The US Senate is going to vote on a bill tonight that is still being drafted…classic. So, we can’t even see what the hell it is that they are going to vote on…and the vote is supposed to happen at 7:30p EST. Once again it seems that the fear factor is front and center. Our current President and team have proven that if you scare the crap out of anyone well enough, you can get them to give you anything…in this case make them think that Chicken Little is right and that the sky is falling. Are many Wall St. financial companies in trouble? Yes, I don’t know anyone that is denying this today (even though I have a couple of friends that were drinking the company koolaid last year). Why would we, the taxpaying public, just hand them over a few hundred billion dollars? If you own stocks, they are held by a third party, they are not in jeopardy….that can’t be it. Because they are old? I sure hope that isn’t it. Because they have a lot of juice in Washington (Hank Paulson used to run Goldman Sachs)? That best not be it. I just don’t get it. Then again, I don’t get how they operate at 40/50 to 1 leverage.

When I first began working in real estate the rules of the game were pretty simple. You needed at least 20% cash into the deal to buy a house (you could sometimes put 10% down, but you would then have to pay for private insurance to insure the loan for the lender), you needed more like 35% cash into a deal to buy a commercial (5+ units) apartment building. To qualify for a loan, your debt to income ratio could not be more than approx 33%. That means that your gross income would have to be at least three times your monthly liabilites including your new mortgage payment. Commercial loans also had to have the property be able to support itself with the income it generated…or you had to come up with more cash to get to the loan amount the lender would give you.

Well, for the past 6 or 7 years, those ideas have gone to pot. DTI (debt to income) ratios went to 45 or even 55% (smart ). Loan to value? Well, shit, you didn’t even need value. Some lenders would give you 125% financing…woohoo. Carlton Sheets is the shizzy. People seem to think that it is normal for property to appreciate at double digit appreciation year over year…well, it is not. I am not a doomsdayer, I am just someone that is slapping your dumb ass in the face and telling you that you are wrong (if you think it is normal). If you think it is, then you are probably someone who thinks that taxpayers should dump hundreds of billions of borrowed dollars (oh yeah, we don’t have the money either) into keeping an INVESTMENT bank from going under. If your business is failing because you made crappy decisions should you expect someone to cut you a check and say, “do over?” I don’t think so either.

Buying non-performing loans for more than they are worth from Wall St. investment banks is just plain wrong. Let them sell them on the open market like everyone else does. No buyers? Lower the price. Still no buyers? Lower it some more. That is called supply and demand and that is how the true value/price of something is figured out. That one was free.

Part of what is making me so mad is that this does not “fix” anything. This keeps some companies in business….for now. It doesn’t help home sales. Why? Well, there are a few reasons. First, let’s go back to our discussion about how financing has been conducted in the past 6 or 7 years. How many new people were brought into the home buying/speculating market because of the financing that was available? I don’t know the exact number, but I know anecdotally that it was more than there was before. Lenders are no longer making loans with these same underwriting guidelines so many people that were able to get a loan before, now cannot. So, if they want to refinance because they don’t like how their current loan is structured, they can’t. For the record, nobody is putting a gun to their head and saying you have to refinance. And, I am sure that nobody was putting a gun to their head when they bought it saying you have to buy. There is so much paperwork and disclosure documentation that you have to sign in this country when you get a loan, if you don’t know what your payment is and could be in the worst case scenario then you are either 1) a lazy person who doesn’t like to read or 2) someone who can’t read and should not be able to get a loan. In either case it is a crappy situation to be in, but such is life. You live and you learn. I learned that falling off my bike was not what I wanted to do, by falling and crashing a lot. I learned that there were risks in doing things that could result in me crashing my bike or falling off. I lived, I learned. I know this is too “mean” for some people, but they can suck it. That’s right, I said suck it. We have become a society of pussies and I am getting fed up with it. Now, back to my point. If you can’t refinance and you can’t afford your payments you have a few options: 1) Sell your property. Maybe it is worth less than you owe (high leverage financing does have risks), you can cut a check to the lender when you sell or you can not sell it. 2) Walk away and let the bank take it back 3) try and work something out with the lender where they will take less than what you owe (when you sell it or while you live in it ). At the end of the day, it is likely that people will “lose” the property. I am not sure why this is the end of the world for so many people. RENT a house. RENT an apartment. RENT a boat. What is so f-ing wrong with renting something? It is cheaper for just about everyone in these situations, so why is there even a discussion? I am no psycho therapist, but it sure seems like there is an opportunity to treat people for this nonsense. Suck it up, move on, rent a place to live, done. Buying some loans that people like this are not paying on is something that taxpayers should be doing. Certainly not so that the investment banks that own them can get a bunch of cash for them…what a joke…actually, it is so bad that it is not even a joke after it was a joke.

The way loans have been structured has brought many new buyers and speculators into the marketplace. My friend’s paralegal spec’d 2 houses that she just walked from. Another person’s gardener had 3 houses that he is going to have to walk from and he is not even a citizen of the USA. The list of stories is long that I know of. Not to mention the people I have spoken to looking for private or hard money loans. Trust me when I tell you that this is not a problem that only affects people who can’t speak English or that have bad credit. This is affecting people from all walks of life. We have someone lost sight of the idea that borrowing money to life your daily life is not the way to do things…we are all guilty of it. Some, just took it a lot further than others. Some didn’t do it at all (Thank You). The govenment exists to make laws not to dole out money that they did not work to make. Giving money to an investment bank and getting nothing in return, like a guarantee that they will repay any losses incurred plus a stiff interest penalty, is complete BS. It is something that no ordinary person would ever get.

I just don’t get it. Are people that ignorant? I am totally baffled. Guess what, if we need a loan right now on a commercial building, we can get one. Why? Well, because we don’t try and do it with extreme amounts of leverage. Because we can show stabilized rents. Because we can show low debt to income ratios. That is how lending works. Buying bad loans doesn’t make the fundamentals of how people have been buying property in the past 6 or 7 years different. If people can’t get these silly loans anymore then there are a lot of people (in all walks of life) that are now trying to figure out how to pay for what they have. Your house is not a free ATM machine that spits out money every year that you can then go spend on a new car or some other useless crap. You know it, I know it. Jesus.

UPDATE 1:42pm PST

Another thought. You have to understand what you are getting yourself into when you buy something. That should go without saying when you are making a purchase of the magnitude a home or other real property puchase has. If you don’t understand what the upside and downside benefits and risks are, you probably should not do it. I would liken it to buying Google stock when it was going up 20 or 50 points a day simply because people are talking about it or because someone you know bought it. You don’t know anything about the financials of the company, their technology, their competition, how they are positioned in their market, book value, etc.. You buy it for reasons other than because you have a good understanding of the company and its prospects of doing well. If you don’t understand how real estate loans work, don’t get one. If you are too lazy or too busy or too something to learn about what you are buying and how it can affect you financially then don’t do it. It really is that simple. Whatever other factors you want to throw in are irrelevant. Home ownership or any real estate ownership is not a requirement or prerequisite to live your life.

[tags]Bailout, Welfare, Banking, Wall St, Investment Banks, Paulson, Bernanke[/tags]