A VC - Latest Comments in Taking It To The Hood

Re: Taking It To The Hood

fredwilson — Tue, 24 Feb 2009 20:43:24 -0000

JLM knows a good bit about this stuff. That's why I asked him to write about
it.

Re: Taking It To The Hood

bill_bennett — Mon, 23 Feb 2009 13:50:49 -0000

Allowing bankrupcty judges to modify mortgages is akin to disavowing contract law in the U.S.

Having a bankruptcy judge intervene with contracts works because the shareholders are wiped out, and thus have nothing to gain. With houses, the owner benefits and is not wiped out - creating moral hazard. Millions of current loans will become delinquent if the house owners are able to get their mortgage payment lowered and house basis reduced. Additionally, real estate lenders will reprice and remove themselves from the market if judges are allowed to set mortgage rates causing either the government to nationalize the system totally, or we all will live with dramatically higher mortgage rates because the lenders have to price regulatory risk.

Please stick to writing on topics within the realm of your expertise.

Bill Bennett

Re: Taking It To The Hood

Miles Shapiro — Mon, 23 Feb 2009 11:57:52 -0000

To the baboons who insist on letting the market take care of it:
Were you paying attention over the last eight years? Markets do not take care of "it" or anything else that resembles "it." Markets take care of those with wealth, period. That is what they are designed to do. Look back historically, anthropologically, or economically. Market serve a single purpose: not the distribution of goods, but the centralization of private wealth. Yes, markets are efficient. Markets are seemingly democratic, or at least they do not violate any laws of democracy that we can prove. But the end result remains the same in every society. Wealth accumulates with the wealthy. This financial fiasco is not about you and your second and third house. It is about regular folks who take the hit for the market magicians who manipulate a system reliant on a notion of fair play and a sense of community. The part that really kills me is Adam Smith was famous in his time, not for the invisible hand of greed in capitalism, but for his moral investigation of what every citizen's duty must be. That duty entailed a deeply felt sense of protectiveness toward one's community, not the desire to put all of that community's wealth in a single pocket. Let the market take care of it, my butt!

Re: Taking It To The Hood

Chris Hamoen — Sun, 22 Feb 2009 22:44:46 -0000

>Car salesmen sell hard too, but no one says "hey, let's tax Andy Swan so someone making $15k/year can keep an Escalade."

I don't understand this - do you lump everyone in to this extreme comparison? This is irresponsible...but having lenders behave like financial advisors to low-income earners should be illegal.

>Telling someone that they have to go back to what they can afford isn't "punishment".
>As to the lenders and the folks who bought the paper, let them take the loss.

Are the lenders really taking the loss? Aren't they getting bailed out...despite their bad behavior? They are corporations - there are apparently no repercussions. The borrowers are paying the price for their bad behavior. Even the responsible borrower is.

Final Point: I agree with a point made on this blog awhile ago - Too Big to Fail = Too Big To Exist. Which means regulation of some form.

Re: Taking It To The Hood

toddsavage — Sun, 22 Feb 2009 17:44:16 -0000

I am looking at investing in a mortgage backed securities fund right now that is buying A rated paper incredibly cheap. So, you'll get principal appreciation and a fat monthly dividend. This, in my opinion, may be the best way to invest in real estate right now. If I were to buy property, the taxes and operating costs hurt my upside. Mortgage-backed securities may be the best way to go...

Re: Taking It To The Hood

kidmercury — Sun, 22 Feb 2009 16:59:05 -0000

lol you know when boss launches the AVC fashion line, and when they accept user-generated submissions from employees/fans, i'm going to design a shirt like the obama hope poster ( http://techbuddha.files.wor... ), except it's going to have fred's avatar, and instead of the word "HOPE" beneath it it'll say "BOSS." you know it'll sell like hot cakes!

Re: Taking It To The Hood

fredwilson — Sun, 22 Feb 2009 11:50:14 -0000

I play basketball with my 13 yr old son and his basketball team after their
practice every Saturday (with a few other dads)

I find myself yelling "you gotta move"

As in the great mississippi blues song covered by the rolling stones on
sticky fingers

Re: Taking It To The Hood

Peter Fleckenstein — Sun, 22 Feb 2009 10:39:07 -0000

LOL - Very nice Jeff.

Re: Taking It To The Hood

Peter Fleckenstein — Sun, 22 Feb 2009 10:36:01 -0000

In recognition of your new motto, I'll share these 2 morsels:

My drill instructor in the Marines was famous for saying this to us - "If you're just sitting around, you ain't nothin but dead, maggots!"

And I thought this was very appropriate for your line of biz Fred:

Jester: “The clock is ticking and as of now we are keeping score.”

Here's the sound clip - http://www.entertonement.co...

Re: Taking It To The Hood

fredwilson — Sun, 22 Feb 2009 08:55:09 -0000

Enagage Damnit, Maverick is going to be my new motto

Re: Taking It To The Hood

fredwilson — Sun, 22 Feb 2009 08:36:10 -0000

I reblogged part of this at fredwilson.vc the part about markets

Re: Taking It To The Hood

fredwilson — Sun, 22 Feb 2009 08:19:11 -0000

Great comment JLM. It's also interesting that small is the new big. I'd
rather be doing dozens of $600k deals in this environment than one $600mm
deal.

Re: Taking It To The Hood

JLM — Sat, 21 Feb 2009 22:53:38 -0000

Hey, c'mon, I'm a hard core hope pusher these days.

I will get a picture as soon as the lobotomy scars are healed. LOL

Re: Taking It To The Hood

JLM — Sat, 21 Feb 2009 22:46:31 -0000

Funny thing is that it will all eventually recover --- perhaps because the market itself was really the BEAR and nobody acknowledged that to be so. Or, it may happen and nobody really knows why or how it happened in which case Pres Obama will end up on Mr Rushmore. But it will recover. Even with all the stories of the Depression, it ended and the markets recovered. This too shall pass.

I love SF and used to go there often on business. I used to sometimes make up reasons to go to SF just to enjoy the fog and to eat at the Tadich Grill and when I was very, very brave to swim down at the harbor --- maybe the Olympic Club's lanes? The coldest I have ever been.

So, I guess that if you love it that much, you have to pay a price --- not a fair price but a good price for such a lovely mistress.

You are absolutely right about the mass hysteria that caused this mess. I marvel that so many people could make such small but collectively huge contributions to such an obvious and enormous mess.

Re: Taking It To The Hood

Peter Fleckenstein — Sat, 21 Feb 2009 22:42:19 -0000

Thanks Jeff. You still provided great insight indirectly. Your 2 best lines - "Sorry I could not be of more hope" (Please if that was a misspell don't tell me - just claim the fantastic wit)

and

"Engage damn it, Maverick" is pure visualization through words. I can just see the flat spin of the Tomcat rushing down 1000s of ft per sec. What a great analogy.

One final note - U need a picture now - you're a guest blogger on AVC - show some respect ;-)

Re: Taking It To The Hood

JLM — Sat, 21 Feb 2009 22:34:22 -0000

All of my experience in actually doing deals was in the institutional, pension fund, insurance company, PE and big bank arena (well, when we actually had big banks), so I would only be fishing to try to draw some perspective as it relates to the history of the GSEs and their securitization practices or history.

I had a lot of knowledge of the various apartment programs but always finally opted to fund them the old fashioned way --- take a tin cup and beg for money on the above money circuit. Having said that, it is my sense that the GSEs are desperate to re-light and re-load if for no other reason other than to save their own bacon. They are in a jobs preservation mode just now.

I think we are going to see a lot of more conservatively crafted financings of real estate. Isn't RE even when envisioned as "conservative" (80/20) still highly leveraged? I used to put up nothing and raise the equity and debt separately and end up with 50% of the deal. Exactly why I liked real estate. Also the fact that I was making money when I slept, played golf or swam. Plus I used to have a strong, silent partner --- inflation.

As always, the pendelum will swing way too far and there will be no cats sitting on that particular stove for a long, long time and then things will change.

Sorry I could not be of more hope.

On a side note, I suspect that most banks are paralyzed just now and that the HASP will have one good impact, they will all get back into the game. Envision Tom Cruise in Top Gun --- "Engage damn it, Maverick!" The banks are just as disengaged as everybody else.

Re: Taking It To The Hood

gregorylent — Sat, 21 Feb 2009 19:13:58 -0000

the comments have been great ...

the main job of "those in charge" now is not fixing anything .. it has its own momentum, and is unfixable ...

now is about managing expectations, so that the drop is incremental, instead of everything in just a few days ...

enjoy the next three years, they will be the best of our lives, looking back from 30 years out ...

paradigm shifts are rare, wonderful, disorienting if one is looking in the wrong direction, at what is falling apart ..

what is growing, still a bit hidden, is a higher order of functioning ... enjoy the flow

Re: Taking It To The Hood

Peter Fleckenstein — Sat, 21 Feb 2009 16:35:38 -0000

Jeff,

Wanted to get your thoughts on Fannie Mae increasing the MBS limit from 4 properties to 10 starting March 1st. Here's the parameters:

Effective March 1, 2009 FNMA will be accepting MBS pool loans for real estate investors with up to four properties on credit according to the following rules on properties FIVE (5) through TEN (10):

1. Middle credit score of 720 or higher (no exceptions)
2. Maximum purchase LTV on single units 75%
3. Maximum limited cash out on single units 70%
4. Maximum purchase LTV on 2 to 4 unit 70%
5. Zero … and they mean ZERO … delinquencies in the last 12 months
6. NO BK or FC in the previous SEVEN (7) years
7. Rental income on the subject property must be fully documented
8. All borrowers must complete a form 4506-T
9. SIX (6) months of PITI payments for ALL properties owned*

Now it looks good on first read to me. Properties 5 through 10 are based on true credit worthiness and low risk of payoff. However - what about properties 1-4? Why the cash out of 70% on them? Why wasn't this trumpeted out publicly? On it's face it looks pretty smart but I have a gut check on this and it's not feel good.

I'm curious as to whether this is just a prop up of riskier MBS packages sitting in Fannie Maes portfolio? How does the HASP billions for Fannie play into this? Are they trying to help Banks reduce their REO? Is this just covering up bad debt with good money?

Like I said I have a gut check that says somethin ain't right here but with your expertise in this arena I was hoping you could provide some feedback.

Thanks.

BTW - Here's the link to Fannie Mae's MBS Program - http://www.fanniemae.com/mb...

Update: Just forgot one thing to add here - It might be me but doesn't number 9 look like a veiled "AIG" bailout program?

Re: Taking It To The Hood

Shane — Sat, 21 Feb 2009 16:33:12 -0000

I agree with you that this problem has created the self-perpetuating fear that the Depression was prolonged by. I think that it is Obama's obligation as the President to come out and reassure the country. However, I think that there is a major difference between assurance, and spending nearly a trillion dollars that our government does not have. To me, that is not any assurance (especially because I am not actually going to see any of the "stimulus" benefit me directly, I employ the strategy of living within my means). In my opinion, that money is just going to be wasted. I think that the leadership in our government needs to come clean, and make sure that the entirety of the populace knows the facts about this crisis. Specifically, the percentage of people who are in or near foreclosure of their primary residence, relative to that number over time, as well as the percentage of unemployment currently, relative to that number over time. To me, the 24 hour news cycle is making this financial mess significantly worse than it really is. I mean, we are at ~8% unemployment right now. Yes, that number will increase over the next several months, but I just do not see us reaching the astronomically high employment levels of the Depression era. Not only that, the vast majority of people in this country still have a job, and are still current on their mortgage payment. However, if you watch CNN, Fox News, etc., they would have you believe that the whole country is getting ready to shut down.

Re: Taking It To The Hood

Junior — Sat, 21 Feb 2009 16:12:43 -0000

40 acres and a Mule 2.0. That's all this is.

Wonderful article and I admire your idealism and inherent faith in the ability of the government to pull off a fiscal recovery in the face of such overwhelming evidence that they are not only incapable of this but not even all that well-intentioned in the first place. But ain't gonna happen. Not on Bernanke's watch and not on Geithner's either. President Obama himself is delusional if he believes in his heart of hearts that this will restore stability to the crippled housing market.

Leave the beast alone.

Or as someone told me the other day... "Stop poking the bear"

Had the housing market not been doped up on hallucinogens (sorry, I live in San Francisco where you are lucky to score a dump for under $600k), we could have prevented all this in the first place.

How about a re-evaluation of housing prices first and foremost? Why are we focusing on those in foreclosure and not those who made it their jobs to inflate values based on obscure Bizarro World methods?

No one has enough fingers to point.

Had equity not been based upon largely fictional figures in the first place, perhaps profound losses would be easier to chew on. Now we have stimulus footing the bill for our military service people who are forced to move so THEY don't have to take an equity hit and I as a taxpayer should also foot the bill so someone can stay in their house which they probably couldn't afford in the first place while I rent in the U.S.'s 2nd most expensive city?

Someone slap me.

But yes... wonderful article.

Re: Taking It To The Hood

JLM — Sat, 21 Feb 2009 15:27:15 -0000

I guess the unfortunate answer is that yes the guy w/ the $200K equity does get screwed but his loss of equity just now is a paper loss only. If he continues to own the house then he has a chance to recover and you have to believe that over the long run everything recovers.

When I was buying large commercial buildings in the late 1980s for $20-30/SF I could not believe they would ever recover to their original creation cost ($125-150/SF). When they were selling for $250/SF 7 years later, I began to believe. Markets change and it will not last forever.

Much of what we are dealing with has multiple loci of pain --- bad housing situation, bad job situation, etc. Bank failures in addition to personal real estate issues.

There is no single solution which solves all the problems fairly and instantly.

There are many folks (myself included) who never want any help. Leave me alone. Let me eat what I kill. I seek no other man's chili bowl and I will eat no other man's bread. Tax me as little as possible and I will create jobs for others that you may tax. Alas, I am not holding my breath.

Re: Taking It To The Hood

JLM — Sat, 21 Feb 2009 15:17:52 -0000

Good and interesting example. A couple of observations.

First, I don't think this is the typical HASP scenario and I don't know that HASP helps them particularly. If they are smart SF type folks who have come upon "hard" times, then they have to go into the bank and negotiate a "work out" even if it entails a deficiency note. This happens all the time.

I don't see the general public being impacted by their deficiency note.

If they are honorable folks, they regroup, get another job, downsize for a while and pay off their deficiency and get started again. If their earning power is based upon advanced degrees or other intellectual property, they have not lost their earning power so they can come out of this fine. They just have to deal with it.

Their house will find an equilibrium point in the marketplace at a substantially lower price and then you and others will be provided with the opportunity to get that extra bedroom, upgraded kitchen, larger backyard or better location for FREE. Well, not really for free but at a price that makes it feel like free.

I don't think HASP is intended to salvage the affairs of otherwise solvent families with strong earning power or loans that are beyond the Fannie, Freddie or FHA thresholds. They are going to have to fend for themselves and retrench. There is nothing wrong with dealing with the negative outcomes of a risk gone wrong as long as one deals with them honorably.

The folks are likely to consider moving to Austin, TX where they will be able to afford three times as much house for half the price as California. There are a 100,000 of them there already. LOL

Re: Taking It To The Hood

JLM — Sat, 21 Feb 2009 14:58:50 -0000

Fly over the landscape from Abilene to Lubbock to Amarillo and you will see windmills as far as the eye can carry. This is T Boone Pickens country.

The old Texas (cattle, oil) is now morphing into the new Texas but equally important is that the manufacturing companies who supply the components of this emerging industry are relocating there because the costs of transport are so high, local community colleges are delivering skilled workers educated to the specifications of these new economy employers and everybody in the oil patch who can weld a straight line is looking for work there.

The guys in the auto industry don't stand a chance and the compensation rates are in the $14-20/hr range.

Texas windmill employer: Son, can you weld a straight line?

Texas welder: Hell yes, sir, I can weld anything but tissue paper, the crack of dawn or a broken heart.

Texas windmill employer: Son, you got a job!

Re: Taking It To The Hood

JLM — Sat, 21 Feb 2009 14:43:16 -0000

It is time to start making some bets. You are absolutely right.

I run a little public company which is engaged in a quirky little business acting as the real estate landlord to charities who conduct bingo as a fundraising mechanism for their charitable purposes. Arcane niche but highly profitable business. At the end of the day, it is a very specialized real estate business to which we add a "franchise manual" value added proposition whereby we teach charities (in appropriate regulatory environments) how to make more money playing bingo. It is a simplistic multi-unit, multi-state (Tx, Fla, SC, Ala) operating business (not unlike the apartment business or the fast food business).

If you can run one, then you can run 1,000 units. It has the same gross up, roll up, consolidaton implications of any similar unitary enterprise. We are just taking a mom & pop business and slapping it with a checkbook, running it using modern business concepts, bringing the marketing into the current century, standardizing procedures, documenting performance, benchmarking the analytics and upgrading the personnel involved --- then we feed, fertilize and grow the number of units thereby reducing overhead as a percentage of revenue. Simple, simple, simple.

In the last year I have made 4 acquisitions. Some are multi-unit acquisitions. The first returned a 25% cash on cost return in its first year of operations. The second is looking like a 145% cash on cost return. The third is looking like a 130%. The last is also going to be over 100%. These are unleveraged returns and with just a pinch of leverage, the returns are astronomical. These returns are improved by our expertise and the assurance that ALL of the $$$ gets into the cash register, a real problem with any cash business these days.

The point is that the returns are already accelerating as the market chaos spreads. Another way of saying the same thing is that selling prices are going down. We usually negotiate a cash and note arrangement and then get an "all cash" discount.

Today I have about 40 + units (up from 16 some time ago) and I hope to grow to about 125 units. There are deals out there and we are actively engaging any and all sellers whether the pricing is right or not because they will change their minds as the economy continues to present challenges.

In every instance, we are buying from someone who is dealing with a "D" --- death, divorce, disability, disease, corruption, regulatory issues, fear, etc. Nobody is just monetizing their investment.

Unfortunately, I cannot deploy much capital in these deals as they all trade in the $300-600,000 range and each deal is like pushing an elephant through a transom window but we have perserverance.

So, yes, I think the time has come to do some deals and to build for the future. Having done this before in the S & L crisis, I can also say that there is a huge premium to be had for simply having a coherent plan and the confidence of it not being your first trip to the rodeo.

In the land of the blind, the one eyed Jack reigns supreme.

Re: Taking It To The Hood

JLM — Sat, 21 Feb 2009 14:16:47 -0000

From a macro perspective, I agree with you completely. Unfortunately the problem has gotten so big and it has gotten into our national psyche in such a manner that it has become a matter of confidence rather than just market behavior. We are on the psychiatrist's couch and he is trying to talk us down off the ledge.

Now is the time for triage and in a few months we can become a bit more critical. I am firmly convinced that the investment and commercial banks who caused the problems and the regulators who overlooked or otherwise empowered them have got to be eliminated.

We are not saving the individual participants, we are saving the system and the coherent whole. Then we should punish the individual misbehaviors who by then may have been punished by the dismemberment of their employers. When Citi lays off 52K workers, you have to believe they will get a few folks who led them down the wrong paths. I hope so.

The most powerful among us use their power sparingly for it is the illusion of power which is the real power. Now is the time to be just a bit compassionate and then lower the boom once the entire system is safe again.

Wait until we are in harbor to begin the board of inquiry as to how we got on the rocks in the first place.