THE TROUBLE WITH REGULATION.

The Regulators Don't Know What They're Doing. Regulators think they know the answer to all our problems but most of them have never worked a day in the industry they're regulating. A good example is their interference in the real estate industry. The mortgage industry has made great strides since I first entered in 1982 but you wouldn't know it from the attempts being made to roll back to those early years. When I first entered the industry, it took months to get a loan approved as we had to send out an average of six verification letters for each file and wait for the results to come back before we could begin assembling a package for the ultimate buyer of the loan. We had to write a detailed explanation for each derogatory item in the credit report. Once the file was sent to the ultimate purchaser, we were often told to go out and get more information. Some of these details were worth pursuing but most were a waste of time. One of the first things I learned was that common sense is out the window and I'll never forget the warning that, "There is a huge difference between a good loan and a saleable loan." It was our job to assemble a saleable loan package with quality out the window. The entire mortgage brokerage industry sprang up because large lenders found it less expensive to buy these loans from smaller companies than assemble the complex files themselves.

Borrowers Were Better Served When the Process Was Abbreviated. The trouble was that the process was abbreviated too much. This could be fixed relatively easily by correcting some of the excesses but government seldom does things the easy way. I could go through a multitude of examples but perhaps a description of the most nonsensical of these new regulations will let you know what I mean.

Huge Changes In The Appraiser Selection Process Lowers Quality. Apparently the government places much of the blame for recent problems on faulty appraisals. Further, they think that the appraisal problem lies with Realtors and mortgage lenders pressuring appraisers to over-value properties. Their solution is that appraisers are not selected by lenders any more. Instead they are assigned to each case by a central clearing house. The result is that the marketplace doesn't discriminate between those appraisers that provide a quality product within a reasonable time frame and those who don't. We can no longer talk to appraisers and point out obvious errors in reports. This problem and other new regulations have increased loan approval times to the point that you can no longer write a contract and expect a quick closing. If this really lowered the risk of foreclosure it might be worthwhile. Unfortunately, this isn't the case in my opinion.

A Mandate For More Regulation? Unfortunately, the government views the recent election as a mandate for more regulation. While I agree that corporate boards of directors have not done their job and corporations have not served shareholders and the general public well, I have no faith in the government to do anything to make it better. I am afraid the next 2-4 years will bring about some major changes in finance, energy, and health care that will be hard to undo once established. Hopefully, I am wrong.

HOT WEATHER COLD MARKETS.

Stopped on My Trip To Pull A Few Weeds Off Blind Lemon's Grave

In Case You Didn't Know. Blind Lemon Jefferson was a blues pioneer. He died in 1929 but had a strong influence over all the old bluesmen. He was relatively successful and had money in the bank when he died, still, they say he froze to death on the streets of Chicago. We just happened to drive by the old cemetery and see the "Blind Lemon Memorial Cemetery" sign. Those who know me very well know I could never miss a chance to stop. Several momentos were left at the grave including an unopened can of beer, an old rusty harmonica, and several guitar picks. The inscription of the grave says: "Lord it's one kind favor I'll ask of you see that my grave is kept clean." Maybe it sounds a bit morose, but I considered it my privilege to pull some weeds and make the place a bit more neat.

Still Watching The Markets. The markets are going close to what I have projected: Nowhere. I am still participating. Selling some stuff, collecting dividends, and writing some options. My assumption is that the market will stay within a trading between 8,000 and 9,000 on the Dow. I am buying only when I can find well-priced dividend stocks and attractive option writing opportunities. My last investment involved buying 1000 shares of Health Care Properties at 20.13 a share. It pays $.46 a share per quarter which amounts to an annual yield of 9.4%. I also hedged my bet by selling calls October 20 calls on the entire investment at 2.13 a share. This immediately reduced my out of pocket investment to 18.00. If the stock stays at the current price, I will have to sell it for 20 in October. That would give me a gain of 11.1% for 3 months (plus dividends). The key to success is sustainability of the dividend. If management finds it necessary to reduce that dividend, my return could go negative, a fact that never escapes me.

The Housing Bubble. There are a lot of folks who would like to blame the lenders for the huge debacle in the housing markets. The prevailing view is that the greedy lenders pushed their risky loans on unsophisticated borrowers while government regulators were "asleep at the switch." The fact is, government regulators contributed a great deal to this mess by trying to regulate lenders to make loans to more risky borrowers. Congress passed the "Community Reinvestment Act" to force lenders to make more loans to minority home buyers. This came about because of some questionable statistics indicating discrimination against minorities by the whole industry group. This was a flawed study as indicated by the fact that foreclosures were not less prevalent among minorities as would be expected if they were held to more strict standards than the rest of the population. The community reinvestment act required detailed reporting by mortgage lenders to prove there was no discrimination. A related Home Mortgage Disclosure Act required even more detailed reporting. As a result of all this, standards were relaxed and less qualified borrowers (minorities and non-minorities alike) entered the market in droves. The federal reserve helped things along by keeping rates on short-term loans at record low levels. The long period of low rates and virtually non-existent underwriting standards pushed housing prices to the stratosphere. So who do we blame? All of the above. Aggressive mortgage lenders, well intentioned legislators and executives who neglected the implications of pushing for relaxed standards, wall street for packaging these loans without really understanding the risk and selling them to investors who didn't understand the risk either, rating agencies who gave these mortgages ratings that didn't reflect the risk. Who suffered the most from mishandling these issues? The very borrowers these measures were designed to help. Why have I gone into this rant? Because I distrust the ability of the government (both parties) to solve our problems through more regulation and that appears to be the direction we are taking.

Waiting For Rain. It's really hot and dry here, in contrast to the rain in Colorado. I should be back in Colorado sometime in early July or late August. Send me an e-mail or call Susan if you want a meeting.

HOME AGAIN. FINALLY

Me and "Uncle Martin" with Lightnin Hopkins

It Was a Long Drive. The main purpose of the past three weeks was to get to Denver to work on some real estate but along the way we made a few important stops. We visited a religious shrine near Amarillo, Texas on the way up and made a stop at a farm established by Ms. Betty's ancestors on the way back. The farm has been designated as a historic family farm, having been in the Boyd family for more than 100 years. Betty's Uncle Robert has lived there for all of his 83 years with the exception of a brief trip to Okinawa during the 1940's. He told me that, at the age of 18, he used to view the sunrise in Okinawa with tremendous gratitude for surviving another day. He now views the sunrise at the Boyd Farm the same way. As I get older, I understand that more and more. The picture above was taken in Crockett, Texas by a statue of Lightnin' Hopkins an old Texas blues man.

Still Watching The Markets. I never missed a day checking the markets once or twice. If you didn't take my advice and lower the interest rate on your mortgage, you have missed an opportunity to lock in a 30-year fixed rate in the 4's. If you are looking for low closing costs, it is likely that you soon won't be able to find rates in the 5's. You might be hearing commercials about rates in the 4% range but, if it isn't totally a bait and switch ad, you will likely find out that there are numerous add ons for loans below $250,000 and credit scores below 725. Cash out loans often involve a premium and paying off a second mortgage can carry similar premiums in some instances. Investor loans are still available but with higher down payments and a substantial premium over owner occupied loans.

Bidding Wars For Lower End Properties. In many instances, we are seeing bidding wars for well-priced properties. If you are looking to pick up a foreclosure at a bargain, you will have plenty of company. We have made offers on behalf of our clients only to find out that we are one of 12 offers on that property. This will probably spread to other parts of the market if rates stay this low. One reason for this is the $8,000 tax credit being offered to buyers who haven't owned a property during the past 3 years. This will be discontinued after the first of next year so buyers are anxious to find a property before expiration date. Another reason is the lack of new inventory being produced by builders. Several builders have been forced to file for bankruptcy due to the high costs of holding inventory. Notable among these are two local builders, McStain and Village Homes. These were well-established companies who did an excellent job of providing quality properties and taking care of their customers. Hopefully, these two excellent companies can re-structure and survive in this difficult market.

What About The Financial Markets. The last few months have brought a strong rebound in the stock market. If you got out at the low point (and we know plenty who did) you missed out on a chance to recover much of what you had lost. Unfortunately there is a strong possibility that all the gains of the current rally can't be maintained and we can no longer say that there is more upside in the market than downside. There are some stocks that have been hit hard and not quite recovered. Among these are established companies like AT&T and Pfizer along with some speculative issues in the REIT and business development sectors. You can't go in and buy those at random but you may be able to tilt the odds in your favor by some careful due diligence. As I mentioned in my last post the stock market continues to have a better risk-return balance than many of the so called lower risk investments.

My Apologies To Regular Readers. I very much appreciate those of you who read this blog on a regular basis. Lately, I have done poor job of keeping you informed. It is my intent to post on a weekly basis and will do my best to re-establish that schedule in the future.