Note Course Bonus: The Bailout & Buying Notes From Distressed Lenders
Published: Tue, 09/23/08
The big news for the past couple of weeks is looming financial
disaster... lenders in distress, banks and investment firms going
under, reorganizing or getting bailouts from the government.
Now is a golden opportunity to pick up good notes from lenders in
distress, and John Schaub tells us how to do it in this Note
Course Bonus Lesson.
Today I received an e-mail with the question,
"If we don't do it (the bailout), will the consequences be as
dire as the gurus claim?"
Here's my reply:
"The consequences would be that prices would fall to what buyers are
willing to pay, there would be an economic shudder, and the boat
would right itself again. But few who depend on voters to stay in
office want the economy to go through that necessary process.
Postponing the inevitable, as we have so many times in the past
by throwing money at it, will only make it far worse when it hits --
when it's so out of control that there won't be enough fiat
money in the universe to stop it.
You don't solve a problem by doing more of what caused it.
This is the biggest federal economic power-grab since the New Deal.
According to the Financial Times, the wording in the bill will
allow Treasury to buy *any* investment instrument. Bloomberg says
it could include car loans, student loans and credit card debt
"and any other troubled asset."
The various bailouts are expected to more than double if not triple
or qeven uadruple the deficit. I've seen estimates that the bailout
itself could go to $2 and even to $3 trillion. $700 billion
"estimated" bailout package for Wall Street + $438 billion projected
deficit in the federal budget for FY 2008 + $200 billion for
Fannie Mae and Freddie Mac + $150 billion in "stimulus rebate checks
+ $85 billion for AIG + $29 billion for Bear Stearns = $1.602
billion. The national debt ceiling will have to be raised for
the second time in the past two months, this time to $11.3
trillion. That will make the national debt over 70% of GDP. The
highest the national debt got during the Great Depression was
44% of GDP.
I am at a loss to understand how the federal government can revive
the economy by saddling its citizens with unprecedented debt.
Lew Rockwell put it well earlier this year when he wrote,
"All this nonsense about digging ourselves out of recession through
government intervention began with the New Deal, when FDR used the
economic downturn as the great excuse to make himself the economic
führer of America.
"Here is the amazing fact: not once has this strategy worked. Not
in the New Deal. Not in the 1970s. Not in the 1980s. Not in the
1990s. Not once has government done anything to restore prosperity
during a slump. What happens again and again is that government
spends, the Fed inflates, the regulators punish, there is wailing
and gnashing of teeth, and then, at some point, we hit bottom,
and normalcy begins to return again.
"The most government can do is prolong the period at the
bottom. Otherwise, it is just wasting resources."
-- Lew Rockwell, president of the Ludwig von Mises Institute
www.mises.org
Cheers,
Bill
W. J. Mencarow
President, The Paper Source, Inc.
www.PaperSourceOnline.com
www.cashflows.org
P.S. John Schaub, my friend for some 20 years and one of the most-
respected real estate investment experts in North America, is the
real deal. He invests in real estate and notes full-time (I've
toured some of his properties with him) and only teaches a few
classes a year to a limited number of students. John's books
are published by McGraw-Hill, and he's just written a brand-new
one called "Building Wealth Buying Foreclosures". It's available
for $21.95 online and at major bookstores. But you can get it
FREE -- scroll down to get the details!
BUYING NOTES FROM DISTRESSED LENDERS, Part I
by John Schaub
Owners of real estate are not the only ones in distress
these days. Lenders, both private parties and institutional, own
notes secured by mortgages and trust deeds which are non-performing.
By non-performing, I mean the borrowers have quit making their
payments.
In normal times when loan defaults are few, and optimism
about property appreciation abounds, lenders often try to profit
from defaulted notes.
They foreclose and try to resell at a profit, often
successfully.
The climate is different today. Most institutional lenders
are scrambling to make a profit and already own an inventory of real
estate they have foreclosed. This real estate produces no
income, compared to the loan they used to hold which paid them
interest. Likewise, many private investors are not receiving the
payments they anticipated.
Most Foreclosures Are Not Opportunities
Many are properties you would not want to own, no matter
how cheap they are. I talked with a lender who made many high
interest rate loans on houses in older, downtown areas.
Making high interest rate loans to people who cannot afford to
repay them is bad business in my book, but that's another subject.
Eventually, he foreclosed and has been unable to sell the
properties at any price. They are now boarded up (condemned by the
city) and he will probably lose everything because of the
past due property taxes he is not willing to pay: An expensive
seminar.
I only look at houses or notes secured by houses in
neighborhoods I know and like. If I buy a note or a house, I need
to know the real value and that I can resell it or rent it at a
profit.
Don't let greed override your common sense. Don't buy a
note at a 90 percent discount if it is secured by something you
don't want to own. It is far better to make a smaller, but sure,
profit than to take an expensive "seminar."
Looking At Both Sides
If you plan to take advantage of the many opportunities
available today from lenders, it is important that you understand
how the lender views his situation.
As both a buyer and owner of a number of notes secured by
houses in my town, and a buyer of distressed paper and property,
I have experience on both sides of this situation. In fact, I
have more experience than I need as a mortgagee (noteholder). Even
when you understand what is happening to you as a mortgagee, it is
still not a comfortable experience when a borrower stops making
payments.
It is unlike the experience as a landlord, because the
remedies available to the landlord are more swift and certain,
and the tenant has less to lose. The loss of a security deposit
on a rental home is not the same as losing equity in your home.
In addition, the courts and our legal system offer more
time and protection to the homeowner. A filing of bankruptcy will
further extend the time a borrower has to repay the debt
or forfeit the security.
The foreclosure process is also more expensive in terms of
out-of-pocket costs and time. First-time investors in small notes
are often wiped out when they cannot afford to pay the costs
of foreclosure and carrying the underlying mortgages on the
property they have for security.
When you are an investor in paper, you should have a cash
reserve at all times that would allow you to make the payments on
any loans senior to yours (recorded before your note) and
attorney's fees, trustee's fees and court costs. If you do not,
when a borrower fails to pay you, you will be in a weak position.
A rule I follow as a buyer of notes secured by houses is
this: Never buy a note secured by a house unless you would like to
own that house.
If you are the holder of a note secured by a property you
don't want to own, you will make costly concessions instead of
taking title to the property. When you don't mind taking title, then
you will not give up any of your profit.
TO BE CONTINUED.
John Schaub has prospered during three recessions, four tax law
changes and interest rates ranging from 6-16% in his 35 years as
a real estate investor.
John buys, sells and manages his own properties, and enjoys
providing quality housing at fair prices for working families in
his community. He teaches two Making It Big On Little Deals
seminars each year where students learn how to identify the best
investment property in their town, how to buy it at below-market
prices, and how to negotiate terms that guarantee a profit.
John also invests his time helping those who cannot afford to buy a
home through conventional sources through his work with Habitat for
Humanity and the Fuller Center for Housing. John has served for
more than 20 years on the board of Sarasota Habitat, 7 years on
Habitat's International Board and currently serves on both
Habitat's US Council and on the board of the Fuller Center for
Housing.
John, a Florida native, is a proud graduate of the University of
Florida, where he earned his B.A. from the College of Business
Administration in 1970. He is an accomplished boat captain (power
and sail), fisherman, skier (snow and water) and an
instrument-rated pilot. John loves to travel, especially with his
wife Valerie and children Jay, Megan and Tyler.
GET JOHN'S LATEST BOOK, "BUILDING WEALTH BUYING FORECLOSURES"
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Topics covered include: developing your personal plan for
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negotiation strategies that really work, buying and selling using
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getting your first 10 houses free and clear.
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Order right away and get John's latest book "Building Wealth
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Visit www.PaperSourceOnline.com/bh.htm
Or call 1-800-542-2270