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Will 2008 Be Looked Back On As Worse, Or Much, Much Worse Than 1929? Part II

By Andy Shaw | January 23, 2010

Originally Posted 27th March 2008

Ok, following on from yesterday when I said, ’so what does all that mean for us on the other end of the scale borrowing money?’

If you are active in the mortgage market at the moment then you can’t help but notice how the mortgage rates are being pulled seemingly every five minutes. Which means every time I try and post some info the damn stuff is already out of date!

Well, what happened to the Feds change in criteria could mean that we get a trickle down effect as the banks can now start lending again in America (this is still to be seen, but the foundations have been laid). If confidence returns to the market and trust goes back into the balance sheets of the lenders then this could happen.

The trouble,  however, is that no one trusts each other’s balance sheets, because there are still so many sub-prime losses to be accounted for. A few weeks ago a hedge fund collapsed. As my regular readers will know I’ve been predicting this for a while now. Well this particular hedge fund was extremely conservative. It lent money only to America’s richest borrowers for mortgages on large homes. I.e. they just lent to the top 2-3% of the American market; it doesn’t get much more prime lending than that.

Their mandate, if you like, was to only lend to A credit ratings and above. As with any mortgages there are always under-performing loans (that’s only because they haven’t figured out how to get round this bit yet :-) )  so their security dropped its rating from triple AAA (the best) to something below A, which meant they had to sell because of their mandate – the principles by which the hedge fund was set up and acquired cash – This is the principle reason why I believe this crunch is constructed, because of this rule which effectively states that you know an opponent has to give in if you force him below a certain level of play. Then all there is to do is have enough control of the game (i.e. big enough) to force play below that level, and then it’s easy to pick your opponents/competitors off.

Well of course when they went to sell their MBS there were no buyers for their otherwise exceptionally strong portfolio. So in a market where there are no buyers they had to reclassify the asset value which, of course, on their balance sheet made them insolvent and so a domino falls (Granny just went bankrupt in monopoly, she had good property assets, several hotels, and if someone had just landed on them then she could’ve handled this short term cashflow problem, but she couldn’t handle it right now, and in business right now is what counts).

Well if a hedge fund with that level of security can fall in a market what do you think can happen to the ones that have pushed the envelope?

Sorry, back to the point, but do you see what I mean about so much going on at the moment, which bits are relevant? If a hedge fund fell when this wasn’t all going on then that would be pretty big news, today it doesn’t even get mentioned by the mainstream media.

You probably haven’t missed the fact that at the moment when the banks lower interest rates, then the mortgage lenders seem to be hardening their criteria and even raising interest rates. This is because the Bank of England’s primary market mover has little effect in a liquidity crisis (as all of the central banks are beginning to see). So the BOE are effectively stuffed, they want to lower rates to stimulate the economy, but their mandate for inflation is at 2%. So Mervyn seems to have finally talked Gordon into letting inflation go up to help the economy out but at a time when the banks don’t want to lend.

The only thing that will have a real effect right now is clear direction from the BOE and Gordon Brown (not easy from one of the world’s greatest ditherers :-) ) which means we need good management right now. Despite my thoughts towards Mervyn King I think he has the intelligence to do it. Unfortunately, the person pulling his strings is a moron and I can’t predict what the moron will not do next!

Here’s what they should do to resolve the problem now, but that doesn’t mean it’s good for the long term as I haven’t properly considered that. The BOE, our central bank, needs to lower their lending criteria to the banks and provide a safe home for their mortgage backed securities. If they do this effectively then banks can borrow again and confidence should/will return to the market.

Then what will need to happen is exactly as the Fed has done: slash interest rates. At least stimulate the economy for a couple of years before reigning in inflation. So will they do it? On the interest rate front, I doubt it. In my opinion they will go some way towards the reduced security, but I doubt they will go far enough to prevent it being a really long and drawn out painful experience for us all. As they only want to give 50% of what is needed, they are believers in the budge an inch and they’ll take a mile example.

I think, however, they will take a wait and see policy. I do think they will cut interest rates again this month, but unless they take other action then this will have little effect. They will wait and see what happens to the Americans and then decide what it’s best to do. Of course this fiddling whilst our economy burns can only be done for so long and if we do end up in a recession, or worse, it will be because of inaction by our central bank, the Bank of England.

Moving on to how to profit and obtain opportunity from this, it’s easy. I had a meeting with our acquisitions department last week, were they were all doom and gloom. So I said to them, ‘what’s the problem?’  I said that we are up to date with the no. of purchases required, we are buying cheaper now than we were 6 months ago, and we are still achieving the values we want and actually pushing them higher. ‘So why are you depressed? Frankly we’ve never had it so good with the exception of mortgage lenders.’ They said ‘yes, but we are getting worried.’ And when I asked why, they said because of the feeling that was in the market?? What happened is that they had let the media get to them, so I picked them up again and showed them the right direction to head in.

And I said, ‘Well let’s use that to buy even better than we are now; let’s use the next two weeks to ’scaremonger’ the Estate Agents into believing that life as we know it is over and not buy much property, if any!’ I then told them all of what I’ve given you above in this article and told them to go out and share this ‘doom and gloom’ with the estate agents and while they are there put really low offers in on property. Then just when they are about to leave they are restating our benefits as buyers, saying this to them:

”We will do the deal at that price, it may not be to your vendors liking, but we will complete at that price – you know our track record for completing; can the same be said for other potential purchasers? So if something else occurs like another Bear Stearns in the time between us agreeing to buy and exchanging, then your vendor knows we will complete. Can the same be said for any other buyers, especially first time buyers in today’s market? Will your vendor want to come back to us in 12 weeks time when they have lost their first time buyer: Do they think we will still offer what we have offered today?

”I suggest your vendor takes our offer while it’s on the table, as if another event happens then he may look back at this offer we have made now as the offer he should have taken. And we will not hesitate for a second to reduce our offer if the market indicates a further slow-down. Our offer today is based on where we see the market being- given what is currently happening. If it changes then our offer doesn’t stand and we may only be willing to pay less as the market has fallen further.

”We are the best buyer for their property as you well know, and if all they have to do is accept that by taking a little lower price, then they are effectively insuring that they have a sale and their lives can move on past this point. I’m sure you agree?” (Get the agent agreeing with you and saying yes – it really does get them on your side)

What I was doing was first getting the guys to say how bad the market is because most Estate Agents will not even consider that Bear Stearns has any bearing on their lives – as most other people think too (ignorance really is bliss).

Then after the chit-chat when the agent was feeling pretty depressed then they’d look at properties with them, passing comments like, ‘there’s not many people coming into the shop at the moment’, or, ‘don’t the phones ever ring in here?’ Then I’d get them to re-justify why that price is unacceptable in today’s market as there are no first time buyers worth having and doesn’t the vendor realise what the market is like at the moment. Then they would deliver their blow justifying it every step of the way. Then again they state their benefits as a buyer; quick completion, actually going to happen etc. Then just as they get up to leave they restate their benefits as a buyer and get the agent to agree with them.

What they are doing is attacking the Estate Agent from every possible angle so that they are beaten – men are easier to beat than women in these cases – I could go into the reasons why, but I’d be accused of being sexist (whereas I am just emotionless and using other people’s emotions to win the better end of the deal) and I don’t want to detract from the message.

When they leave the agent knows that they have more chance of making the sale and collecting a bonus payment with us than with any other prospect. All they have to do now is sell the vendor using some of the info we have provided to them for free in our chit-chat.

The biggest problem for us all right now is the mortgage lenders. As I have said before, I don’t find a property that works and then go and find a mortgage. No, first I find the mortgage and then I go and find a property deal that fits it. Believe me, this is usually a somewhat easier way to do things. However, at the moment with criteria and policy changing all the time, this is really going from easy to fairly tricky to almost downright difficult.

We have already lost the instant refinance capability with most deals because Mortgage Express has effectively pulled out of the main market by hardening their criteria. They are probably the only lender that allows an instant refinance with ease. What I am hoping is that MX’s owner is just slowing the lender down as they have too much of the market, or they are restricting lending in their last few months of their financial year. What I am hoping is that they will start to lend again in April as they are very liquid. What has happened to them is that they have effectively made themselves the only lender in the market worth going to for the new borrowers and experienced active property investors.

Long term players don’t use MX as much as their arrangement fees are too high and they don’t need as high loan to value ratios. But the real surge came from the more high risk element so I think that is why MX took themselves out very quickly.

So we are now left with the fact that we are tying up money for 6 months or going for other exotic deals similar to daylight bridges, which are not mainstream and therefore tricky to get to work. In my opinion tying up money for 6 months for a certain outcome is better than spending 6 months trying to get one of those deals to work and ending up with zip.

So what the changes that have happened in the last 8 weeks really mean for us is that the financial commitment has gone from 2–4 months to 6–8 months. This will slow things down a bit, but in today’s market I don’t think that this is necessarily such a bad thing.

The message is to educate the Estate Agents, offer lower prices, and be prepared to walk away as you are not surrounded by buyers. Today is a buyers’ market, so present this fact especially well. Frankly, I have never been able to buy property with so much value already locked in ever before!

Best wishes


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