to determine what they will end up with. That hurts the brain.p>
"A servicer’s policy for determining the minimum net must be consistently applied for all loans serviced for that investor."
Well, at least there's that.
"The minimum net may be expressed as a fixed dollar amount, as a percentage of the current market value of the property, or as a percentage of the list price as approved by the servicer."
The bank approves the list price, AND the net proceeds?! Are banks in the business of real estate now? Because that's what it looks like.p>
"After signing an SSA, the servicer may not increase the minimum net requirement until the initial SSA termination date is reached."
But after the 120 days, they can increase it.
"In determining the minimum net, the servicer must consider reasonable and customary real estate transaction costs for the community in which the property is located and determine which of these costs the servicer or investor is willing to pay from sale proceeds."
>BEFORE they even start, they set what they will and will not pay! Who guesses that their payment plan will be: "as little as we can get away with"?p>
"Either proactively, or at the request of an eligible borrower, the servicer will prepare and send an SSA to the borrower after determining that the proposed sale is in the best interest of the investor."
Tell me again, if this is in the best interest of the investor of the loan, WHY are we giving incentives to them?
[Regarding the requirements that all SSAs must have]
"[S]servicers may amend the terms of the SSA in accordance with investor requirements..."
What? WHAT?! Did you just gave them free reign to do whatever they want? A friend of mine said: "Yeah, they can change it, but they can't make it any worse." We just laughed and laughed.p>
"...borrower will be entitled to a relocation incentive of $3,000, which will be deducted from
the gross sale proceeds at closing."
Ah, so the net proceeds has to work around that: meaning that BUYERS NEED TO PAY MORE.
"The borrower must sign and return the SSA within 14 calendar days from its Effective Date along with a copy of the real estate broker listing agreement and information regarding any subordinate liens."
The seller is responsible for getting a competent agent and gather ALL documentation regarding any liens within two weeks (calendar, not business, even). Real nice, guys.
DIL Terms. The following terms apply to a HAFA DIL:
"The borrower must be able to convey clear, marketable title to the servicer or investor."
The poor people have to deliver clear title for a DIL?p>
"Servicers may not charge the borrower any administrative processing fees in connection with HAFA. The servicer must pay all out-of-pocket expenses..."
Great! Even though they will add those fees onto the debt if the seller can't sell. I can totally see some lenders trying to get people to do this, though. Watch out!p>
"A mortgage loan does not qualify for HAFA unless the mortgage insurer waives any right to collect additional sums (cash contribution or a promissory note) from the borrower."
GAAAH! More people to appease.
Question: How long do the servicers have to get insurer approval?
Treasury: The servicer 'should' do this before they started the HAFA, but it is not in the guidelines. There is also no timeframe limit. It's up to the servicer to decide on what they want to do.p>
"Investor Reimbursement for Subordinate Lien Releases. [...]
This reimbursement will be earned on a one-for-three matching basis. For each three dollars an investor pays to secure release of a subordinate lien, the investor will be entitled to one dollar of reimbursement up to the maximum reimbursement of $2,000."
Question: If the subordinate liens are being paid out of closing (up to $6K), but this doesn't affect the NET proceeds... why are we paying them money?
Credit Bureau Reporting:
The information below is consistent with 'CDIA Mortgage and Home Equity Reporting Guidelines
in Response to Current Financial Conditions' (May 2009).
Reporting should be as follows:
Short Sales
- Account Status Code = 13 (paid or closed/zero balance)
...
Deed-in-Lieu
- Account Status Code = 89 (deed-in-lieu of foreclosure on a defaulted loan)
I KNEW IT! Which one looks better, hmm? HMM?!
HAFA SHORT SALE AGREEMENT PAPERWORK
"By signing this letter, you are agreeing not only to a short sale but also to a deed-in-lieu of foreclosure if a short sale is not successful."
Question: You have 120 days to sell and then you agree to a DIL?
Treasury: This is an optional provision that the servicer can put in there and yes, if you sign it, you do have to do a DIL.p>
"Optional", eh? But this is confirmation that if you (or your Realtor that you had only two weeks to get) can't sell it, it automatically goes back to the bank. READ THE CONTRACT!
"We are not responsible for the accuracy of the list price and have no responsibility to you in the event the property is not sold."
AAAAAAAAAAAAAAAAAAAAAAH! But YOU pre-priced it! AAAAAAAAAAAAAAAAAAAAAAH!
"Seller may cancel this Agreement prior to the ending date of the listing period without advance notice to the broker, and without payment of a commission or any other consideration, if the property is conveyed to the mortgage insurer or the mortgage holder."
It's cancelled if you do a DIL? Is there any other way to cancel it? Please?
Partial Mortgage Payments
Need I say more?
"The Buyer agrees not to sell the property within 90 days of closing of this sale."
Question: Why is this in here?p>
Treasury: It was put in there to prevent fraud.
Follow up Question: How many instances of fraud have there been in the past, say, three years?
- Treasury was unable to provide any data.p>
"We may initiate or continue the foreclosure process as permitted by the mortgage documents; however, we will suspend any foreclosure sale date until the expiration date of this Agreement..."
If this fails, they'll start immediately back up. Just like normal.
Regarding the termination of the agreement:
"g.[Insert only if applicable:] You do not make the payments required under this Agreement."
Interesting, perhaps certain lenders won't require payments? Hahahahaaa. I kill me.
LETTERS TO HOMEOWNERS
Under Seller responsibilities:h3>
"[You, the seller, must] Be able to provide the buyer of your home with clear title... You will need to either pay [any subordinate] loans off in full or negotiate with the lien holders to release them before the closing date. Under this program, you must make sure other lien holders will agree not to pursue other legal action related to the pay off of their lien, such as a deficiency judgment."
I'm sure that people facing foreclosure are MASTERS of negotiation.
"We may allow up to 6% of the unpaid principal balance of each loan (not to exceed an aggregate of $6,000 for all the loans in total) to be paid from the sale proceeds to help get a lien release."
So that takes care of the "settle all liens before closing problem. At least the homeowners don't have to deal with the other lien holders. What's that? What do you mean "We MAY allow"?
My guess is that subordinate lien holders will now demand as much, or (if they're owed a lot), will refuse to participate.
"You may not have any agreements to receive a portion of the commission or the sales price after closing. Any buyer of your property must agree to not sell the home within 90 calendar days of the date it is sold by you. You may not have any expectation that you will be able to buy... your house back after the closing."
Why is the 90 day thing sandwiched in between the arms-length transaction verbiage? That's just weird.p>
"If by the termination date of this Agreement, you have complied with all your responsibilities but are unable to sell your home, we will allow you to convey ownership of your home and all real property secured by your mortgage loan."
I love the "we will allow you to give us the house," because they're just so nice.p>
Although, if it's your principal residence (at least, in Oregon), a foreclosure sale is basically the exact same thing as a DIL, credit-wise and the fact that they can't come after you for the debt. The only difference seems to be the $3,000 that you get for relocation.p>
However, in the past people have just been squatting, letting it go back to the bank, and many institutions are letting them live rent-free just to keep the homes occupied. $3,000 or free rent. Hmm... *
* Please do not take this as "professional advice," seek a competent attorney before you make any big decisions. Come on.
Disapproval of Short Sale Form
The net proceeds available to pay off the first mortgage loan are insufficient, due to:
- [ ] Contract sales price is below list price stated in Short Sale Agreement
- [ ] Net proceeds amount is less than acceptable net proceeds stated in Short Sale Agreement
- [ ] Excessive financial concessions
- [ ] Excessive commissions
- [ ] Excessive closing costs
- [ ] Excessive payments to subordinate liens/mortgages OR release of subordinate liens did not occur
I'm torn. Should I be enraged by the fact that they have checkboxes (CHECKBOXES!) to tell you how you were declined, giving no more information, or grateful for the fact that it's far better than what we have now?
Deed-In-Lieu Agreement
Under the heading: "How Does a DIL Work?"
"You must also be able to deliver marketable title free of any other liens. We will contribute up to six percent (6%) of the unpaid principal balance of each subordinate lien, not to exceed a total of $6,000, toward paying off any subordinate lien holders."
Remember, that 6% comes out of the GROSS proceeds of a short sale, so the bank pays nothing, really. They only actually pay out of pocket for a deed-in-lieu. It seems that the DIL is not in the bank's best interest. I approve.
If you are going to hold a seminar, don't kick people out for handing out their business card. This is how seminars usually work: you go there to learn a little bit, and (usually the second day) are pitched a "coaching program" that is literally tens of thousands of dollars. Is that wrong? No, it's just how seminars work. We all understand this going in.
However, there is an unwritten rule to real estate seminars: you also go there to network and meet other investors. Everyone who I have ever talked to knows this. Heck, many real estate coaches actively encourage it. And why not? It's great! It's a wonderful way to meet people that either you can help, or they can help you, or both. Oh, and just because you meet someone at a seminar, doesn't mean that you shouldn't buy whatever the company is pitching. If you feel that it's right for you, and at a good price (relative to value), you should go right ahead! I thought this was obvious.
Apparently not. I was kicked out of a seminar a few days ago for "soliciting" people by talking about real estate, you know, at a real estate seminar, and giving out my business card when people asked for it. When someone asks "what you do?", what do you tell them? I'll tell you what you tell them: what you do. This is basic stuff that doesn't need to be pointed out. When someone asks me a question, I usually like to respond with an answer if I have it. If someone doesn't understand something, I try to explain it better. Doing so is, for reasons that are unknown, "soliciting your services", and I was kicked out.
I know why they did it, of course. They were afraid that I would be "competition", seeing as how I was willing to answer questions without using the phrase: "You'll find out when you get a coach!" They were afraid that no one would buy into their undoubtedly expensive coaching program because I was actually doing what they were trying to sell. I get that.
This also leads me to a thought that someone shared with me afterward: "If they couldn't handle the 'competition', is their program really that good?" I cannot say, but it does make you wonder, which leads me to...
Don't teach people extremely dangerous business practices
If you want people buy your program, don't tell them something that can get them into major trouble. Just throwing that out there. If you get a "local man" so that we will like him better, make sure that he actually knows local laws and regulations. Telling a room full of newbie investors and business owners that a "lease back is a great solution to buying people's homes in foreclosure," is one of the most irresponsible offenses that I have ever seen. For those who don't know, a "lease back" is when someone would buy a house that's going into foreclosure, and allow the former owners to "rent it" and buy it back at a later date.
Of course, if they were actually local, they would know that house bill 3630 (which has now become part of state law) makes that a very, very bad decision. Losing 82% of the profits from the sale would probably be the least of your worries. Kicking people out for telling others what they do is one thing, giving them stuff that will land everyone in a world of hurt is just unforgivable.
Here's an idea I had: the government should charge the banks late fees. I passed it along to my Oregon congressman as well as my Senator but I thought that I'd post it here too. Let us first examine the problem that this program will hope to accomplish.
Banks are moving too slowly
Right now, banks have very little incentive to close on short sales. Why is that? The answer, of course, is that they can take back the house via REO and sit on the government bailout money. If you knew that your company was going to get a big fat check from the government, what would you do? The problem with this is that the REOs are dragging down the market and effecting non-distressed home sale prices. This, in turn, has become a drag on our financial recovery. Banks are very slow to move on short sales right now. The only way to speed them up, is through a little incentive. A different kind of incentive than what they have now, but the banks should be very familiar with it: late fees.
Why do banks charge late fees? To get you to pay on time, or to get money. If you're late, that's fine with them, they just made upwards of $50 bucks or even more. If you pay on time, that's fine too, because that's what you agreed upon. Why do people pay on time? To avoid the fees, obviously. It's a nice little system. Now it's time to use the system to our advantage.
Solution: Every month the bank is late, they get a fee
Since the banks are so slow to respond to short sales, they should be given a maximum of 60 days, or else the government charges them $5,000 for every month that they are late. Simple, but effective nonetheless. The threat of being charged those fees will encourage banks to make quicker decisions, get these houses off of their books, and finally start us on our way to economic recovery.
This will have one of two effects:
- This will significantly speed up these transactions, leading to a faster economic recovery
- This will generate significant revenue for the federal government
What America needs right now is turnover. We need banks to get these loans off of their books as quickly as possible so that they may start lending again. In order to do that, these banks need motivation to do so. Right now, they have none.
