Real Estate Market Values Always Local

Location – Location – Location

By Rick Kahler CFP 

What investment asset class grabs the most attention of the average American?

My guess is that it isn’t the stock market, but a category many people don’t even think of as an investment—the local real estate market. While I don’t have data to back up this assumption, I find that people tend to be more interested in what’s happening in their local real estate markets than on national stock exchanges.

Why?

I think the reason is simple. Houses are tangible, understandable assets that we can see and touch. Most of us live in them, and some of us are in love with our homes. You likely know the ballpark value of your house from the annual assessed value you receive from the county. Chances are you know what repairs your home needs and have an idea of the rent you could charge for it. You probably have an idea of the price trends in your neighborhood or city. You know the best areas in which to live and the neighborhoods to avoid. You know these things because all real estate is local. There is no “national” real estate market.

Not so with common stocks. Because most of us own our stocks in mutual funds and exchange traded funds, we often don’t really know what companies we own, what town their headquarters are in, the price of the stock, the current yield, the trend of the company or sector, and any weaknesses or strengths of the company. Unlike real estate, publicly traded stocks are priced based on national rather than local influences. Further, we don’t work for or live in the companies in our portfolio. And few of us are in love with our portfolio of stocks.

It’s no wonder that most of us are far more interested in the economics of our homes than our stocks. This is even less of a surprise when we consider the average American has more invested in their home than they do the stock market.

Research

According to CoreLogic, the average annual price increase of real estate has slowed down in 2019. “During the first two months of the year, home price growth continued to decelerate,” said Dr. Frank Nothaft, chief economist for CoreLogic in an April 2, 2019 press release.

But that is just the average. Annual price changes range from an increase of 10.2% in Idaho to a decrease of -1.7% in North Dakota. South Dakota showed a 1.6% increase over the past 12 months.

Also according to CoreLogic, of the country’s top 100 housing markets, 35 percent are overvalued, 38 percent were at value, and 27 percent were undervalued. An under- or overvalued market is one in which home prices are at least 10 percent above or below the long-term sustainable level.

While my hometown of Rapid City, SD, is not among the top 100 markets, home prices are booming, according to Jeremy Kahler, a Realtor with Keller Williams of the Black Hills. He indicates that through April, the 12-month price increase in Rapid City is over 7%, which puts our local market into the top quartile for price increases on a national level. Zillow shows our average sales price as $204,100 compared with the national sales price of $226,800, so my hunch is that the Rapid City market might be at value to undervalued.

Assessment

However, I think it’s a reasonable generalization that most homes in flyover country are priced lower than their coastal cousins. Some of the reasons are what I call the snowflake discount, seasonal weather patterns, and the distance from major metropolitan areas. Those that can cope with those challenges are rewarded with lower housing costs.

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homes

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Opine: Your thoughts are appreciated.

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

[Dr. Cappiello PhD MBA] *** [Foreword Dr. Krieger MD MBA]

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Housing Wealth Continues to Rise

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Back to pre-financial-crisis levels?

josh

[By Josh Velazquez CMPS]

jvelazquez@bankingunusual.com

The amount of equity that Americans have in their homes has risen back up to pre-financial-crisis levels.

The interesting thing is that it still seems like there is room to grow because housing affordability is still very comfortably above its historical average (see chart below).

This is partly due to the fact that mortgage rates remain low and home ownership is still very affordable relative to renting a house.

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Bottom line: if you or someone you know missed the opportunity to purchase a home a few years ago, it may not be too late to ride this wave higher!

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Conclusion

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Drs. Home

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Video on Physician Loans and Doctor Mortgages [Why Over-Pay Big Banks?]

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Bank Offers a Zero Down Payment Physician Mortgage Loan in Kansas and Missouri

Doctors mortgage programs are offered as a benefit in many hospitals. Banks use these physician mortgage loans as an entry point to gain checking, savings, investment, and Home Equity Line of Credit accounts.

It’s important for physicians to realize that a Big banks objective is assets under management and not necessarily the best mortgage for them.

Many banks offered  special  zero down doctor loans and below market mortgages for physicians.  With the upheaval in the mortgage and secondary market requirements (the people who bought those special physician loans), most of the doctors mortgage programs advantages went away, or became no different than what is available to every other borrower.

Get a second opinion

For this reason, it is prudent for physicians to be aware of the changes in doctors loan programs and seek expert independent 2nd Opinions consultations.

Link: www.MedicalBusinessAdvisors.com

Assessment

Many physicians needlessly over pay $10’s of thousands of dollars in interest to big banks. Over a career of homes and refinances, this could add up to well over $100K that could stay in their account.

Video link: http://www.youtube.com/watch?v=ygs81Rsk-Zw

Source: http://www.Physician-Loans.org

Assessment

Conclusion

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Short Sale versus Mortgage Foreclosure

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A Third Option?

By Lon Jefferies, CFP® MBA and Dr. David E. Marcinko MBA CMP®

An increasing number of homeowners – even some doctors – owe more on their mortgage than their property is worth. If the borrower doesn’t want to continue making payments, he could explore executing a short sale of the property, or foreclosing on their loan.

So, I’ve summarized some thoughts below.

Short Sale

A short sale enables a property owner to sell their home at market value, and the bank forgives whatever part of the loan isn’t covered by the proceeds of the sale. Some experts believe a bank will not begin discussing a short sale on a property until the owner stops making payments. However, there are reports of individuals obtaining an offer for their home and then negotiating with their lender, and the bank approving the short sale in an attempt to minimize its loss and property management responsibilities. There are even stories of people who were able to buy a new home before finalizing the short sale of their previous home. Of course, purchasing a new home wouldn’t likely be possible immediately after completing a short sale after suffering such a hit to one’s credit.

Before executing a short sale it is critical for the owner to determine whether the property is located in a recourse or nonrecourse state. In a recourse state, a bank may sue a borrower for the difference between a home’s selling price and the amount the seller still owes on a mortgage. As a result of this policy, in a recourse state a property owner may end up filing for bankruptcy even after the short sale. Consequently, a property owner might be better off keeping the home and paying off the mortgage. By contrast, in a nonrecourse state a bank that agrees to a short sale cannot recoup its full loss by suing the property owner. Find out whether your state is a recourse or nonrecourse state here (Utah is a nonrecourse state).

As you might expect, there are potential tax implications to a short sale. Usually, debt forgiven by a lender counts as taxable income. However, for the tax years 2007 through 2012, the Mortgage Forgiveness Debt Relief Act exempts homeowners from up to $2 million in forgiven debt on their primary residence. Note that the law doesn’t apply to business property, rental property or second homes, or to debt that was refinanced to pay off credit cards or other consumer debt. Additionally, beware that this law is set to expire at the end of this year.

Foreclosure

As an alternative to a short sale, foreclosure is another way to dispense with a property. With a foreclosure, the homeowner stops making the mortgage payments and the bank reclaims the house and then resells it in hopes of covering or offsetting the defaulted loan. Foreclosure requires very little from the defaulting borrower. Be aware, however, that in a recourse state a bank can sue the former homeowner for the difference between the amount owed and the resale price. The deficit could even be more than that in a short sale because the home’s post-foreclosure selling price may be hurt by vandalism, theft, or deterioration that can occur when a home stands empty.

Foreclosure also wrecks a defaulting borrower’s credit, making it very difficult for that person to get another loan at a reasonable rate. Experts say that outside of bankruptcy, foreclosure is the worst thing you can have on your credit report. For this reason, for most people a foreclosure should truly be a last resort.

As you might imagine, with both short sale and foreclosure situations an attorney and a real estate agent who specializes in such situations can be helpful, particularly if they have strong connections with the banking community.

A Third (Superior) Option

Lastly, before exploring a short sale or a foreclosure, a borrower should always attempt to work with their lender to modify their mortgage. Negotiating a reduction in the interest rate or principal can help some homeowners hang on to their property. There is no penalty for requesting a loan modification, so it is likely an appealing route to try before considering a short sale or foreclosure. Pursuing a loan modification is simply a matter of talking to your bank and informing them that you can’t meet your payment obligations as they stand.

Conclusion

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Selling into a House Poor Market

When the Local Real-Estate Market is Challenging

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By Rick Kahler MS CFP® ChFC CCIM www.KahlerFinancial.com

An exciting new medical practice opportunity in another state …. Health problems that make one-level living an urgent necessity …. The need to downsize quickly because of a hospitalist job loss ….

These are just a few of the reasons medical professionals might need to sell a home sooner rather than later. The real problem arises when the local real estate market is a challenging one. Here are a few suggestions for anyone looking to sell a house under difficult conditions.

1. Evaluate the urgency of your situation. If you can wait a few months without harming your career, your finances, or your health, that may be the wiser choice. If you can’t make payments, or you need to relocate right away and can’t buy a new house until you sell the current one, waiting to sell is usually a losing proposition.

2. Take a hard look at the costs of waiting. You often can cut your overall housing costs significantly by biting the bullet and selling, rather than paying for two homes until you get the price you want. In addition to mortgage payments, add up expenses like property taxes, maintenance, utilities, and commuting costs.

Example:

For example, suppose you paid $400,000 for a house that’s worth $300,000 in the current market. Selling it now would mean a loss of $100,000, but holding onto it costs $3000 a month. Suppose the market improves by 33% in three years, which of course is not something you can count on. You sell the house then for $400,000. In the meantime, keeping it has cost you $108,000. If you keep the house on the market for a year, then give up and sell at $300,000, you’ve added $10,800 to the original $100,000 loss. You’re often better off to cut your losses and sell.

3. Grit your teeth, hold your nose, and be realistic about the market value of the home you are selling. Your original purchase price has NOTHING to do with current reality. The market is the market, and buyers couldn’t care less about what you paid for the home. They only care about the competition and getting the most home for their money, just as you did when you bought the property.

You need to research the housing market in your area or hire competent help (like an appraiser) to help you determine the market value of your property. Real estate agents can help with pricing, but you must proceed carefully. Some agents practice a technique of “tell them what they want to hear, get the house listed, and then work on getting them to reduce the price.”

4. Think like a buyer as well as a seller. Many sellers forget that the pain of selling at a loss is eased if the replacement home they buy is also valued less than it was several years ago. The loss in the home being sold can often be offset by the bargain price of the home being purchased.

5. Do your best to negotiate with your lender. If your mortgage is more than the sale price of the house, you’ll owe money to the lender at closing. Depending on the circumstances, it may be possible to get the lender to accept a lower payoff. Before the closing date, find out exactly how much you’ll need to pay and know where you’re going to get it.

Assessment

Our reluctance to sell a property for less than the amount we’ve put into it is described as “sunk cost fallacy.” Holding on until we get our money back sometimes works. More often, though, all it does is sink us deeper into a financial hole.

Conclusion

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Is 2012 a Good Year to Buy a House?

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Doctors Appreciating the Reasons of Home Ownership

[By staff reporters]

There may be several reasons for a medical professional to buy a home. For example, you’re ready to practice and commit to a certain area and call it home. You’re ready to make a financial investment, or housing prices have dropped to an affordable level and the market is highly favorable for home buyers.

Rule of Thumb

But, how do you tell if it’s a buyer’s market? In a buyer’s market, the price of a home will be under 20 times a year’s worth of rent for an equivalent home. If the price of a home is more than 20 times the annual rent, it’s generally better to rent.

Current Climate

Today’s housing climate is better for home buyers. The average price of homes for sale in the US is currently around 19 times the average annual rent. The general housing climate is much friendlier than a few years ago, but still fluctuates greatly depending on your specific location. Some of the buyer’s markets in 2011 were Charlotte, Inland Empire, Phoenix, Raleigh, Sacramento, San Diego and San Jose.

Source: www.SeaHomes.com

Assessment

The decision to buy or rent also depends on your lifestyle and long-term goals. 2011 saw a resurgence in buyer’s markets across the country and that trend is likely to continue for the foreseeable future. It’s true that housing markets will fluctuate from year-to-year, but owning property usually remains a wise investment over time.

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Dire Emails About New Medicare Surtax Have It Wrong

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Enter the Obama Care Fear Mongers

By Rick Kahler MS, CFP®, ChFC, CCIM

www.KahlerFinancial.com

Ronald Reagan was noted for saying, “Trust but verify.” And, that was before Al Gore invented the Internet. When it comes to believing forwarded emails with dire warnings, it’s a good idea to go even further and “Verify before trusting.”

My e-mail

Here are a few lines from an email I’ve received numerous times over the past two years: “Did you know that if you sell your house after 2012 you will pay a 3.8% sales tax on it? That’s $3,800 on a $100,000 home . . . It’s in the health care bill and goes into effect in 2013. . . . Under the new health care bill all real estate transactions will be subject to a 3.8% Sales Tax. If you sell a $400,000 home, there will be a $15,200 tax.”

Before trusting this, I verified it with Paul Thorstenson, an accountant with Ketel Thorstenson in Rapid City, South Dakota. He said, “The information in this email is nearly entirely false.”

As with a lot of what you read on the Internet and hear from politicians, if you sift through the rubbish in this statement you will find a few grains of truth.

The True, and Not So True, Grains

First the truth

There is a 3.8% Medicare surtax contained in the health care act passed by Congress and signed into law by President Obama in 2009. It does take effect in 2013.

Now the falsehoods

This is not a sales tax. Sales taxes apply to the gross sale price of an item. Thorstenson explained this is a surtax that only applies to a gain (not the sales price) on sale of an investment asset. This not only includes real estate, but other investments like stocks, bonds, mutual funds, commodities, precious metals, and collectables. The surtax will also apply to other passive and investment income, such as interest, dividends, and net rental income.

The act only applies the surtax to investment gains when the total adjusted gross income on a return exceeds $250,000 for couples and $200,000 for single taxpayers. If your adjusted gross income is less than those amounts, the surtax will not apply.

If you sell a primary residence, the surtax will not apply to the first $500,000 of gain for couples or the first $250,000 of gain for individuals (IRS Code Section 121). “The surtax will only apply if the gain is above $500,000,” explained Thorstenson, who added, “And who even has a gain in a home these days, let alone over $500,000?”

Section 121

What is important to note is there is no Section 121 exclusion on the gains of vacation homes, second homes, or rental property. So if your adjusted gross income tips over $200,000 for individuals and $250,000 for couples in the year you sell an investment like a mutual fund, rental property, second home, or small business, you will be hit with a 3.8% tax on the portion that exceeds the $200/$250 threshold.

Assessment

Now consider what happens if President Obama gets his way and raises the capital gains tax to 28% on taxpayers earning over the $200/$250 limits. You could easily see the capital gains rate more than double from 15% to 31.8%. On every $100,000 of gain, that means a tax increase from $15,000 to $31,800.

Thorstenson told me, “This law is an atrocity in my opinion. It is an attack on successful investors, and the tax revenues aren’t even earmarked for Medicare. The proceeds just go into the general fund.”

The truth about this surtax is bad enough without believing exaggerations about it. The next time this particular email shows up in your inbox, just delete it. Trust me; I verified.

Conclusion             

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Property Taxes in America

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A Seldom Discussed Topic Among Medical Professionals

The housing market across the country has tanked. That should mean lower property taxes, right?

It’s true that property taxes do fall when housing values drop. But, this fall doesn’t happen in perfect time with the market. There’s usually a delay. And even when property taxes do fall, it’s often not enough to satisfy cash-strapped doctors and other homeowners.

Plummeting Home Values

This isn’t surprising. Homeowners today are struggling with plummeting home values. Those who bought their homes in 2004, 2005 or early 2006, especially, have most likely seen their homes lose tens of thousands of dollars in value.

It is little wonder, then, that physicians and others homeowners today are taking a closer look at their property taxes. Here is a look at what type of property taxes you pay depending on the state that you call home.

For example, if you live in New Jersey, you might not want to open that property tax bill. The state featured the highest median property taxes on owner-occupied housing, according to 2008 data by the U.S. Census Bureau. Homeowners here paid a median of $6,320 in property taxes each year. Connecticut came in second with a median property tax of $4,603 on its households. Right behind was New Hampshire, $4,501; and New York, $3,622.

Other states with high median property taxes include Rhode Island, $3,534; Massachusetts, $3,404; and Vermont, $3,281. Looks like you shouldn’t buy a home in the East if you want to pay lower property taxes.

On other end of the scale, Louisiana homeowners paid a median of $188 on their property taxes. In Arkansas, that number rose a bit to $383, while it stood at a still low $457 in West Virginia. In Mississippi, this median value stood at $468. Other states with low median property tax figures were South Carolina, $678; Oklahoma, $762; and New Mexico, $843.

Median Values

In general, these median property tax numbers do make sense. The states that have the highest median property taxes tend to have the highest median housing values, too. The opposite holds true, too.

For instance, the states with the lowest median housing values include West Virginia, $95,900; Mississippi, $99,700; Arkansas, $105,700; Oklahoma, $105,500; North Dakota, $112,500; and Alabama, $121,500. These states also tend to have some of the lowest property taxes.

Highest Median Home Values

Some of the states with the highest median home values include Hawaii, with a median value of $560,000; California, $467,000; New Jersey, $364,100; Massachusetts, $353,600; and Maryland, $341,200. Again, the property taxes tend to align well with these prices. Homeowners in these states pay some of the higher median property taxes in the country.

Relation to Home Values

The most important number, though, when analyzing property taxes isn’t what homeowners pay in each state. It’s how high this figure is in relation to home values.

For instance, Texans don’t pay the highest median property taxes in the country. They do, though, pay the highest percentage of their home values in property taxes, 1.76 percent.

Other states fare poorly in this measure, too: New Jersey, 1.74 percent; Nebraska, 1.72 percent; Wisconsin, 1.71 percent; and New Hampshire, 1.70 percent.

If you want to live somewhere where property taxes take up the lowest percentages of your home’s value, you might want to consider moving to the South.

For instance, homeowners in Louisiana pay 0.14 percent of their home values in property taxes, lowest in the nation. Hawaii comes in second with a figure of 0.24 percent. In Arkansas, that number is a still low 0.32 percent, while it’s at 0.47 percent in Mississippi. In West Virginia, the percentage rises to a still low 0.47 percent.

Assessment

Analyzing the impact of property taxes is far from an exact science. But by looking at how large of a percentage these taxes take up when compared to housing values, homeowners will get a better idea of what kind of financial burden property taxes are placing on them.

Source: www.CreditLoan.com

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Rethinking the Reverse Mortgage Paradigm

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Option of Last Resort  -OR- Something Else?

By Rick Kahler CFP® MS ChFC CCIM

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Like most financial planners, I generally recommend not thinking of your home as a part of an investment portfolio or a source of retirement income. One possible exception to this rule, for medical professionals to consider, is a reverse mortgage.

Lenders

Lenders which are FHA-approved can offer Home Equity Conversion Mortgages, or HECM’s. These are insured by the U.S. government and allow homeowners age 62 and older to borrow against the equity in their homes. When the homeowner dies or moves out, the property is sold to repay the loan. Any equity left over belongs to the owners or their heirs. Any outstanding loan balance must be forgiven by the lender.

Reverse mortgages may be useful for elderly people in good health who have limited income or assets but who are living in paid-for homes.

Until now, I have viewed them as options of last resort. But, a new report by financial planner Michael Kitces CFP® has given me some cause to re-evaluate that position.

Link: http://www.kitces.com/index.php

Disadvantages

  1. One major disadvantage of reverse mortgages is that the income uses up the equity in the house. Seniors who take out reverse mortgages too early risk spending most of their home equity to cover living expenses. As long as they can stay in the house, that’s no problem. If they have to move, however, they will have to pay rent or long-term care costs. Without income from the sale of their house, they may be left with little except Social Security to pay their bills.
  2. A second disadvantage has been high upfront fees. A new option described by Kitces, however, significantly lowers those costs. The HECM Saver option eliminates the upfront mortgage insurance premium of 2%. This would drop the costs of a reverse mortgage on a $500,000 home from $17,000 to $7,000. The tradeoff is a lower lump-sum or monthly payment.

Typical Uses

  1. The most typical use of a reverse mortgage is to tap into home equity to pay the bills when all other means of support become exhausted. Instead of selling or refinancing, the homeowners can choose to stay in the home and receive monthly payments for life. They don’t have to sell the property until they can no longer continue to live in it.
  2. Another way to use a reverse mortgage is to refinance an existing mortgage. This can not only eliminate the monthly payment, but if there is enough equity in the home it can also provide a monthly income or a lump sum payment.

Example

Kitces uses the example of a 70-year old couple paying $1000 a month for a $175,000 traditional mortgage on a $450,000 property. A $175,000 reverse mortgage would eliminate the $1,000 payment. Assuming the net principal limit for the borrower was $250,000 on the property, they could use the reverse mortgage to extract an additional $75,000 of equity. They could receive this in a lump sum payment, create a $75,000 line of credit, or receive lifetime monthly payments based on the $75,000.

Let’s assume this couple’s monthly expenses, including the mortgage payment, are $5,000. They receive $1,500 a month from Social Security and withdraw $3,500 a month from their $600,000 investments. The total $42,000 annual withdrawal is an unsustainably high 7% of their portfolio.

The reverse mortgage would eliminate the $1,000 mortgage payment and reduce the investment withdrawal to $2,500 a month. This totals $30,000 annually, a more sustainable withdrawal rate of 5%. Investing the $75,000 of excess proceeds would produce additional monthly income and reduce the withdrawal rate even further. Using a reverse mortgage in this way makes sense if the lost home equity is offset by an increase in investment assets.

Assessment

We’ll look at some other reverse mortgage options another time, so stay tuned to this ME-P, and subscribe today!

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Merrill Lynch Investigated for CDO Deal Involving Magnetar

Hedge Fund Probed

By Marian Wang

ProPublica, June 15, 2011, 3:10 pm

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The Securities and Exchange Commission is investigating whether Merrill Lynch short-changed investors and gave undue influence to the hedge fund Magnetar in the creation of a $1.5-billion mortgage-backed security deal.

The investigation, which was first reported [1] by the Financial Times ($), appears to be the agency’s first probe of Merrill Lynch’s CDO business since the financial crisis. (Check our bank investigations cheat sheet [2] for which other firms are being probed.) Here’s the FT:

The investigation is one of several SEC probes into banks that helped underwrite billions of dollars of collateralised debt obligations, securities comprised of mortgages or derivatives linked to them.

It also marks a broadening of the SEC’s investigation into the role of collateral managers, institutions that help select the assets included in CDOs.

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The deal that the SEC is investigating—a collateralized debt obligation, or CDO, called Norma—was detailed both in our reporting last year [3] and in a report [4] by the Financial Crisis Inquiry Commission released in January. Norma was one of more than two dozen CDO deals [5] done by Magnetar, whose bets against a number of CDOs earned it billions in the waning days of the housing boom.

As the FCIC detailed, Magnetar helped select the assets that went into Norma even though it had a $600 million bet that would pay off substantially if the CDO failed. As we reported [6], Magnetar often invested in the portion of the CDO that was riskiest and hardest for the banks to sell. Banks typically gave such investors—equity investors—more say in how the deal was structured. (Magnetar isn’t named as a target of the investigation and had no responsibility to investors. It has also maintained that it did not have a strategy to bet against the housing market.)

In the offering documents for Norma, there’s no mention of Magnetar’s role in asset selection, according to the FCIC. Investors were told that an independent collateral manager, NIR Capital Management, would be selecting the assets with their best interest in mind. The report concluded: “NIR abdicated its asset selection duties… with Merrill’s knowledge.”

Bank of America

Bank of America, which took over Merrill Lynch in 2008, declined our request for comment. The firm’s general counsel told [4] the Financial Crisis Inquiry Commission that it was “common industry practice” for equity investors to have input during the asset selection process, though the collateral manager had final say.

NIR Capital Management

NIR Capital Management is also being investigated by the SEC, according to the FT. The firm did not immediately respond to our request for comment. (The Wall Street Journal did an impressively detailed story in 2007 on how NIR came to be manager [7] of the Norma deal.)

Magnetar declined our earlier requests for comment on Norma, but FT reports it has denied claims [1] that it selected the assets for Norma.

Assessment

As we reported, the SEC had launched a probe of Merrill’s CDO business 2007, but that investigation petered out without resulting in any charges.

Conclusion

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Misdirection in Goldman Sachs’s Housing Short

Goldman Sachs appears to be trying to clear its name

By Jesse Eisinger

ProPublica, June 15, 2011, 3:10 pm

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The compelling Permanent Subcommittee on Investigations report on the financial crisis [1] is wrong, the bank says. Goldman Sachs didn’t have a Big Short against the housing market.

About The Trade

In this column, co-published with New York Times’ DealBook, I monitor the financial markets to hold companies, executives and government officials accountable for their actions. Tips? Praise? Contact me at jesse@propublica.org

But the size of Goldman’s short is irrelevant.

No one disputes that, by 2007, the firm had pivoted to reduce its exposure from mortgages and mortgage securities and had begun shorting the market on some scale. There’s nothing wrong with that. Don’t we want banks to reduce their risk when they see trouble ahead, as Goldman did in the mortgage markets?

Nor should shorting itself be seen as a bad thing. Putting money behind a bet that a stock (or bond or commodity or derivative) is overpriced is necessary for the efficient functioning of capital markets. Short-sellers can keep prices from getting out of whack and help deflate bubbles.

The problem isn’t that Goldman went short and reduced risk — it’s how.

It is How … Short?

To establish many of its short positions, the Senate report says, Goldman created new securities, backed them with its good name, and then strung together misleading statements to its customers about what it was actually doing. By shorting the way it did, the bank perverted the market instead of correcting it.

Take Hudson Mezzanine, a $2 billion collateralized debt obligation created by Goldman in 2006 [2]. In marketing material, the firm wrote that “Goldman Sachs has aligned incentives with the Hudson program.”

I suppose that was technically true: Goldman had made a small investment in the C.D.O. and therefore had an aligned incentive with the other investors. But the material failed to mention the firm’s much larger bet against the C.D.O. — a huge adverse incentive to its customers’ interests.

Goldman told investors that the Hudson assets had been “sourced from the Street,” which most investors would understand to mean that Goldman had purchased the assets from other broker-dealers. In fact, all the assets had come from Goldman’s own balance sheet, the Senate report found.

In his April 2010 testimony to the Senate, Goldman’s chief executive, Lloyd C. Blankfein, argued that Goldman was merely making a market in these securities and derivatives, matching willing and sophisticated buyers and sellers. But, Goldman was acting like an underwriter, not a market maker.

As the underwriter, Goldman threw its marketing muscle behind Hudson Mezzanine and other C.D.O.’s. When the bank’s salespeople ran into trouble selling the securities, they begged for help from the executives who created them. One requested material to give to clients about “how great” the sector was. One needed the aid to get a client to invest, to be “THERE AND IN SIZE,” according to e-mails cited in the report.

Sometimes, Goldman took advantage of the opaque markets. According to the Senate report, Goldman executives had extensive concerns about the prices of its 2007 Timberwolf C.D.O. Goldman sold the C.D.O. securities anyway, often at higher prices than it had them recorded on its books. In summer 2007, Goldman marked some Timberwolf assets at 55 cents on the dollar, but sold similar securities to an Israeli bank at 78.25 cents at the same time, according to the report. Oh, well, tough luck!

Goldman’s Famous Mantra

For decades, Goldman’s famous mantra was to be “long-term greedy” and a central element of that was putting customers first. In these C.D.O.’s, the bank’s customers were “only first in the same way that on Thanksgiving, the turkey is first,” a former C.D.O. professional told me.

Goldman declined to address these specific disclosures from the report. A spokesman maintained the firm fulfilled its obligations to buyers of these kinds of C.D.O.’s, which were made up of derivatives. The customers were large and sophisticated investors who knew that one side had to be long while the other was short. And they knew, or should have known, that Goldman might be on the other side.

“It was fully disclosed and well known to investors that banks that arranged synthetic C.D.O.’s took the initial short position,” a spokesman wrote in an e-mail.

True, but few thought that the bank that had created and hawked the C.D.O.’s expected them to fail.

Goldman’s techniques harmed the capital markets. Goldman brought something into the world that didn’t exist before. Instead of selling something — thereby decreasing the price or supply of it — and giving the market a signal that it was less desirable, Goldman did the opposite. The firm created more mortgage investments and gave the world the signal that there was more demand, for C.D.O.’s and for the mortgages that backed them.

Assessment

By shorting C.D.O.’s, Goldman also distorted the pricing of the underlying assets. The bank could have taken the securities it owned and sold them en masse in a fairly negotiated sale, though it likely would have gotten less for them than it was able to make by shorting the C.D.O.’s it created.

Because of Goldman’s actions, the financial system took greater losses than there otherwise would have been. Goldman’s form of shorting prolonged the boom and made the crisis that followed much worse.

Goldman executives surely hope to change the subject from the firm’s specific actions to a more general discussion of how much and when it shorted. We shouldn’t let them.

Link: http://www.propublica.org/thetrade/item/misdirection-in-goldman-sachss-housing-short/

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How to Detect a Dishonest Mortgage Loan Officer

Some Red Flags for Doctors and Others to Consider

From Infographics Archive

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Mortgage loan officers with questionable ethical standards profited sweetly during the go-go years of the real estate boom, mostly by pushing risky loans to borrowers who didn’t necessarily have what it took to qualify for one the honest way.

The Red Flags

Now, thanks to new legislation and regulations, predatory loan officers are all but out of business. But. that doesn’t necessarily mean you should trust your lender wholeheartedly.

Here are some of the red flags that your loan officer may not be completely honest with you — along with signs that they do have your best interest at heart.

Assessment

Link: http://www.infographicsarchive.com/economics/how-to-detect-a-dishonest-mortgage-loan-officer/

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About the Mortgage Electronic Registry System

Loan Help or Hindrance?

By Dr. David Edward Marcinko MBA, CMP™

[Editor-in-Chief]

According to their website, Mortgage Electronic Registry System [MERS] is an innovative process that simplifies the way mortgage ownership and servicing rights are originated, sold and tracked. Created by the real estate finance industry, MERS eliminates the need to prepare and record assignments when trading residential and commercial mortgage loans www.MERSInc.org Sounds good, right?

State Laws

Unfortunately, property law is handled on a state-by-state basis and digital MERS may not be a legal replacement for paper. In fact, MERS use may devalue the physical paper trail and lead to lost or misplaced loan documents [aka: admissible evidence].

Assessment

As a financial advisor for more than 15 years, and a former certified financial planner for more than a decade, who resigned due to the industry’s lack of fiduciary accountability, I appreciated this issue deeply

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Full Disclosure:

I am also the Founder and CEO of www.CertifiedMedicalPlanner.com; an online certification, licensure and educational program for financial advisors and medical management consultants working in the healthcare space; who are always fiduciary advisors.

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