Category Archives: investments

We Institutionalize Kleptocracy

That’s how Yves Smith describes the probable outcome of the latest bunch of mortgage finance scandals.  We already know that lenders lied, brokers lied, consumers were instructed to lie, and the whole house of cards was built on perpetually-rising land prices. In recent weeks, and especially the past couple of days, we are learning that the back office lied too, nobody bothered to process much of the paperwork, it was easier to just forge documents as needed, and for many parcels it will be difficult or impossible for tell who really owns the mortgage (which likely will never be repaid anyway as it far exceeds what the property could be sold for).

The solution? Smith (and others) expect the federal authorities to move in, Continue reading

Theories are easy; facts are hard

Georgists say that we understand the cause of the global financial crisis, and we saw it coming.  So if we’re so smart, why ain’t we rich? Well, some of us are, but for most of us it’s a matter of data and calibration. If we had detailed data on land prices and land rents, and a few other robust variables, properly and consistently defined, for a couple hundred years, we might make some real and pretty quick money from the theory that we do understand quite well.Or maybe not.

The above is suggested by a somewhat related post at Falkenblog.

Most people think facts are easy, and theory is hard, but actually I think it is the reverse. Theory, once you understand it, is trivial, yet important facts are very elusive, often at the bottom of most major disagreements.

And, from one of the comments:

Economics is not Physics. Economists do not collect data then develop theories like physicists. Economics is closer to Ethics in form and methodology…

Taking risk for modest returns

As interest rates on “safe” bonds and CD’s decline, those with cash to invest may look to riskier options in order to generate significant return. M P McQueen in the WSJ identifies possibilities including cellphone towers, self-storage facilities, parking lots, and offcampus student housing.

The article notes some cases of > 100% returns, but what’s scary is the indication that an ordinary investor with reasonable luck is told to expect returns more in the range of 7% – 10%.  Does that compensate for the risk involved?  Or is everyone still counting on selling out at a profit several years down the road?

Of course another option is peer-to-peer lending, such as Lending Club or Prosper, who claim returns in the same range. There’s still plenty of risk, but a modest investor can diversify by participating in a hundred or more loans.  Liquidity is limited, but at least in the case of Lending Club loans can be bought and sold (no guarantees about the price, however).

Avoiding foreclosure vs. getting ripped off

A significant post at Naked Capitalism asks “Why Are NACA’s Innovative Mortgage Modification Marathons Below the Radar?”    Suppose a property bought for $300,000, with a $290,000 mortgage, has declined in value to only $200,000.   If the borrower can’t keep up the payments, the lender could foreclose, but would net less than $200,000 after expenses, while the borrower would lose the property.

The rational solution is for the parties to agree to a reduction in principal, write the mortgage down to, say $200,000, with payments reduced commensurately.  The lender is better off, the borrower is better off, and there’s no vacant foreclosed home for the neighbors to worry about.

But homeowners under financial stress tend to have a lot of difficulty dealing with their lenders.  Lenders want to pretend that the mortgage is still worth $290,000 (otherwise they might have to liquidate or raise more capital), and/or hope to be bailed out by yet another federal program, and/or lack competent staff.

The NC post implies that NACA can be helpful in this situation.  But, as one of the commenters there notes, thousands of other enterprises make similar promises, and many of these are predatory.  How is the stressed homeowner to find someone who will help, rather than rip her off?

NACA provides some reason to be suspicious:

NACA – America’s Best Mortgage Program
The incredible NACA mortgage allows NACA Members to purchase or refinance homes with:

  • no down payment,
  • no closing costs,
  • no fees,
  • no requirement for perfect credit,
  • and at a below-market interest rate.

Everyone gets the same incredible terms, including the below-market interest rate, regardless of their credit score or other factors.

I can only answer by treating it like any other purchase of consumer services. You ask your friends, google around to see what other folks say about it, evaluate the explicit promises made on the provider’s web site…. and maybe you guess correctly, getting real help. [Hopefully you are not working three jobs trying to make ends meet, lacking time to do any real investigation.] There is no sure solution, only ways to improve the odds.

A better remedy, of course, would be a system that allows people to obtain decent housing in a decent neighborhood, without having to mortgage their futures for an “investment.” That would be one benefit of a land value tax.  No, we wouldn’t expect our homes to appreciate in value, at least not beyond the general rate of inflation.  But we would need much less debt to purchase them, and more easily build a reserve of real savings.

A warning about the NACA web site, btw: They seem beholden to Microsoft and will display an error message on many pages if you are not using genuine Internet Explorer.  I think some other browsers allow you to pretend to be using IE, and possibly this will solve the problem.

Time to buy land?

Bloomberg reports that upscale homebuilder Toll Brothers is starting to buy land even tho it already has enough for 15 years of development at current rates. This is a change from the prior several quarters, when they disposed of most of the lots they had held.  And Toll isn’t alone. “The 12 largest homebuilders by market value added 14,214 lots to their control over their two most recent quarters.”

It appears Toll spent $27 million in recent weeks to purchase land interests from a failed bank at “40 cents on the dollar,” presumably 40% of what somebody claimed the land was worth at one time.  This is just part of a reported $250 million that Toll has spent to acquire land so far in 2010. Still, they seem to have over $1 billion in cash available for further purchases.

Securities analysts quoted by Bloomberg don’t appear impressed by this strategy, suggesting that the cash would be better used to buy back shares, or acquire one of their more down-market competitors.  I dunno, somebody is gonna buy land at the bottom, maybe it’s Toll?

Debt trolls

One (of several) good arguments for eliminating, or at least drastically scaling back, patents, is the existence of patent trolls, entities whose sole business is trying to hinder the diffusion of innovation. They buy patents believed to have little value, and try to intimidate actual productive individuals or companies into licensing them.  If you’re, say, a manufacturer, and a troll offers you a license for a few thousand dollars, you might just pay up to avoid the expense and risk of defending yourself.

Now, we have debt trolls.  These are (per second page of this article) “well-funded, aggressive and centralized collection firms, in many cases run by attorneys, that buy up unpaid debt and use the courts to collect.”  The reason it’s news is that, in Minnesota and some other states, taxpayer-funded police, jails, and courts are used to arrest the alleged debtor and collect the debt. It’s not exactly debtor’s prison, but it is going to jail because you’ve failed to pay what you (presumably) owe.

via Naked Capitalism.

How we’re subsidizing the big banksters

This will not be news to most of us, but here’s a nice summary posted on Yahoo’s Tech Ticker.  Banksters borrow from the Federal Reserve Bank at zero (or from savers at practically zero), lend to the U S Treasury at 2% or 3% (by buying U. S. Bonds), and pocket the difference. Courtesy of the taxpayers, and especially those of us who have saved.  (Yeah, I know many folks don’t pay federal income taxes, but isn’t everyone entitled to a share of what the government could fund if it wasn’t paying the banksters?)

Investing risk vs. return: Henry George was right

Back in the ’70s when I learned about investing, we sophisticated folks understood that financial markets are “efficient” and the Capital Asset Pricing Model (CAPM) would guide us.  You could reduce your risk somewhat by having a diversified portfolio, but to get a higher return you’d have to accept more risk of loss.  Of course there was no Internet, no easy way to check this for ourselves, but I did get access for a time to a remote terminal connected to a computer which supposedly allowed me to test this theory.  I did so, and the results were consistent, tho today I certainly can’t remember the details.

So when I first read Progress & Poverty in the ’80s, I was a bit troubled by this from Book III Chapter 4: Continue reading

More general ignorance of economic fundamentals

Fannie Mae’s new National Housing Survey, intended “to gauge the public’s current attitudes toward housing,” shows that Americans still believe buying a home is a good investment, and socially beneficial. Both ideas are, as Felix Salmon put it, “horribly misguided.”  Public policy subsidizes owner-occupants in numerous ways, all of which get capitalized into the price of real estate making it even less affordable.  One might be able to time the market so as to buy and sell one’s house profitably, but it’s not something to count on and many of us have had things go disasterously the other way.

Salmon’s done a good job of describing some of the social costs

[T]he top two reasons to buy a home are that “it means having a good place to raise children and provide them with a good education”; and “you have a physical structure where you and your family feel safe”. Reading between the lines here, I think that what we’re seeing is the effect of rental ghettoes, and the fact that neighborhoods with high levels of homeownership tend to be safer, and have better schools, than neighborhoods which are mostly owned by landlords. That’s a negative aspect of homeownership, in the grand scheme of things, but it’s clearly here to stay: no one’s anticipating a more sensible world where it’s commonplace to be able to rent a house in a good school district.

And most of those surveyed– renters, unmortgaged owners, mortgaged owners, underwater mortgaged owners– still think that now is a good time to buy themselves a house.  Imagine how they’d react if told that now is a good time to shift more taxes on to the land they want to buy. Will they sit still long enough to understand the mechanism that makes housing easier to afford when land is taxed?