I spent several hours recently reading blogs, magazine and newsprint articles written by some of the country’s top economists. I was trying to get a sense of where the U.S. economy is headed and gain some sort of insight as to when things might get back to “normal.” The reality is, what we had come to think of as normal really never was.
The United States has been on a completely irresponsible fiscal joy ride (some would call it a demolition derby) for many years. Unbridled greed at all levels of the financial markets was unleashed by deregulation of the financial industry and unrealistic mortgage terms. The Madoff & Stanford revelations, the huge cost of the wars in Afghanistan and Iraq, partisan politics, etc., indicates how badly we lost our way. As a society, in some way, almost everyone contributed to the fiasco through our collective mindset. This is our wake-up call.
Our country and the rest of the world will see some extremely rough bumps and scrapes along the way, but I think the fear factor will be the biggest personal and collective challenge of all. Our imaginations can be our greatest friend or worst enemy. One thing I’ve learned over the years is that almost nothing is as good or as bad as we think it will be. And, clearly, it feels better to be an optimist than to be a pessimist, so why not look on the bright side of adversity? Those who are looking for good signs will find support for optimism, while those looking for bad signs will find support for their pessimism. Oddly enough, either one can be right if their attitude becomes the mindset of the mainstream. Collectively, we’ll hit our target because it’s the only one we can see.
I’m an optimist by nature and I believe that every adversity carries with it the seed of opportunity. While fortunes have been lost in the past year, others have been made as the economy flounders. I’ve been making the case for buying more real estate while the market is depressed. That view is stronger now than ever as the pendulum has swung way too far to the negative side, emotionally as well as price wise. Savvy investors are taking advantage of the current super low real estate prices (far below replacement costs) while they can. It’s times like these when real estate millionaires are made. And cash, as always, is king.
Direct Participation Mortgage Programs, as well as other private investment vehicles have grown very slowly recently, which is no surprise. Personally, I’m seeing only a handful of new private investors coming on board since the economic meltdown. They are the ones who want to be ready to grab the commercial real estate opportunities as they appear in 2009. We want to be sellers when liquidity is restored to the financial markets. It’s an exciting time for those who follow the workings of market cycles.
It’s important to accept the profound changes occurring all around us, changes that shake up our cozy little worlds. We need to be able to adapt. One thing for sure, American life as we have known it WILL change—perhaps permanently. Maybe the lessons we’re learning (and about to learn), aren’t so bad for us after all, even if they’re painful.
In about 50 B.C., Homer, the Roman poet and satirist said, “Adversity has the effect of eliciting talents which in prosperous circumstances would have lain dormant.” He also said, “Cease to ask what the morrow will bring forth, and set down as gain each day Fortune grants.” Although many things have changed since Homer’s time, some things remain the same. Attitude is everything!
Friday, March 6, 2009
Thursday, February 12, 2009
The Magic Of The Wraparound Mortgage
In times like these, when the economic future is so uncertain, let’s take a moment to revisit a lending vehicle that most people aren’t thinking about at the moment, the “wrap.” I know, I know, you’re wondering how this debt vehicle would be used in a real estate market such as this. Well, why not take a look at the function and structure of this type of mortgage and come to your own conclusions.
A wraparound mortgage (also known as an all-inclusive mortgage or trust deed, commonly called a “wrap”) is defined as “a mortgage that secures a debt and includes the balance due under an existing first mortgage.” This type of mortgage will "wrap around" the current debt and include any new funds advanced.
Under the terms of a wrap, the borrower makes one monthly payment, which includes the payment due on the first mortgage and the principal and interest due on the “new money” advanced. The wrap holder then makes the payment due on the existing first mortgage. By using this method, the borrower can’t default on the first mortgage. If the borrower fails to make a payment, the wrap holder can continue to pay the existing first mortgage debt to protect its interests, while pursuing a foreclosure on the wrap.
When we talk about making a mortgage that will be in second position to an existing first mortgage, it raises the question of risk. If the borrower defaults on the payment of the first mortgage, the second mortgagee (lender) may not know about it. Any unpaid monthly payments, late charges, penalties, property taxes, insurance and legal costs can add up quickly. If this leads to a foreclosure action, these costs are paid before the second mortgage receives anything. The second mortgage is at risk of being foreclosed out if the property doesn’t sell at auction for enough to cover both loans and all the costs. However, when using the wraparound mortgage the payment on the first mortgage is included in the monthly payment from the borrower. A default cannot happen on the first mortgage without the wrap holder’s knowledge. It is an excellent instrument to use for mitigating risk when in second position, and, it can generate returns to the wrap holder that are much higher than normal.
The way to achieve the higher returns when using a wrap mortgage when in a junior position is that the principal reduction (amortization) realized by making monthly payments on the existing first mortgage goes to the wrap holder, not the borrower. This can make a significant difference in the yield of the wrap holder’s new money advanced. For instance, the actual principal reduction of an original $1,000,000 first mortgage with a 25-year term at a 7% interest rate is $20,000 in the fifth year of the loan.
When the wrap on that first mortgage includes $500,000 of new money advanced by the Grace Fund at 15.5% interest, the yield to the Fund looks like the example below.
One- year principal reduction
(amortization) of 1st mortgage: $20,000
Interest -only payments
on new Money @ 15.5% rate: +77,500
Total annual earnings
to The Grace Fund: $97,500
Annualized yield on new money: 19.5%
The older the first mortgage, the greater the annual principal reduction and the higher the yield to the Grace Fund. The amortized portion will be received by the Grace Fund when the wrap loan matures, usually in 12 to 18 months.
Grace Realty Group and its affiliates prefer property sellers that are willing to provide financing that includes an amortizing first mortgage that can be wrapped. The increased yield passes to the Grace Fund, which is how annual earnings over 15% are easily and safely achieved for distribution to investors.
I’ve written a book called, Mortgage Deed Investments – How to Achieve High Returns Through a Proven Safe Investment. The explanation of the wraparound mortgage is just one chapter in it It’s written in a quick-reference format that will aid the reader when contemplating the inclusion of mortgage deeds as part of their investment portfolio. I’ll be glad to send one out to anyone who’s interested in brushing up on some basic on mortgage deed investing.
A wraparound mortgage (also known as an all-inclusive mortgage or trust deed, commonly called a “wrap”) is defined as “a mortgage that secures a debt and includes the balance due under an existing first mortgage.” This type of mortgage will "wrap around" the current debt and include any new funds advanced.
Under the terms of a wrap, the borrower makes one monthly payment, which includes the payment due on the first mortgage and the principal and interest due on the “new money” advanced. The wrap holder then makes the payment due on the existing first mortgage. By using this method, the borrower can’t default on the first mortgage. If the borrower fails to make a payment, the wrap holder can continue to pay the existing first mortgage debt to protect its interests, while pursuing a foreclosure on the wrap.
When we talk about making a mortgage that will be in second position to an existing first mortgage, it raises the question of risk. If the borrower defaults on the payment of the first mortgage, the second mortgagee (lender) may not know about it. Any unpaid monthly payments, late charges, penalties, property taxes, insurance and legal costs can add up quickly. If this leads to a foreclosure action, these costs are paid before the second mortgage receives anything. The second mortgage is at risk of being foreclosed out if the property doesn’t sell at auction for enough to cover both loans and all the costs. However, when using the wraparound mortgage the payment on the first mortgage is included in the monthly payment from the borrower. A default cannot happen on the first mortgage without the wrap holder’s knowledge. It is an excellent instrument to use for mitigating risk when in second position, and, it can generate returns to the wrap holder that are much higher than normal.
The way to achieve the higher returns when using a wrap mortgage when in a junior position is that the principal reduction (amortization) realized by making monthly payments on the existing first mortgage goes to the wrap holder, not the borrower. This can make a significant difference in the yield of the wrap holder’s new money advanced. For instance, the actual principal reduction of an original $1,000,000 first mortgage with a 25-year term at a 7% interest rate is $20,000 in the fifth year of the loan.
When the wrap on that first mortgage includes $500,000 of new money advanced by the Grace Fund at 15.5% interest, the yield to the Fund looks like the example below.
One- year principal reduction
(amortization) of 1st mortgage: $20,000
Interest -only payments
on new Money @ 15.5% rate: +77,500
Total annual earnings
to The Grace Fund: $97,500
Annualized yield on new money: 19.5%
The older the first mortgage, the greater the annual principal reduction and the higher the yield to the Grace Fund. The amortized portion will be received by the Grace Fund when the wrap loan matures, usually in 12 to 18 months.
Grace Realty Group and its affiliates prefer property sellers that are willing to provide financing that includes an amortizing first mortgage that can be wrapped. The increased yield passes to the Grace Fund, which is how annual earnings over 15% are easily and safely achieved for distribution to investors.
I’ve written a book called, Mortgage Deed Investments – How to Achieve High Returns Through a Proven Safe Investment. The explanation of the wraparound mortgage is just one chapter in it It’s written in a quick-reference format that will aid the reader when contemplating the inclusion of mortgage deeds as part of their investment portfolio. I’ll be glad to send one out to anyone who’s interested in brushing up on some basic on mortgage deed investing.
Tuesday, January 13, 2009
Grace Realty Group Investors Help Local Economy
The present economic decline has been described as the greatest financial crisis to strike America since the Depression. Job losses are climbing and most predictions are alarming at best.
Grace Realty Group is in the position of being part of the solution to today’s problems. Our redevelopment projects create jobs for construction workers, architects, building material manufacturers and suppliers. County and state government administration personnel kept busy permitting and inspecting our construction sites. We are having a very positive impact on the economy in that area in a time of uncertainty. And don’t forget, redevelopment is the ultimate recycler of otherwise worn-out buildings.
The reason the Grace companies can do this is because of our investors. Without their faith in our ability to “git ‘er done” and the role of real estate investment as a major market influence, we wouldn’t have this opportunity. So, we have only words of gratitude to our investors on behalf of the folks in Marianna, Florida. Without you their holidays wouldn’t be nearly as cheerful.
Grace Realty Group is in the position of being part of the solution to today’s problems. Our redevelopment projects create jobs for construction workers, architects, building material manufacturers and suppliers. County and state government administration personnel kept busy permitting and inspecting our construction sites. We are having a very positive impact on the economy in that area in a time of uncertainty. And don’t forget, redevelopment is the ultimate recycler of otherwise worn-out buildings.
The reason the Grace companies can do this is because of our investors. Without their faith in our ability to “git ‘er done” and the role of real estate investment as a major market influence, we wouldn’t have this opportunity. So, we have only words of gratitude to our investors on behalf of the folks in Marianna, Florida. Without you their holidays wouldn’t be nearly as cheerful.
What Does Sam Have to Say?
On more than one occasion I’ve mentioned Sam Zell, the real estate billionaire and organizer of the original real estate “vulture fund” (now known by the politically correct term “opportunity fund”) of the early ‘90s. When commercial property turned sour he was ready and armed with his $409 million fund (small by today’s standards) to buy out excellent properties for pennies on the dollar from troubled sellers, including the Resolution Trust Corporation.
The RTC was a quasi-government corporation set up by Congress to take over troubled thrifts and dispose of properties foreclosed as a result of the S&L meltdown. He bought brand new apartment complexes for less than $5,000 per unit when they were going for $40,000 or more shortly before the crisis. He was prepared.
At a December 14th Israeli business conference Zell remarked that “the U.S. real estate market will be in recovery by spring 2009.” Zell also pointed out that “the US population is growing, and with fewer than 600,000 building starts in 2008, a million fewer than any of the last 10 years, demand for housing will rise.” Zell blamed the current crisis - at least in part - on “ill-considered decisions disseminated around the world and people, in effect, respond to it, perhaps, often without any particular caution or attention.”
What that means is that the news we hear is printed without being thought through rationally and, as a result, people panic. But doesn’t it make sense that there would eventually be a housing shortage if new construction is virtually shut off, down to only one quarter the normal number of annual new housing starts? Sure, there is excessive inventory (ten months worth) right now, but when financing is restored people will buy in a big way and the inventory will be quickly absorbed. In the early 2000s there was excessive inventory, too, but it didn’t take long to turn that around.
Another thing, in the U.S. we replace about 2% of our housing stock each year. Add to that the increased number of new household formations and suddenly we need millions of new housing units per year. It’s coming. There aren’t enough park benches for all those who will need housing.
Another factor I think contributes to the panic and confusion is the lightning speed at which information is disseminated around the world by email, TV, radio and other communications. News comes to us instantaneously, in real time, and people are able react to it immediately and en masse because they all got the news at the same time. Markets crash and banks suffer a run on deposits when everybody does the same thing at the same time.
If it took a bit longer for news to get around, important events would be old news before half the population knew about it. Today, we can get the news that Lehman Brothers is going belly up and how awful that is, with “talking heads” putting their own spin on events and how it will affect the world. And then it does because of the speed by which we tend to collectively react.
We’re now at or near the bottom of another real estate cycle and those who have the courage to be contrarian and buy today will be the multi-millionaires of tomorrow. It’s not rocket science, brainy or anything like that. Buy low and sell high.
I’m certainly not saying that I have all the answers but I have learned at least one thing in my long march to geezer status: Slow down, stop and think, wait and see.
Remember, almost nothing is as bad or as good as you think it’s going to be.
The RTC was a quasi-government corporation set up by Congress to take over troubled thrifts and dispose of properties foreclosed as a result of the S&L meltdown. He bought brand new apartment complexes for less than $5,000 per unit when they were going for $40,000 or more shortly before the crisis. He was prepared.
At a December 14th Israeli business conference Zell remarked that “the U.S. real estate market will be in recovery by spring 2009.” Zell also pointed out that “the US population is growing, and with fewer than 600,000 building starts in 2008, a million fewer than any of the last 10 years, demand for housing will rise.” Zell blamed the current crisis - at least in part - on “ill-considered decisions disseminated around the world and people, in effect, respond to it, perhaps, often without any particular caution or attention.”
What that means is that the news we hear is printed without being thought through rationally and, as a result, people panic. But doesn’t it make sense that there would eventually be a housing shortage if new construction is virtually shut off, down to only one quarter the normal number of annual new housing starts? Sure, there is excessive inventory (ten months worth) right now, but when financing is restored people will buy in a big way and the inventory will be quickly absorbed. In the early 2000s there was excessive inventory, too, but it didn’t take long to turn that around.
Another thing, in the U.S. we replace about 2% of our housing stock each year. Add to that the increased number of new household formations and suddenly we need millions of new housing units per year. It’s coming. There aren’t enough park benches for all those who will need housing.
Another factor I think contributes to the panic and confusion is the lightning speed at which information is disseminated around the world by email, TV, radio and other communications. News comes to us instantaneously, in real time, and people are able react to it immediately and en masse because they all got the news at the same time. Markets crash and banks suffer a run on deposits when everybody does the same thing at the same time.
If it took a bit longer for news to get around, important events would be old news before half the population knew about it. Today, we can get the news that Lehman Brothers is going belly up and how awful that is, with “talking heads” putting their own spin on events and how it will affect the world. And then it does because of the speed by which we tend to collectively react.
We’re now at or near the bottom of another real estate cycle and those who have the courage to be contrarian and buy today will be the multi-millionaires of tomorrow. It’s not rocket science, brainy or anything like that. Buy low and sell high.
I’m certainly not saying that I have all the answers but I have learned at least one thing in my long march to geezer status: Slow down, stop and think, wait and see.
Remember, almost nothing is as bad or as good as you think it’s going to be.
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