[Rhodes22-list] Accounting

[TN Rhodey]

Did you sell your house? Just wondering ......Wally

On Thu, Oct 2, 2008 at 10:52 AM, Brad Haslett <flybrad at gmail.com> wrote:

> Wally,
>
> Actually, there's two closings.  The buyer and his ex are supposed to
> close on the sale of their house tomorrow morning and he on ours in
> the afternoon.  We'll see what happens. I didn't have the house on the
> market, the buyer found out from one of the professors he works with
> that we might be interested in selling and I made him an offer he
> didn't want to refuse.  The house has been nothing but a PITA for me.
>
> I didn't even go to the closing on our business property.  They faxed
> me the HUD paperwork to look over and I FedEx'd a power of attorney
> down to Gulfport. In fact, I never even saw the property until after
> we owned it. I found it and researched it on the internet and I had my
> brother go by and look at it.  Always better to be lucky than good.
> The State of Mississippi is building the largest port in North
> America, bigger than LA in Gulfport.  They also finalized the route of
> the four-lane connecting the port to US49 and the only exit between
> the Gulf and 49 is going to be about 100 yards from our property -
> just outside the footprint. Maybe the real estate gods smiled on us.
>
> Brad
>
> On Thu, Oct 2, 2008 at 9:35 AM, TN Rhodey <tnrhodey at gmail.com> wrote:
> > Brad - Good luck on your close.  Has the title company drafted a closing
> > statement and have they received wire funds from lender? If you are going
> to
> > close in the morning they should have this ready to go. Of course banks
> and
> > title companies love to wait until the last minute but things are slow.
>  I
> > would call and ask for a copy/draft of HUD Settlement Statement and ask
> if
> > they have the wire. If they do you are all set. If not there is still a
> > little sweating....
> >
> > Hopefully your buyer is going to live in this house, investment property
> is
> > very tough to close these days.
> >
> > A Realtor with a broker license .....I could share a few
> stories.....nothing
> > worse unless it is a builder, realtor, broker.
> >
> > Wally
> > On Thu, Oct 2, 2008 at 10:10 AM, Brad Haslett <flybrad at gmail.com> wrote:
> >
> > If all goes well, we should close on our rent house tomorrow
> > afternoon.  I sold this house in 2002 to a mortgage broker who was
> > also a real estate agent.  One day before closing she calls me and
> > says she can't get financing?  Huh?  Her story was she can't get
> > financing on the extra lot so I volunteer to finance it for her.  No
> > deal, she wants her earnest money back and I tell her to go pound sand
> > (what really happened is she found another house).  We get sued for
> > $30,000 + over a $2000 earnest money deposit and have a hearing set
> > for freezing our assets for $200,000 for possible punitive damages.
> > She asserts in her suit that we fraudulently represented the extra lot
> > as a buildable lot when it wasn't. My attorney convinces me to follow
> > expediency over principle and we settle the deal with a return of the
> > earnest money on the courthouse steps.  The rest of the story gets
> > even more convoluted and repulsive but I filed a complaint with the
> > whatever TN state department covers mortgage brokers and the TN Real
> > Estate Commission.  You know where that went - the foxes guarding the
> > hen house.
> >
> > And now the good news.  The whole episode pissed me off so badly that
> > I built a spec home on the extra lot in 2002 just to prove it could be
> > done and made some money. Now if everything goes OK tomorrow, I'll be
> > done with the whole thing.  Other than our house and our business
> > location in Gulfport, I'm done with real estate in this country.
> >
> > Brad
> >
> > On Thu, Oct 2, 2008 at 8:54 AM, TN Rhodey <tnrhodey at gmail.com> wrote:
> >> Brad, I really wasn't arguing just for the sack of argument. I promise.
> > :-)
> >> I had stayed out of the fray but having actually had work experience
> that
> > is
> >> directly involved I had to pipe in. Now keep in mind I do agree that
> there
> >> was a bunch of fraud  and defaults in CRA loans.....just drop in the
> > bucket
> >> compared to the true sub-prime dogs.
> >>
> >> The worse of the worse sub-prime Lenders was Ameriquest. Around 2005 hey
> >> were doing super bowl commercials, they sponsored the Rolling Stones
> tour,
> >> and sponsored the Ranger's baseball stratum in Texas. There were rolling
> > big
> >> time . Even in Knoxville their so called loan originators were making
> 200K
> >> plus!!! After a couple of class action lawsuits they were shut down.
> >>
> >> Before I understood their methodology I tried to hire some of these
> guys.
> >> Unlike a broker First Horizon (First TN) requires credit check, criminal
> >> background check, fingerprints, and drug test. I gave up after I figured
> > out
> >> they were successful because they were crooks. They couldn't pass the
> >> background checks. Interviewing these scammers was a real eye opener.
> Many
> >> were quite proud and would brag on the amount of fees and points they
> > tacked
> >> on a loan. No I never hired on of these guys.
> >>
> >> Sub-prime + broker = disaster. Well not always but most of the fraud,
> high
> >> pressure tactics, elevated appraisals, and so on were from Brokers.
> > Brokers
> >> were typically not involved with CRA programs. Now many banks also
> broker
> >> loans but in my opinion there was usually a higher level of integrity in
> > the
> >> bank process. Defaults rates support my conclusions. Of coure there are
> >> crooked bankers. .....
> >>
> >> Note to beome a licensed Mortgage Broker in TN requires no education, no
> >> testing, and no background check. You send a $100 check to the State.
> >>
> >> Brad if you saw what I saw you would know why I was crying chicken
> little.
> >> The shit I saw every day scared the hell out of me from a financial risk
> >> stand point.
> >>
> >> Wally
> >> On Wed, Oct 1, 2008 at 6:28 PM, Brad Haslett <flybrad at gmail.com> wrote:
> >>
> >>> Wally,
> >>>
> >>> This article from a tax blog just showed-up on the scan and supports
> >>> some of your points (note to self - Brad, get a life, leave the house,
> >>> go to the hangar, go sailing).
> >>>
> >>> -----------------------------
> >>>
> >>> September 30, 2008
> >>> 7 The Financial Crisis: What Went Wrong?
> >>>
> >>> The ongoing turmoil in the financial markets has diverted me from my
> >>> usual tax academic pursuits, including this blog, for which I
> >>> apologize. This post explores the causes of that turmoil. My next post
> >>> will explore solutions currently under consideration, including
> >>> aspects of the so-called "$700 billion bailout."
> >>>
> >>> The current financial crisis has many causes, some long-term and
> >>> structural. I focus here, however, on three immediate aspects of the
> >>> crisis: the trigger, how problems generated by that trigger spread
> >>> through the markets, and how this produced the liquidity freeze that
> >>> persuaded Mr. Paulson and Mr. Bush to act (unsuccessfully thus far).
> >>>
> >>> The Trigger: Teaser-Rate Mortgages
> >>>
> >>> The media talks about "sub prime mortgages" – by which it means
> >>> mortgage loans to borrowers with less than stellar credit. The real
> >>> problem, however, was the advent and widespread use of teaser-rate
> >>> mortgages in both the prime and sub prime markets. A teaser-rate
> >>> mortgage allows a borrower to make relatively small payments for
> >>> several years. At some point, the rate jumps dramatically, and the
> >>> borrower faces much higher monthly payment obligations.
> >>>
> >>> Not surprisingly, borrowers loved this innovation. Teaser-rate loans
> >>> allowed folks who otherwise could never have afforded to own a home to
> >>> buy one, at least until the rate reset. But it wasn't just sub prime
> >>> borrowers who liked teasers. Teasers sold like hotcakes; loan
> >>> originators made correspondingly fabulous profits.
> >>>
> >>> (Some have tried to blame teaser-rates on the Community Reinvestment
> >>> Act of 1977, which encouraged lending to minorities and lower income
> >>> Americans. But that act only applied to commercial banks. A majority
> >>> of this crisis's teaser-rate loans were made by unregulated
> >>> originators not subject to the act. More fundamentally, there is no
> >>> evidence the present crisis started in 1977. Teaser-rate mortgages
> >>> first became widespread after Mr. Bush took office in 2001.)
> >>>
> >>> In any event, it's not hard to predict what happens when rates reset.
> >>> All of a sudden, buyers who have been paying $1,000 per month face
> >>> monthly payments of $4,000. Many, perhaps most, go into default.
> >>>
> >>> The possibility that this would become a major problem became apparent
> >>> as early as 2005. (I actually wrote that fall predicting the current
> >>> crash.) Mortgage economists began publishing reset schedules –
> >>> schedules of how many billions or trillions of dollars of mortgages
> >>> would reset and when. In effect, those tables offered a rough schedule
> >>> of how many mortgages would go into default and when.
> >>>
> >>> As defaults increased in number, lenders ended up holding large
> >>> amounts of foreclosed property. When they tried to convert the
> >>> property into cash, they put downward pressure on housing prices. And
> >>> this, in turn, made financing and refinancing more difficult and
> >>> further defaults more likely – even of non-teaser loans. (A perfect
> >>> vicious cycle, and we're not remotely near the end of it. In parts of
> >>> the country, more half the homes offered for sale are now
> >>> foreclosures. Banks are desperate to get those homes off their balance
> >>> sheets and are dumping them much faster than the market can absorb
> >>> them.)
> >>>
> >>> The Spread: Securitization and Debt Chains
> >>>
> >>> But why did Lehman Brothers and AIG go under? After all, they don't
> >>> make mortgage loans. I turn next to how the problem spread.
> >>>
> >>> Assume that A borrows from B to buy a home, giving a mortgage on the
> >>> home to secure her debt. B then borrows from C, using A's mortgage as
> >>> security. C in turn borrows from D, using B's obligation as security.
> >>> And so on.
> >>>
> >>> Now assume that A's mortgage goes bad. What happens to B, C, and D?
> >>> Answer: all the loans up the chain go bad as well.
> >>>
> >>> And this isn't all. If the loan is secured (as mortgages and many
> >>> other links in debt chains are), the lender is typically less
> >>> interested in the creditworthiness of the borrower. The lender relies
> >>> primarily on the collateral, not the borrower, for assurance of
> >>> repayment.
> >>>
> >>> As a result, each financial intermediary can be thinly capitalized. So
> >>> a company with $10.1 billion in assets and $10 billion in debt may
> >>> have a small amount of net equity. Indeed, the more thinly capitalized
> >>> a company, the higher the return it can make on its capital.
> >>>
> >>> Unfortunately, what this means is that when A's mortgage goes bad,
> >>> it's not just the loans up the chain that go bad – financial
> >>> intermediaries in the chain often go bust as well. A thinly
> >>> capitalized intermediary cannot absorb many losses. And that is why
> >>> teaser-rate mortgage defaults triggered and are still triggering
> >>> defaults and failures across the entire financial sector. Almost
> >>> everyone was in the debt-chain business and extended themselves to the
> >>> max to take advantage of the extraordinary profit opportunities of
> >>> that business.
> >>>
> >>> I've explained the transmission mechanism in terms of debt because
> >>> readers have an intuitive understanding of how debt works. In fact,
> >>> however, many of the most important links in the chain were not
> >>> technically "debt." Some were shares in "mortgage pools"; some,
> >>> "derivatives"; some, "credit default swaps." What they all had in
> >>> common was that each transferred some risk of default up the chain to
> >>> someone else. Wall Street sometimes calls links in such debt chains
> >>> "toxic waste," because today no one wants them.
> >>>
> >>> AIG, for example, held about $500 billion in "notional exposure" on
> >>> credit default swaps. In English, it was at risk to the tune of about
> >>> $500 billion if mortgages down the chain went bad. When mortgages
> >>> began to go bad in large numbers, the market realized that AIG might
> >>> not be able to cover its obligations and began to sell AIG stock
> >>> seriously short. Lenders stopped lending. End of story.
> >>>
> >>> What made this more than just a corporate problem was that AIG was a
> >>> domino at the head of many long chains of dominoes. If AIG had gone,
> >>> some believed the world would have faced immediate economic collapse.
> >>> So the US government bought an 80% stake in AIG in exchange for enough
> >>> money to allow AIG to dissolve gracefully – over a couple of years –
> >>> instead of imploding overnight.
> >>>
> >>> The Crisis: Liquidity Freeze
> >>>
> >>> None of this, however, would by itself have led a free-market US
> >>> administration to propose a $700 billion general "bail-out." Real
> >>> estate is important, yes, but there are many parts of the economy not
> >>> dependent on the market for home mortgages. What happened?
> >>>
> >>> In ordinary times, most businesses borrow on a short term basis to
> >>> fund payroll, inventory, and other operating needs. There are two
> >>> principal sources of short-term money: banks and money-market funds.
> >>> In the past several weeks, each of these has substantially reduced the
> >>> amounts they are willing to lend. This is what's called a liquidity or
> >>> credit freeze.
> >>>
> >>> Why did banks and money-market funds stop lending?
> >>>
> >>> Let's start with money-market funds. Investors put money into
> >>> money-market funds when they want absolute safety and the ability to
> >>> pull their money out at will. Put in a dollar, get out a dollar,
> >>> whenever you want. In return, they accept a very low return. What
> >>> happened was that The Reserve, the oldest and most highly regarded
> >>> money-market fund sponsor, "broke a buck" – which means it paid back
> >>> only 97 cents for every dollar investors put in.
> >>>
> >>> The reason was simple: The Reserve had loaned short-term money to
> >>> Lehman Brothers, a major participant in the debt chain business.
> >>> Lehman Brothers went belly up, and The Reserve's short-term loans to
> >>> Lehman became uncollectible. (Remember that the Treasury and the
> >>> Federal Reserve Bank, having bailed out Bear Stearns, decided to let
> >>> Lehman Brothers go bankrupt to teach the market a lesson. In
> >>> retrospect, this was probably a mistake.)
> >>>
> >>> As a result, investor confidence in money-market funds plummeted.
> >>> Fortunately or unfortunately, investors always have a secure place to
> >>> park money, Treasury bills – short term obligations issued by the U.S.
> >>> government. When The Reserve broke a buck, everyone moved their money
> >>> into Treasuries. Money-market funds dried up. And that was the end of
> >>> one major source of business working capital.
> >>>
> >>> Another major source is the banking system. Unfortunately, banks and
> >>> other financial intermediaries became reluctant to loan to each other.
> >>> As a result, money in one part of the banking system stopped flowing
> >>> to where it was most needed.
> >>>
> >>> Why did banks stop loaning money to each other? When lenders lend,
> >>> they generally look at borrowers' financial sheets to determine how
> >>> creditworthy they are before giving out money. Unfortunately, most
> >>> banks and other financial intermediaries have large amounts of toxic
> >>> waste on their books.
> >>>
> >>> In situations like this, accounting rules require companies to "mark
> >>> assets to market." If an asset with a face value of $100 appears to
> >>> have a market value of $40, the company is supposed to record a loss
> >>> of $60 immediately, even before the asset is sold, and to carry that
> >>> asset on its books at a value of $40. So banks and other financial
> >>> intermediaries began reporting enormous losses on the toxic waste they
> >>> held, and their balance sheets crumbled. (The head of the Securities
> >>> and Exchange Commission was pressured to waive this rule, but refused.
> >>> It was for this reason that Sen. John McCain demanded that he be
> >>> fired.)
> >>>
> >>> But recognizing market losses isn't the most serious problem. If a
> >>> lender can be confident that the asset in question really has a value
> >>> of $40, it may still conclude that the prospective borrower is likely
> >>> to repay the loan – notwithstanding the reported loss. If no one knows
> >>> how much the toxic waste is actually worth, however, lenders can't
> >>> assess the creditworthiness of any prospective borrower with
> >>> significant amounts of toxic waste on its books. Almost all banks hold
> >>> toxic waste. So banks stopped lending to other banks. (Waiving the
> >>> mark-to-market rule would not have solved this problem; it would
> >>> simply have hidden the accrued losses. Banks are sophisticated enough
> >>> to worry when accounting rules do not correctly reflect what's going
> >>> on in the market.)
> >>>
> >>> But why is the unavailability of short-term money so bad?
> >>>
> >>> Remember what businesses use short-term money for – to meet payroll
> >>> and put inventory on their shelves. When businesses lose access to
> >>> working capital, they stop operating, not because there is anything
> >>> fundamentally wrong with their products or markets or business plans,
> >>> but simply because they can't get the cash they need on a daily basis.
> >>>
> >>> You might think of short-term money as the lubricant that keeps the
> >>> world's economic engine turning over smoothly. If there's no
> >>> lubricant, the engine freezes. No paydays, no goods on the shelves.
> >>> Seriously.
> >>>
> >>> This was the possibility that persuaded Mr. Bush and Mr. Paulson to
> >>> change course and support a general "bail-out." And it remains a very
> >>> real possibility.
> >>>
> >>> The $700 Billion Bailout
> >>>
> >>> I will discuss the details of possible solutions in my next post.
> >>>
> >>> What is important to emphasize here is that current proposals are
> >>> primarily intended to solve the liquidity freeze part of the problem –
> >>> to prevent the world's economic engine from seizing up.
> >>>
> >>> Mr. Paulson's original proposal hoped to accomplish this in two ways.
> >>> First, by buying up toxic waste at fair market value, Mr. Paulson
> >>> could take toxic waste off financial intermediaries' balance sheets.
> >>> This would allow lenders to assess borrowers' creditworthiness with
> >>> greater confidence and, hopefully, get banks to start lending to each
> >>> other again.
> >>>
> >>> Equally importantly, however, Mr. Paulson requested authority to buy
> >>> up that waste at whatever price he thought best. By buying toxic waste
> >>> at higher prices than private buyers were willing to pay, he hoped to
> >>> bolster the financial intermediaries' balance sheets – to make them
> >>> more creditworthy.
> >>>
> >>> This aspect of the proposal was what made it a "bail-out." And this
> >>> was part of what led to its defeat in the House.
> >>>
> >>> Note that Mr. Paulson's proposal was not intended to solve the
> >>> teaser-rate mortgage problem, either now or in the future. In the
> >>> transactions that created the teaser-rate mortgages in the first
> >>> place, both parties made bad decisions – the lender and the borrower.
> >>> Mr. Paulson's proposal was not intended to help either. One of its
> >>> unavoidable side effects, however, was to relieve lenders of the
> >>> consequences of their bad decisions, while leaving borrowers to suffer
> >>> the consequences of theirs. This made it politically less palatable.
> >>>
> >>> In addition, at least $500 billion more of teaser-rate mortgages are
> >>> scheduled to reset over the next several years. In all likelihood,
> >>> they too will go into default and become toxic waste. Nothing in Mr.
> >>> Paulson's original proposal was intended to do anything about this
> >>> next $500 billion installment – or, indeed, to prevent lenders from
> >>> making more teaser-rate mortgages in the future.
> >>>
> >>> Similarly, Mr. Paulson's proposal was not intended as a general Wall
> >>> Street bail-out, although to some extent it would have had that
> >>> effect. Note that the outstanding overhang of credit default swaps
> >>> alone is estimated to be between $45 and $60 trillion – three to four
> >>> times the size of our annual gross domestic product. The requested
> >>> $700 billion, although the single biggest appropriation request in
> >>> U.S. history, was miniscule when compared with the toxic waste problem
> >>> as a whole. Mr. Paulson's proposed solution was to cost just 1% of the
> >>> size of the problem and was aimed only at a small part of that
> >>> problem. (It is unnerving to realize that the U.S. government – the
> >>> "beast" we have been starving for so long – may now lack the borrowing
> >>> capacity to solve the problem as a whole. We need to get our financial
> >>> house in order.)
> >>>
> >>> All Mr. Paulson's proposal aimed to do was to put lubricant back into
> >>> the engine, to get short-term money flowing again to prevent our
> >>> economic engine from freezing up. Now that the proposal has gone down
> >>> to defeat, we can only hope that Mr. Paulson was wrong.
> >>>
> >>>
> >>> On Wed, Oct 1, 2008 at 8:10 AM, TN Rhodey <tnrhodey at gmail.com> wrote:
> >>>  > "A sharp CPA could design a believable computer
> >>> > model that could make the value come out wherever his boss wanted it
> >>> > to be. He could also convince outside auditors and regulators of the
> >>> > soundness of his model. "
> >>> >
> >>> > Brad, I am with you but wondering how they determine new (long term)
> >>> value
> >>> > for this big pile of crap?  One thing the article mentions that often
> >>> gets
> >>> > lost. Most people are paying their mortgages. The properties that are
> >>> > bundled in these securities are not worthless. At some point they all
> >>> will
> >>> > be worth something to somebody.... but when?
> >>> >
> >>> > Are there computer models that accountants trust? Not poking a stick
> I
> >>> have
> >>> > no idea. I can see how it would ease credit. I also see how it led to
> >>> past
> >>> > problems.
> >>> >
> >>> >  I thought we were rushing into the bail out. I am all for any plain
> > that
> >>> > reduces government intervention.
> >>> >
> >>> > Wally
> >>>  > __________________________________________________
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