Archive for the ‘Real Estate’ Category
The Mortgage Crisis: The U.S. vs. Denmark
In 2002 I wrote a column contrasting the housing finance systems of Denmark and the U.S. Recently, both systems have been stressed by the worldwide financial crisis, prompting me to take another look. I was interested in whether the impact of the crisis on the two systems revealed anything further about their relative strengths and weaknesses.
The core of the Danish system is eight specialized mortgage banks which originate all home mortgages, as well as a mortgage bond market where the loans are funded. Each new loan is immediately sold in the market for the equivalent bond. If the new loan is a 30-year FRM, for example, it will be sold to investors as an increase in the balance of the 30-year fixed-rate bond. There are bonds with fixed and adjustable rates, and within each category there are separate bonds for different terms.
The Danish system makes it easy for borrowers to shop for a mortgage. On a given day, all borrowers pay the same interest rate on a given type of loan. (Borrowers either meet the credit and other requirements, or they don’t.). The interest rate on a new mortgage loan is the current market yield on the specific bond that will fund the loan, plus the mortgage bank’s markup. Bonds are traded on the Copenhagen stock market, and their yields are readily available.
Danish mortgage banks do not adjust the interest rate for points, nor do they tack on a series of fixed-dollar charges to cover specific expenses, as is the practice in the U.S. Total upfront fees are modest and pretty much the same at all the mortgage banks.
The strength of the Danish system consists of its transparency and low origination costs. Its major weakness is that it does not serve as large a segment of the population as the U.S. system. Loans are not priced for risk, so borrowers who have poor credit or who cannot make a down payment of 20 percent are not served. In a financial crisis, however, this “weakness” is a source of strength, as we have recently learned.
A Worldwide Loss of Confidence
Both countries were afflicted by the worldwide loss of confidence in financial institutions. Both governments responded by guaranteeing the liabilities of banks and other financial firms, including mortgage banks in Denmark. However, in Denmark that guarantee did not include mortgage bonds, because it was not considered necessary. The Danish mortgage bond market continued to function normally during the crisis, which meant that new loans continued to be written as before.
In the U..S, in contrast, markets in mortgage-backed securities (MBSs) not guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae ceased functioning. This is why “jumbo” loans — those too large for purchase or insurance by a government entity — which before the crisis were often placed in MBSs, are so costly in today’s market relative to conforming loans.
The market for private MBSs collapsed because investors incurred — or anticipated that they might incur — horrendous losses, whereas investors in Danish mortgage bonds did not suffer any losses at all. One reason is that the Danish mortgage bond system is inherently stronger than the MBS system. A Danish mortgage bond is a liability of the mortgage bank issuing it and is supported by the capital, reserves, and income of the bank, as well as by the mortgage loans that collateralize that particular bond. If the collateral supporting one bond happens to suffer large losses, the bond holders are nonetheless protected by the entire resources of the bank.
In contrast, in the U.S. system each private MBS has “credit enhancements”, such as reserve accounts, excess cash flows, or insurance, designed so that each can stand on its own. If the credit enhancements on one issue out of 100 turn out to be insufficient, the investors in that issue will suffer loss, even though the enhancements in the other 99 are excessive. Further, any such failures can have a contagious effect on the confidence of investors in other issues, who may wonder whether the credit enhancements in their issues are adequate.
A Higher Default Rate
The second reason the private MBS market in the U.S. collapsed and the Danish bond market didn’t is the much higher default rate on mortgages in the U.S. In addition, investors incurred larger losses on defaulted mortgages because defaulting borrowers in the U.S. had less equity.
Home prices have declined in Denmark since the crisis began, though not quite as much as in the U.S. Single-family home prices were down 15 percent in the second quarter from their previous peak, while “owner-occupied flats” were down 28 percent. As in the U.S., price declines have been much larger in some areas than in others. Despite the price declines, however, the great majority of Danish borrowers had substantial equity in their homes when the crisis struck. The widespread negative equity that emerged in the US — a major factor encouraging defaults and increasing losses when default occurs — had no counterpart in Denmark.
Why? A major reason is that, in the U.S., down payments of less than 20 percent were the norm well before the bubble began, and no-down payment loans became increasingly common during the bubble. When the bubble burst in 2007, therefore, a substantial proportion of the homes purchased in the prior two to three years had no equity.
In contrast, the down payment requirement in Denmark was 20 percent well before the bubble and remained 20 percent during the bubble. While second mortgages were available from commercial banks and may have increased in importance during the bubble period, all mortgage borrowers in Denmark have personal liability which is enforced by lenders. Losses on second mortgages have been very small compared to the U.S.
Erosion of down payment requirements was only one of the ways that the U.S. housing finance system was weakened much more than the Danish system during the bubble period. The “quality” of new borrowers, meaning the array of financial and personal factors that affect the likelihood that they will default at some point, deteriorated much more in the U.S. There was no Danish equivalent of subprime loans to attract tenants into ownership who were not qualified to be owners. And Denmark did not have alternative documentation rules that allowed borrowers to claim higher incomes than they actually had.
After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade [Hardcover]
Praise for After The Fall “Steve Bergsman provides his readers with one of the most comprehensive, yet concise overviews of real estate and all its property types.”—Christopher Macke, Vice President, GE Real Estate “This is an extraordinary work of detailed research and compelling writing. I’ve never seen the subject presented in such a cogent and skillful manner.”—Phil Hall, editor, Secondary Marketing Executive “The way out of the financial crash of 2007/2008 will come through skilled operations, astute investing, and the ability of real estate practitioners to give up their mental memory of the future! The heated success of ten-year, unprecedented growth in the real estate industry has somehow atrophied the industry’s application of knowledge. What we need is a fresh look at opportunities and strategies for real estate investing. We are lucky that Bergsman’s book has fit the bill—just in time.”—Jack M. Cohen, CEO, Cohen Financial (more…)
Your First Year in Real Estate: Making the Transition from Total Novice to Successful Professional [Paperback]
Review
“Dirk Zeller’s approach is brilliant! He gives the best basic marketing techniques to his students. I applaud this book.”?Bonnie S. Mays, vice president, Realty World America, and executive director, Realty World Academy”Follow the advice in this book and you will join the growing list of real estate professionals who call Dirk Zeller their mentor!”?Rick DeLuca, nationally recognized real estate speaker — Review
Classic Insight into Building a Fabulous Career in Real EstateWelcome to the world of real estate sales! Now, you control your destiny. A career in real estate offers endless opportunities, the freedom of flexible hours, and the potential to earn fabulous amounts of money. But to reach your goals you need to be prepared. Before you dive in, you must learn everything you can and discover the edge that will take you to the top.Inside, experienced and top-notch real estate professional Dirk Zeller presents the secrets to success that (more…)
FLIP: How to Find, Fix, and Sell Houses for Profit [Paperback]
FLIP, the third book in the National Bestselling Millionaire Real Estate Series (More than 500,000 copies sold!) FLIP provides a detailed, step-by-step process to analyze each investment, identify the best improvements, accurately estimate the costs and intelligently oversee the construction. It takes out all the guess work and almost all of the risk. Here’s what industry experts are saying about FLIP: “Read this book before you flip that house! FLIP is an indispensable step-by-step guide to flipping houses that you will refer to again and again.”-Carlos Ortiz, Executive Producer, “FLIP That House” (TLC’s most popular real estate TV show) “At HomeVestors, we’re in the business of buying and selling homes for profit and I can attest that there are few, if any, who can rival Rick’s and Clay’s expertise when it comes to fixing up houses for profit. This book is a must-read for any investor.”-Dr. John Hayes, President and CEO of HomeVestors of America (the largest homebuy (more…)
The Millionaire Real Estate Investor [Paperback]
Review
“Filled with practical workable advice for anyone wanting to build wealth.” — Mike Summey co-author of the best selling The Weekend Millionaires Secrets to Investing in Real Estate”On my scale of one to 10, it rates a solid 10.” — Robert J. Bruss, Inman News Features
Forget the old paradigm of financial successthat a big house, a fancy car and a great job mean youve made it. True financial wealth has a different measureits about having the unearned income to finance your life mission without having to work. Gary Keller, best-selling author and self-made millionaire, teaches you what school never didhow to leave the daily grind and acquire long-term financial freedom through investing real estate. The Millionaire Real Estate Investor offers straightforward strategies and wisdom gleaned from research and interviews with over 120 real life millionaire real estate investors. Ordinary people who have achieved extraordi (more…)
Real Estate Investing For Dummies, 2nd Edition [Paperback]
Real Estate Investing For Dummies, 2nd Edition, is completely revised and updated to help you overcome the challenges and and take advantage of the opportunities in any real estate environment, including a down market. But Eric Tyson and Robert Griswold’s core message remains as relevant today as it did upon the initial publication of Real Estate Investing For Dummies — investing in real estate is time-tested vehicle to build wealth in the long term. Tyson and Griswold don’t tell you how to become a millionaire overnight. Instead, they offer proven, practical, and actionable advice so that if you chose to invest in income-producing properties, you can do so wisely and confidently.
From the Back Cover
Now updated — your guide to building long-term wealth through real estate Want to be a successful real estate investor? Eric Tyson and Robert Griswold present their proven strategies, along with updated tips for easily riding out downturns i (more…)
Real Estate
2009 debut full-length album from New Jersey quartet. Real Estate play sun-streaked Psych/Indie Pop reminiscent of The Feelies, Yo La Tengo and other like-minded outfits. Guitarist Matt Mondanile also plays in Ducktails and Predator Vision (Not Not Fun).
Rich Dad’s Advisors®: The ABC’s of Real Estate Investing: The Secrets of Finding Hidden Profits Most Investors Miss [Paperback]
Want to get rich through real estate? Then you need The ABC’s of Real Estate Investing. It’s the definitive guide that will teach you how to find property, evaluate its worth, negotiate the deal and make money in the process. There are no ‘get rich quick’ tricks on these pages, just proven methods that deliver bottom-line profits and increased property values. -Ken McElroy, Real Estate Investor, Property Management Expert, Business Owner, and Author The ABC’s of Real Estate Investing will: * Achieve wealth and cash flow through real estate * Overcome the myths that are holding you back * Find property with real profit potential * Evaluate a property and set your own purchase price * Negotiate the deal based on the numbers * Discover hidden profits in the properties you buy or own * Increase your income through proven property management techniques.
About the Author
Ken McElroy, CEO of MC Management, has over 20 years of real estate experience wit (more…)
California Real Estate Principles [Paperback]
Continuing the legacy of this well-known text, authors Brady and Estes have fully updated and re-energized the content to accurately represent modern real estate practice in California today. Coverage of the SAFE Act and its impact on mortgage brokers has been added along with current information on homestead laws, buyer’s agency, senior community exceptions to fair housing laws, and much more. Each chapter includes learning objectives, preview, summary, highlighted important terms, practical applications and review questions to boost user comprehension and mastery of material. Designed entirely around the salesperson exam’s content, this book is easy-to understand, yet rigorous in its learning models to reinforce information necessary to pass the exam. The 150-question practice exam included is similar in format and content to the actual real estate salesperson exam with answers and test-taking hints.
From the Publisher
Provides a practical, ac (more…)
2 Years to a Million in Real Estate [Paperback]
Review
“This is the success story of an ex-dot-com employee who got tired of working long hours at a great job for 10 years and watching his fellow workers lose their jobs. He accidentally discovered real estate’s market-value appreciation, leverage, tax savings, cash flow, reliability and freedom from a 9-to-5 workday. In the process, he became a multimillionaire, and he shows readers how they can have the same result.” (Bruss, Robert J. San Francisco Chronicle. )
Quit your day job! Make a million in real estate! It’s easier than you think! A few years ago, Matthew Martinez was a lot like you – he worked hard to make as big a salary as he could. But it wasn’t enough. He worked by the clock, and yearned to be his own boss. With a small amount of savings, he acquired his first rental property. Two years later, he was making more from his rentals than he was working 9 to 5, so he quit his day job to oversee his real estate invest (more…)
100% mortgage Tenerife
