Richard's Real Estate Thoughts: September 2008

The house vote has come in - the answer NO.

Is it back to the drawing board to rework the bailout plan?

Is it a total rejection of this type of solution? Let the market sort out the troubles?

Main street evidently won the vote by overwhelming the representatives with their anger over the bill.

Not even sure that Wall Street wanted the bailout.

With the President, the Treasury Department, the Federal Reserve, the Speaker, the Chairman of the House Financial Services, both Presidential candidates and many others telling the world that this is necessary or else, what happens now?

There are many economists that are against the bailout. Here is one I heard yesterday on NPR.

Update: Not sure what will change, but apparently the House will attempt a revote later this week. Either the bill will be modified or there will be some arm twisting.

Here is a summary of the bill and the full bill.

Here is a section by section.

In the bill there is specific language about loan modifications, which to me makes the proposal (Troubled Asset Relief Program TARP) something that may provide a solution.

For mortgages and mortgage-backed securities acquired through TARP, the Secretary
must implement a plan to mitigate foreclosures and to encourage servicers of mortgages
to modify loans through Hope for Homeowners and other programs. Allows the
Secretary to use loan guarantees and credit enhancement to avoid foreclosures. Requires
the Secretary to coordinate with other federal entities that hold troubled assets in order to
identify opportunities to modify loans, considering net present value to the taxpayer.

I would like to see more details about modifications, to have confidence that the program can work. Relying on Hope for Homeowners does not give me hope. 

UPDATE 9/30

SEC is providing guidance about asset valuation that may address one of the concerns that is keeping some legislators from supporting the rescue plan. This might be enough of a change to allow relunctant representatives to change their vote with justification and without appearing to have caved in to the leadership.

Richard Smith
American Acceptance Mortgage, Inc
Toll Free 888-474-9920 Cell 423-280-0345
Home financing in Tennessee, Georgia, and Alabama.
Experience matters when it is your home loan.

The $700 billion bailout has a goal of restoring market confidence and stability, but is it enough, and does it even address the right problem?

Because of the make up of the pieced mortgage security pools, it is impossible to determine the value of the securities. It is impossible to determine how much is needed to purchase the bad mortgages. It is impossible to determine the potential loss.

The markets are not really responding well to the hope of the rescue plan. The Asian markets have dropped. The Wachovia sale has been announced today, despite the hope of this rescue. Two European banks are being nationalized.

Do the markets see this $700 billion rescue as enough to address the problem?

The mortgages are bad because the home owners are not making payments. The mortgage securities' asset values cannot be established because the income stream from homeowner monthly payments is not dependable.

Home values are uncertain because of the increasing inventory, caused in part by the growing foreclosure problem.

The rescue plan is short on details about how foreclosures are to be addressed.

Will the Treasury be able to modify individual mortgages that will change the yields on mortgage security pools?

There just is too little information about how this plan will be able to impact mortgage terms that are the root cause of foreclosures.

As I write this post, the Federal Reserve has just increased the limits on short term lending outlets by several hundred billion dollars. This action is being done in coordination with other national central banks.

Is this money really addressing the cause of the crisis?

It just does not seem to me that it is, and that may be the real problem with the $700 billion rescue plan.

Richard Smith
American Acceptance Mortgage, Inc
Toll Free 888-474-9920 Cell 423-280-0345
Home financing in Tennessee, Georgia, and Alabama.
Experience matters when it is your home loan.

This morning after midnight the final details of the bailout plan were reached. The bill goes to the House today for a vote. The Senate is expected to vote by Wednesday. The plan follows the basic outline of the initial Treasury proposal presented to key lawmakers September 18. It calls for $700 billion from the US Treasury to be used to purchase mortgage securities.

Largest government intervention since Great Depression, action taken because of concerns resulting from bank to bank short term lending freeze that occurred two weeks ago. Several national central banks coordinated efforts to put $180 billion into the markets as an emergency measure to restore confidence and liquidity.

• Two part enactment of $250 billion
• Additional $100 billioin upon presidential certification of need
• $350 billion subject to congressional review
• Limits on executive compensation, including repaid bonuses if promised gains are not achieved
• Encourage loan modifications by lenders
• Agreement to share spending controls between congress and administration 
• President to report to Congress after 5 years the plan to recoup any taxpayer loss
• Provision for lenders to purchase government insurance as a credit enhancement, rather than sell the mortgage security

The initial proposal from the Treasury was 3 pages. The final bill submitted to Congress for vote is 110 pages long. The initial proposal was believed to be too vague on details and to provide the Treasury too much power.

Changes were proposed to spend the requested $700 billion incrementally, to limit executive pay, to provide foreclosure relief for families, to provide some protection for tax payer protections.

Each of these concerns were addressed in the final version to some degree.

I have not read details on how the purchases are to be made. There are mentions of a reverse auction. I have not heard if whole mortgage security pools will be bid or if the pools will be split up to isolate delinquent loans.

A concern of mine is whether the mortgages will be purchased at a discount or a premium. I have not heard much about that issue. My hope is that the government can turn these mortgage securities into a profit on the resales.

The final version does not seem to have any provision for the government to obtain equity positions in the lenders who participate in the rescue plan.

Speaker Nancy Pelosi is quoted, "This isn't about a bailout of Wall Street, it's a buy-in, so that we can turn our economy around."

This could be correct if issues that caused the crisis are addressed. Mortgages must be modified so homeowners can retain ownership. 

Foreclosures are at the core of the credit crisis. Banks dealing with the burden of nonperforming assets. Securities with undetermined value. Increasing existing home inventory. Downward pressure of home values. Neighborhoods with large percentage of vacant homes. And families devastated by the loss of the financial security of owning their home. 

The government must be able to sell back the securities, at a profit. And there needs to be some return to Glass- Steagall type of banking regulation. It is possible that in the aftermath of this lengthy credit crisis, regulation will go too far in correcting the mistakes made in the last 10 years.

Richard Smith
American Acceptance Mortgage, Inc
Toll Free 888-474-9920 Cell 423-280-0345
Home financing in Tennessee, Georgia, and Alabama.
Experience matters when it is your home loan.

Tuesday Mona Gobalek gave a one woman show to a packed auditorium at Chattanooga City High School Center for Creative Arts. She combined her Emmy nominated talent as a classical pianist and her vividly emotional monologue from her book Children of Willesden Lane.

The evening was part of the Facing History curriculum that is taught at the Center for Creative Arts high school. Facing History program has been operating since 1976. Its approach is to" offer an interdisciplinary approach to citizenship education that connects the history of the Holocaust and other examples of genocide to the moral questions young people face in their own lives.

This program is part of the Community Conversations series sponsored by Allstate Foundation, which brings "prominent scholars, authors, filmmakers, and policy leaders to speak." The goal is to explore issues of civic responsibility.

Mona Golabek's mother was a child refuge from Nazi Germany. Her book The Children of Willesden Lane is her account of her mother's story.

It is a story of a Jewish family living in Germany during World War II who has the opportunity to send one of their three teenage children on the Kinder Transport to safety out of Germany. The other two were to stay in Germany with the parents to face the Nazi threat.

It is a story of a 14 year old girl put on a train to leave her family and home, to travel with complete strangers, afraid, uncertain, alone.

It is a story of that girl rising out of a life as a boarder in a Jewish hostel with dozens of other children refuges.

It is a story of these children supporting each other through nights of German bombing in London.

It is a story of hope and love, and the gift of music.

Richard Smith
American Acceptance Mortgage, Inc
Toll Free 888-474-9920 Cell 423-280-0345
Home financing in Tennessee, Georgia, and Alabama.
Experience matters when it is your home loan.

Blue Cross Blue Shield of Tennessee is a major employer and corporate citizen in Chattanooga. They are in process of building new offices on Cameron Hill. Construction should be completed by, which should be completed by June 2009.

The new offices should consolidate operations which now take place in 10 different buildings in Chattanooga. The site at Cameron Hill looks over downtown Chattanooga. It is 5 buildings, with a 1 million square foot parking garage.

Cameron Hill has had an important history in Chattanooga. In the 1860's it served as a Union cannon emplacement. In the late 19th and early 20th centuries it was a premier social location. Durint eh mid 20th century it began a decline. In 1962 the top was leveled for development. It had been the site of Cameron Hill apartments since 1975.

In April BCBS announced plans to obtain LEEDS certification for the office complex. This certification program offers 4 levels: certified, silver, gold, and platinum. The new BCBS offices should meet the silver rating level. The announcement in April indicated that there are 9 LEED certified projects in Tennessee. LEEDS certification measurements evaluate sustainable site development, water savings, energy efficiency, materials selection and indoor environmental quality. The certification program is rund by the Green Building Council.

The office construction is being by the Staubach Company, a global real estate firm chaired by Roger Staubach. He spoke at this year's Spirit of Innovation awards on April 16. The project is estimated at $299 millions and will be approximately 950,000 square feet.

Vicky Gregg is president and chief executive office. Blue Cross Blue Shield of Tennessee provides insurance for over 3 million people. It was founded in 1945 and is based in Chattanooga.

Here is a Cameron Hill and construction site image library from the BCBS website.

 Here is an interesting series of photos showing daily progress since the start of construction in May, 2006.

View of new Blue Cross Blue Shield offices from a hill across town.

View of new Blue Cross Blue Shield offices from close to the construction site.

 
Existing Blue Cross Blue Shield offices down town Chattanooga.

Richard Smith
American Acceptance Mortgage, Inc
Toll Free 888-474-9920 Cell 423-280-0345
Home financing in Tennessee, Georgia, and Alabama.
Experience matters when it is your home loan.

Last weekend the 145^th anniversary of the Battle of Chickamauga was celebrated with a massive reenactment.

The Battle of Chickamauga was a bloody and costly 3 day fight that gave the Union forces one of its biggest defeats. It saved Chattanooga from Union control temporarily, until Sherman and Grant engaged the Battle of Chattanooga that November.

The Union Army under General William Rosencrans marched from Murfreesboro approximately 90 miles south east to Chattanooga with the plan to drive out the Confederate Army. Chattanooga was a key to victory in the war, because of it was a rail way hub and a commerce and manufacturing center. Taking Chattanooga would provide a direct route for the assault on Atlanta. President Lincoln said that "whoever controls Chattanooga will win the war."

Union General Rosencrans split up his 3 corps to surround the confederate army which had been reinforced by armies from Virginia and Mississippi. With the Union forces divided, the Confederate General Braxton Bragg engaged one of the Union corps at Chickamauga Creek on September 18. The battle was joined by both armies and lasted until September 20.

Union forces under Union General George Thomas made a valiant stand that saved the Union army from a more disastrous defeat. For this he earned the name the Rock of Chickamauga. The Union army under Rosencrans withdrew to Chattanooga, where is was laid siege for 3 months

The battle of Chickamauga stopped the Union army advance on Atlanta until Sherman and Grant gave the final defeat of the Confederate forces in Tennessee.

The Chattanooga and North Georgia area has an active community of Civil War enthusiasts, including dedicated partipants in the annual reenactments. There are 4 annual reenactments. The Battle of Bridgeport in March, Resaca in may, Tunnel Hill in September, and Missionary Ridge in November. The City of Chickamauga (The Gettysburg of the South) has the War Between the States Day, the third Saturday of September on the grounds of the Gordon-Lee Mansion and Crawfish Springs.

The 145^th anniversary was done on a large scale with thousands of observers. This link is to the Times Free Press article about Saturday's events and has a very good video.  The reenactment  was attended by Vice President Dick Cheney.  This was the first reenactment of Chickamauga since 1999 and was 1 year in preparation. The reenactment was sponsored by the Lakeway Publishers who publishes the Civil War Courier  .

Richard Smith
American Acceptance Mortgage, Inc
Toll Free 888-474-9920 Cell 423-280-0345
Home financing in Tennessee, Georgia, and Alabama.
Experience matters when it is your home loan.

The bailout plan that was proposed last week to purchases defaulting mortgages using up to $700 billion from the US Treasury is being debated this week. Newt Gingrich in an interview today on NPR came out firmly against the idea of a bailout.

Much of the partisan debate is about how to add to the bill, how to limit executive pay, how to help families with foreclosures, whether to add subprime mortages, how to oversee the bailout, how to help struggling homeowners.

Newt Gingrich calls for a debate first on whether this bailout is necessary and wise.

The market response has not been so good so far. Stocks down, bond market down, oil up. Adding $700 billion to the economy must have an inflationary impact.

I am generally in favor of this move, but it seems to me that the debate needs to be held on the plan's merits, on other options, and on the specifics of the debt to be purchased, the oversight, limits, and control needed over the new agency.

Other issues need to be off the table with this bill.

Here is the link to Gingrich's remarks, on the merits of the plan.

UPDATE 9/23 - Rep Barney Frank said "We don't have a choice now of debating whether this is a good or a bad thing."

What else should they debate?

Whether corporate pay limitations should be added to the bill???

They only want to discuss whether to add legislation to the bill, not whether the bill needs to be approved.

It seems to me that this debate has not focused on the right topics and has not considered the full implications and alternatives.

I am leaning in favor of the idea of the bailout plan, but I would be hesitant to vote for it so quickly with so little real discussion, without fully understanding the impact of an additional $1 trillion. I really do not trust the people making the decision.

Why do we have to do this? What are the consequences of doing this? of not doing this? What are other choices?

Richard Smith
American Acceptance Mortgage, Inc
Toll Free 888-474-9920 Cell 423-280-0345
Home financing in Tennessee, Georgia, and Alabama.
Experience matters when it is your home loan.

The $700 billion bailout debate began in earnest yesterday. There is much to consider - the amount of the bailout, the wisdom of risking tax payer money to bail out the market, the inclusion of foreign financial institutions, the details of what loans can be purchased, what form the purchasing agency will take, how long the agency will last, the need for and the type of tax payer safeguards.

What is being debated though is additional provisions.

This bill needs to be focused, quick, simple.

Presidential candidate Obama says, "Swift and unprecedented action to shore up Wall Street must come alongside equally swift and serious efforts to help struggling families on main street, create new jobs, and grow our middle-class once more."

Frankly, Presidential candidate Obama is still a Senator. He can introduce any legislation needed to shore up main street that he feels is necessary, but this bill needs to be clean and quick.

The Housing and Economic Recovery Act passed in July was loaded down with excessive legislation. It was much too large for anyone to know what was included into the law.

This bill should not be weighed down with excess. It is a simple.

One idea is to provide warrants for equity in institutions that would receive these bailout funds. That would seem to me to be a deterent for institutions to participate. It seems to cloud the measure, and lead to the US nationalizing commercial entities.

Choices that financial institution would have in dealing with these assets.

• negotiate their own modification
• negotiate short sale
• foreclose
• sell to this bailout agency 

Likely, if warrants are required to sell to the bailout agency, then foreclosing is a better financial decision for the institutions.

My understanding of the plan is that the purchases would not enrich the coffers of Wall Street. These debts would be purchased at a discount, giving a significant loss on each sale.

The program is just to purchase assets, at this point not just mortgage assets. These assets have value, and should at some point become liquid again. The federal government is in the best position to modify these assets in such a way that they can become performing assets.

This plan is to restore liquidity to the global economy, by removing underperforming assets. Foreclosures will be stopped, not by extra legislation, but by loan modifications making payment affordable.

Treasury fact sheet for bailout.

Richard Smith
American Acceptance Mortgage, Inc
Toll Free 888-474-9920 Cell 423-280-0345
Home financing in Tennessee, Georgia, and Alabama.
Experience matters when it is your home loan.

The surge in Iraq has been credited with turning the tide in that war. This bold plan to invest up to $700 billion to purchase mortgage securities seems to take a similar approach against the growing crisis in the mortgage and financial markets.

Last week the global economy came near a complete standstill, with banks refusing to provide short term loans to each other, choosing instead to hold on to whatever liquid assets they had. The world central banks, except for Russia, came together in a cooperative effort to pump billions of dollars into the world financial system to restore liquidity.

Thursday the US Treasury Department announced plans to get ahead of the problem. They would purchase defaulted mortgages, up to $700 billion worth.

Banks will sell non performing assets to the Treasury throught a reverse auction. The bank accepting the lowest price gets the sale.

• Selling these assets restores needed cash to the bank.
• Owning these discounted assets enables the Treasury, or its newly established asset management agency, to negotiate affordable modification.
• Homeowners with restored ability to make mortgage payments will keep their homes
• Foreclosures will stop the recent growth
• Home inventory will begin to slacken
• Housing price decline will hopefully turn

The actual cost of this program is yet to be known. The Treasury will be purchasing assets that have some value. If the program works and home prices will stabilize, the performing modified mortgages will be sold back to the mortgage markets. The actual cost of the program can be minimized.

This is a workable solution. There is a chance that, as Congress debates the plan this week, attempts will be made to add on additional pieces of legislation. Congress needs to fight this temptation, and pass this simple legislation, with minimal amendment, and with no unrelated amendment.

Richard Smith
American Acceptance Mortgage, Inc
Toll Free 888-474-9920 Cell 423-280-0345
Home financing in Tennessee, Georgia, and Alabama.
Experience matters when it is your home loan.

Today my wife and I participated in the Memory Walk for Alzheimer's Research. The crowd was fairly large. My estimate is around 1000. There were several groups participating. Some were from health care providers, some from churches, some in support of a family member.

Judy's Team won the coveted Spirit Award. This award went to St Barnabas Nursing Home.

This year the Memory Walk set up personal websites to help participants collect contributions. The highest total collected on the internet was by a dedicated Memory Walk volunteer whose husband is suffering from the disease. She collected over $1100 on her website.

It was a beautiful cool autumn day for the 1 mile walk - 4 laps around the Chattanooga Lookouts ball field.

St Peter's Team at Chattanooga Memory Walk

Looie Lookout leads walkers

Walkers in the outfield during the Memory Walk

Sigma Kappa sorority dance team. The sorority is active in aging charities.

Richard Smith
American Acceptance Mortgage, Inc
Toll Free 888-474-9920 Cell 423-280-0345
Home financing in Tennessee, Georgia, and Alabama.
Experience matters when it is your home loan.