Buyer’s Choice Realty blog

The power brokers in Washington just met for a photo shoot and gave some brief comments about the pending bailout that has dominated the news in recent days. After negotiations between both parties, Sen. Chris Dodd announced that they have agreed, in principle, to the principal amount. Got it? Here are the vague details that Dodd, among others, provided.

• Congress will give Paulson the money he needs (assumption: $700 billion)

• They have agreed on protecting home ownership (how?)

• They have agreed on executive compensation limits (this will be part of the terms of the bailout)

• There will be taxpayer protection (likely story)

• The federal government will get equity stakes in the form of warrants from the companies that participate in this bailout. (exactly how much, how this will happen has not been disclosed, nor agreed upon as of yet)

Thus far, there has not been consensus reached regarding who exactly will be covered under executive compensation limits (not giving golden parachutes to executives). Is it only the top officials from these companies, or will it encompass all executive officers, of which there are hundreds in the large Wall Street firms.
When will Wall Street get this money? Most likely the money will be paid out in installments. The mortgages and associated securities will be sold via reverse auction to the government. Pricing these assets is the tricky thing. Companies will need to write off these assets and most likely raise new equity (here comes…. shareholder dilution!).

Whether you think this bailout needs to happen or not, your opinion does not really matter. It will happen, and they will most likely be voting on the bill Friday or Saturday, according to many reports.There are still many items to negotiate and iron out, but things are progressing at a fairly rapid rate.

Big Hank went before Congress today to ask for a sizable investment into his fund. He says he needs $700 billion from us, and congressional folks are so far trying to sate him somewhat by contributing $150 billion over the next couple months. The questions are many, and for those of us who are not money market, credit, derivative, TED, swaps experts, they are a bit overwhelming.

Here are the main issues:

• Should we give Paulson a blank check so that he can, according to Senator Dodd, “act with absolute impunity“, in rescuing our nation’s financial system?
• What amount of money will be sufficient to overwhelm the system in order to restore confidence?
• What exactly does the plan/bailout entail? Sen. Dodd, commenting on the Treasury’s plan, called it, “stunning and unprecedented in its scope and lack of detail.”
• How can we be sure this plan will not fail? Clearly that is an impossible question to answer, but those in power need to get this right, the first time. In truth, this needs to happen, as unfortunate as it is for each of us that pays taxes. Also, it needs to happen within the next week.
• How will this plan help to stem foreclosures? HPHF will be buying risky mortgages so that lending can again take place in the market as a whole. Will HPHF renegotiate with homeowners on their mortgages, or allow them extra time to refinance at a fixed rate?

Please enjoy some great quotes from the testimony today:

Sen. Bunning said the plan would, “take Wall Street’s pain and spread it to the taxpayers. It’s financial socialism, and it’s un-American.”

Ben ‘the beard’ Bernanke, “if financial conditions fail to improve for a protracted period, the implications for the broader economy could be quite adverse.”

Sen. Schumer, “Even on Wall Street, $700 billion is a lot of money.”

Hank Paulson’s hedge fund (HPHF) has struck again. They are taking a bunch of bad debt off the hands of the U.S.’ largest financial firms. No, they’re not banks any longer, simply financial firms. Banks are not having troubles like these multinational companies are.

From my understanding, HPHF will buy MBS (mortgage-backed securities) for less than 50 cents on the dollar, sit on them for a year +, and then resell them. Hundreds of billions of dollars will be spent to do this. Luckily, HPHF has an effectively unlimited supply of funds since we are all investors, can afford to hold terrible investments for multiple years, and they do not have to provide any returns to shareholders. Some of these MBS will be bought for 20-30% of their original value. These would be many of the mortgages that originated from 2005-2007. You know the ones, where there is an exhorbitantly high default rate? Yeah, those.

In any event, this plan has just been formulated, and many of the details are still in the minds of HPHF bigwigs. Updates will be a-plenty over the next week, and you can be sure you will receive my next HPHF newsletter.

Have you heard about Fannie Mae and Freddie Mac? Most likely you have, but in case you haven’t, here’s a quick recap…

These two government sponsored enterprises that own, sell, insure, and generally slice-and-dice our mortgages were helped out by the U.S. government almost one week ago.

Helped out? Well, a couple hundred billion of our tax dollars may potentially have to go to work for them. Fannie and Freddie’s accounting methods combined with the lack of public knowledge regarding their current fiscal situation is a detailed subject that deserves its own post. Some see this as a positive sign. Mortgage rates are at their lowest levels in months, the government wants us to think that confidence should be restored in the housing market and that home prices should stabilize soon. Basically, this step is seen as a bottom in home prices, at least during this cycle.

Others see this as a ridiculous maneuver that defies the logic of our free market economy. They feel that our government is one step away from becoming socialists or, more drastically, communists.

The upshot of this entire deal? Our Treasury Department and many others are protecting a large part of our economy, and Fannie and Freddie, at least in their current forms, will cease to exist in a short while. They have moved to conservatorship status, and are now under control of the Federal Housing Finance Agency (FHFA). The CEOs from both companies have been dismissed, and the FHFA has installed new ones - both new executives have extensive background and track records of success in management at large financial entities TIAA-CREF and US Bancorp.

On to the meat of this post. Many have said, written, etc., that these companies were, and are, too big to fail. It’s become a bit of a buzzword recently, starting with the Bear Stearns situation.

I thought I would ask myself the same question. Am I too big to fail? To save you from any more consternation, you should know that I am not, unfortunately, too big to fail.

• The assets that determine my current underlying value, according to GAAP (generally accepted accounting principles), are less than $100,000. No, it’s none of your business how much less.  Fannie and Freddie? Billion$, trillion$. No one knows exactly, as their assets are never static due to foreclosures, whereas mine are static unless I’m driving my car or using my golf clubs.
• I do not sell things that I own to foreign countries’ central banks, nor to huge multinational institutional investors. There was one time where someone from Nigeria tried to get me to ship them the hip video game system I had listed on Ebay, after which they would send me payment via money transfer, but I digress. Fannie and Freddie? Fannie just completed, within the past few days, another debt offering. Freddie is finding it harder to sell their debt at the moment, but they succeeded in the past.
• My continued success is not vital to the United States’ economy as a whole. I might like to think so, but it just ain’t that important if I go bankrupt or not. Fannie and Freddie? They win this one as well.
• There are many more reasons, but this post is too long already. If you made it to the end, thanks for your time. As your reward, look at that meat again. Mmmmm.

As a post script, if you are too big to fail, by all means let me know your reasons why.

The following numbers come from the Massachusetts Association of REALTORS® (MAR). Surprise surprise, prices are down as are the number of units sold. It is interesting to note that condo prices statewide dropped a very small amount on average. The towns north of Boston were hit a little harder, with both single-family and condo prices dropping 12.1% versus a year ago. As always, real estate is local, and some towns are very insulated from the effects of these price drops. That said, it is quite a buyer’s market right now, with plenty of inventory and lower prices. When this whole thing turns around, it will turn sharply, so if you are thinking about buying, don’t get caught on the other side when prices increase dramatically. It looks like next year will be the low point, so save that money and give me a call when you’re ready to buy!

MA Detached Single-family Home Sales and Median Selling Prices

July 2007     July 2008     % Change

4,363           3,928          -10.0%

365,775       326,500        -10.7%

MA Condominium Sales and Median Selling Prices

July 2007     July 2008     % Change

1,933           1,804           -6.7%

293,500        284,000         -2.9 %

North Shore Detached Single-family Homes Sales and Median Selling Prices

July 2007     July 2008     % Change

373              328             -12.0%

385,000       338,075          -12.1%

North Shore Condominium Sales and Median Selling Prices

July 2007     July 2008     % Change

158                 156             -1.2%

262,500        230,625         -12.1 %