Rant on Construction Lenders

Here's a heartwarming story about a bank trying to put it to a consumer (one of my customers and the largest builder of luxury homes in Somersett) building a $2M luxury home for his family!

First Horizon has decided to exit the construction lending business. They are leaving carnage in their wake. Contractual obligations are now becoming meaningless in today's brave new world. This is a material breach of contract. Even if a company discontinues business, especially in the banking world, prior commitments are still honored to avoid such potential legal action.

Here is a borrower, who qualified for a 1-Time Close construction loan, put over $200K of his own money into the project prior to the loan on a $2.2M property (value at time of OTC, current value unknown but surely less). Project is now complete and FH is not following through on their commitment. That simple. They tried to offer another program that would cost him more money, cost me as the pricing was above par. Not only trying to stick to the borrower, but the brokers, as well.

Initially, calls from the borrower to the modification department were not returned. When the borrower finally got through to someone (customer service, no where near the appropriate term), the borrower was told to contact his broker, as they could not help him. That as the first sign of trouble ahead. After repeated unanswered calls and emails to the construction rep at FH, I got him direct. He explain ‘our’ problem (now trying to share their failings with me. That’s rich!). They had 3 options: (1) take a horrible substitute program described above, (2) get a permanent loan somewhere else, or (3) see what he could do with senior management (another loose term). I informed him of a 4th: take the house back and face litigation and press.

That was 3 weeks ago. Still no resolution. Now they are trying to play the ‘the property won’t appraise now’ card. Again, trying to shirk their responsibility and commitment to the borrower.

I will continue to fight this on behalf of the borrower and in the essence of good will. I will also seek greater media attention, as this is unacceptable behavior for any business, let alone an organization that has the ability to financially cripple a consumer.

Hoping for a happy ending....

It's time for Economic Evolution

Alvin Toffler's message in Future Shock aptly applies to Washoe County's situation, “Change is not merely necessary to life – it is life.”

The industries and economies that got us to today may not be what takes us to the next level. Gaming and housing cannot be the pillars of the future of economic growth for our area. It is abundantly clear that our business and civic leadership, along with our citizenry, must continue to develop an environment that attracts the businesses and workforce that will allow us to successfully molt into the economic vision we see, but are having trouble to realize.

Though the core casinos are doing well, we are not a gaming Mecca. This core group of viably, well managed establishments are a key bridge to the synthesis that Reno is experiencing. They provide entertainment and revenue that is key to this continued change.

Like most cities, housing booms create availability. The cyclical correction will now make pricing of those homes more reasonable, attracting for employer and employee to the region. This correction would have come even without the reckless exuberance of wall street investors (the real reason for the failures of Subprime and alternate home financing...a story for another day!).

The job vacuum that the construction downturn has caused must be backfilled by viable, sustainable employment that can only be created by attracting companies that employ a higher skill level and therefore income that will propel Washoe County to that next level. Organizations such as EDAWN are key to making this a reality. Our state and local governments must do their part, as well.

Finally, it comes down to us, the citizens of this great area. I am doing my part by creating a small business alliance to promote sound business practices with my small business neighbors and continue to be or become good corporate citizens. We are all striving to maintain the quality of life we so cherish in Washoe County, and, at the same time, mature economically.

Now, what can you do?

Dow Know-How

The Dow Jones Industrial Average made history when it broke 14,000 briefly on July 17. Two days later, on July 19, it closed above 14,000 for the first time. (1)
This watershed marks a sharp rise in the index over the past several months. It took seven and a half years from when the Dow first broke 11,000 in April 1999 to hit the 12,000 mark in October 2006. However, it took only six months for the Dow to clear 13,000 and a scant 57 trading days (about three months) to hit this latest milestone.(2)
The Dow Jones Industrial Average, often called the DJIA or the Dow for short, is a price-weighted index that tracks 30 blue-chip stocks traded on the New York Stock Exchange and The Nasdaq. The oldest and best known U.S. stock index, the Dow was created by Charles Henry Dow in 1896 and originally tracked only 12 stocks.

The 30 stocks that make up the Dow are generally from among the largest and most stable companies in the United States. General Electric was one of the first 12 stocks chosen for the Dow in 1896 and remains in the index to this day.(3)
Although much has been made about the DJIA breaking 14,000, the number itself is an interesting signifier. "Fourteen thousand what?" you might ask. This number by itself doesn't necessarily mean anything. It is important only as it relates to the history of the index, indicating the market's general trend.

A Little Help from Foreign Friends
The general trend of the Dow's last nine months has been higher. This rise has been in the face of some considerable obstacles. High energy prices and a housing slump driven by the drop of subprime lending have provided the market with some big hurdles. However, in light of these difficulties, there have been a few bright spots that have helped the Dow climb recently. The emergence of a global economy has helped keep inflation in check, thanks to the importing of low-cost goods from countries such as India and China. The recent strength of the global economy has also helped boost the revenue of U.S.-based multinational companies, many of which are listed on the Dow.

What does this DJIA milestone mean for your investment strategy? It's probably good news if you're invested in large-cap stocks in the Dow. But milestones mean little to traders since it's impossible to see a trend in day-to-day action. One day after closing at 14,000, the Dow lost 150 points, closing at 13,851 on July 20. (4)

However, if you're invested for the long term, this news may not mean much. Part of a successful buy-and-hold strategy involves weathering market volatility in favor of positive long-term returns. A savvy investor may take note of a Dow record, but would hesitate before making any hasty decisions as a result.

The performance of an unmanaged index is not indicative of the performance of any particular investment. Individuals cannot invest directly in an index. The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.

1-2, 4) Yahoo! Finance, July 2007
3) Dow Jones & Company, July 2007

Vulture Capitalism 101

We first learned the art of Vulture Capitalism during the bursting of the tech bubble. Investors savvy enough to keep their powder dry, war chests at the ready, and swoop in to pick clean troubled companies. The big prize for most of these companies during this round was not real estate but intillectual property (smart people!). Sure, there was plenty of real estate, capital assets and personal booty up for grabs, but the real deal was human capital (again, great employees at bargain prices).

Today, we are at the sill of another window of opportunity: the housing slump. The prize is obvious (ah, real estate), but the technique not so. The biggest question, as always , is when are we at the bottom of the trough. The problem, you'll never know until we see the sustained upward trend. It's like digging half a hole: you can't. It's always a hole! Likewise, you (nor any of the 'experts') can time the bottom. With real estate, the market is flodded with savvy investors as well as 1st time home buyers (not that 1st time buyers are not savvy, you may have, in fact, been sharp enough not to buy at the height of the frenzy. To you, my humble double thumb's up!)

Opportunities will continue to abound here and throughout the US for extraordinary real estate buys. That window, however, will not stay open for very long. There will always be buying opportunities, even in the hottest sellers markets. This real estate vortex, however, does not happen very often to this extent (our last major window was during the failed S&L debacle of the late 80's early 90's..the much maligned RTC (no, not the bus service)). Patience and due diligence will be the key to your success. Work with a truly seasoned Realtor, make sure you and the property qualify for financing (programs are changing almost daily) and act.

Depending on what government intervention happens, the number of properties may change dramatically, in either direction. Not a big fan of government interferring with our free market economy. That does not change what is happening (freezing foreclosures, banks working out suitable arrangements for those on the brink, etc).

We will weather this financial 'perfect storm'. Those that play the game smart will come out stronger than before. To quote a Paul Simon song, 'One man's ceiling is another man's floor'.

Where do you stand?

New Level of Mega!

Back from LV after a few days of meetings and catching up with a college friend that moved his practice back to Princeton (from AZ...he loves the Reno area). It was great to get some sun.

I must say, if you have to deal meet anywhere in LV and loath the strip, try the Red Rock Resort. It's a billion dollar local's casino and true resort. We never left. Great rooms/suites, every one with a view of the strip or the red rocks, great gym, even better spa. The restaurants we tried were very good and not overpriced. It is connected to a cinema with IMAX, arcade, a kid zone for day care. Very functional and business friendly.

An interesting article in their local paper talks about the over $10Billion (yes Billion) worth of casino/resort product coming on the market over the next few years. After visiting again, I am still convinced that gaming still remains recession proof. As previously discussed, LV is best of class when it comes to foreclosure filings in the US. Maybe there is a bright spot. After the market comes to an end of this correction cycle, there will be opportunity. These projects are predicting well over 100,000 new jobs created by these mega casino/resorts. That can lead to the creation/growth of support industries and businesses, creating an upward trending fiscally. LV is an anomoly. It has the potential to set it's own market. I truly hope the gamble these developers are taking truly pays off. Again, we do not live in a bubble, it will benefit all!

To get back on point, our discussions over the weekend had to do with the global housing market. It put into perspective, again, the global, not international, community we live in. Aside from the US, Great Britain, Spain, France, Japan, amongst others were discussed in detail. We are in a global real estatt slump...we are not alone (not that this should make you feel any better).

Is there light at the end of the tunnel? Yes. I'm just not sure if it's the sun or an on-coming freight train. No one know. You. Me. The talking heads on the tube. No one knows. I do know that the correction is far from over, the recession is here, let's see if we can avoid a depression (maybe one of the pharmies can come up with a pill for that. Lord nows, they seem to have a knack for creating new maladies just to keep us popping those colorful little treats!!).

As I have stated all along, prudence should be the mantra. If you're under water, get to the surface and out of the water as quick as prudently possible. If you're not, now's not the time to jump in.

The Elephant in the Room

Recession - the muched maligned 'R' word. Like that huge, gray circus animal standing in the middle of the room, most 'experts' do their best to ackowledge it's presence until they step in something that makes it impossible to ignore. Some say we've been in it since August, others say we are on the brink now.

No denying, we are in dire economic times. Like birth and death, recession and inflation are part of the natural order of economic life. Most everything happens in cycles. The global economy is no exception.

The key to avoiding those piles is to practice prudence and practicality. A great line in a Sheryl Crow song, 'It's having what you want, it's wanting what you have'. Words to live by always, but most certainly in these tough times. Hunker down, don't spend on what you want, just on what you need.

What are you seeeing out there?

Well, off to drop our Golden Retriever byhis girlfriend's for a weekend. He surely has things in perspective!

Mayonnaise Jar and 2 Cups Of Coffee

This was sent to me by a neighbor and business associate, Bob Morales with Morales & Associates (www.yourtrustedadvisor.com). It deserves it's own post. Read it, smile and forward!

When things in your life seem
Almost too much to handle,
when 24 Hours in a day is not enough,
remember the mayonnaise jar and 2 cups of coffee.
A professor stood before his philosophy class and had some items in front of him.
When the class began, wordlessly,
He picked up a very large
And empty mayonnaise jar and proceeded to fill it with golf balls.

He then asked the studentsif the jar was full.
They agreed that it was.

The professor then picked up a box of pebbles and poured them into the jar.
He shook the jar lightly.
The pebbles rolled into the open areas between the golf balls.

He then asked the students again if the jar was full..
They agreed it was.

The professor next picked up a box of sand and poured it into the jar.
Of course, the sand filled up everything else.
He asked once more if the jar was full.

The students responded with an unanimous "yes."
The professor then produced two cups of coffee from under the table
And poured the entire contents into the jar, effectively filling the empty space between the sand. The students laughed.

"Now," said the professor, > as the laughter subsided,
"I want you to recognize that this jar represents your life.
The golf balls are the important things -
God,family, children, health,
friends, and Favorite passions --
things that if everything else was lost and only they remained,
your life would still be full.

The pebbles are the other things that matter
like your job, house, and car.

The sand is everything else --
the small stuff.

"If you put the sand into the jar first,"
he continued,
"there is no room for the pebbles or the golf balls.
The same goes for life.

If you spend all your time and energy on the small stuff,
you will never have room for the things that are important to you.

So...

Pay attention to the things that are critical to your happiness.
Play with your children.
Take time to get medical checkups. >
Take your partner out to dinner.
Play another 18.

There will always be time to clean the house
and fix the disposal.

"Take care of the golf balls first --
the things that really matter.
Set your priorities.
The rest is just sand."

One of the students raised her hand
and inquired what the coffee represented.

The professor smiled.
"I'm glad you asked".

It just goes to show you that no matter how full your life may seem,
there's always room for a couple of cups of coffee with a friend."