Bailout? Or Smart Investment?

September 22, 2008

A great deal has been written so far about the government’s proposed $700 billion purchase of mortgages. Almost all of it presents it as a huge taxpayer burden and a hard blow for the government’s finances.

I had to look through many articles before I found any discussion of how the government is actually going to purchase the mortgages. When I finally found it, I was very pleased.

The government is going to hold a “reverse auction”. They’re basically going to say “ok, who wants to sell us some 6 month delinquent stated income mortgages, and how good a price are you willing to give us?” Then the government will take offers. If one bank offers to sell at 20 cents on the dollar and the other bank requires 25 cents on the dollar, the government will first buy at 20 cents. It may never get to the 25cents bank, since the amount it will buy is finite. That gives the banks considerable incentive to sell their mortgages to the government (i.e. the taxpayer) on the cheap.

What happens then? The government sooner or later will either foreclose or restructure each loan that is in default. In order for the taxpayer to lose on this deal, the end sales price has to be even less than what the government paid.

Let’s take an example. Suppose there’s a house in Las Vegas that sold for $400k in 2006 with a 100% $400k mortgage, and is now in default. If the government pays 20 cents on the dollar for that mortgage, the government will write a check to the company holding the paper for $80,000. But the government still has a claim for $400k on the property. When the government forecloses and hands the property over to a LV agent to get it sold, the agent will put it back on the market. How many houses that were worth $400k are worth less than $80k now? The answer is hardly any. Most houses in Vegas are able to sell at prices at about 50% of their peak value. So the agent will sell the house for, say, $175k. The government gets the full $175k, and isn’t obligated to give any of it to the original lender. In this case, the taxpayer will double their money.

So whether or not this bailout costs the US taxpayer, or is even profitable, depends on two things:

1) How good the Treasury Department is at running the auction

2) How much other stuff gets thrown into the legislation by Congress

I’m not too concerned about #1. We are very fortunate to have Paulson in charge. You just don’t get to the top of Goldman Sachs without being very very intelligent. He is driving good deals for the taxpayer. The AIG bailout offer was very punishing to AIG shareholders, as was the negotiated Bear Stearns deal. I don’t think much moral hazard is being created here.

Also, the market level was set recently when Merrill Lynch sold a big set of mortgages for $.22 on the dollar. The buyer is going to make a lot of money on those mortgages, in my opinion.

I’m a little more worried about #2, but we’ll see what gets negotiated this week.

This new bailout could be incredibly profitable for the US taxpayer.


New Airline Service to Vegas

September 19, 2008

WestJet announces new nonstop service to and from the capital of Saskatchewan. They’re also flying nonstop now to Regina and Victoria.



More Drop in Housing Starts = More of A Good Thing

September 18, 2008

An interesting picture on housing starts. The fact that starts are continuing to drop nationwide is a good thing. There’s a supply imbalance out there, and the best way to deal with it is to stop building new housing for a while. Interestingly, though, housing starts in the West are up considerably. Not sure what to make of that. Could be a sign of renewed enthusiasm in the West, an indicator that companies in the trenches see signs of demand. It’s certainly still hard to get financing to build housing in the West, so the people pulling permits must be pretty optimistic.

Oil Continues to Fall = Good for Vegas

September 16, 2008

Oil continues to fall, to nearly $90 per barrel, even in the face of hurricane-caused refinery damage, Venezuelan threats, and Russian aggression. There’s increasing evidence that the spike over the summer was largely driven by speculation as opposed to general demand. Oil is now where it began the year, and remember that at the beginning of the year, no one was talking about “airlines cutting back service because fuel is too expensive”.

An article in the WSJ talks about the new airline fees being “here to stay” even though oil has retreated. While that may make flying a little less appealing, it’s good for the health of the industry. One analyst comments:

The sharp drop in oil prices over the past few weeks has dramatically changed the financial outlook for airlines. The difference between buying jet fuel when crude oil is $147 a barrel versus $100 a barrel is $15 billion a year — a staggering saving for airlines.

Airline analyst Gary Chase at Lehman Brothers estimates that even with a recession, the U.S. industry can break even with oil prices in a range of $100 to $105 a barrel.

“The outlook for the industry is in dramatically better shape than it was,” he said.

Half of Las Vegas Foreclosure Sales Canceled or Postponed

September 15, 2008


The most recent trustee sale numbers for August 2008 showed that 50% of all scheduled Las Vegas foreclosure sales were either canceled or postponed before the auction.

There’s a common misperception that nearly all of the Las Vegas homes currently in the foreclosure process are owned by investors or owners with zero equity and very little incentive to keep their properties from being sold at auction.

The conventional wisdom seems to be that once a home goes into default you might as well count it as inventory because it’s going to end up back on the market eventually.

But the numbers tell a different story.

At least half of the people with homes in foreclosure are fighting to keep them, and many are having some success.

While not all of the postponed sales will escape the auction in the long run, it’s encouraging to see how many people still believe that their homes are worth keeping– even in today’s climate.

-Frothing Mark

Great Cramer Summary on Housing

September 15, 2008

Jim Cramer has been converting from bear to bull on housing overall, and he wrote his best analysis yet in New York Magazine. Here are some highlights of his 10 reasons that he thinks housing will bottom in about 9 months:

The converted bears, as well as the panicked sellers desperate to bail out and nervous buyers afraid to jump in, will be dead wrong nine months from now, when housing prices bottom. In fact, I’ll call the precise date of the housing-market turnaround. It will begin on June 30, 2009.

Let me give you ten reasons why everyone who now thinks there’s no end in sight to weakening home prices will look like a fool in nine months and will miss the best opportunity to buy since the 1989–1991 real-estate crash.

1. Two years ago, we were building twice as many homes as in 2008, and the decline in new-home building is now accelerating. At this pace, we could see new-home construction fall an additional 25 percent, back to levels last seen when we had 60 million fewer people living in this country. By next June we won’t be building enough homes to accommodate demand, and the gap between supply and demand won’t be made up by unsold inventory..



6. Come June, the bulk of the reckless 2-and-28 loans—the ones with the low teaser rates for the first two years that sucked people in and then reset at much higher rates, dragging people under—will have moved through the system. These loans have been the biggest source of foreclosed property, so the rate of foreclosures should decline sharply once those loans are off the books, tightening supply and soothing anxious buyers’ nerves.

This one, on household formation, is one of my favorites:

7. We may not think of ourselves this way, but we are still a growing nation: Four million babies are born each year in this country, vastly exceeding the nation’s death rate. Household formation, meanwhile, has held steady at about 800,000 a year. Families have been camped in their apartments or crowding in with their in-laws for some time now. That pent-up demand is bound to find expression and put upward pressure on prices, as credit again becomes easier to get.

Double-Counting of Foreclosures

September 12, 2008

The monthly report from RealtyTrac has become a major media event, and the press duly reports the foreclosure numbers RealtyTrac produces. One came out this morning. We apparently have It’s worth perhaps pointing out that there’s an unknown but real amount of double-counting and possibly triple-counting going on. Here’s an example:


These two listings are the same unit. In addition to the same price, they have the same owner, and since I built this condominium and sold it to the owner, I know that he only purchased one.

You can’t fault RealtyTrac too much for this. It’s a very unscientific error-prone process to cull through all those County records.

But keep it in mind when you hear about big foreclosure numbers.