Real Estate Investment Column

I hate to say it, but I will anyway: I told you so. I so did. I knew that bailing out the banks that were "too big to fail" was a bad idea. CIT Group, Inc. filed chapter 11 bankruptcy a while back.

Remember when the government gave billions of dollars to bail out our automotive industry? Remember what happened after that? Yep, bankruptcy. The U.S. government gave about $2.3 billion dollars in taxpayer money to CIT some time back. What's going to happen to that? Gone, I'd wager.

To those of you out there that are still in the "we have to save them because they're too big to fail" camp, have you reconsidered your position lately? Let's face it, anything that is too big to fail should not exist. It's the same reason our own government has checks and balances. No branch can have too much power, so that we don't devolve into a dictatorship.

Giving money to businesses (and people ) that make bad decisions is always a bad idea. Why don't we get that? I know! Let's give billions of dollars to the health insurance companies! That will solve all of our health-care woes! [Warning! Dangerous levels of sarcasm!] Why not the oil industry? Then we'll get to see them fall, and be right back where we started, only worse, because we'll have the knowledge that we could have saved all that money and let them die in the first place.

You know, I didn't start this company to win awards. Even fake ones. I'd like to think that I'm wise to scams and am smart enough to avoid them. In any case, Skybox Homes is apparently the best real estate investor company of 2009, or something.

To be honest, I'm not entirely sure if this award is fake or not. On one hand, they do make you pay for your physical plaque, which is like paying to get into the "America's smartest children book" and having to buy it (plus shipping) yourself. On the other hand, though, they give you the ability to to simply link to a press release on their website. No need to enter in any credit card information. That's a plus, at least.

Scam or not, we won an award. Eat it everyone who hasn't won an extremely obscure award from an organization they've never heard of!

I knew that the new name "WaMu" was stupid when they changed it. It is pronounced by imitating a angry cow. I did not know, however, just how evil they were before they (rightfully) failed. A recent Seattle Times article on the lender shows just how awful they were. Basically, WaMu decided that money was far more important to them than safety, rules, or common decency. They were so toxic, that I have now moved Chase to my blacklist of lenders. Be forwarned, this article will make you want to burn down things. That is a natural reaction, but I must ask you not to.

The case of WaMu exemplifies absolutely everything that got us into the Great Depression 2: Electric Boogaloo. It seems all the trouble started with a certain CEO who went by the name: Kerry Killinger. There could not be a more appropriate name in all of history. He, and several other leading WaMu executives, proposed some "bright ideas" that ultimately became the downfall of WaMu, and helped bring America to its knees. Of course, they deny that any of it was their fault. Oh no, they were only the ones running the company so yeah, it makes sense that it wasn't them. The article quotes executives as saying that Killinger was "always, always optimistic". Optimism is bank slang for greedy. Quick tip: if anyone at your bank says that they're optimistic about something, run. Run away as quickly as you can. The deal will fall through.

Here's a delicious piece for you from a former associate: "He always thought he could get out of whatever trouble he was in." Cue studio audience laughter. The article continues: "Killinger was focused on WaMu's stock price as the company's — and his — primary gauge of success." This, of course, is also a huge mistake for companies to make, as the stock market is fueled, at least in the short term, by speculation. And speculation is a very bad word. Basing your company's performance on the stock price will put pressure on everyone to always do better at any cost. The company isn't allowed to have a bad year, and it will focus on one strategy that works and become completely dependent upon it, be it ethical or not. Sound familiar?

WaMu and Option ARMs, sitting in a tree...

But it gets so much better. Better in a train wreck sort of way, though. The turn towards the dark side actually began in 1996, when WaMu was introduced to the most dastardly of loans: The Option Arm. An Option ARM is a ridiculously complicated loan type that can be summed up as such: People could pay lower payments than the amount of interest on their loan, and the difference was added to their balance. Of course, they adjusted to far higher rates later, making monthly payments spike, sometimes quadrupling in amount. The article goes on to explain how WaMu saw Countrywide (another winner of an institution) as competition and had to "outdo" them at any cost.

And boy did they ever. Option ARMs were pushed heavily, because WaMu could make more money in fees. Their standards fell to ridiculously low levels, and they even paid their brokers more money if they could push an Option ARM on some unsuspecting cborrower. "A $300,000 option ARM, for example, would earn a $1,200 commission, versus $960 for a fixed-rate loan of the same amount." All this spells disaster. Any normal thinking person could see the potential for abuse. Low-doc became no-doc; nothing was too far-fetched and no excuse was too flimsy. They even started pressuring appraisers for higher and higher values. This is undoubtedly what spurred on the recent regulation separating banks from appraisers. It's probably the main cause for FHA's Mortgagee Letter 2006-14. Yeah, thanks for that.

And then O.J. showed up

This is what will make you put your fist through a wall: WaMu's standards sunk so low that someone gave a second mortgage to O.J. Simpson. Yes, the O.J. Simpson. Fay Chapman, (former chief legal officer) is quoted:

"Someone in Florida had made a second-mortgage loan to O.J. Simpson, and I just about blew my top, because there was this huge judgment against him from his wife's parents," she recalled. Simpson had been acquitted of killing his wife Nicole and her friend but was later found liable for their deaths in a civil lawsuit; that judgment took precedence over other debts, such as if Simpson defaulted on his WaMu loan.

"When I asked how we could possibly foreclose on it, they said there was a letter in the file from O.J. Simpson saying 'the judgment is no good, because I didn't do it.' "

THAT WAS ALL IT TOOK!

That was enough to convince them that everything was alright. The mind boggles at the stupidity at work, here.p>

They saw the storm coming

They just chose to ignore it.

In June 2005, CEO Killinger had realized that something was going to go wrong with all these loans that they had made. "We have a significantly above-average risk in housing today. ... Overall, the price appreciation has been at a very high level and, I believe, an unsustainable level." Now, what do all good leaders do when they see a potentially huge problem facing their company?

Why, pass the buck, of course!

The solution to their problem was, naturally, to bundle all of the bad loans up and sell them off. Not their problem anymore! WaMu was free to continue their predatory lending, raking in billions in fees and commissions. But all good things must come to an end, as theel>suckers investor-buyers got worried that no one was paying on WaMu's ridiculous loans, and stopped buying. Suddenly, WaMu had billions of dollars worth of loans and no one stupid enough to sell to. Uh oh.

The rest is history. Give the article a read, and have a stress ball ready. Or a bank CEO.
Part one of the article is here: Reckless strategies doomed WaMu
And part two follows: WaMu: Hometown bank turned predatory

I've said it before and I'll say it again: Greed kills everything. WaMu is the perfect example of how to do everything wrong.

Navigating the local MLS, you might have some trouble figuring out which house is a good deal and which is a waste of your time. It's difficult to tell sometimes, with only the Realtor's description to go on. So presented here is a list of Realtor phrases, and what they actually mean. [Warning: May contain humor value].

In honor of Warren Buffett's birthday, I thought that I'd share a few words. I started studying Mr. Buffet a while ago and have only been more and more impressed with everything that he does. He and Charlie Munger have done an amazing job (and continue to do so) and, even though my forte is real estate, I would very much like to earn a share of Berkshire Hathaway. Not for investment purposes, but for one simple reason: Omaha. Specifically, the annual shareholders meeting held in Omaha, NE. Just being able to be in the same room as these financial geniuses would increase my net worth ten-fold, I'm sure.

Why do I think that Mr. Buffett and Mr. Munger are so fantastic? Because they and their company represent the values that other companies should have had all along. Bull market, Bear market, it doesn't matter: values stay the same. What's great about that is the fact that they have consistently made Berkshire Hathaway shareholders tremendous returns with those very values. In short: Being good and being rich are definitely not opposites.

Time Tested Principles

The real estate "reset" has forced us to go back to the old ways. Valuing commercial buildings based on cash flow, selling a house based on what it's actually worth, and making deals based on real world data. Speculation is what drove the real estate market up, and now it's come crashing down. Values never should have been that high in the first place. Reading up on Warren Buffett taught me about the importance that he places on the strength of the actual business, and that he shuns speculation (in stock market terms: day trading). Sound like something we should have been doing for the past 20 years, real estate or otherwise? Exactly.

Extreme Honesty

This is probably my favorite thing about Mr. Buffett. He openly admits when he is wrong. That alone makes me want to give him a present. Bad situations become complete disasters when you don't admit your mistakes. Why? Because if you don't admit that it's a mistake, then you won't do anything to fix it. Such as, oh I don't know, when a bank tells you that everything is fine, that they don't have many foreclosed properties on their books, and then suddenly the FDIC stops ensuring their deposits and they effectively get shut down. I'm not thinking of any one bank (or forty) in particular, though.

Being completely open and honest also has a side benefit: it's really hard for anyone to accuse you of fraud. Think about it: fraud is the misrepresentation of material facts. If you present all the facts, any misrepresentations will be easy to spot. Hiding properties in trusts, getting over-valuations on houses, and many other shady dealings have now become obsolete, (at least, for the next decade or so). I hope that things stay that way, but I know that they won't, as the human race never seems to learn from it's past mistakes.

In conclusion: I think Warren Buffett owes the entire world a big "I told you so."