Sunday, June 10, 2012


This is going to seem really sstupid simple to some people, but, it is actually how a lot of long term investors make money.

Most forclosure is stupid for the banks, for the homeowners, for the neighborhoods, for pretty much everyone.

Realestate is the best investment in the world.  No one is making any more of it.  What we have is what we have and so the value of realestate is always going to go up in the big picture.  Sure, there will be corrections.  Prices go up, they go down, then they go up more then they go down, then they go up more.  In the end realestate is always going to be worth something.

Mortgage companies are losing money on real estate because they are stupid.  Not because homeowners are stupid.  Not because people made bad loans.  Because mortgage companies are stupid.

If banks maintained leins against property and allowed owners to keep and maintain their properties the banks will eventually make their money back.

This is a long term investment outlook.  Prices were down in the late seventies and early eighties.  Prices were up in the late nineties and early 2K's.  It will probably take 20 years to pull the investment back out of a house, so around 2030.

But the investment will be recouped if the investors wait. 

Banks could take the long term approach and make money or they can take the short term approach and lose money.  Which do they take?  "Lets piss money away, it isn't really ours and we can trash the economy as we do it!  Yay!"

The problem is cash flow and banks believe that forclosing on people, taking the losses, results in some kind of preferred cash flow position.

Now suppose someone can make the insurance, the taxes and half or less of their mortgage payment.  Essentially the interest on the unpaid mortgage interest creates a huge paper asset that in reality will never be paid.  But suppose the bank just offered to allow someone to make payments like that with a lein of 75% of the value of the home when it was eventually sold, what would happen?

Well the interest cash flow from the loan would be reduced.  Suppose someone could only pay $300 a month instead of $1000.  Or the bank can just take a loss of $125,000 on a loan of $250,000.

For some reason it makes sense to a bank to take the $125,000 dollar loss rather than maintain a reduced cash flow with a high probability of recouping the investment plus 6% interest over 20 years.  Yep homes typically average that kind of return on investment.

Now suppose the home never manages to become worth more than the original investment plus 6% per year interest.  Unlikely, but, it can happen.  Some people are going to either keep paying forever or walkaway.  It will probably happen in a few cases.

Now suppose people can't pay enough to make the taxes, insurance and a partial mortgage payment.  Forclosure, we can't save everyone.  A long term outlook will improve the financial position of everyone involved.

Any mortgage company foreclosing on someone that can make 25% of their mortgage payment, maintain the property, pay the taxes and insurance is throwing away money that could be recovered by entering into a long term ownership sharing position.

Mortgage company managers are just too stupid to make money and the United States deserves to get screwed because so many stupid people are allowed to manage money.

Ownership partnerships are and have been a primary investment tool for many years.  This ain't new and it ain't rocket science.

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