Not All Investors Are Equal
Published: July 17, 2012
Surveys Give Big Investors an Early View From Analysts
By GRETCHEN MORGENSON
Published: July 15, 2012
Aug 30, 2004 ... On August 15, 2000, the SEC adopted Regulation FD to address the selective disclosure of information by publicly traded companies and other ...
Private Equity Has Too Much Money to Spend on Homes *
By John Gittelsohn on June 13, 2012
From the article:
“You’ve got Warren Buffett saying he’d buy 200,000 homes if he could find the operational ability to do so,” Warren said. “The reverse of the conversation is, where the hell do you think you’re getting 200,000 properties?”
Gathering investment money in an artificially low interest rate environment doesn’t seem to be a major challenge. The challenge may be getting a decent rate of return after management fees, the costs of acquisition, rehabilitation, and management of the properties (I believe this is the operational ability to which Mr. Buffett is referring.It seems to me that traditional real estate management firms may have a better undertanding of the challenges of maintaining and managing a large number of widely dispersed single family residential rental properties.
I had to chuckle when I read, "Nobody’s ever done this on a scale before,” Michael Burns, chief executive officer of the Alaska Permanent Fund, which had $41.5 billion under management at the end of the first quarter, said in a telephone interview from Juneau, Alaska.“These people’s background is in public storage, which is about as close as we could find.”
When home prices begin to fall, a natural level of weak support may develop around a loan-to-value ratio of one. That is, when equity in a home approaches zero, the homeowner ought to become reluctant to sell. History suggests any such strategy should prove foolhardy. Trends in housing tend to be long and headstrong, and hence not easily resisted…The development of significantly negative home equity among the same homeowners that also comprise the world’s most voracious consumers would likely trigger several economic problems…banks would become reluctant to lend to home buyers. The effect would be to contract the credit available to would-be homeowners and therefore severely undercut the main late-cycle driver of demand…These problems would compound the worsening domestic employment situation, further reducing demand for residential housing and thereby producing the requisite positive feedback loop that historically has allowed burgeoning asset deflation to accelerate. As the real estate deflation wears on, it would not be unreasonable to expect that unemployment-induced income shocks mix in toxic fashion with the comparatively high mobility tolerance of the United States citizenry, motivating homeowners to start sending their keys to the bank in ever-increasing numbers. Many banks taking possession of increasing amounts of real estate will ultimately fail themselves. A catharsis could then take shape, and home prices would leg down yet again. After much pain both despair and disgust will settle in, and a bottom would begin to form.-Scion 2Q 2003 Letter to Investors
BUSINESS DAY | February 05, 2012
A Mortgage Tornado Warning, Unheeded
By GRETCHEN MORGENSON
Inspired by a personal experience, a businessman began delving into the practices of the mortgage industry, including Fannie Mae. His findings have been prescient.
Ms. Morgenson:Regarding MERS, a few months ago I read that MERS was actually conceived by Fannie Mae and the concept was described in a presentation given at a Mortgage Bankers Association convention in 1993 or 1994. The article claimed Fannie got positive feedback on the MERS concept from the mortgage bankers. The article claimed that Fannie Mae and Freddie Mac then funded the development of MERS with contributions of 2 million dollars each. After MERS was 'brought live' Fannie and Freddie invited large mortgage industry members to join MERS on a subscription basis.I've searched again for the article(s) recently, but I haven't been able to find the articles that described the actual creation of MERS. Perhaps the articles have been "scrubbed".What I read seems to confirm the leadership role that Fannie and Freddie had, and the ways these two GSE's influenced and led the industry, and how they shaped practices in the industry. You might find the two articles referenced below interesting:Is FM Watch a Crusader With an Agenda? By Louis Sichelman – RealtyTimes, pub. 7/5/1999 at: http://realtytimes.com/rtpages/19990705_fmwatch.htmNew Alliance Confronts FM Watch, Champions Existing Housing Finance System By Broderick Perkins RealtyTimes, pub. 10/5/2000> http://realtytimes.com/rtpages/20001005_fmwatch.htm
New York Times –Opinion | Editorial - pub. January 26, 2012So, Who’s a Lobbyist? *
Three step test for a duck: (1) If it walks like a duck (2) Looks like a duck (3) And, quacks like a duck.It is, more than likely, a duck.Inside the D. C. Beltway definition and semantics are tortured to death by people who strive to gain (or, strive not to lose) by blurring the lines of the meaning of what is . . . .Do you remember: "I did not have sexual relations with that woman" William Jefferson Clinton – 1998
On the subject of capital investment, and the taxation of capital gains, it seems to me that almost all of the media has missed an important point, and several lesser points that flow from that central point.
The Central Point:
Capital investment pays for (or finances) what Karl Marx called “the means of production”.
In a free capitalistic market individual investors decide where they want to invest their money, how much risk to take with their money, and whether they are going to invest in, for instance, the manufacture of cell phones or the activities of grocery stores. Or, they can decide if they want to invest in solar panel manufacturers (like, Solendra?).
If individual investors are not incented to invest their capital in “the means of production” it seems the alternative is for government to use taxpayer funds for investment and use some form of ‘central planning’ to decide in which enterprises the taxpayers taxes will be invested.
It’s been pointed out by several in the media that capital investment actually produces taxable revenue when the enterprise must pay a tax on revenue. And, it’s been mentioned that the investor then pays another tax (the capital gains tax) - if the investor is fortunate, or smart, enough to make a capital gain.
However, I’ve not seen any media (or reporters) mention that there is usually another source of taxable revenue which flows from capital investment. Capital investment generally contributes to job creation. Most of the people who are employed in the investors’ enterprise will have an income – some of which is taxed. And another point, which also seems subtle to the press, the part of those workers’ income which is not taxed can be used by the workers to consume, save, or invest. These worker activities (consumption, saving and investing) all add value to the economy, and they produce jobs and more (downstream) revenues which are taxed.
I believe myriad individuals participating in a relatively free market, and making judgments about products to be offered while making judgments about demand levels for those products, and evaluating risk-and-reward payoffs, is a far more efficient, objective, and practical way to finance ‘the means of production’ than any central planning scheme.
During a December 15, 2010 U.S. House of Representatives Judiciary Committee hearing witnesses gave testimony on issues relating to "Mortgage Servicing and Foreclosure Practices".1
A critical focus of the testimony and discussion was apparent problems with the recordation of land title and note ownership. Witnesses claimed that the Mortgage Electronic Registration System (MERS)2 has failed to reliably record changes in title and note ownership (chain-of-title). The accompanying video-clip is a segment from the C-SPAN video of the hearing:
If you are not familiar with MERS do a key-word-search for more information.
1. see, C-SPAN Video Library, Mortgage Servicing and Foreclosure Practices House of Representatives Judiciary Committee December 15, 2010 at: http://www.c-spanvideo.org/program/297095-1
2. see, Washington Post - October 8, 2010 article titled, Reston Based Company MERS in Middle of Foreclosure Chaos By Brady Dennis and Ariana Eunjun Cha at: http://www.washingtonpost.com/wp-dyn/content/article/2010/10/07/AR2010100702742.html
Congressman Ron Paul U.S. House of Representatives July 16, 2002*
Mr. Speaker, I rise to introduce the Free Housing Market Enhancement Act. This legislation restores a free market in housing by repealing special privileges for housing-related government sponsored enterprises (GSEs). These entities are the Federal National Mortgage Association (Fannie), the Federal Home Loan Mortgage Corporation (Freddie), and the National Home Loan Bank Board (HLBB). According to the Congressional Budget Office, the housing-related GSEs received $13.6 billion worth of indirect federal subsidies in fiscal year 2000 alone.
One of the major government privileges granted these GSEs is a line of credit to the United States Treasury. According to some estimates, the line of credit may be worth over $2 billion. This explicit promise by the Treasury to bail out these GSEs in times of economic difficulty helps them attract investors who are willing to settle for lower yields than they would demand in the absence of the subsidy. Thus, the line of credit distorts the allocation of capital. More importantly, the line of credit is a promise on behalf of the government to engage in a massive unconstitutional and immoral income transfer from working Americans to holders of GSE debt.
The Free Housing Market Enhancement Act also repeals the explicit grant of legal authority given to the Federal Reserve to purchase the debt of housing-related GSEs. GSEs are the only institutions besides the United States Treasury granted explicit statutory authority to monetize their debt through the Federal Reserve. This provision gives the GSEs a source of liquidity unavailable to their competitors.
Ironically, by transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market. This is because the special privileges of Fannie, Freddie, and HLBB have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive use into housing. This reduces the efficacy of the entire market and thus reduces the standard of living of all Americans.
However, despite the long-term damage to the economy inflicted by the government’s interference in the housing market, the government’s policies of diverting capital to other uses creates a short-term boom in housing. Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.
Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing market forever. In fact, postponing the necessary but painful market corrections will only deepen the inevitable fall. The more people invested in the market, the greater the effects across the economy when the bubble bursts.
No less an authority than Federal Reserve Chairman Alan Greenspan has expressed concern that government subsidies provided to the GSEs make investors underestimate the risk of investing in Fannie Mae and Freddie Mac.
Mr. Speaker, it is time for Congress to act to remove taxpayer support from the housing GSEs before the bubble bursts and taxpayers are once again forced to bail out investors misled by foolish government interference in the market. I therefore hope my colleagues will stand up for American taxpayers and investors by cosponsoring the Free Housing Market Enhancement Act.