While I’m just an “Armchair Economist”, because of my unique background in lending and financial planning I am 100% sure that I did not miss the lessons learned and I’m going to share my opinion with you in this blog.  I hope that you will take a moment to add your comments to this blog.  Frankly, I hope that a LOT of people take some time to join in on this conversation because the more people that “get it” the more likely society will learn the lessons this incident teaches and help to empower us to not let it happen again for a very, very long time.

Not Guilty!

First of all, let me say that ultimately I don’t believe that Goldman will be found guilty of anything.  The probability is that Goldman will opt for a settlement with no admission of guilt.  The SEC will then take that settlement money and mail a check to everyone who had a Goldman Sachs’ loan and lost their home.  I’m kidding of course.  Frankly, I have no idea where the SEC’s settlement money goes.  It’s more likely going to their attorneys and staff  rather than any homeowner who was actually damaged by Goldman’s actions.  We can save this discussion for another blog.  That said, even if Goldman Sachs went through a full trial I believe that they would not be found guilty of any wrong doing in this instance.

Now, contrast my opinion to the other consumers portrayed on the nightly news the day after the broadcast.  The news clips I saw looked more like a scene of a Frankenstein movie with the villagers carrying pitchforks and rakes storming the castle.  While I can certainly understand the level of frustration, as I am equally as frustrated as it appears that both the media and those consumers are frustrated for the wrong reasons.  Again, while I believe that Goldman is not guilty of the SEC’s fraud charges, they certainly are guilty of working the system.

What I mean by this is the Goldman, along with many other institutions successfully and legally pulled of a classic “Sting”.  The sting was simple, help to create and exacerbate a financial bubble in housing.  Then, while no one is looking bet against the bubble.  Insure your bet so that you know you will get paid.  Finally, double-down on these bets through buying up the the undervalued assets once the bubble pops.  All perfectly legal.  All ethical from the perpetrator’s perspective, the perspective of the scorpion (story below).

Sadly, I also believe that in time all will be forgiven because “we the people” will not hear the truth on the news and ultimately, these events will also be forgotten as we settle back to our busy lives trying to make up for our losses in both investments and time.  It does not have to be this way.  If we understand the real message of this episode we can force our law makers and enforcement agencies to take the right actions and correct the real problems.  Apathy is the real enemy.  Ignorance is their weapon.  Get involved and understand the real issues so you and I can have a better future.  If you won’t do this work, BTW, stop your complaining.  (OK, back down from my soapbox now.  Please keep reading.

Larry Kudlow

In one of the follow-up interviews CNBC’s Larry Kudlow said something like, “They (Goldman) got it right!  They make the right business decision regarding the direction of the housing bubble and made a nice profit as a result.  Now, we are demonizing Goldman for making a profit”  (Larry, if you read this blog please understand that I’m not making an exact quote.  I’m just trying to capture the essence of your argument.)  Most time I am on board with Larry’s positions when he’s editorializing about the financial markets.  This time, however, I think he may be too close to the story and not seeing the proverbial “forest through the trees”.  What’s all this got to do with scorpions and frogs you would ask?  I will let the story provide you with the answer.

The Story of the Scorpion and the Frog

A scorpion wanted to cross a pond rather than take the time to walk around.  Scorpions don’t swim, of course, so he walked up to a frog sitting at the edge of the pond and asked the frog if he, the scorpion, could get on to the back of the frog and then the frog could swim the scorpion safely to the other side of the pond.  The frog said, “No way!  Why on earth would you expect me to do that?  If I put you on my back you going to sting me with your tail and I’m going to die.  Do I look particularly stupid or something?”

The scorpion said, “No, you look exceptionally bright.  You look like a rational being so let me paint you a picture.”  The scorpion goes on to say, “Frog, you know that I can’t swim don’t you?”  The frog agreed and the scorpion went on to say, “Can we assume that I don’t want to drown, which is why I want to sit on your back as you swim across the pond.  If I sting you, you would die, I would drown and then we would both be dead, wouldn’t we?”  The frog agreed with the scorpion’s logic.  He put the scorpion on his back and started to swim across the pond.  Halfway there, the scorpion stings the frog.  The frog looks up at the scorpion and said, “Why on earth did you do that?  Now I’m got to die and so will you!”  The scorpion looked back at the frog and said, “I’m REALLY sorry for what happened and I take full responsibility for my actions.  But I couldn’t help myself.  I had to sting you.  I’m a scorpion.  That’s what we do!”

I trust that the moral of the story is obvious.  In the context of Goldman and the real estate bubble/mortgage meltdown they skillfully engineered a fortune in profits as the bubble grew.  They they were just as skillful to engineer a strategy to make money as the market collapsed.  Now, going forward, they will make even more money as the market recovers.  The bottom line is that Goldman does what Goldman does.  They can’t help themselves.  It’s what they do and they do it very, very well.  What they do is make money.  Within the confines of the law, right or wrong, they make money and they are REALLY good at it.

Taken in this context, Goldman is innocent of all guilt.  In the context of this story, Mr Kudlow, “Goldman did get it right”.  Goldman got it right for themselves and for their shareholders.  They also killed the frog!  Moreover, Goldman was also smart enough to buy a life jacket!!

A New Paradigm

To understand the real issue, we need to change our paradigm and look at this story from a different point of view.  We need to look at this story from the point of view of the individual homeowner.  Why, because they, these homeowners, are the frogs in the story.  They along with the local businesses that provided the pizza and the groceries for these homeowners.  They along with the movie theater, the flower shop and every other business that provides goods and services to these homeowners are collectively “the frog” in this story  This is what they saw.  (BTW, from now on in the context of this blog, Goldman is just a euphemism for all the institutions that played this game right along side Goldman.)

Let’s go back to 2005 and let’s look at it from the paradigm of four homeowners, AKA, a “neighborhood”.  What I mean by this is I’m going to use three examples of homeowners and we can extrapolate these concepts out to 30, 300 or 3 million homeowners.  My story represents a group of homeowners as a community anywhere in the US and the scenario I am about to describe has been played out over and over again, all over the country.

In my story one neighbor, Mr Free N. Clear has done everything right.  He works hard for his income, spending less than he earns.  He could have spent or saved the difference, but to ensure that he would have no mortgage moving into his retirement he directed his excess income to his mortgage lender to accelerate the pay down of his mortgage.  Over time he watched his loan balance go down and his home’s value go up.  His plan for retirement looks very solid as someday he will be able to sell his home, pocket the equity/profits, downsize and the now liquid equity would provide the extra cash needed to fund his retirement.  This is the ideal plan for the Suze Orman or Dave Ramsey fan.

Another neighbor, Mr Ican Affordit, bought his home in 2005 at the peak of the real estate market.  Mr Ican Affordit is essentially following the same plan as Mr Free N. Clear.  He made a large down payment to ensure that he has a modest mortgage, one that that he can easily afford.  He did pay a lot of money for his home of course, much more than Mr Ican Affordit, because the demand to buy homes and the readily available Goldman mortgage loans have made it easy for more and more people to buy a home.  As a result, simple supply and demand has pushed up the home prices.  Again, he’s not concerned because he can afford his payments.  He sees how well this plan has worked for his neighbor and he feels very comfortable with his situation.

The third neighbor, Mr Inover Myhead, really cannot afford the clothes he’s wearing or the car he’s driving, much less the home he’s living in.  He also bought his home at the peak of the market.  Mr Inover Myhead does not have a good track record with debt.  He’s always late with his credit card and his car payments.  He’s never saved a dime.  That’s not a problem for him, however, because the Goldman loans don’t require good credit, a down payment and the Goldman loans don’t really care to much about his income either.  You see, Goldman’s theory is that if they can get Mr Inover Myhead into home that he will change.  He will magically transform from a flake to a model citizen.

Therefore, Goldman makes him a loan to buy a home at an somewhat affordable rate/payment for 2 years.  In 2 years that rate and payment will double or triple, but that is not a problem because as Mr Inover Myhead demonstrates over the upcoming two years he will make his payments on time, and if his home’s value stays the same or goes up just a little (which historically home values have ALWAYS appreciated on a national basis), then Mr Inover Myhead can simply refinance before his rate/payment adjusts into another affordable payment. Both Goldman and Mr Inover Myhead are very confident with this strategy.

Everyone is happy!  Homes do appreciate in value because of the the demand.  The business community thrives from more and more money circulation from the growing population.  “It’s a good life.”

Let’s fast forward to 2007.  Guess what, everything has played out as Goldman has predicted with one exception.  Yes, Mr Inover Myhead did not change his bad credit habits.  He didn’t make payments for his credit cards, his car payments or his mortgage payments on time.  Despite this lousy credit history, he even acquired more debt to buy more clothes and nicer car!  Now, even with his lower mortgage payment he’s struggling again and contacts Goldman to see if they can help.

Goldman doesn’t care about any of Mr Inover Myhead’s financial problems.  Goldman made a nice chunk of money from the fees giving Mr Inover Myhead his purchase loan in the first place.  Secondly, Goldman’s collected a much higher than market rate from this borrower for the past two years as well.  Goldman sees that there is some additional equity in Mr Inover Myhead’s home and agrees to refinance Mr Inover Myhead to payoff the old loan and  new debts.

As a result Mr Inover Myhead gets to extend his 2 year period of lower payments/rates.  Even though his refinance loan is large than his original purchase loan, Mr Inover Myhead can afford the new payments once the credit cards and auto loans are paid off.  There is no more equity in his home, but that is OK because home values have never declined on a national basis and if he can just hang in there another couple years, make his payments on time (this time), then he will be able to refinance before his 2 year window is up and everyone will once again be happy.

BTW, there is a prepayment penalty for paying off the old loan early.  Goldman, of course, gladly accepts that extra income.  Now Goldman has made money from the first loan, made money colleting payments on that loan.  Goldman’s made even more money from the refinance loan because it a bigger loan, generates more fees plus they get the prepayment fees.

Moreover, they have proved their model!  These “shitty” (Goldman’s words, not mine) loans don’t go into default.  Better than defaulting the borrower was late with their payments so Goldman got to collect late fees and penalties on top of all the other income previously mentioned.  These mortgages are a goldmine for Goldman and Goldman is smiling “all the way to bank”.  Goldman is golden and investor in the world wants to buy Goldman’s mortgage products to increase their portfolios’ yield.  Why not, they income is great and the rating agencies, S&P and others, all reaffirm that these a AAA investments suitable the the most conservative portfolios like pension funds for example.  The investors all become yield hogs and Goldman is filling the trough. (You’ve heard the expression, “Sheep get sheared and pigs get slaughtered?)

Now fast forward to  2008.  Mr Inover Myhead is in the same place he was a year ago and he is once again in way over his head.  So, he goes back to Goldman and asks to refinance again.  This time Goldman says “no”.  Goldman says that there is no equity in Mr Inover Myhead’s home, equity needed to tack on the additional costs of the refinance.  Mr Inover Myhead has no savings of course to pay the costs.  Now, with no opportunity to bail himself out with another refinance and none of his money invested in the home, Mr Inover Myhead decides to walk on the deal leaving Goldman with a defaulted mortgage and a vacant home.

Goldman has the home is sold at an auction for 50 cents on the dollar and life goes on.  But wait, did I say 50 cents on the dollar?  Yes, Mr Inover Myhead’s home has just set the market value similar homes in his neighborhood at 50% of their previous selling price.  Goldman doesn’t care, they don’t live in that neighborhood.  Goldman doesn’t really care that they lost 50% of the loan’s principle either because they sold that loan to some other investor a long time ago.   As time goes on more and more homes are sold at the lower price.  This is happening all over the country.  Suddenly, home values start to decline on a “national basis” for the fist time in history.

Mr Free N. Clear is not too concerned.  He bought his home long ago.  He’s lost a lot of equity, but not all of it.  Mr Ican Affordit, on the other hand, is not happy with this situation whatsoever.  He has new neighbors, one’s buying their homes at half the price he paid for his.  The new neighbors are also enjoying lower mortgage payments due to the lower loan amounts and interest rates in general have dropped.

Mr Ican Affordit wants his payment to be lower too, so he goes to his bank and asks to refinance at the new lower rates as he can save hundreds of dollar each month.  The bank tell him “NO!”  Despite Mr Ican Afford it’s large down payment, solid income and perfect credit history, there is no equity in his home.  His entire down payment/equity has evaporated and, as a result, now he can’t even lower his monthly payments through a refinance.

Mr Ican Affordit is no dope, however.  He realizes that even if he did refinance that it could take years before his equity/down payment would reappear.  He knows that eventually his home would go up in value again.  He knows that if he continues to make his mortgage payments that his principle will go down.  Then is dawns on him that his new neighbors, however, will enjoy the same appreciation and the same principle reduction, but on a lower loan amount and a lower interest rate.

Mr Ican Affordit has other money saved.  He decides to take that money and buy another home in his neighborhood at the new lower price, with a lower loan amount and interest rate.  He actually cannot afford two mortgage payments and qualify to both loans, however, he’s got a great plan.  He just tells the lender that he’s going to rent his current home and move into the new one.  With that additional rental income the bank says “yes” to the new purchase loan and Mr Ican Afford it moves into his new home.  He collects the rent on his old home, but he NEVER never makes another mortgage payment on that old loan.  He keeps all the rent collected and the old home goes into foreclosure.  He’s done nothing illegal.  What he has done was to save himself hundreds of thousands of dollars in interest expense and principle payments, plus pocketed months worth of rental income.

Now let’s introduce the fourth neighbor, “the other guy”.  The other guy started  with the same strategy at as Mr Ican Affordit but he loses his job because people are moving out of the neighborhood and not moving in causing his local economy to decline.  Unlike Mr Ican Affordit, he wants to honor his contract with his lender.  Therefore, he continues to make his mortgage payments on time using his savings.  He asks his lender to refinance his loan to make it more affordable.  He knows that if he can refinance he can save hundreds of dollars a month which will help to maintain his savings while looking for a job.  The bank says, “no equity, no job, no way!”

Meanwhile, he sees more and more home going into foreclosure in his neighborhood, selling at lower and lower prices.  The new home buyers are putting only 3.5% down and have awful or even NO CREDIT.  In fact, they don’t even have to be US Citizens.  They just need to prove they have income to make the payments.  If they don’t have enough income, they can add other borrowers to their loan application so that their combined income allows them to qualify for the loan.

He asks himself why can these people buy a home with little money down and crappy credit only to find that the Government is insuring these loans, guaranteeing that if they default that the bank lending the money will be made whole.  This hurts.  He asks, wasn’t it the low/no down payment, crappy credit, little income loans what got us into trouble in the first place?  Then,  pouring salt on to his wounds he finds out that these home buyers are receiving a tax credit from the Government as well because they were 1st time home buyers!  Yet this guy, the guy who made a large down payment which has since evaporated, the guy who always made his payments on time and the guy who is draining his savings to honor his obligations, this other guy cannot even refinance his home to save on his monthly costs.

Forward to March 2009.  President Obama signs the Home Affordability Plan/Making Home Affordable bill (HASP/MHA) allowing homeowners to refinance even if they have little to no equity in their home, even if they have little to no savings.  They are not even required to document their income.  Finally, a break for the other guy!  So our guy contacts his bank to start his refinance.  Once again, however, the bank says “no”.  This time the bank tells him that his loan is not owned by Fannie Mae or Freddie Mac.  Instead it’s owned by Goldman.  Therefore, a HASP/MHA refinance is not an option. 

Down, but not out, our guy then contacts Goldman and says, “Hey, have you guys heard about these HSAP/MHA refinances?  I’m told that the bill only address loans owned by Fannie or Freddie, but you are smart people.  You must offer a similar program as well.  Can you please refinance or modify my loan?’  Goldman says “no!”  Not only will we not refinance your loan, we will not modify the terms of the loan to make them more affordable for you.  We couldn’t make any changes to your loan if we wanted to because, although your loan was originated through Goldman, your loan now owned by other investors.  As long as the loan is not in default are hands are tied.  Stop making your payments, go into default, ruin your credit, then we can talk.  Or, keep honoring your agreement by making your payments.  We know that you don’t have a job but you can keep draining your cash reserves, your savings, your life insurance, your retirement accounts, sell your under valued stocks.  You can do it!

Let’s take a moment to access the situation:

Mr Free N. Clear (Big Loser) – He’s lost a ton of equity in his home.  Equity that, in his retirement plan, was going to used once he sold his home to help supplement his income.  Yes, he owns his home free & clear, however, his investment, his home has lost 50% of its value. His equity’s, his investment, is gone and his plan retirement is gone as well.  To add insult to injury, his pension fund (he is one of the few and fortunate to have one) heavily invested in Goldman’s mortgages has also lost a ton of money.  To make up for those losses his union is going to lobby the State Government to issue bonds.  The bonds are simply debt of course, so the State will need to raise income taxes on Mr Free N. Clear as well as everyone else to pay for servicing the debt.  Mr Free N. Clear did everything right, but took it in the shorts anyway.

Mr Ican Affordit (Winner!)– He’s happy with his decision to game the system.  Yes, his 401k took a hit too, but he’s still well ahead.  He’s got his new home, at a lower price, an even smaller loan at a lower interest rate.  He’s increased his savings by collecting rent and never making mortgage payments on his old home.  Yes, his credit took a hit, but in 4 years he can get a new mortgage and in 7 years all the derogatory credit information will be expunged from his credit profile just like nothing ever happened.

Mr Inover Myhead (Big Winner!!)– He lost his home through foreclosure.  Just like Mr Incan Affordit, his credit took a hit but will also be perfect in no time at all.  He never lost any of his money.  His original down payment was returned to him through his refinances.  He didn’t have a 401k so he’s lost nothing there as well.  He had a good run and he will get a chance to do it again soon enough.  

The Other Guy (Biggest Loser!!!) – He is a vast majority of American homeowners.  He’s honored his contract with the bank, never missing a payment.  He’s wiped out his savings and his 401k as well.  He’s lost the investment, his down payment, in his home.  He can’t refinance.  He’s left with no option but to sell his home at a potential loss and perhaps ruin his credit in the process.  He may even owe additional taxes because he’s selling his home at loss.  He keeps asking himself these questions:

Why wouldn’t Goldman be willing to work with me, refinancing or modifying the terms of my loan?

Why would Goldman want another empty foreclosed home on their hands?

Why wouldn’t Goldman do everything possible to keep me in my home and making my payments?  After all, they would be paid.  Surely, keeping another foreclosure off the market would help stabilize home prices.

Why would Goldman do absolutely nothing to help unless I stopped making my mortgage payments?

These questions are very reasonable, very logical and these questions were, and continue to be, asked by millions and millions of homeowners over the past five years.  If you think about it, if you loaned money to someone you would hope to be repaid on time.  If something happened to your borrower’s ability to repay you, you would do whatever you could to be repaid.  If the collateral for the loan was sufficient, you would potentially foreclose and sell the assets.  If the collateral were insufficient, however, Left with no other alternatives you would modify the terms of the loan, hoping that with those modified terms that your borrower would not only want to honor his commitment to repay his loan to you, but now be enabled to do so.

The Bet – “The Big Short”

However, if you were to place a side bet on your loan, one that if the loan were to go unpaid the bet would cover your losses, wouldn’t that change your motives entirely?  Think about it.  Modifying the terms of the loan MAY get you repaid.  Having a bet that if the loan goes into default guarantees repayment, well that is an entirely different set of circumstances.  Moreover, once repaid you now have cash at a time when you can purchase assets at undervalued prices.  Cash-flow (payments) and a maybe/eventually paid in full, or cash now and paid in full through your side bet.  If you were Goldman which would you choose?

You see from the paradigm of these four homeowners what transpired was different among themselves and completely different from the perspective of Goldman.  Goldman and the homeowners were never on the same team even though it appears as though they were.  Goldman found a way to “checkmate” the game.  As long as the other guy kept making his payments, Goldman was happy.  If the other guy were to default on their mortgage, however, Goldman was just as happy, maybe even more happy, because their bet that the other guy would eventually fold meant that Goldman received payment in full!  Either way Goldman wins!  Checkmate!!

This strategy went pretty well for a while as Goldman kept making new loans and betting against them.  Eventually, Goldman could see that the game had to come to an end as the more and more foreclosures paid off more and more bets, eventually there would be no more money to payoff those bets.  So, what did Goldman do?  As others started to understand what was going on a panic spread.  A panic of epic proportion because literally no one knew exactly how many of these loans were made and for sure no one knew how many bets were made against them.  With that backdrop Goldman has to play just a couple more cards well and they would clean up on the game.

The End Game

The problem was that Goldman needed to collect on its bets.  They were pretty sure that one of their bookies who owed them money, aka AIG & others, didn’t have it.  Therefore, they had to get money to AIG/others.  Goldman knew that only entity that could be counted on to have money at that point and time was the US Government.  To get the US Government to give AIG/others money was a two-step process.  First Goldman had to fan the fire and accelerate the panic that was already in motion around the globe.  Hank Paulson and others did superlative job for Goldman, doing this right on television, pitching everyone that the world was coming to an end if we didn’t do something NOW!  Congress reactive predictably and before you know it we had TARP.

Interestingly, it was my opinion that the money from TARP was going to be loaned to the banks, the Goldman’s who made those troubled, toxic loans, so that they could use the money to buy back the loans from the investors and then be empowered to renegotiate and modify the terms of the loans keeping the “other guy” homeowners in their homes and stabilizing home prices.  Instead, however, the banks took their TARP money and bought other banks for pennies on the dollar because their assets have been devalued due to the “mark to market” rules.  I believe that the banks NEVER intended to buy back their troubled loans.  After all, why should they?  Remember, they were better off having them go into default.

Flash forward to April 27th 2010 and Team Goldman is lined up in front of the Inquisition, I mean the Senate Investigative committee.  Frankly, it would have been just as acceptable to have had a panel of Senators and Congressman lined up in front of a panel of “the other guys” asking them why they did it?  That said, I believe that ultimately, Goldman, the Senators and Congressman all them would have been acquitted of any wrong doing.  They are all scorpions.  They acted within the law and they did what they were supposed to do.  They all killed the frog (the other guy) and the scorpions were all wearing life jackets.

What’s the Real Message?

In their testimony Goldman repeatedly made two claims.  One, “we are market markers” and two, “we wanted to get closer to home”.  For the benefit of those who don’t understand what these statements mean, a market maker essentially finds two or more parties interested in making a deal.  Relating to the Goldman example, Goldman made or purchased mortgages to consumers.  Then, they found other parties who were interested in owning mortgages and sold their mortgages to them.  With that, their market was complete.  They had a source of new product to sell (mortgages) and a number of others interested in buying them.  The made a market.

Congress’ assertion was that because Goldman got to pick which of their mortgages were to be included in a particular package of mortgages that were sold to a particular investor, that there was some hanky-panky in that selection process.  Yes?  No?  Maybe?  Who knows for sure if that assertion is right.  My feeling is that it’s not relevant as the purchasers of those loans had the right and the responsibility to know what they were buying.

Now, if Goldman switched up the loans, replacing loans the buyer thought they were purchasing with other loans, or or Goldman did not disclose some important/material information about the loans, something that would have made the buyer make a different decision, then Goldman is going to be guilty of wrong doing.  My guess is, however, that this is not what happened.  My guess is that the disclosures were substantial and the buyer knew exactly what they were buying.  (Understand that even though this may still sound complicated, I am super-simplifying what happened because in reality there were no mortgages in this instance.  This was a “synthetic derivative, a made up investment, the details of which are not important to my point.)

What Congress and the SEC are asserting is that Goldman did not disclose that they had taken a short position on these loans, meaning they made a side bet that the loans would go into default by taking a “short” position against them.  Again, the courts will decide if this is an issue.  In my opinion it’s not.  That said, what IS an issue is that these short positions not set the one entity at odds with the borrowers.  In other words, with this short in place the lender and the borrower are clearly not on the same team hoping the see that the loan terms are honored.  Instead, the holder of the short is hoping, praying and planning on the borrower not honoring his obligations because then and only then does the holder of the short get paid.  Clearly, clearly, clearly, clearly, this is a BIG problem!  It would be like taking a bet on how many people will live or die if the Titanic were to sink and the guy who bet on the “die side” also owns the keys to the life boats.

Should short positions be allowed?  Absolutely.  There are reasons why owning short positions would make sense.  Moreover, it’s a free market and if a market maker like Goldman can put that trade together with full disclosure, then they should make those markets.  Again, it’s not the shorts that are the problem.  It who owns the shorts that is the problem because the lender and borrower MUST be on the same team.  They must always have the same goal, to honor the contract.

Goldman also stated their goal was to get “closer to home”, meaning if you added up all their long positions (in the case of the mortgages, all their positions where they hoped the borrower would honor their contract) and added up all their short positions (again, all the positions where they hoped the borrower would not honor their contract and default) Goldman wanted to be close to neutral.  That is, if they owned a $1 billion mortgages, they wanted to own close to $1 billions in short positions.

However, Goldman did not want to be completely neutral.  If they were, theoretically, they would make no money as the gains/losses from their long positions would simply offset their gains/losses on their short positions.  So, Goldman took a side and decided to be more short than long.  This is where the real problem lies and the “real issue” Congress and the SEC need to sort out because Goldman was in a position to influence the outcome of the bet (short).

When the “Other Guy” called his lender for help, remember what the lender said?  He said, sorry, I can’t help you unless you are in default.  If you continue to choose to honor your contract, to drain your savings, your retirement funds and keep making payments, there is nothing I can do for you.  This conversation happened over and over again with millions of homeowners.  Goldman is a scorpion, it does what it does.  Goldman does it well, very well.  That said, this is the problem that needs to be resolved or going forward, this is going to happen again.  A lender and a borrower must always maintain the same desired outcome, honoring the contract.  Solve that problem and you will be more likely to avoid a crisis like this again.

What happens next?

In all likelihood, don’t expect too much real change unless, … you demand it.  (Back on my soapbox) I’m a Boomer born in 1953.  My generation was full of promises to change the world.  Now it appears that the world’s changing us and we are not fulfilling our dreams, our promises.  For the most part we want to advocate our responsibility because it is much easier to blame someone else or remain ignorant than it is to get involved.  Ultimately, we can’t blame anyone but ourselves for our problems.  We can’t blame anyone for the next bubble and subsequent collapse if we let it happen.  Apathy, like wishful thinking, is not a viable strategy for a great future.  It’s a cop out.

I know, you work, you’ve got kids, money problems, health issues.  So what.  I’m no different than you.  That said, I’ve taken 23 years learn how these financial markets work (and still barely understand them).  I took 8 hours to write this blog.  Hopefully you will take 15 minutes of your time to read it and, more importantly, you will learn something in the process.  Hopefully, you will join the conversation, comment on this blog and pass it along to your friends, family and associates asking them to do the same.  I believe that if you educate yourself today you will make better, smarter choices tomorrow.  I believe that if you really want things to be different tomorrow, then you need to get involved today.  Join the conversation.  Educate yourself.  Vote for the right people.  Hold them accountable.  Don’t take what you see, hear and read at face value.  Finally, always remember, everyone’s got an agenda, even me!

It’s a Good Life!

Definition: 1. a sudden realization: a sudden intuitive leap of understanding, especially through an ordinary but striking occurrence

It goes without saying that every one of us has experienced an “ah ha” moment at some point in their life, a moment where one wakes up to an idea or a concept that should have been self evident all along.  Another way I’ve heard this moment expressed is referring to this moment as a BFO, or a “Blinding Flash of the Obvious”.  Either way, what the epiphany does is bring clarity to an otherwise unclear concept or bring awareness of something you were previously unaware.

As you read The 12 Principles of Money it is my hope that you will have many, many epiphanies.  Ultimately, it is my hope that the ideas and concepts I share with you about money will provide you clarity and awareness so that you can benefit from them.

These principles are not mine.  That is, I deserve no credit for creating or discovering them.  I am simply reporting them, explaining them, bringing them to your attention.  If I do a good job with my explanations I believe that you will begin to understand why some of your choices and decisions about money have worked and why others have caused you failure.  I must confess, I’ve made and will continue to make some poor choices and decisions myself.  That said, like you, we can now utilize these principles, The 12 Principles of Money, as our compass to help put us back on track when we get lost.

As all these principles are very important they will not be presented in any particular sequence and we will start with “The Regeneration Principle”.

It’s a good life!

Randall A Luebke RMA, RFC

randy@REbiz.com

Fortunately, through responses to this blog, my readers are keeping me/us posted with the latest developments of the HASP.  As I’ve previously written, the HASP is really two programs; a refinance program and a loan modification program, which I have dubbed HASP ver 1.0 and HASP ver 2.0 respectively.

The HASP ver 2.0 Update

Just yesterday I confirmed that one of my clients obtained a loan modification from his lender Countrywide Mortgage now Bank of America.  BTW, the loan modification was unsolicited from my client.  (More on this in another posting)  That said, from out of the blue he received a phone call from Countrywide offering to modify the loan for one of his rental units located in Colorado.

Skeptical, and aware that there are SO MANY loan modification scams, he asked me to review the offer, which I did, and it turned out to be 100% legitimate and, frankly, quite amazing.

What Was the Modification?

Currently he had a Neg-Am (referred to as a “Pay Option” by Countrywide) 1st mortgage.  He also had a second mortgage.  We are absolutely certain that he was very “upside down” with these loans, meaning he owed much more than the properties were worth.

Without requiring an appraisal, without providing any income documentation, he was offered a no cost loan modification extending for his first mortgage only and the terms were amazing.

They extend the term of his loan from 30 years to 40 years.  They lowered his interest rate to 4.5% and froze that rate for 10 years and they allowed him to make interest-only payment during that 10 years.  At the begging of the 11th year the loan will make annual adjustments of no more than 2% and the rate can never exceed 9.95%.

Now, there are many of you that will say “who wants an interest-only adjustable rate mortgage?”   While on one level, I will agree that if at all possible we should try to obtain a 30 year fixed rate mortgage today and lock-in these post-depression era rates that are available today.  One the other hand, however, locking in a rate for 10 years is a LONG TIME.  To put it into perspective, your 6 six year old will be driving before the rate makes it’s first adjustment!

The bottom line is that the HASP is evolving as I predicted and, hopefully, it will continue to evolve and expand to help more and more homeowners.

ONE VERY IMPORTANT NOTE

The client NEVER missed a mortgage payment!  I believe that he was selected for the loan modification for this reason, compounded with the fact that his loan was very much at risk for default.  The lender, Countrywide/Bank of America, exercised some very good judgment in my opinion because they provided a very nice incentive to keep a reliable borrower as the owner of this property.  Frankly, this entire housing debacle could have been prevented  or at least minimized had lenders implemented this type strategy 3 years ago when these issues became apparent.

It’s a good life!

Randall A Luebke RMA, RFC

Over the past few weeks many of you have contacted me asking me to either assist you with your HASP refinance (Thanks!) or asking me for advice when working with your current lender.

While there are many topics to discuss, and I will write on them in the forthcoming weeks, one topic that seems to be most relevant is “What is the rate” going to be.

The answer is that it depends on many, many things.  We refer to these “things” as pricing adjustments.  All mortgage loans today are subject to pricing adjustments.  The adjustments HASP loans in particular are VERY confusing.

There are adjustments for Loan-to-Value, for Condo’s, for loan size.  The big surprise, however, are the adjustments for the type of income documentation provided for the loan we want to refinance today.   More specifically, if you did not provide any income documentation when you financed your original loan, then your HASP loan will be assessed additional fees!

For your information I’ve included a “Pricing Adjustment Matrix” below.  I’m doing this more for effect than I am expecting you to use this as a tool.  What I mean by this is that I want you to see all of the potential adjustments to which your loan could be subjected. 

The bottom line is that you won’t know what your rate/fee will be until you have a lender price it out for you AND, you need to make darn sure that he/she knows what they are doing because what you don’t want to do is waste your time going through the refinance process only to be disappointed at the end.

It’s a good life!

Randall A Luebke RMA, RFC

This marks the first full week I’ve been directly involved with implementing HASP loans for my clients.  As such, I have communicated with nearly 100 people concerning their loans.

Going forward I plan to keep this blog updated regularly so that it can become an ongoing resource of information for those of you interested in the plan, more so than the institutional sites established by the government or the various banks involved with the program.  What I mean by this is I will continue to provide you with real-time, real-life information about the program and avoid the sales pitch and some political correctness.

My observation so far is that I like the program. It is going to save a lot a people a lot of money and, done right, it appears that the initial portion of the HASP won’t cost the taxpayers anything, the operative word being “appears”.

The HASP is really two programs, a refinance program and a loan modification program. From now on I’m going to refer them as HASP version 1.0 and HASP version 2.0.  It’s version 1.0 that open for business today and, from what I’ve seen, I really do like it.

Essentially, HASP 1.0 allows borrowers with excellent credit to refinance their mortgages at today’s rates, even if the equity in their homes is no longer there.  In fact, HASP 1.0 will allow you to refinance your home up to 105% of the property’s value.  You are even allowed to roll your closing costs into the refinance and, if you have a 2^nd mortgage, that debt is not included in the formula.  For example:

Home Value = $100,000

Current 1^st Mortgage = $95,000

Current 2^nd Mortgage = $50,000

Therefore the loan-to-value or LTV, the ratio of the 1^st mortgage divided by the value of the home, is 95% ($95,000/$100,000).  The combined loan-to-value, or CLTV, the ratio of the 1^st mortgage and 2^nd mortgage added together divided by the value of the home is 145%. ($95,000 + $50,000 = $145,000 / $100,000).

Even though the combined loan-to-value well exceeds the 105% HASP limit, because the 1^st mortgage is under the 105% limit it can be refinanced.  Even if the closing costs were to add an additional $10,000 in points and fees, the loan would still work under the HASP guidelines.

With all that said, if you have a 2^nd mortgage there will be complications. I will deal with these issues in my next posting.

For today, THE most important thing for you to do is find out if your loan is owned by Fannie Mae or Freddie Mac.  These Government Sponsored Agencies (GSE’s) own the vast majority of mortgages today.  However, just because your loan is less than $417,000 (the GSE’s basic loan limit) DO NOT ASSUME YOU MORTGAGE IS OWNED BY ONE OF THESE GSE’S!!

In many instances they are not. They are owned by other investors and, as a result, they are not going to work with HASP 1.0. In all likelihood, however, they will work for HASP 1.1 or 1.2, 1.3, meaning as this program evolves I believe that the program will expand.

In addition, just because your loan is larger than $417,000 DO NOT assume that your loan is Not Owned by one of the GSE’s, as up until the end of 2008 loans to $729,250 were purchased by these agencies.

The bottom line is simply check to see if your loan is owned by one of the GSE’s. For your convenience I have included links to their sites at the end of this posting so that you can quickly find out if your loan is one of them.

Please, start here, by checking to see if your loan is owned by one of the GSE’s.  If it is, contact me or your lender to see if you meet the remaining qualifications of the program (randy@ReBiz.com or 949-224-4240).

If your loan is not owned by one of the GSE’s you will need to wait for the HASP to expand.  Again, I believe that this will happen over the weeks and months ahead (HASP 1.1, HASP 1.2, etc).

Meanwhile, please, continue to make your mortgage payments on-time because if you are late with a payment you will not qualify for

In summary:

HASP 1.0 – The Refinance Program

Investors: Fannie Mae or Freddie Mac

Property types: Primary Residence, 2^nd/Vacation Home, Investment/Rentals

Loan Amounts: $729,750 or less

LTV (Loan-to-Value) Maximum: 105% and an appraisal may not be needed

CLTV (Combined Loan-to-Value): Unlimited, only the 1^st mortgage is refinanced

Income Documentation: Stated (Meaning you do not need to provide documentation, not meaning you get to state any income you like. These loans are for qualified borrowers with good credit)

Credit Profile: Excellent credit is required

HASP 2.0 – The Loan Modification Progam

Investors: Fannie Mae or Freddie Mac

Property types: Primary Residence Only

Loan Amounts: $729,750 or less

LTV (Loan-to-Value) TBD in future posts

CLTV (Combined Loan-to-Value): TBD in future posts

Income Documentation: Fully Documented (The goal is to make your home affordable, very affordable.  Details to follow)

Credit Profile: Your credit can be in the toilet!  Seriously, I read that can in in foreclosure or possibly bankruptcy and this plan can work for you. “Yes we can”?

Link to Fannie Mae Lookup

Link to Freddie Mac Lookup

It’s a good life!

Randall A Luebke RMA, RFC

randy@rebiz.com

949-224-4240

We are ready to roll-out the first phase of the HASP program.  Your understanding of how the program works and how it affects you is very important.  Please, take 15 minutes to read this article even if you believe that the HASP does not relate to you.  If you own real estate or have a mortgage you should read this article as, in all likelihood, the HASP will affect you or someone you know and everyone NEEDS to know the facts.

Program Summary:

The HASP (Home Affordability and Stability Plan) also known as "The Making Home Affordable" plan is a far-reaching program created to assist home owners with their current mortgages in two ways:

-    A Refinance Program
-    A Loan Modification Program

It is important that you understand the difference between these two programs and how they will affect you.  It is even more important to understand the facts surrounding these programs because there is so much hype, misinformation and intentionally misleading information circulating that, frankly, it will be difficult for you to know the difference.

Rest assured that I will ONLY present you with the facts as I learn them and I will do my best to not SELL you anything in the process.  That said, please understand, I am in the business of making loans and I DO want to assist you, your family friends and associates if I can.  Therefore, rely on me for the truth and please use my services if possible.

Loans That Qualify for the Refinance Program:

Under the refinance program guidelines your primary residence, vacation/2nd home and investment/rental homes will qualify EVEN IF YOU HAVE LITTLE OR NO EQUITY!  This is very important feature as, through this program, you can refinance your loan even if you owe more than the home is worth and you will NOT BE REQUIRED TO HAVE PRIVATE MORTGAGE INSURANCE.  This is a tremendous opportunity to obtain a permanent payment subsidy, every month, through lowering your monthly mortgage expense.

You must have excellent credit to qualify for this program, however, there is NO REQUIREMENT TO DOCUMENT YOUR INCOME OR YOUR ASSETS.  While this might initially appear to be stupid, especially when coupled with the idea of having no equity requirements (after all, wasn’t it those no income, no asset liar loans that got us in the mess in the first place?)  The fact of the matter is NO!  Those "liar loans," more correctly defined as "Stated Income, Stated Asset" loans, were not the cause of our current financial troubles.  (More on that another day in a another blog.  Today, I just want to stick to the facts on the HASP.)  The fact is that the HASP refinance program is a good program and it will reward those who have continued to make their mortgage payments on time by allowing them to refinance their loans at today’s low interest rates.

Additionally, there is NO APPRAISAL REQUIRED if your property’s value can be identified through one of our automated evaluation methods.  Not all properties will work with these systems, however, as sometimes there is insufficient data to evaluate.  Other times the data being evaluated are not accurate, not reflecting a room addition, other major remodel or upgrade for example.  If the free automated evaluation process does not provide us with the value needed to effect your refinance then you will have the option of paying for a full appraisal.

The refinance program is available today.  If you are interested in participating in this program then you should get started now because, rest assured, as an industry we are going to very quickly become overwhelmed with applications and getting to the head of the line now will be much better option than being at the end of the line later.

Loans That Qualify for the Loan Modification Program:

If you have suffered a financial hardship and perhaps you have subsequently fallen behind with your mortgage payments, Uncle Obama will try to rescue you too.  He will do this buy lowering your payments until you can afford them!  (This is the more controversial part of the HASP.  That said, and regardless of your politics, this program will be available to help millions of homeowners as well.)

The loan modification program is available only for loans that secure your primary residence.  These are the ONLY loans that will qualify for this program.  (By the way, you may be eligible for both of these programs in some instances.)  There are a series of steps that will be implemented to help make "your home affordable" starting with lowering your interest rate, then subsidizing your mortgage payments, extending the term of your loan for up to 40 years and in some instances forbearing or even forgiving a portion of the loan altogether.  Oh well….  Again, I am not here to judge.  I am just to help.

The loan modification portion of the HASP has not been rolled-out yet.  I will, however, keep you informed as this portion of the program does become available.

What To Do Next:

1.    Do Not Pay Anyone Any Money for Assisting You With These Programs – Every time there is money to be made, rest assured that someone is going to find a way to take advantage of people in an unethical way.  As a result the schemes and scams involved with real estate and mortgages are flourishing.  I am in no way suggesting that every company marketing itself as a "Loan Modification" expert is a fraud.  I am, however, suggesting that you do not need to pay for assistance.  If your time is short or you find the process too confusing, then certainly hiring a credible representative can be a viable alternative.  There are legitimate companies out there.  That said, I suggest that call your lender first or contact me even if you have tried this in that past and you had no success.  Again, the HASP has just rolled-out and everything is very different now, different that it was just a few months or weeks ago.  I will not charge you an upfront fee to refinance your loan under the HASP, with the exception of an appraisal fee if required.  I will, however, make you do your fair share of the work needed.

2.    Keep up with Changes and Developments – As the HASP is rolled-out in phases it will be important for you to keep up with these changes and the availability of these programs for you.  Continue to check my blog for updates www.MoneyNation.org as well as reading the emails you receive from me.  Again, I promise to only give you the facts and to keep things concise.

3.    Determine if Your Loan Qualifies Now - You can do this very quickly and easily by going to my blog www.MoneyNation.org and then going to the section concerning the HASP.  Here you will find links to the government web sites where you can immediately determine if your loan is currently eligible for the program.

 
-    If it is not currently eligible, then skip to Step 4
-    If it is eligible, then contact me immediately by email or phone for further instructions

o    randy@ReBiz.com
o    949-224-4240

4.    Prepare and Plan Now - Even if you loan is not currently eligible for the HASP today,  this program is evolving and there are steps you should take now:

-    You should know what your credit looks like, the operative word being "know" vs. “having a good idea”.  I can assist you with this in two ways.

• First, is to provide you with a tri-merged credit report.  This report will accomplish two things for you.  a) You will see your credit exactly as a lender will see it including all three credit scores (6 scores if you are married).  This cannot be accomplished through ANY of the "free" credit report services.  This can only be accomplished through a tri-merged credit report provided to you by a lender.  b) You will effectively "freeze" your credit profile for 90 days.  There is No Charge for this service.  You do, however, need to be serious about applying for this program and provide the required income and asset documentation as requested.

• Second, if you do want a more definitive review of your credit and assistance in protecting your identity then consider enrolling in the CreditKey Plus! instead.  CreditKey Plus! is not part of the HASP, nor is it a requirement.  You can find more information about CreditKey Plus! on my web site www.CreditKeyPlus.com

I trust you found this information informative and helpful.  Please, pass it along to a friend, relative or associate.  Remember, knowledge is not power, taking action with your knowledge is!

It’s a good life!

Starting March 1st, 2009 Fannie Mae plans to allow real estate investors to finance up to 10 properties, easing their currently restrictive 4 loan policy.

This is great news for real estate investors who have been forced to the sidelines over the past six months watching both mortgage rates and real estate prices decline, while unable to participate in this historic opportunity.

Mortgage rates are at post 1929 Depression lows.  Home values are priced at or below their 2004 values.  Rent rates have been fairly stable.  Put the three of these together and it spells OPPORTUNITY any way you look at it.  The problem up until now, however, has been that even the most qualified borrowers, borrowers with good income, credit and cash reserves, have been locked out of the market due to their inability to obtain financing.

If you think about the utter stupidity of this, meaning at a time when our Government is looking for ways to put floor under falling home values, they (remember our Government now owns both Fannie and Freddie) are disallowing some of the most qualified home buyers from borrowing and helping to absorb the surplus of available homes.  Clearly, the pendulum has swung way to far in the direction of lending conservatism, frankly exacerbating the biggest problem with our housing market today, over supply.

Well, as of March 1st Fannie Mae is getting back into the game.  With some reasonable restrictions, Fannie is once again allowing qualified borrowers to finance up to 10 properties.  With that said, let me make this very simple and very clear….take advantage of this opportunity NOW!  Because in a time of uncertainty the one thing that is 100% certain is that, tomorrow, things will change.

As a result of changes like this, I believe that one of three scenarios will play out.  1) Real estate investors will jump back into the game themselves and start to put a real dent on the oversupply of homes, which will in turn stabilize home values for everyone. 2) Fannie will become overwhelmed with investor loans and turn-off the spigot or at least turn it down, which means that the growing inventory of homes will continue to multiply.  3) Investors will sit on the sidelines either afraid to buy and take advantage of the opportunities surrounding them or, they will wait too long as the bargains in both home values and interest rates disappear.  Clearly, this is a time to take action.

To view the actual announcement from Fannie Mae and read all the details associated with this program please use the following link.

Fannie Mae-Up to 10 Loans 2009 02-06.pdf
http://www.trueshare.com/DirectLink/FileAccess.aspx?DLID=gFWY00XpWm4nC45Xo6N0

If you would like more information about investment real estate, real estate financing or how to integrate real estate strategies into your retirement planning, please email randy@ReBiz.com

It’s a good life!

Randall A Luebke RMA, RFC

1200 Newport Center Dr, Ste 250

Newport Beach, CA 92660

(P) 949-224-4240

(F) 866-639-6889

(E) Randy@Rebiz.com

Missed Fortune, written by author Douglas Andrew, spread like wild-fire to the financial advisors, who wanted to implement his strategies to sell more life insurance, and to mortgage professionals (like me) who wanted to provide mortgages to fund that life insurance.

The question remains, was or is the “Missed Fortune” strategy in the best interest of the consumer or is it in the best interest of the financial services salesperson?

The answer is, as is almost always the case, it depends!

 Below is a link to an interview on the topic with the President of Platinum Properties International, Jason Hartman.  Please take a few minutes to listen to our discussion to help you form your opinion.

If you want more information on this topic please contact me by email with the words “Missed Fortune” in the subject line and I will send you a report called “The 8 Myths of Missed Fortune”.  Seen your email request to: Info@Rebiz.com

 
Click To Play

The reverse mortgage is starting to become a mainstay in the world of financial planning.  Why?  Simple, because many seniors never expected to live as long into their retirement as they have been blessed to do.  Those seniors (as well as their “financial advisors”) never really contemplated the effects of inflation on their income.  As a result, the reverse mortgage becomes a life-line for many seniors who followed the adage, “pay off your mortgage before you go into retirement”. That said, equity is over rated you know.

- You can’t pay your bills with it.

- You can’t even put it in your gas tank!

- Yet, iinflation and market forces eat away at its value each and every day.

The fact is that equity is trapped in your home and the only way to free up your equity is to sell or refinance your property.  The reverse mortgage frees up the equity in real estate to provide needed cash and cash-flow to seniors who, fortunately, own a home.  But, a reverse mortgage is loan.

- What if you really didn’t want a loan?

- What if you really didn’t necessarily need cash, but you owned a significant amount of real estate with a significant amount of equity?

- What if you had an estate tax problem?

- What if you could convert the equity in your real estate into debt free cash?

Now we have another alternative, EquityKey.  As the name implies, EquityKey is “the” key to unlocking equity in real estate.  Unlike a reverse mortgage, EquityKey is not even a loan?  EquityKey provides seniors with DEBT FREE cash.

Why?  EquityKey believes that real estate will appreciate over time.  EquityKey is willing to pay the senior for that “future appreciation”.  That’s right.  EquityKey pays the senior today for a stake in the future appreciation of their real estate and 100% of the current equity remains with the home owner.

EquityKey is flexible, available for not only your residence, but also for your rental property, your vacation home, your commercial property EVEN RAW land! 

What could you do with DEBT FREE CASH?

Below is a link to an interview with the President of Platinum Real Estate Investments, Jason Hartman and myself.  Please listen to our talk and post your comments to this blog.

It’s a good life!

Randy

Click To Play

The “State” of Money, Credit and Finance in Our World Today 

September 20, 2008 

www.MoneyNation.org

It’s a good life!

Randall A Luebke RMA, RFC

1200 Newport Center Dr., Ste 250

Newport Beach, CA 92660

Phone 949-224-4240    

Fax 866-638-6889

Email Randy@Rebiz.com

Loan Applications and Mortgage Information Available 24/7 Online!

www.LockMeNow.com

Most people view their home as an asset and their mortgage as a liability.  Ironically, it’s the other way around!!

Your home is a liability that costs you substantial amounts of money each and every month.  Your mortgage, however, when used as a financial tool, can make you money, increase your safety and reduce the taxes you pay.  If you want to win at the game of money credit and finance, stop doing what banks want.  Start doing what banks do.  Become your own bank.  Become The Bank of You! 

Click here for more information

www.Rebiz.com

It’s a Better, Smarter, Safer Way!

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International Association of Registered Financial Consultants, Academy of Mortgage Planning, Certified Mortgage Planning Specialists, National Association of Mortgage Brokers, California Association of Mortgage Brokers, Financial Planning Association, Nation Association of Insurance and Financial Advisors, National Association of Tax Professionals