Mortgage Fraud Still Going Strong And Taxpayers Will Get The Bill

Last Friday the Orange County Register published an article that uncovered the details of a recent real estate transaction which was blatant mortgage fraud and will likely be left on taxpayer’s plates. Reading this article just made me shake my head because it is apparent that banks have learned nothing from the mortgage mess we are in today. If you haven’t read the article I suggest you do so, but I will attempt to summarize it below.

An investor purchased the home on Camile St. in Santa Ana at a foreclosure auction for $304,500, about half of what the home had sold for in 2006. This investor then fixed the home up and flipped it to a Hispanic family for $625,000. On a street where homes are selling in the mid $300,000s, this sales price should be an immediate red flag. However, Wells Fargo which issued a $500,000 loan on the property, didn’t bother looking deeper into the deal. The investor sold the home as a for sale by owner and had a plan in place where he could offer a potential home buyer 100 percent financing, even though that is all but unheard of right now. As part of the sale, the seller paid the $125,000 down payment for the buyer, but that’s not all. The seller also agreed to pay the buyer $30,000 in cash, pay the first 3 months of the mortgage and buy them a 52-inch LCD TV. So the real sales price was around $460,000 once the seller concessions are taken into account.

The author of this article went so far as to call up the mortgage broker, escrow officer, appraiser and even Wells Fargo to get their reaction to the deal; it's no surprise, though, that they all brushed it off, saying the details weren’t their business and that it was between the buyer and seller. Wells Fargo declined to commit on this loan in particular because of privacy issues, but beyond that, the best they could come up with was that they have tightened their lending standards. I don’t know about you, but if this is their idea of tightened lending standards, then they have some problems. I sure hope that Wells Fargo uses this information to take some action against this sort of practice, but I’m not holding my breath.

It gets better though, the Hispanic couple who bought the home claim they were lied to. They said that they were told they were buying the home for $500,000 and that they were going to get 100 percent financing. They didn’t know about the $625,000 sales price till the end when they signed the papers. Translation: Either this couple didn’t bother to read the purchase and sale agreement when they signed it, or else they are lying in order to protect themselves now that this information is on the public radar. My take is it is probably option #2. This couple already owns another home on the same street, so this is not their first time buying a property. In addition, they admitted to noticing the price at closing, but agreed to sign anyway. I think an honest person would have questioned that then and there.

If you ask me, these buyers were in on the deal, along with the seller, mortgage broker, appraiser and escrow officer. They were wooed by the prospects of $30,000 in cash. All they had to do was sacrifice their credit. The investor would pay the mortgage for 3 months, taking away the chance of the bank red flagging the deal for further investigation if the loan goes non-performing right away. After that, the buyers don’t even need to bother paying the mortgage, they can just let it fall back into foreclosure and get lost in the crowd. After all, Camile St. is already a foreclosure haven; what's one more?

So the next question is, who is going to be stuck with the final bill when all is said and done? The buyer? The lender? That would be a no and a no. The buyer has nothing at stake in this deal; in fact, they were paid to buy the home. If you thought the lender, you are also mistaken, because guess what? This was likely a conforming loan. That means it is going to be guaranteed by Fannie Mae or Freddie Mac. Thanks to the new housing bill that President Bush signed into law yesterday, taxpayers are likely going to be the ones to take the hit on this one, as well as for other mortgage frauds out there. It is disheartening to see that obvious cases of mortgage fraud are still occurring. But now that we as taxpayers are ultimately responsible for the bill, this just makes me mad.

Housing Bill Signed By Bush; Now What?

President Bush signed the housing bill this morning, so the biggest housing legislation in decades is now officially on the books. The bill finally came together when opposing sides were able to agree that the bill as is was better than nothing. Republicans got their Fannie Mae and Freddie Mac support and Democrats got their foreclosure bailout. Neither side is 100 percent happy, but then, when does that ever happen in politics? So now that this housing bill is official, what happens? Can we expect to see dramatic changes in the housing market for the better now? Well, not exactly…

It is no secret how I feel about the housing bill, and if you aren’t familiar with my blog, read this prior post on the housing bill to get caught up. There are also officials who share my same discontent for the bill. According to BusinessWeek, a top official in the Bush administration admitted that this housing bill will probably help fewer people than the previous expansion of the FHA. This new housing bill is estimated to help around 400,000 people, compared to the previous FHA bill, which was slated to assist 500,000. This news, of course, made me even more upset because the FHA bill certainly didn’t live up to its billing (see previous post about FHA Secure loans). It turned out that many of the people the FHA bill helped were people who really didn’t even need the help, but instead elected to take a nice little government (read: taxpayer) subsidy for their mortgage. So if this new housing bill is going to help even fewer people, and cost us more, then pardon me if I don’t exude excitement.

I’m not sure of the exact cost of the bill, and to be honest, no one does. It ultimately depends on how many insured loans go bad and whether or not Fannie and Freddie will need the assistance that we are now offering. Estimates from the Congressional Budget Office put the price tag on the Fannie and Freddie package as high as $25 billion. As far as how many of the $300 billion in new FHA loans will go bad, your guess is as good as mine, but I’d assume it will cost us a few billion. In addition, there is a $3.9 billion foreclosure bailout provision included, along with a tax credit for first time homebuyers. I don’t know about you, but all the uncertainty of potential costs is a little scary to me. Sure, officials have made estimates, but those are just that: estimates. This is the equivalent of dropping your car off at the repair shop and getting a repair quote of between $500 and $10,000, but in order to get the repairs done, you have to agree to pay the final tab, regardless of where it might end up. I guess when you have debt approaching $10 trillion, what’s a few billion more?

Housing Inventory Finally Heading In Right Direction

People looking for a glimmer of hope that declines in housing prices might someday drop can now revel in the fact that housing inventory is finally beginning to shrink. While this certainly does not mean we are out of the woods yet, it is a positive sign that thing are starting to head in the right direction. One of the reasons prices fell so much was because there was too much supply; the quicker the supply goes down, the sooner we can expect a balance between supply and demand and find that equilibrium for housing prices.

I’m not going to predict when the housing market will begin to turn around, or prophesy the date people need to start buying homes, but I do know that until the supply falls (and by a lot), we will continue to see declines in housing prices. Demand is being squeezed by several factors, including tightened lending standards, consumer fear and the fact that people are stuck in their homes (or they owe more on them than they are worth and can’t sell them because they don’t have the cash to pay off the balance). There are still people ready and willing to buy homes, but that number pales in comparison to the supply, and as long as there are a lot of options, buyers are going to be demanding of sellers and prices should be expected to drop.

The Wall Street Journal just published a helpful chart that covers most of the large metro areas across the country. It shows the change in the market’s housing stock along with how many months' supply is available and even the employment outlook for the area. Obviously areas seeing increased employment can expect a stronger and faster recovery, as new jobs will increase demand for housing. According to the numbers on their chart, one market I would be concerned about is Portland, Oregon. They have seen a huge increase in inventory (27.8 percent)and have almost a 10-month supply of housing, but only average job growth.

The drop in supply that we have seen thus far is really pretty minor, but it marks the start of the process that needs to take place in order for a recovery to occur. As long as the supply continues to shrink, and demand doesn’t shrink with it, we should slowly start to see signs of recovery in the housing market. Keep in mind, though, that it is going to take a while; as for how long it will take, your guess is as good as mine.

Judges Denying Foreclosures, But What’s The Point?

We’ve seen politicians proclaim the injustices of foreclosures, and now judges seem to be rallying around those ideas as well. The housing crisis has created two camps: one side which supports the homeowners, saying they were manipulated by the greedy lenders, and the other side which supports the lenders and their resolve to make a profit. The most popular side has obviously been the one supporting the homeowners; after all, it is much easier to feel for a family losing their home than a big multinational bank losing some money. Judges, though, are supposed to be impartial regardless of any personal feelings they may have.

The Wall Street Journal recently published an article about how a few judges from across the country have taken up the fight against foreclosures. They recount several cases where the judges seemingly go above and beyond in order to deny foreclosures. Here is one example as written in the article: “In June, the judge dismissed with prejudice two cases filed by a unit of Wells Fargo & Co. By doing online public-records research himself, the judge found that Wells Fargo didn't own the two loans, and his dismissals mean that even if Wells Fargo eventually obtained legal ownership, it could take up to another year to obtain foreclosure.” Wells Fargo said that they were acting as the trustee for a loan securitization trust which holds the mortgage, an arrangement which is pretty standard in the industry. This judge definitely went above and beyond in order to find a loophole which he could use to stop the foreclosure. And now, thanks to this judge, the homeowner gets to live in the home for another year on Wells Fargo’s dime. What the judge was trying to accomplish other than allowing the homeowner to mooch off the system for a while longer is not certain.

Wall Street Journal’s law blog author Amir Efrati tells another story of a judge named Arthur M. Schack. “In one of his foreclosure dismissals, Schack (Indiana, NYU Law) cited the film 'It’s a Wonderful Life' to make the point that homeowners now deal with 'large financial organizations, national and international in scope, motivated primarily by their interest in maximizing profit, and not necessarily by helping people.'” My question is, how does the fact the bank is trying to maximize profits have anything at all to do with the case? These major banks are all publicly traded and their main responsibility is to their shareholders and turning a profit, not helping people. I think Mr. Schack might be confusing these publicly traded banks with non-profit microfinance institutions.

Don’t get me wrong--I feel horrible that these people are losing their homes and having to go through the misery of foreclosure, but at the same time, I know that milking the financial system is not for the greater good. These judges can try all they want to delay the inevitable, but in the end these people are going to lose their homes. That’s the normal course of action when someone stops paying their mortgage payment. All that they are doing now is making life miserable for lenders and costing them more money in legal fees and lost interest. In case you didn’t guess it already, we can bet that those increased costs are going to find their way back to borrowers one way or another. So because these judges are making a stand and helping a few people, all the other borrowers out there can expect to pay the price. This isn’t exactly my idea of justice.

Still Waiting For The Bottom In Housing Prices

Every time we hear bad news about the housing market someone out there says this is now the bottom, and that housing prices are only going to get better from here. At least so far, those predictions have proven to be poor. This week there have been several new reports issued detailing the turmoil the housing market is in, and it does not look pretty.

CNN Money even created a special report section called the “Mortgage Meltdown.” In this section they highlight the various gloomy reports that have recently come out. These include: “Foreclosure Filings up 120%,” “2.2 million vacant homes for sale” and “Home sales at 10 year low.” Those headlines pretty much sum things up; foreclosures are mounting, there are a ton of homes on the market and no one is buying them.

Ultimately homeowners and investors alike shouldn’t concern themselves with trying to time the market bottom. Trying to time such things is an inexact science, and if you are banking on timing the market in order to secure the quality of your investment, then chances are you shouldn’t be making the investment.

It appears that the government is going to pass the huge housing bill soon, and many politicians, at least, believe that it will be just what the doctor ordered for the housing market--that it will right all the problems. I’m not sure if they are completely oblivious to the problems, or if they are just putting on a show to appease their constituents, but it will hardly fix the problems of the housing market. That being said, there are going to be a lot of people calling the market bottom now--the news is bad and there is favorable legislation on its way. Don’t fall for these soothsayers' words, though; they are merely guessing, nothing more and nothing less. Anyone who says they know for sure is lying. If you are looking for a home to live in, you have to live somewhere right? If you are looking for an investment home, that’s okay too, but just don’t plan on appreciation, make sure the numbers work regardless of which direction the market goes. Don’t get caught up in market predictions: Use your own brain and do what is best for you and your family.

San Diego: Foreclosure Sanctuary Or Lender Hell?

In the latest attempt at the city level to curb foreclosures, San Diego city attorney Michael Aguirre filed suit yesterday against Bank of America and Countrywide, and is planning to file similar suits against Washington Mutual, Wachovia and Wells Fargo, to prevent the lenders from foreclosing on homes in the city, according to Reuters. “We would like to see San Diego become a foreclosure sanctuary,” Reuters quoted Aguirre as saying. This of course begs the question of whether San Diego will turn into a “foreclosure sanctuary” or a lender hell.

Aguirre’s intentions may be good at heart, but how can you justify something like this? Telling a business that they cannot collect on debts owed to them is ludicrous. Here are a couple quotes from Aguirre that appeared in the Reuters article that speak to his reasoning:

"The Countrywide executives who originated these subprime loans were engaged in a massive fraud on homeowners, borrowers and investors. They enriched themselves by over $1 billion."

"We have the big stick of being found in violation of the law and the carrot of taking something that is a nonperforming asset, that all these houses are, and making it a performing asset by keeping the families in it."

Sure, some Countrywide executives may have cut some corners and performed some questionable acts, but surely he doesn’t think that all the executives at all those major banks did the same thing? Furthermore, the Reuters article states that Aguirre's lawsuit, brought in the name of the people of California, names four current and former Countrywide officers, including former CEO Angelo Mozilo, and alleges they personally profited from selling shares of the lender's stock while knowing its subprime loans did not comply with company policies. My question is, what does this have to with the homeowners in foreclosure? This sounds like an issue between Countrywide, the aforementioned executives and the investors. As long as homeowners were getting the loans they thought they were getting, this has little to do with them. If a bank wants to break their own rules in order to fund some loans, that is their prerogative. They were not breaking federal or local laws with these loans, but company rules and guidelines.

The bigger issue here is if Aguirre is successful in his suit, and with the information I have seen I can’t imagine he will be, how will banks react to future mortgage lending in the city? If a bank knows that they are going to have to put up with people like Aguirre, who strongly favor homeowners over businesses, is it really worth the trouble to even lend in the city? I know if I were a bank in this situation, I would wash my hands of San Diego and focus my efforts elsewhere. If the city is telling me I can’t go after debtors who don’t pay me back, then I would have to think long and hard before I lent there.

Housing Bill Set To Pass: Bush Drops Veto Threat

It appears that the proposed housing bill has all but passed now that the threat of a veto from the White House is gone. It is expected that the bill will easily pass through the House and Senate and then be signed by President Bush within the next week or so. Whether this bill will ultimately help or hinder our economy remains to be seen, but unless you are a bank, chances are this bill probably isn’t too exciting for you.

The main opposition to this bill all along has been that it represents a bailout of lenders and really doesn’t offer homeowners much relief. Now that Fannie Mae and Freddie Mac are on the ropes, Bush was willing to cut a deal and withdraw his veto in order to get a support measure for the two companies through. The following are some of the key components of the bill:

• Fannie and Freddie support (see previous post: Foreclosure Bill and $300 billion Housing Bill could pass thanks to Fannie and Freddie)
• Allow the government to insure up to $300 billion in refinanced mortgages
• $4 billion program for local governments to buy and rehab foreclosure properties
• Regulation changes for Fannie and Freddie ($625,000 loan limit, oversight of top executive compensation)
• Raise national debt limit to $10.6 trillion from $9.8 trillion

Of these, the most controversial one has been the $4 billion foreclosure program for local governments. On several fronts it represents a bailout of lenders, and considering the poor lending decisions they made, it is something that is hard to support. We will have to see how the $300 billion allocated for refinanced mortgages ends up helping, but if it goes anything like the other programs which have been rolled out of late, it is doubtful all that many homeowners truly in need will get assistance. Most likely, we as taxpayers will end up subsidizing the mortgages of a few homeowners who probably would have been okay (though they probably would have gone through some struggles) without our help.

Personally I’m against this bill, and I would have loved nothing more than to see it vetoed by President Bush. Unfortunately, it doesn’t appear like that is going to happen. If you want to know why we should be so opposed to this bill, look no further than the last bill component listed above. Our national debt is about to pass $10 trillion, yet we keep throwing more money at every problem we come across. The Fannie and Freddie rescue plan is probably something that needs to be in place, because if they fail, our economy is doomed for the most part. But we really need to look long and hard at whether these companies should be our long-term solution. I can probably live with bailing them out once, and learning from our mistake. But if they just keep doing what they are doing, what is to stop them from needing another bailout down the line? If we hang out an implied government guarantee then taxpayers are in essence subsidizing the shareholders of these companies. This is a long-term problem that needs to be evaluated and addressed. In the meantime, get ready for the latest attempt to resurrect the housing market. This attempt is bigger than ever, but unfortunately I foresee it falling short just like its predecessors. The housing market needs more than this housing bill to turn around--bottom line, it needs to get more affordable for the masses.

China Olympics: Cost Versus Reward

With China’s Olympic Games coming next month I thought it would be fitting to look at the cost they have paid, and compare that to the potential rewards which come from hosting this prestigious event. There has been a debate for sometime about whether or not hosting the Olympic Games is good or bad for the city’s economy, and this year’s games are no different. Beijing will spend an estimated $42 billion on the Olympic Games, according to the Wall Street Journal, a number that far surpasses any other city’s previous commitment, but will they receive value from this investment?

Sure, $42 billion is a ridiculous number to think about, and on the surface one could say that there was no way the Olympics could generate that much money for a city. However, we must also consider what that $42 billion went towards. A good majority of these funds went towards infrastructure improvements, as well as environmental cleanup. In the rapidly growing economy of China, infrastructure is in high demand, and many of these improvements were badly needed. The bigger question is whether they got a little too extravagant with the improvements, and whether those additional funds could have been put to better use elsewhere. Not all of the improvements have been of the extravagant type, however; in some cases, residential areas now feature streets lined with port-a-potties.

In addition, the almost $10.5 billion spent on environmental cleanup--while not providing immediate economic benefits, per se--is hard to argue with. I’ve heard horror stories about the pollution in Beijing, as I’m sure most people have. In fact, the pollution is so bad that many Olympic athletes will be staying in South Korea or Japan and flying in solely for their events. So the fact that the government is finally trying to clean it up is probably a good thing. Now, if they can just keep the pollution under control once the Games are over, that would be the next step.

On the other hand, some of that $42 billion has seemingly been spent on extravagances and items which will be of little lasting value. For example, there really aren’t any plans for the bird's nest stadium after the Games, and it doesn’t offer protection from Beijing’s harsh winters and hot, rainy summers, according to the Wall Street Journal. If we want to see how the Olympic Games can adversely affect a city’s economy, we need to look no further than Athens. The $15 billion Athens spent readying itself for the last Olympic Games--ranging from building a light rail system to kenneling all the city's stray dogs for the duration of the event--sent the city into debt, and they have yet to recover. In addition, according to Tourism-Review, the Olympic Games don’t always result in increased tourism. They point out that during the Barcelona and Sydney games, for example, while they did see Olympic Games-specific tourism, the regular tourists stayed home. They ended up in the same place, tourism-wise, as they would have been without the games.

Increased tourism to China is unlikely, as the country is making it more difficult to obtain visas to visit the country. Many people who have already purchased tickets to the Olympics will not be able to attend because the country won't allow them in. Further, the city will be shutting down shops and restaurants that are near Olympic venues because they don't want crowds to form. The city is so paranoid about crowds that, on the 11th day of each month, the city's residents practice lining up (this is done on the 11th because the number 11 looks like two people standing in line).

When all is said and done, I think on the books, at least, this spending spree in Beijing will appear to be a loser. I also think that China knows this, but is willing to put up with a loss on paper in order to cement their image across the globe. They want to be seen as a modern world power, and what better stage on which to make this statement than the Olympics? They are being smart with a lot of the budget, putting it towards things such as infrastructure, however at the same time, they are building this infrastructure in a manner that is probably not the best long-term. One example of this is that they build brick buildings quickly and cheaply, then encase them in glass so that they look modern. They are being a tad more extravagant then they really need to be, and the infrastructure they are building is likely being maximized for Olympic venues. China is a growing world power; they know it, and they want the world to know it. The Olympic Games will likely prove this point, and for that, China is willing to waste a few billion dollars.

The World Won’t Let America Fail

An interesting article was published yesterday in the International Herald Tribune titled, “Is America too big to Fail?” In today’s world of globalization, the U.S. has been borrowing hundreds of billions of dollars from foreign countries, and while these countries of course expect to be repaid, it is doubtful that they are ready to take any drastic actions that could jeopardize the U.S. The author made several points about how countries have repeatedly bailed out companies deemed “too big to fail” and believes that the U.S. falls under that same category.

One of the most interesting points made in the article is how the U.S. for years has condemned countries for bailing out companies and interrupting the free market forces, yet the U.S. does the same thing. The most recent example of this is with the legislation that U.S. officials are working on to rescue Freddie Mac and Fannie Mae if needed. The whole point of the free market is that only the strong survive. By allowing the market forces to take their course, weak companies will get weeded out and it will force those remaining to be more diligent about how they are run. If you set the expectation, though, that the government will step in and bail companies out if needed then it allows the companies to be lackadaisical and take undue risks. By supporting companies that should have failed, we are only supporting poor business practices.

The problem is that fear of job loss and economic setbacks proves time and time again to be too much for governments. I’m not sure if that has more to do with the politicians' and other officials' true beliefs for what’s best for their countries, or if they just can’t see past their term in office (feel free to toss in your favorite Alan Greenspan joke here).

This might actually end up working out in our favor, though, considering that foreign governments are begging to make the same arguments in regards to supporting the U.S. China and Japan, for example, which are the two largest debt holders of the U.S. have a lot at stake in regards to the U.S. economy. These countries make a large portion of the goods sold to American consumers, so a slowdown in the American economy could potentially cost them a huge number of jobs and have a drastic effect on their economies. If they continue to buy American debt, though, and finance more buying of their stuff then things go on all nice and rosy--at least in the short term. The question is how long are these countries going to be content allowing the U.S. to buy their goods on credit? When will they finally draw the line? Just as when you bailout a flailing business you have to ask yourself, “what am I ultimately encouraging?” And whether they are actually going to turn things around or you are just going to be faced with bailout after bailout in the future. At what point do you cut your losses and move on? At least in the short term it is unlikely that our foreign creditors are ready to cut the bailout lifeline quite yet. Whether or not that is a good thing, though, for them as well as us, remains to be seen.

Foreclosure Bill And $300 Billion Housing Bill Could Pass, Thanks To Fannie Mae and Freddie Mac

Democrats have been pushing a foreclosure bill that would provide $4 billion to states and cities to repurchase foreclosures and rehabilitate them, along with a more encompassing $300 billion housing bill. Republicans have strongly opposed the bills saying they represent a bailout of lenders, among other things. Now that the White House and Republicans want to get their Fannie Mae and Freddie Mac rescue bill passed ASAP, Democrats are trying to strike a deal.

The Fannie and Freddie rescue plan involves extending the government sponsored entities an unspecified line of credit (basically unlimited), along with establishing the right for the government to step in and buy equity positions in the company if they need to, according to the Wall Street Journal. The Congressional Budget Office estimates the cost of Treasury's proposals to the federal government to be in the tens of billions of dollars, according to the Wall Street Journal. This doesn’t sound so hot to us taxpayers, but if you consider what would happen if we let Fannie and Freddie fail, tens of billions of dollars doesn’t sound too bad. These two companies run the mortgage market, and if they go under, so too does the entire U.S. mortgage industry. It is one of those "you’re damned if you do, damned if you don’t" things.

While Democrats do recognize the importance of Fannie and Freddie, most are reluctant to give the companies a blank check. They want to make adjustments to the proposal, but Republicans want to see this thing done now. This is where politics comes into play: Now the Democrats are trying to push their foreclosure and/or housing bills to be passed in conjunction with the Freddie and Fannie one, and are threatening to hold talks up unless Republicans comply.

Whether or not Republicans give in remains to be seen, but I can’t help to think as a taxpayer that I’m getting the short end of the stick here. So you’re telling me that not only do you want to pass a bill that is going to cost us tens of billions of dollars, but now you want another $4 billion minimum (possibly $300 billion if the full housing bill is included) on top of that to bail out lenders who made dumb choices?

Light At The End Of The Tunnel For Homebuilders?

There is no denying that homebuilders have been battered lately, but it appears that some of them think now is the time to get back in the game. For the past couple years, builders have been dumping land left and right, trying to stay afloat amidst the housing collapse. Buying more land was certainly the furthest thing from their minds. Now several large builders are preparing to buy up several hundred millions of dollars of new land. They are looking at the market and seeing opportunity. It should be noted, though, that not everyone shares that same view.

According to Reuters Lennar spent $162 million on new land in the second quarter and will spend at least $200 million more by the end of the fourth quarter. KB Home is expected to spend $300 million on land and $400 million on land development, according to JP Morgan analyst Michael Rehaut, as reported by Reuters. In addition, Hovnanian and Meritage are also working on large land purchases, according to Reuters.

In a new development, private equity funds are now teaming up with homebuilders to capitalize on some of these perceived opportunities. The private equity funds provide the money and the homebuilders step in with their expertise in the industry. The areas that are mainly being targeted are the same ones which saw the biggest hits from the housing crash. This of course begs the question of whether this is a smart move on the part of the companies, or whether they are just digging themselves a bigger hole. Thanks to the huge value losses these companies experienced during the downturn they don’t have nearly as much room for failure, but they seem ready and willing to take on this new risk.

The following are some views from industry analysts, as presented by Reuters:

“’No one should be buying land just yet,’ Raymond James analyst Buck Horne said. ‘They should be building cash until the full extent of the available land supply is revealed.’”

“Yet buying remains risky as long as the slump lasts. Even new assets bought at attractive prices might lose value, Rehaut pointed out in regards to Lennar's and KB's land buys.

The bottom line is land purchases could compromise the very cash generation efforts companies touted as downturn survival strategies.”

“A 50 percent cut in land spending was key to their meeting cash generation goals in 2007, according to Rehaut. But many large builders will be spending in the range of $500 million to $1 billion on land this year, jeopardizing those goals.”

On the other hand:

“In theory, buying land now is a smart move, said Todd Lowenstein of HighMark Value Momentum Fund, which owns 187,000 shares of Pulte Homes Inc.

"You have to be a predator in these down markets to position yourself for the upturn," he said.

“…builders need some land to maintain their presence in key markets,” JP Morgan's Rehaut said.

It is hard to say whether these land buys will turn out to be a wise move or not, but I think it says a lot, considering the circumstances, that these companies feel now is a good time to get back into the market. I don’t know that I’d have the stomach to buy up the amount of land that they are, however, I can certainly see the potential opportunity. My personal view is that the real estate market is going to start to flatten out. I don’t think that we are done falling quite yet, but the declines are slowing and probably sometime next year, they should start to flatten out. Give it another year or so after that and we should start seeing some moderate gains again. Considering the uncertainty in the markets, though, there might never be a better time to buy than right now. Most of these properties they are getting straight from lenders, so I’m sure they are getting some pretty good deals. There are a lot of uncertainties right now: what about a Freddie and Fannie bailout? Will the market continue to fall? Is anyone even going to be able to get a mortgage? These are all questions that no one really knows the answer to, and any one of them could ruin these homebuilders' plans.

New Mortgage Regulations Come Just A Tad Late

The Fed approved some new measures Monday meant to crack down on what they deem to be deceptive lending practices. Because most of these problems have already worked themselves out, thanks to the whole credit crisis thing going on, these measures likely will have little impact. But just for fun, let’s take a look at what the changes are.

The following summary was collected from the San Francisco Chronicle:

Rules for all mortgages

- Prohibit creditors and mortgage brokers from coercing appraisers into misstating a home's value.

- Require additional information about rates, monthly payments and other loan features in all advertising.

- Ban seven deceptive or misleading advertising practices, including calling a rate or payment "fixed" when it can change.

New lending rules

- Force lenders to consider a borrower's ability to repay loans from income and assets other than the home's value.

- Require lenders to document a borrower's income and assets.

- Ban penalties for borrowers who pay off loans early if the payment can change in the first four years. In certain cases, a prepayment penalty period can't exceed two years.

- Mandate that creditors ensure certain borrowers set aside money to pay for property taxes and insurance by establishing escrow accounts.

The “new” rules for all mortgages are welcome additions, I guess, and really should be no brainers. I’m pretty sure coercing appraisers into misstating home value was already a no-no, but now it is “official,” for whatever that’s worth.

The new subprime lending rules are, for the most part, already being followed. At this point in time a borrower is going to be hard-pressed to get a loan if they can’t document their income (unless they are putting down a large down payment). Also, on almost all loans now--and in recent memory--lenders have required escrow accounts to pay for taxes and insurance. Since this was the norm even during the subprime heyday, I’m not sure exactly what they were trying to accomplish, but I guess we can now use that “official” word again. The biggest change that I can see is with the pre-payment penalties. In the past, having a two year pre-payment penalty was pretty much the norm, and borrowers who wanted to get that waived had to buy it off. From the lender's perspective it made complete sense: They wanted to ensure that they were able to make at least X dollars on the loan even if the borrower sold the house the next day. This is one that I think could backfire for borrowers. Now that lenders are not going to be able to add a pre-payment penalty, they are going to make the loan more expensive because they have to ensure that they are able to make their profit no matter what the borrowing time frame. So we can expect that buy-down pricing will now be included in every loan--whether the borrower wants it or not. The borrower who knows that they are going to be in the property for at least two years will now have to pay a little more on their loan. I think a better solution might have been to make the pre-payment penalty opt in rather than opt out--that way people who do want it can still have it.

All in all, I think these new regulations were more for show than for function. The government needed to appear like they were trying to do something about the problem, so they put together a list of things that look good on paper, but in practice are pretty much useless.

So What Happens Now With IndyMac?

Yesterday I wrote about the failure of IndyMac bank and how it was seized by federal regulators on Friday, but I didn’t cover the “what’s next?” aspect. There are a couple of things in particular that investors who have IndyMac loans need to know, and for those without IndyMac loans it is still good information to understand in case you deal with other bank failures in the future.

Some of the most important things that could be impacted by IndyMac’s failure are construction loans. For those who are not familiar with construction loans, typically banks pay out the loans based on certain milestones. So, after a builder gets the foundation done, they receive a payment which covers the expenses until the next milestone, and so on. Well, now all the builders who rely on these distributions to fund the construction of their homes might have some problems. Because the FDIC (who now controls IndyMac) has certain protections, they are able get out of these loans if they so choose.

One developer’s concern was captured in The Wall Street Journal: "’I don't know what's going to happen,’ says Raymond Pacini, chief executive of Hearthside Homes, a small builder based in Irvine, Calif., that has two loans totaling $34 million from IndyMac. ‘We are just waiting for the dust to settle.’” According to the same article, a FDIC representative was quoted as saying the FDIC was prepared to do a case-by-case review of the construction loans. So, if you are a developer with an IndyMac loan, you had better cross your fingers and hope for the best. But if I were you, I would start looking for a backup plan just in case.

Another interesting development, which is not necessarily part of a typical FDIC bank seizure, is that the new IndyMac is putting all foreclosures on hold. The FDIC chairman Sheila Bair has been one of the most outspoken parties about how banks should cut borrowers some slack and really try to work things out before proceeding to foreclosure. Now that the FDIC has taken control of one of the biggest mortgage lenders in the country, Bair has a chance to test out some of her ideas and seems ready to do so. They didn’t specify whether or not they were willing to work out deals with investors who have bad loans with them but, chances are, if you were ever going to be able to cut a deal now is the time. The FDIC is actively trying to sell off IndyMac’s assets and it is very likely that the purchasing party will not be as friendly as Bair wants IndyMac to be.

Lastly, it appears that the FDIC is prepared to let depositors withdraw up to 50 percent of their uninsured deposits at this time according to the Wall Street Journal. This is probably a welcome surprise to most depositors, given the circumstances. The FDIC is hoping that the balance of those deposits will be covered eventually, but that is not guaranteed.

IndyMac Bank Failure: The Latest Casualty Of The Subprime Fallout

On Friday federal regulators seized IndyMac Bank, making it the third largest bank failure in U.S. history according to the Wall Street Journal. The largest bank failure in U.S. history was the $40 billion failure of Continental Illinois Bank & Trust Co. back in 1984. IndyMac Bank held about $32 billion in assets, and it is estimated that the failure will cost the Federal Deposit Insurance Corp. (FDIC) between $4 and $8 billion, amounting to around 10 percent of the fund’s total reserves according to the Wall Street Journal.

If you were to ask why the bank failed you might get various answers, but here is what a couple key players had to say as reported by the Wall Street Journal:

“The director of the Office of Thrift Supervision, John Reich, blamed IndyMac's failure on comments made in late June by Sen. Charles Schumer (D., N.Y.), who sent a letter to the regulator raising concerns about the bank's solvency. In the following 11 days, spooked depositors withdrew a total of $1.3 billion. Mr. Reich said Sen. Schumer gave the bank a ‘heart attack.’”

Schumer responded by saying, “’If OTS had done its job as regulator and not let IndyMac's poor and loose lending practices continue, we wouldn't be where we are today,’ Sen. Schumer said. ‘Instead of pointing false fingers of blame, OTS should start doing its job to prevent future IndyMacs.’”

Personally, I prefer the idea that the bank is reaping the rewards of all the dumb loans they made. How can one possibly justify making high LTV loans to people without verifying their income? Do you think people might stretch the truth a bit if they know you aren’t going to double-check their numbers? Duh. If they actually had proof of their income, then they wouldn’t even need to come to IndyMac: They could get a better loan somewhere else.

The question now looms of whether IndyMac is just one more in a line of many banks which are to fail, or if the carnage is done. If the outlooks of banking regulators are any indication, it is worth noting that they are hiring more examiners and prepared to take a tougher line towards risky banks according to the Wall Street Journal.

I don’t believe that IndyMac will be the last bank to fall at the hands of the subprime crisis, but they very well may be the largest. If you start dealing with anything much larger than IndyMac, the government would likely get more involved in fixing problems before it came to this. I said it after the NetBank failure, and I’ll say it again: If you are depositing money in a bank right now, then make sure that it is an FDIC insured account. Not all deposit accounts are FDIC insured, and the insurance only covers the first $100,000 (and $250,000 for retirement accounts). About 10,000 depositors of IndyMac, with deposits of approximately $1 billion, learned that lesson the hard way, and may receive little if anything. If you have more than $100,000 sitting in a smaller bank deposit account, I would suggest transferring the excess over $100,000 to either a very large bank, or several insured accounts at different banks. Really though if you are going to put your money at risk, you might as well invest it in something that will return a little more than deposit accounts do.

A Closer Look At Inflation

Inflation certainly has been on the rise of late, but a closer look at Inflation might reveal some things that are lost in the hype. If we actually look at what is driving inflation right now, the resounding culprit is commodities. From food to construction materials--and, of course, oil--commodities are seeing dramatic increases in prices. Since these are things that consumers see and buy every day naturally they are feeling the pressure, and because they are items they deal with everyday and can see how prices are increasing, it means that inflation is on their minds. In all of this, the fact that prices on many items and services are actually falling--in some cases dramatically--is being lost in the fray. In addition, there are some other underlying factors surrounding employment that could also have a serious impact on inflation.

I was reading an article from Michael Shedlock (a.k.a. "Mish") that was posted on Seeking Alpha which really brought out this next point. In the article, Mish quotes a business owner who had e-mailed him about how he is now able to get workers for $8 to 12 an hour that were previously costing him $15 to 20. Then Mish goes on to talk about how jobs have declined for six consecutive months, and that in order to break even on the job front (taking into account new people joining the workforce), we have to add at least 150,000 new jobs. He also talks specifically about how state and city layoffs are at 45,000 so far and mounting, along with the fact that strip mall vacancies are at their highest levels in more than 10 years. These are just some of the ominous signs for employment, but the basic idea is that unemployment is continuing to rise and employers have all the leverage right now.

With unemployment rising, wages seemingly falling (in some cases, at least) and people being scared out of their mind about the economic prospects, we can expect spending to fall. This was already the case before the stimulus payments went out, and as those payments dry up, so should the little boost in spending we are seeing. As demand for products and services fall, companies will have to lower their prices in order to sell their products. In some cases this may lead to businesses going under or push competitors to consolidation; regardless, we will surely see some changes.

Predicting commodity prices is a little harder because demand for commodities does not just come from Americans. Much of the commodity price increases can be traced to the ridiculous amount of growth going on in several Asian countries right now, particularly China. They are seemingly willing to pay whatever they have to in order to get their hands on materials, and it is forcing the price up for everyone. If I had to guess, though, I’d say that we should see some easing in commodity prices soon. As the U.S. and other western countries start to scale back, it will impact those Asian countries which are providing us with exports. As we cut back on our consumption, they will have to cut back on their production, resulting in less demand for the commodities used to make the products. The main thing I think that we have to worry about is food. While Americans certainly can do with a cut back in their diets, we still have to eat. Considering that we are continuing to use an increasing amount of food supplies for fuel, and the increase in global demand and consumption, food will continue to be highly sought after, although a modest price drop is not out of the question.

Freddie Mac And Fannie Mae Bringing Fear To Investors

Yesterday, former St. Louis Federal Reserve President William Poole was quoted by Bloomberg as saying Freddie Mac and Fannie Mae were insolvent, followed by reports that the Bush administration was working on a possible bailout—the culmination of a very bad day for the two companies. Freddie saw their shares fall 23.2 percent, and Fannie’s shares shed 15.4 percent. The government will certainly come to the aid of the two companies if push comes to shove, but there is speculation that a government bailout could leave shareholders with little to nothing according to the Associated Press.

I’ve been harping the potential fallout of a Freddie and Fannie failure for some time, and it is a scary to contemplate. A failure of one or both of these companies would have serious consequences in the real estate market, the economy and of course tax payers. Some estimates have put the price tag on a potential bailout at over $1 trillion. With the current state of the economy as well as the national debt (over $9.5 trillion) this is a number that could cripple us.

Now that I have painted this doom and gloom picture, you should know that most people still think a bailout is unlikely. Here is a quote from a Wall Street Journal article this morning: “The government doesn't expect the entities to fail and no rescue plan is imminent. Government officials and market analysts expect both companies will be able to raise large amounts of capital relatively easily.” The two companies have been raising billions of dollars in additional capital to shore up their balance sheets, and analysts believe that they will continue to do just that if necessary. This strategy will dilute the holdings of existing owners of the company, but it appears to be the best strategy at this time.

I’m certainly not daring enough at this stage to invest in Freddie Mac or Fannie Mae, and though I do think the chances of a government bailout are increasing I don’t think it is the most likely scenario. Readers of this blog know that I like to plan for the worst and hope for the best, and I think this falls right in line with that. I’m starting to consider what might happen if the two giants were to fall, and specifically how it would affect my investments. I wouldn’t take any drastic measures at this point, but it doesn’t hurt to have a plan, just in case.

National Association Of Realtors Market Forecast Recap

Yesterday the National Association of Realtors (NAR) issued their latest real estate market forecast and it contained both negative and somewhat positive news about the market. The Pending Home Sales Index (PHSI) fell by 4.7 percent in May and existing home prices are projected to fall 6.2 percent this year; however, NAR also projects a recovery in 2009 with a gain of 4.3 percent on existing home prices.

This optimism about the real estate market in 2009 could have a lot to do with the $300 billion housing stimulus bill on the table right now. “The overall decline in contract signings suggests we are not out of the woods by any means. The housing stimulus bill that is still being considered in the Senate is critical to assure a healthy recovery in the housing market, jobs and the economy,” Lawrence Yun, NAR chief economist said in the NAR news release.

As far as regions go, the West appears to be the strongest right now. The PHSI for the West only dropped 1.3 percent in May and is at 97.5. The Northeast, which saw a decline of 2.9 percent in May, is sitting at 77.0. The Midwest decreased by 6.0 in May and is now at 78.6, while the South, which fell 7.1 percent in May, sits at 84.5.

According to this report, it would seem that we are nearing the bottom of the housing market troubles, yet I would advise caution on that front. We must remember that while NAR is a respected organization, they are biased. They want to see the real estate market rebound because their business is assisting real estate agents, and real estate agents obviously want--and need--a healthy real estate market. That being said, I would look at these numbers as an optimistic projection. In reality, things are likely to be a little worse than NAR is projecting, and that is likely especially true with the 4.3 percent housing price gain they are forecasting in 2009.

While I believe that the market is likely to start turning around sometime in 2009, I more imagine something more like a leveling out than a gain. So rather than seeing the sharp price drops, the market will find its equilibrium, where it will probably sit for most of 2009. In 2010, I think we may start to see some modest price gains, but nothing like before the real estate market crashed. When I do my investment projections, I don’t like to even include appreciation in the numbers, but if you do, I wouldn’t go above 1 to 3 percent. In my mind, if you can’t make the deal work without adding in appreciation, then you shouldn’t do the deal.

College Graduates Get Mixed Messages From Job Market

If most people had to guess about the employment prospects for recent college graduates, they would probably paint a pretty dim picture. The economy is certainly not hitting on all cylinders right now, and there are more companies laying off folks right now than there are companies hiring. Coupled with the timid business investment environment, you can see why most have this view. Yet things might not be so bad after all, at least for some graduates, according to a press release from the National Association of Colleges and Employers (NACE).

NACE reports that, while job opportunities for college graduates are down in number, salaries for college graduates have actually increased 7.1 percent over last year. So for those graduates lucky enough to get a job, they are in great shape. The rest are probably doomed to spend some more time living with Mom and Dad.

On the surface, this wage increase may seem like a surprise, but at the same time it really shouldn’t be. In this competitive job market, companies are enjoying the luxury of selecting only the best and the brightest. For the increased productivity they are going to get from these individuals they are willing and able to pay more. During the last several years, businesses have been focusing a lot on increased productivity. Ideally, businesses want to have as few people as possible producing as much possible, while still being economically beneficial, of course.

If you happen to be in college, know that it is now more important than ever to set yourself apart. The best of the best have great prospects, and the rest do not. Moral of the story: Make sure you are one of the best.

On another note, if you have the right skill set and aren’t interested in corporate America, then maybe you should consider starting your own business. More than ever, young people are making a name for themselves as entrepreneurs. It is hard work, loaded with risk, but just take a look at Bill Gates or Michael Dell (of course, they both dropped out of college, though I don't necessarily recommend that path), or any number of other young entrepreneurs to see the potential rewards.

A Look Back At America’s Energy Policy Blunders

I was reading the New York Times and came across an interesting article that talked about America’s energy policy, and particularly the political happenings that led us into the energy problems we are now faced with. I found it fascinating to look at the various opportunities we had over the years to address this problem, and that we opted to do nothing about it. So I thought I’d share some of the key points of this article with you.

“Ever since the oil shortages of the 1970s, one report after another has cautioned against America’s oil addiction.”

“Nearly 70 percent of the 21 million barrels of oil the United States consumes every day goes for transportation, with the bulk of that burned by individual drivers, according to the National Commission on Energy Policy, a bipartisan research group that advises Congress.”

“’Much of what we’re seeing today could have been prevented or ameliorated had we chosen to act differently,’ says Pete V. Domenici, the ranking Republican member of the Senate Energy and Natural Resources Committee and a 36-year veteran of the Senate. ‘It was a bipartisan failure to act.’”

“Home to only 4 percent of the world’s population, the nation slurps up about a quarter of the planet’s oil — and Americans’ daily use is nearly twice the combined consumption of the Chinese and Indians, according to an annual energy survey published by BP, the British oil giant.”

“According to energy policy experts, it was in the late 1980s and early 1990s — during the administrations of President George H. W. Bush and Bill Clinton — that things began to go wrong. Before that point, the country reaped the benefits of the first fuel-economy standards, passed in 1975, known as corporate average fuel economy, or CAFE. Between 1974 and 1989, the efficiency of a typical car sold in the United States almost doubled, to 27.5 miles per gallon from 13.8.”

“…oil consumption in 1990 totaled 16.9 million barrels per day, basically on a par with the 17 million barrels per day consumed in 1980, even as the economy grew substantially.”

“In 1990, Richard H. Bryan, a Nevada Democrat, teamed up in the Senate with Slade Gorton, Republican of Washington, and proposed lifting fuel standards again over the next decade, with a goal of 40 m.p.g. for cars. Amid furious opposition from Detroit, liberal Democrats from automaking states, like Carl Levin of Michigan, joined conservative Republicans like Jesse Helms of North Carolina, who died on Friday, to block new CAFE standards.”

“’But had we passed that bill, we’d be using three million barrels less oil a day now,’ Dan Becker then a lobbyist for the Sierra Club said.

“Consumers overseas might not like higher taxes on gasoline, but they’ve adapted, says Jeroen van der Veer, chief executive of Royal Dutch Shell, the European energy giant. In Mr. van der Veer’s native Holland, for example, gasoline sells for more than $10 a gallon, with $5.57 of that going to taxes. Even in Britain, which has substantial North Sea production, gasoline sells for $8.71 a gallon.” Several measures to raise gas tax were shot down during both the Bush and Clinton administrations.

“In 1990, three months before the effort to raise fuel-efficiency standards failed on Capitol Hill, President Bush issued an executive order making large swaths of the continental shelf off-limits to new exploration. That policy remains in effect today.”

“As Paul Bledsoe, strategy director of the National Commission on Energy Policy, recalls it, ‘The 1990s were something of a lost decade for American fuel efficiency.’ With oil prices low, consumers began snapping up pickup trucks and sport utility vehicles, which were governed by less stringent fuel economy standards, thanks to a loophole in the original 1975 law. These carried higher sticker prices and profit margins, and both Detroit and foreign automakers were happy to oblige.”

“In 2007, with oil at $82 and gas nearing $3, Congress finally approved the first big increase in fuel-efficiency standards in 32 years, requiring the fleet average to reach 35 m.p.g. by 2020. That will save one million barrels a day by 2020…”

“Since the 1980s, fuel efficiency has flatlined at 24 m.p.g., while vehicle weight has jumped more than 25 percent and horsepower has nearly doubled. In Europe, on the other hand, fuel efficiency currently stands at 44 m.p.g. and is slated to hit 48 m.p.g. by 2012.”

“Congress, meanwhile, in its bid to explain the run-up in fuel prices, is examining the role of speculation and the increased flow of investor money into commodities.”

I found it very interesting that in the '90s there was legislation proposed that would take fuel efficiency standards to 40 m.p.g. Now today we are hoping to increase fuel efficiency to 35 m.p.g. by 2020. The old saying that hindsight is 20/20 could certainly be applied in this situation, but as the author points out in the article, we all knew that oil was in limited supply. Basic economics tells you that when something is in limited supply, then as demand increases, prices are going to go higher. American auto makers saw an opportunity to make a quick buck off big gas guzzling cars and consumers ate them up.

At the end of the day, it is hard to blame the auto makers because they just produced what consumers wanted. They are businesses, after all, so we can’t expect them to do anything other than what is best for their business. On the other hand, as a nation we rely on our government officials to spot these types of glaring problems and take the necessary steps to prevent them from happening. In my mind the politicians are the main culprits, with ignorant consumers coming in a close second. We can drill in the Alaskan National Wildlife Refuge and we can drill in the Gulf of Mexico, but in the end it will have little effect. High gas prices are here to stay and I’m a firm believer in raising gas taxes. In order for us as consumers to make the necessary lifestyle adjustments, we need stern guidance away from gas. In case you are wondering how high gas prices might go, just take a look at the $8.71 a gallon being paid in Britain. It is not out of the question here by any means.

Extreme Makeovers For Commercial Real Estate Buoy A Struggling Market

Though some sectors of commercial real estate remain stable and profitable, many retail and hospitality spaces are sitting vacant as poorly-performing tenants shut their doors. Beyond the lack of cash flow, commercial real estate investors with vacant spaces face a vicious cycle much like the Broken Windows effect in foreclosure-struck neighborhoods, wherein the vacant space may attract crime, loiterers and vandalism, which further decreases traffic and eventually compels existing tenants to move when the lease is up. However, some commercial real estate investors are overcoming this problem by turning to unconventional tenants to fill these spaces.

A recent AP article highlights some interesting examples of this trend. My favorite:

“In November, mall owner Pennsylvania Real Estate Investment Trust snagged New River Community College as a tenant for a former theater space in its New River Valley Mall in Christianburg, Va. The satellite location features seven classrooms, four computer labs, a science lab, two auditoriums, testing and conference rooms and office space."

A cinema complex seems difficult to convert successfully, but using theatres as auditoriums with plenty of study space just outside in the lobby and a concession stand is honestly quite brilliant. I like it much better than my idea to convert an abandoned Chuck E. Cheese into a funeral home (though I still insist that a ball-pit and an animatronic band would improve any wake).

Shopping malls and strip malls especially are facing high vacancy rates as larger chains begin to falter in leaner economic times. Levitz, Zales, Ann Taylor, PacSun and Foot Locker are closing hundreds of stores this year. Linens 'N Things and Sharper Image have already filed for bankruptcy protection. I guess radio-controlled backscratchers and self-cleaning plungers aren’t quite recession proof.

To generate income from vacant stores, larger malls are leasing empty storefronts as billboards while they search for new tenants. Malls large and small are also courting first-time and independent business owners by offering short-term leases with attractive rates, according to the AP article.

This may be bad news for many corporate retailers and their employees, but it isn’t necessarily bad news for commercial real estate investors in the long term and it is certainly good news for small business owners. Larger companies with more overhead will continue to suffer in a recession, but savvy entrepreneurs in control of their own expenses can still come out on top. Meanwhile, their landlords will still enjoy a regular income and a more diverse use of their property, which could guard against future fallout like that of Sharper Image.

Beyond all of that, this sea-change could even benefit the consumer, as erstwhile interchangeable chain shops become inoculated with local talent and independent ventures. In years to come, some malls may have a local flavor beyond the bland corporate spumoni that one customarily finds. The times may be sour for some retailers, but as in all upheavals, there could be sweet results for those who can adapt—most of all, investors and entrepreneurs.

Global Real Estate Becoming More Transparent And Accessible

In the age of globalization, the world's markets are becoming ever more available to foreign investors, and while real estate has traditionally been one of the tougher markets to enter and navigate in foreign countries, it is getting ever easier. Nearly 50 percent of all countries improved their real estate transparency, according to the Jones Lang LaSalle Index from 2006 to 2008, with eight of those countries moving up a full tier. The only country to fall in the index was Venezuela. The Jones Lang LaSalle index ranks the transparency of countries based on five items: performance measurement, market fundamentals, listed vehicles, legal and regulatory environment and the transaction process.

While many countries still have a ways to go before investors can truly feel confident about investing there, this is a great sign that the world is recognizing the need for foreign investment. For investors, it is also great to see the number of investment opportunities continue to rise. Many people are fearful about investing in foreign markets, so out of fear they neglect them. Investors who take this stance are missing out on literally a world of opportunity. Know that while there are additional risks involved with foreign investment, there is also a significant reward variable to consider in addition to the main factor which should compel investors: diversification. Those investors who have 100 percent of their investments in U.S. funds, companies and other U.S. vehicles should seriously re-evaluate their portfolio.

Buying physical property in a foreign country can be rewarding, but it is not for everyone. That being said, if foreign real estate isn’t your cup of tea, then consider at minimum investing into some foreign funds, which could even include a foreign REIT (real estate investment trust). For the more adventurous, though, buying property in an emerging market, or even a developed foreign market, can be exciting and profitable.

If you are considering buying property abroad, the best piece of advice I can give you is to do your homework. Fully evaluate all the potential risk factors and then weigh them against the potential rewards; if an investment makes sense, then do it. Depending on the market you are entering you may also need to take additional precautions. If you are investing in an emerging market, I would recommend that you don’t invest more money than you can lose. Emerging markets and their governments and markets are not always stable, so things can go south quickly--but they also can get better quickly as well. To be safe, though, take extra precaution, especially if you are a new investor. Also, I always recommend seeking trusted local legal counsel (make sure to get referrals from other investors who have been successful), regardless of whether or not your agent tells you that you need one. Things don’t work in other countries like they do in the U.S., so be open-minded and patient (especially in Latin American countries), but that doesn’t mean let people walk all over you. Just realize that things are going to work differently and take a little longer in most places compared to the U.S.

Lastly, I want to point out that, especially in emerging markets, it is easy to get excited by promises of incredible returns and other such things, but there is a reason the developers are offering these returns: There is a lot of risk. Many developments that start never see completion for various reasons. Until you fully understand the market and how things work there, it is wise to only buy what you can see and touch.

Rising Inflation May Lead To Deflation

Inflation is certainly on the minds of the masses today as it appears each new day brings with it a new record price for oil and food, among other things. Inflation is especially bad right now because wages aren’t keeping up with it and thus our buying power is being reduced with each passing minute. But while Inflation is certainly a bad thing, deflation may be even worse, and according to a report issued by the Bank of International Settlements (BIS), which acts as the bank for central banks, we may be heading for just that.

Deflation occurs when prices fall. That may seem like a great thing, but deflation is typically anything but great. The greatest depressions are accompanied not by inflation, but by deflation. Our economies today are driven by spending, and inflation spurs spending. If you know that something is going to be more expensive next month, or next year, you are probably going to buy it now, if possible. In fact, you may even borrow money to buy that good or service now. Not only do you benefit by acquiring the product at a lower price now, but assuming your loan is fixed, you win that way, too. Taking money now and paying it back with inflated dollars sounds like a pretty good plan, right? In an inflationary environment there is little incentive to save because money saved simply loses value.

On the other hand, in a deflationary environment, people are encouraged to save. They know that every day they hold out to buy something, the cheaper it is going to be. In addition, they most certainly do not want to take out a loan, because they would have to pay it back in appreciating dollars. They would be much better off to simply save their money and wait until they have enough to buy something outright. Naturally, this type of scenario doesn’t bode well for an economy that is built on spending. When people stop spending, a funny thing happens: businesses struggle and eventually close. That, of course, leads to people getting laid off, which leads to even less spending, and it becomes a vicious cycle. This is how depressions start--and become really bad really fast.

In its annual report, BIS said that the impact of rising food and energy prices on consumers' incomes, combined with heavy household debts and a pullback in bank lending, may lead to a slowdown in global growth that "could prove to be much greater and longer-lasting than would be required to keep inflation under control…Over time, this could potentially even lead to deflation," according to the Wall Street Journal. The BIS went on to essentially blame the central banks for the current financial problems, claiming that they kept interest rates too low for too long.

In a bit of good news though, the BIS said they see the chances of deflation as fairly low, and consider inflation to be a much greater threat at this time. The BIS is urging most central banks to consider raising their interest rates to combat this danger.