Pilota…
As a financial advisor who has been in the unique position of seeing the subprime bubble firsthand from the driver’s seat with a mortgage brokerage I have some insights that may be worth your reading pleasure. As property prices rose astronomically in Aspen and to some degree elsewhere from 2002 to 2006 spectators marveled at the appreciation that was to be had for insiders and others in the know or who had the resources to accomplish flips, developments and other various property based plans and schemes. With the recent unwinding of the credit markets and frozen nature of the top end real estate market those left holding the bag when the music stopped have two questions? 1. When are the credit markets going to unfreeze (i.e. when can I get a loan) and 2. When is the market going to come back or (when can I sell my property.)
The answer to number two is obviously linked to number one. The answer to number one is complex and has varying shades of grey. If you can prove enough income to qualify then maybe you can get a loan, if that loan is not too big. If you call asking for a stated income (i.e. no tax returns) loan, with cash out for 5MM dollars you are out of luck. Especially if your project is a spec build. At a recent meeting I was at the question was put forth “when will it come back?” A bank exec of some local note replied, “Well last time it took 20 years”.
To find answers regarding the future we need to look at the past, what caused the run up and why are at where we are today. It started one day in 1987, when the most powerful man in the world came to power. Alan Greenspan. In a nutshell, to create economic prosperity he used several tools, deregulation, obfuscation and artificially low rates to create the largest bubble in the history of the world. I call this the “free money party” I am over simplifying here but continue to follow along. In concert with Fannie, Freddie and HUD the free money party began to escalate. Let’s print more! Great how do we do that? Well, we get people to sign notes, just like the note in your wallet; it has no meaning other than now that you signed it, that money is created. Prosperity abounds!! Well, we are running low, let’s make some more money, well let’s lower interest rates so that we can invent some more money. Everyone is happy now.
Now we need more money to give to the people to invent more money and have more prosperity. How about a secondary market to recycle this money so we don’t just have to print it all. Spectacular!! Move it – shake it – slice it – dice it. Don’t know what you have in your portfolio Mr. Investor or the pension fund of the State of South Carolina, don’t worry about it is backed by REAL estate, no worries. Well what if the people signing these notes can’t exactly qualify for the freeee moneeeey that we want to give them…Hmmm let’s see, lets state their income!! Brilliant!
Many people blame “stated income” – I received an email from a realtor chastising me stating that “this was what got us into this mess in the first place”. I did not reply, however I thought it amusing that this individual had made his living for the last 30 years in a place where the appreciation was fundamentally solely driven by loose lending policy, stated income loan qualifications , and the Greenspan “free money party” mentality.
However stated income has its place. I have clients with a net worth of 350MM Dollars that have a net negative tax return. Many of our self employed builder developer’s realtor financial guys have to use stated income as they write off a substantial portion of their income. By way of example I have a builder, he sells 2 – 4 homes a year in the midvalley so he is looking at 1.5 to 2M in revenue, but with his costs he really has a difficult time qualifying for a loan, even one under 417K. What does this tell you? That if you are a developer and need institutional financing and you are not a top tier concern, better look to self finance or find a new line of work. More later.
If you need any financial products and or advice I am your man… Life Insurance, Estate Planning, Asset Protection, Life Settlements, Fixed Annnuities, Variable Annuities, you name it. Let me know http://www.fpaspen.com/ or by Email
If it is Aspen Real Estate or foreclosures you seek, look up both properties and my wife at http://www.searchaspenrealestate.com/ or by EMAIL
Uncategorized | dkitchell January 21, 2009
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