The Economy posted its first healthy net gain in jobs in years! And now talk centers on how strong the recovery is rather than if it’s sustainable or not. Time will tell, let’s hold out hope it is…
New home sales slipped 2.2 percent in February to a record low of 308,000 units. Durable goods orders rose 0.5 percent. Final 4th Quarter GDP was revised downward to 5.6 percent from percent .9 percent. About two-thirds of the gain was due to inventories. For all of 2009, GDP fell 2.4 percent. Personal income was unchanged while spending rose 0.3 percent. The ISM manufacturing index for March increased to 59.5 percent. But big news was the 162,000 gain in non-farm payrolls in March. The unemployment rate, however, remained stuck at 9.7 percent. It is interesting to note that Fortune magazine is reporting the fortune 500 largest US companies cut a record 821,000 jobs in 2009.
A report by RealtyTrac finds foreclosure filings (default notice, bank repossession or auction sale notice) jumped 19 percent in March vs. February and up nearly 8 percent from the same period last year. The national average was 1 foreclosure foe every 352 homes. Compared to that level, the five highest states in order were Nevada (1 in 76); Arizona (1 in 144); California (1 in 144); Florida (1 in 149); and Utah (1 in 224).
Based on the numbers released in the March Bratton Report; Deschutes County is finally climbing back up in value after bouncing along the bottom. On a single family home, the medium sales price is now up 5 percent for February to 199,000 from 190,000. The all time high was 233,000 at the end of 2008 and the recent all time low was 189,000 at the first of this year in 2010.
The Magic 8-Ball was invented in 1946 and is sold by Mattel to the delight of kids and adults worldwide. This advice-giving toy provides entertainment for hours and can often be found lurking around offices as well as in homes. Given all the turmoil in the industry as of late, we could certainly use a tool that accurately predicts the future. Unfortunately for us all, we only have to look at the past two years to know that forecasting the future is impossible. After all, no one predicted the carnage of the credit crisis, the number of companies that would fail or the ultimate impact on the country and indeed the world.
We must deal with uncertainty on a daily basis, so developing strategies and plans around an evolving business model is the best I have found to date to deal with things. As I shake the Magic 8-Ball one more time, I ask it whether we should stop believing our predictions about the future and shift to doing business in a way that can respond to surprises. The answer is a resounding “YES”.
One shift that I have found that works in this time of carnage is: a program of buying NOTES from the FDIC. Offerings of NOTES are being put out to auction. As the FDIC closes banks and merge others the inventory of these assets grow. We have heard of these as “Toxic Assets,” because they are non-performing, the bank has to write them off and reserve a contingency fund to deal with that problem loan.
So, instead of trying to work these out for themselves they are selling the asset and “Booking” whatever cash they receive, which cleans up their balance sheets and raises compliance capital that they need to meet regulatory criteria. When the FDIC makes a deal to transfer these toxic assets it guarantees large chunks of the bank’s loans, meaning that if there is a loss the FDIC is making up part of that loss to the selling bank. This creates an opportunity for real estate investors who want to get ahead of the competition on the court house steps. The investor steps into the “bank’s shoes” and assumes its lien position on the property, which is legally very secure, but the loan is upside down.
However, the investor may buy that Note for perhaps twenty cents on the dollar of what the bank is owed. This may turn out to be about 30 percent to 50 percent of current appraised value. That in itself is pretty good, but the investor may also pick up any “personal guarantees” or other “cross-collateralized” properties used in the loan process.
As you can image, it is not easy to enter into the FDIC bidding arena, one has to be FDIC approved, which involves strict underwriting on the firm’s experience and financials. I have found one approved firm locally that is working with the smaller investor. Their strategy is to bid about 20 percent of the loan amount and no more than 55 percent of current value.
The FDIC auction has a short time line, forty-days from the time of the offering until the sale date. This is all the time there is for due diligence. They review all the documents the bank has on the property and the client/borrowers, and walk all properties. Once they have done the reviews and pick the best of the crop to bid on they make the bids, if they win the bid, they form a new LLC, all loans, assets and personal guarantees, everything the bank has is transferred and assigned to that LLC from the FDIC.
I have examined one of these; it was a pool of assets consisting of two Central Oregon NOTES for one million dollars. I called and talked to the bank loan officer who worked on this loan at the bank for a few years and he confirmed that the bank should have keep these Notes and worked them out, but they had run out of time.
I also spoke to the attorney handling the judicial foreclosure process; he just picked it up where the bank left off and mentioned how the county likes these because they get a few thousand dollars every time there is a filing, other than that it is pretty much a straight play. They are now preparing for their seventh pool of toxic assets and are very excited that they have found a way to be in a position to ride values back up out of the carnage!
I suppose I should write a how-to book about this, but I don’t see this being a long term opportunity, as the economy improves and the banks get healthier they will keep these Notes and work then out themselves. Even though I do not have a Magic 8-Ball, I do invite any of my readers who would like to know more and are interested to give me a call, as always I am happy to share any Good News…
Philip Hamilton is a long time contributing writer for CBN. You may contact him by writing: phamilton@bendcable.com, cell: 541-480-7580, or his office: 235 SE Yew Lane, Suite 210, Bend, OR 97702
