Hilarious Daily Show Clip Reveals Geithner's Real Estate Prowess

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Tim Geithner Can't Sell His House...And He's Underwater To Boot

CNN reports that Treasury Secretary Tim Geithner is having trouble unloading the McMansion he purchased in 2004...close to the top of the housing bubble.

Shocking on multiple counts, huh?

Geithner purchased the home for $1.601 million...after there were no takers for $1.575 million, he decided to rent the joint for $7,500/month. Without breaking out a spreadsheet, I'll go out on a limb and say that baby is not quite cash flowing for Timmy.

Here was my favorite quote from the article:

"When the house first went on sale it was very evident that he was not going to get what he paid for it," said Scott Stiefvater of Stiefvater Real Estate in Pelham, N.Y. "He was [bound] to lose some money."

Please permit me to remind you, this is the financial genius controlling the fate of the US dollar.

More Geithner follies: Chinese students laugh him out of town...and a good SNL spoof too!

Next Wave of Risky Housing Loans Due to Reset...Soon

Seems like just yesterday that subprime loans were blowing up like the last few seconds of a batch of microwave popcorn.  Pop-pop-pop...now you see them now you don't...keys in the mailbox, see ya later, Mr. Lender.  That loan is now your problem.

The good news is that the bulk of the subprime loans have reset to their higher rates - most of the kernels have popped, in other words.  

The bad news is that there is another bag of popcorn in the microwave...potentially an even larger bag...and it's just getting started!

So if you've been smoking too many green shoots lately, and have got a case of the munchies, pull up a seat while we snack on the next wave of potential carnage in the housing market...

***

The Second Crash – On the Way and Unstoppable
By Doug Hornig, Editor, BIG GOLD

Tuesday, October 9, 2007 started as a nice day in New York City. A lovely early fall day, with the temperature still a balmy 80° at 2:00 in the morning. By evening, though, the temperature had dropped twenty degrees, the clouds had rolled in, there was thunder and rain.

As with the weather, there were some hints of trouble here and there on Wall Street. But all in all, things could not have seemed better. Little did we know, the stormy end of 10/9/07 signaled a very large bubble that had just popped.

That was the day when the Dow Jones Industrial Average hit its historic peak. From there, it was all downhill -- slowly but steadily at first, and then violently after last August -- until the Dow bottomed (for now) on March 9 of this year. Over that span, the index lost 54% of its value.

It’s been a crushing blow to just about everyone. But it’s already being referred to as the crash. As if the unpleasantness were now all behind us. More likely, in the future it will be seen as, simply, the first crash.

Don’t believe it? In a moment you will, when you see the scariest graph of the year.

But let’s quickly recall what’s already happened. During the late, great housing boom, interest rates were at microscopic levels, while bankers were encouraged to grant home loans on little more than a wink and a nudge. In order to inflate their balance sheets, those bankers resorted to all sorts of gimmicky, adjustable rate mortgages (ARMs), whose common feature was an interest rate that would eventually reset. That is, it would balloon somewhere down the road. And those most likely to come quickly to grief were the riskiest borrowers, who held loans known as “subprime.”

“But not to worry,” borrowers were told. “Betting on ever-rising home prices is the safest wager in the whole wide world. If you have problems with cash flow when the ARM resets, your house will be worth a lot more, so you can simply sell it and walk away with a nice chunk of change in your pocket.” Uh-huh.

The bankers themselves were a little more concerned about the deterioration of their portfolios. They took out insurance in the form of credit default swaps (CDSs). These were a brand-new invention in world financial history, allowing mortgages to be sold and resold until they were leveraged 20 times over. They became the shakiest part of a huge global derivatives market, with a nominal value in the tens of trillions of dollars.

For a while, this Ponzi scheme even worked. But then, as they had to, the ARMs began resetting, and there were defaults. Then more of them. Because at the same time, the housing market was cooling off and the economy was stalling out. More and more people were trapped in a situation where they owed more on their home than they could sell it for. Many simply mailed their keys to the bank and moved on.

All of this wreaked havoc in the derivatives market. Sellers of these exotic packages could no longer establish what they were worth. Buyers couldn’t determine a fair price and so stopped buying. As the ripples spread through the world financial system, trust disappeared and liquidity dried up.

Now consider that the base cause for all that dislocation was the subprime sector. And how big is that? Not very. Subprime mortgages account for only about 15% of all home loans. Their influence has been way out of proportion to their numbers, because of derivatives. Here’s the good news: the subprime meltdown has about run its course. These loans were resetting en masse in 2007 and the first eight months of ’08. Now they’re pretty much done.

And the bad news? No one in the mainstream media seems to be asking what should be a pretty obvious question: What about loans other than subprime? Truth is, the banks didn’t just trick up their subprime loans. ARMs were the order of the day – across the board.

Now, here’s that frightening graph we referred to earlier.

Take a good, long look. You can see that from the beginning of 2007 through September of 2008, subprime loans (the gray bars above) were resetting like crazy. Those are the ones people were walking away from, sending a shockwave from defaults and foreclosures smack into the middle of the economy. Now they’re gone.

The ARM market got very quiet between December 2008 and March 2009, hitting a low that won’t be seen again until November of 2011. Small wonder a few “green shoots” have poked their heads above ground. But in April, resets began to increase and will reach an intermediate peak in June. After that, they tail off a little, going basically flat for the next ten months.

It’s not until May of 2010 that the next wave really hits. From there to October of 2011, the resets will be coming fast and furious. That’s 18 months of further turmoil in the housing market, and the beginning is still nearly a year away! (Although the months in between are likely to be no picnic, either.)

While it isn’t subprime ARMs that are resetting this time, neither are they prime loans. Those eligible for prime loans wisely tended to stay away from ARMs in the first place, as indicated by the relatively small space they take up on each bar.

No, the next to go are Alt-A’s (the white bars), Option ARMs (green) and Unsecuritized ARMs (blue). Alt-A’s are loans to the folks who are a small step up from subprime. Unsecuritized loans are a 50-50 proposition; either the borrowers were good enough that they weren’t thrown into the CDS pool, or they were so risky no one would insure them.

Those two are bad enough. But Option ARMs are the real black sheep, loans with choices on how large a payment the borrower will make. The options include interest-only or, worse, a minimum payment that is less than interest-only, leading to “negative amortization”—a loan balance that continually gets bigger, not smaller. Imagine what happens with those when the piper calls.

Once the carnage begins, will it be as bad as the subprime crisis? That’s the $64K question. Perhaps not. For one thing, subprime loans were a much larger chunk of the market when they started going south. For another, there’s been a lot of refinancing as interest rates dropped; that should help ease the default rate. And the government has massively intervened, with measures designed to prop up those who would otherwise lose their homes.

On the other hand, we’re in a severe recession, which wasn’t the case when the subprime crisis started. More people will be unable to meet payments. And the housing market has continued to decline, pressuring both marginal homeowners and banks that can’t sell foreclosed properties.

Is the stock market’s next 10/9/07 on the way? Yes. Which day will it be? That’s unknowable. It could be in a week, or not for another year.

But make no mistake about it, the second crash is coming. It can’t be prevented, no matter what desperate measures Obama and his hapless financial advisors come up with. All we can hope for is that, with a little luck, it won’t be as severe as the first one. But it will last longer. We aren’t even in the middle of the woods yet, much less on the way out.

The order of the day is to be very defensive. There will be few safe havens, but they do exist. Read our report on “48 Karat Gold,” a gold-related, conservative investment that has continued going up even while the common stock market bombed. It’s not too late to profit… click here to learn more.

Over 20% (!) of US Homeowners are Underwater on Their Homes

The Wall St Journal reports that over 20% of US homeowners owe more on their mortgage than their homes are worth.

Some metropolitan areas are faring worse – much worse – than others. Las Vegas takes the prize, with an astounding 67.2% of homes that are “upside down” in terms of equity. Maybe the Obama administration can order the remaining 32.8% can take what’s left of their home equity over to the roulette wheel at MGM – appealing to their patriotic duty to help less fortunate home and casino owners with each spin of the wheel.

If you’re scoring at home, perennial foreclosure powerhouse Stockton, CA placed a distance 2nd, with 51% of their homes underwater.

This bit was also picked up by our friends at The Daily Crux.

How bad can this financial crisis get?  Check out Bud Conrad's analysis of our current situation, in comparison with similar types of financial collapses.

137 Pages of Detroit Foreclosure Listings!

Looking for a cheap house in the Detroit area? You've got some options!

Bargain Basement Deals on Spain's Coastal Real Estate

Here's an educational and entertaining article by the folks at Casey Research detailing the popping of the Spanish real estate bubble. Here in the US, we're not the only ones who can inflate wild real estate bubbles. There are some upcoming opportunities for potential real estate profits in Spain when the bubble completely pops - and over corrects to the downside - as bubbles have a habit of doing.


Spanish Coastal Property - "The Russians are Not Coming. The Russians are Not Coming!"

By the editors of Without Borders, Casey Research

If you’ve made your way over to Europe in the last few years, you may recall being inundated with flyers, billboard messages and seminar advertisements for Spanish property, particularly if you were in the UK. British buyers were scooping up ”cheap” homes in Spain at a blistering rate, reenacting the turn-of-millennium Florida boom. Builders followed the trend, doing what comes naturally to them, until there seemed to be an off-plan Spanish condo for every man, woman and child in Great Britain. The nice thing about real estate is that demographics can be counted on to resolve any supply and demand anomaly, even if painfully.

The pain in Spain is mainly on the coast; 2007 was a tough year, and in hindsight, 2008 will likely have been tougher. The price appreciation of real estate in Andalusia was at its peak in 2003, with 18.5%. By 2006, it had whittled down to 9.1% growth, and in 2007 turned negative; in fact, the market has since gone “no bid” in many places.

This is bad news for the coastal communities because, other than real estate, tourism, and the container port in Algeciras, there is no real economy in southern Spain. Mainly they sell sun, homes, and stuff to fill homes. And judging by the vacancies, more people are choosing sun over shade. This is worse than Miami, the other bubble-busting, sun-drenched prairie of empty homes. At least southern Florida has an attractive tax regime and modern infrastructure that lure new businesses and jobs. Not so southern Spain, where the tax code and infrastructure were both conceived in an era of donkey riding and windmill charging.

How Did This Happen?

Everywhere you wander from Malaga to Cadiz, you’ll find empty apartments and apartment projects left half-built. As Simon would say, “The only person making money in this real estate market is the guy who paints the ‘Price Reduced’ signs.” It seems like there’s an idle “overseas property specialist” on every street corner.

Most of the real estate agents are British because, for the last twenty years, most of the buyers in coastal Spain were British, with a smattering of Germans and other northern, sun-starved Europeans. About four years ago, the buyers became a bit more eclectic. Or did they?

What really happened was the builders became more eclectic. In particular, Russians converted their commodity wealth from U.S. dollars to Spanish property… as developers. In what could be a Monty Python comedy, the British property promoters turned this into, “The Russian BUYERS are coming. They are going to buy only the best. And they don’t care about the price.” The story wasn’t a huge leap for the average Brit, since Russian billionaires and their newly affluent nephews are a force to be reckoned with in London. Known for their conspicuous consumption, the Russians are seen as the flashiest and most gauche of the nouveaux riche.

After a decade of skyrocketing property appreciation, the thought of price-agnostic Russkies fleeing from the cold winters of Moscow warmed the hearts of speculators from Birmingham to Bristol -- many of whom had already made small fortunes flipping Costa del Condos. The promoters brought in a slew of new “investors” to build the inventory the Russians were supposed to buy. This birthed a creative scheme that would make Carlton Sheets, and the rest of the late-night, no-money-down TV gurus, salivate if not hyperventilate.

Developers could sell condos, townhouses and villas “off plan,” which means people would purchase property that was, at the time they plopped down their deposits, nothing more than a piece of Spanish dirt and an architectural drawing. In many cases, the banks in Britain and Spain were so eager to turn plumbers and schoolteachers into property moguls, they would give non-recourse loans for up to 90% of the sales price foretold by the developer. Yes, that means no personal guarantee by the buyer. It mattered not whether he drove a lorry in Liverpool or was a doctor in Dorsett, the property “underwrote itself off-plan,” which is banker talk for “I believe in fairies.”

The promoter and the developer, often one and the same, saw an opportunity to take this concept out for a real spin, so they started offering incentives for people to buy before construction. One of the most aggressive teasers was a €20,000 “decorator’s credit,” allowed if a buyer signed the contract and paid the deposit before the project broke ground.
Following the laws of Ponzi thermodynamics, it worked perfectly if you started in 2000 and had the mind to quit in 2004. We know a couple of hourly-wage earners who now drive Aston Martins, but for everyone who drove his Vanquish into the sunset, there are quite a few more who kept rolling those decorator’s credits and condo profits into the next deal and who are now wondering when the repo man will come knocking.

What happened? That silly supply-and-demand thing combined with the fact that the Russians never came. We met with a flashy Brit promoter who actually went to St. Petersburg and hired two very attractive young Russian women in anticipation of the wave of Russian buyers. He and his wife, a Russian-Estonian, spent tens of thousands on visas and real estate training only to have his fine Russkies sit around the office, chain smoking and talking about shopping. In Russian.

The State of the Market Today

As we mentioned above, the market is now at that uncomfortable “no bid” stage. Developers and owners are scrambling. One condo we visited came with a brand-new car and an offer to carry the first year’s mortgage payments. Another came with six months of groceries and two weeks in the Canary Islands. In our property speculating experience, the “no bid” stage is often followed by the “any bid” stage. It will be just the same here, in a massive way.

What does this mean to you? Right now, properties are still in the hands of reality-challenged people who are either not yet desperate enough to sell at a significant loss or are still hoping that “the market will pick up again this summer.” Is this possible? Not unless half of Russia comes with their checkbooks. New housing starts in 2005 were the highest since they started keeping tabs shortly after Hemingway left the ambulance service. Even if sales returned to 2005 levels, there would still be too much supply. This is how a business cycle works. This is why Las Vegas makes money. The lesson for the players at the Costa del Table will be costly, and there are no more free drinks.

What to Do? How to Profit?

Things will get worse before they get better. But incredible bargains and profits are coming from this.

Because most of the loans were non-recourse, many speculators, in effect, bought options on the property market. Their losses are limited to the cash they put into each deal. They will hang on as long as they can, but eventually there will be too much month left at the end of the money. They will walk away from their condo/townhouse/villa before it’s being repossessed. The banks will be stuck with a lot of this property, and developers will be sitting on finished or nearly finished projects they can’t afford.

The banks that will be hurt the worst are the local Spanish banks, not the British banks that kicked off the mania or even the national Spanish banks. It will be the little “Cajas,” something akin to the old savings and loans, that will be feeling the most pain. If the worldwide credit crisis becomes a full-blown monetary crisis, the bottom could fall out soon. If more banks are going under because of the goofy paper on or off their books, they will be happy to get any cash they can. When you start hearing about the local banks going bankrupt or some sort of “government solution,” hop a plane and check out the offer.

So where to start once the time is right? The high end. The highest end. In percentage terms, the very high end falls the furthest when things get ugly and rebounds the most when the cycle turns. Our recommendations are Marbella and Sotogrande. Marbella has long been the haunt of Europe’s rich and famous, and Sotogrande commands a premium because it is Sotogrande. When we think the time has come, we will be buyers.

***

As many pundits – and President-elect Obama – expect, “Things will get worse before they get better.” In an economic crisis like this, prudent investors are well advised to diversify their portfolio… ideally, some of it in global stocks and real estate. And, as Casey Research Chairman Doug Casey likes to say, you may prefer to expatriate and “watch the crisis on TV instead of through your living room window.”

Without Borders is your go-to guide for the soundest international investments and the most beautiful (and cheap) places to live. Get the inside scoop from two ex-CIA agents with privileged connections around the globe… learn more by clicking here.