Posted: 14 Mar 2011 03:31 AM PDT
Out of Bank of America's assets excretes a special home investment trust (SHIT) bank designed to hold their crap loans from the housing bubble.
Irvine Home Address ... 174 CHERRYBROOK Ln Irvine, CA 92618
We are still living in the past. The legacy of the housing bubble is pockets of overpriced real estate and mountains of untenable debt. Banks will work to manage their reputations, but they really don't care what people think as long as government keeps bailing them out.
What are the banks going to do with all their REO?
I have written at length about the lending cartel. Their activity is important because how the lending cartel disposes their REO will determine the market’s fate. There were over a million foreclosures last year, and 2011 will likely break last year's record. Over two-thirds of those foreclosures end up as real estate owned or REO.
As banks convert more and more of their non-performing loans into real estate, they become less of a bank and more of a real estate investment trust (REIT). People who are investing in banks want to see their money put into loans to obtain the cashflow stream from interest. The large institutional investors become concerned when so much of the banks assets and income is tied up in real estate instead of a loan portfolio.
The easiest solution to this problem for banks is to compartmentalize it. If they take all of their bad loans and create a special home investment trust (SHIT), they can dump their SHIT on Wall Street. Investors can buy shares based on their opinion of the liquidation value of the portfolio. Rather than having to wait for the actual liquidation of the assets to regain their lost capital, the banks can get the capital from investors as they sell their SHIT in an IPO. By getting the SHIT off their balance sheets investors will regain confidence they are investing in loans rather than depreciating real property.
On an accounting basis, lenders can keep the value of the loan on their books at par value, convert the income stream from rental into a mock "payment" on the loan. If they reduce the interest rate enough, nearly any rental income can be use to amortize even very large loans to zero over 30 years. Basically, they can take the rent, pretend it was a loan payment, and ignore the real value of the collateral. If they hold it as a rental long enough, they will pay off the amortizing loan.
Right now, lenders have squatters in properties that are paying neither rent nor their mortgage. It is a completely non-performing asset tying up their capital, and to make matters worse, liquidation value is well below par value on the note. Creating a special home investment trust allows banks to remove toxic assets from their balance sheets, turn non-performing assets into performing ones, and if they are lucky, they will even get to recoup a significant portion of their capital.
By Dawn Kopecki - Mar 8, 2011 11:43 AM PT
I am always really annoyed when I see the term "legacy loans" associated with stupid toxic crap these same bankers peddled as safe affordability products. This is a classic euphemism designed to obscure the plethora of errors behind the existence of these loans.
Legacy conjures up images of wealthy benefactors and things from the past to be proud of. Further, it provides a convenient receptacle for all criticism of errors past. No matter what folly is exposed, it was one of those legacy loans, right?
I wish he was describing how quickly they will liquidate. In reality, he is saying it will take three years to make this SHIT and get all of their toxic crap into it. It will take a decade or more for this pile to stop steaming.
About half of B of As loan portfolio is made of of that garbage? OMG! that is so much worst than I thought.
There's a brilliant investment strategy: focus on the good and ignore the bad. Winning combination, I'm sure.
Apparently, B of A expects the majority of the 6.7M loans in their SHIT to stink.
In case you needed any reminding, you must default on your loan before they will give you a loan modification. Free money is waiting for you if you just stop making your payments.
During 2011 the other major banks will follow suit and make their own special home investment trust. Bank SHIT will be offered up to Wall Street who will likely bet on the recovery. This mechanism will work for the banks. Will it hold the lending cartel together? I doubt it.
What happens to the rental neighborhoods?
Many bubble era communities will be loaded with bank-owned rentals. These neighborhoods are converting from owner occupants to renters. What impact will all these rentals have on the communities they are in? Will lenders maintain their properties to a reasonable standard, or will they all become slumlords?
What happens to the housing market?
Perhaps of more interest to readers here is what impact will this bad bank liquidation have on house prices? Ordinarily, when a market crashes, there is capitulatory selling. Any debt used to finance the asset is expunged, and everyone holding out for a higher price gives up waiting and sells for whatever they can get. This activity lowers prices, but it also clears out the overhead inventory which allows appreciation to return. All markets behave this way.
Let's assume lenders will try to hold out for their asking prices even if that means holding on to properties for many years. They are determined not to capitulate. As some point either rising home values or declining loan balances (remember the rent is paying down the note) will make asking prices reasonable, and houses will be sold. What this bad bank will do -- if it can resist pressures for liquidation -- is create a huge amount of overhead supply. Basically, prices won't go down, but they won't be able to go up until the overhead supply is liquidated. That would cause prices to remain below the peak until the backlog of inventory is gone.
Irvine's version of a cashflow property
A few years ago, this property was for rent for $2,500. I went to see the property and met the owner. He bought the property as an investment. Based on his $370,000 purchase price, a few years of rent inflation made this unit cashflow positive. He managed his mortgage reasonably well, and the balance of $374,000 is only slightly over his purchase price.
Without appreciation, the rate of return on this investment was low, but since we did have a housing bubble, this investor stands to make a tidy profit on his 10-year hold. I don't believe in buying for appreciation, but some investors seem to make it work. Are appreciation speculators skilled, or are they lucky?
Irvine Home Address ... 174 CHERRYBROOK Ln Irvine, CA 92618
I really don't get realtor writing techniques. Does someone give seminars on how to write badly? Why are there RANDOM capitalized words in the description? If she at least chose important words to capitalize, I could see a justification as an attention getting technique; however, in the description above, the word AND is capitalized. Why?
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