I have borrowed the concept of "note myths" from Tom Henderson and Lawrence Tepper, two seasoned pros in the note business. Hope my words do justice to their teaching.
My old Webster's New Collegiate Dictionary provides a definition for the word "myth" as follows: "A person or thing existing only in imagination." In other words, a myth has no basis in reality.
The #1 myth that many noteholders have is that their $100,000 note is equivalent to $100,000 cash. This is simply false. I am holding a note in my hand right now, and the first line reads " In installments as herein stated, for value received, the undersigned PROMISE to pay...
Promise to pay! A note is not cash. A note is not a bank CD. Rather, it is a promise to pay cash over some period of time. Since the payment is not guaranteed, there is uncertainty about repayment of the debt. This uncertainty creates risk.The risk involves every aspect of the transaction, including adequacy of the downpayment, credit worthiness of the payor, adequacy of the interest rate, nature and condition of the collateral, proper paperwork and documentation, etc., etc. The risk escalates if payments have been consistently late or missed. A notebuyer's evaluation of this risk is compensated for with a higher yield, which in turn reflects the discount to the seller.
Here is an analogy that many people find easy to understand. If a state lottery claims to have a $5 million dollar prize, the lottery will not pay $5 million dollars up front to the winner. He will have two choices: say, $200,000 per year for 25 years, which equals the $5 million, or, cash up front of say $3.15 million. The cash option is a 37% discount from the advertised $5 million jackpot.
So the choice is cash today or payments over a period of time. In selling a note, the seller has the same choice - cash today or payments over a period of time. We all understand that cash today is worth more than payments received over a period of time into the future.
Another myth somewhat related to the #1 myth is this - what is the value of a note? Value is the monetary worth of a thing, says Webster's, and goes on to give 11 different definitions of value.
Value means different things to different people. To a noteholder, the value is as he sees it based on his perception of the property value, quality of the terms agreed upon, knowledge of the buyer, property/neighborhood desirability, and, of course, his emotional attachment.
But how about other people. How may they view the "value" of the note? How about the payor - the buyer of the property who is living in it and making the monthly payments? Might he have a different perspective? Could this be based, at least in part, on the nature of his relationship with the seller? Whether their negotiations were friendly or difficult, and extended to the current day.
How about a note investor? He is an outsider considering the use and risk of his capital. He will be completely objective, devoid of emotion or passion. It's a business decision. May his eyes see things differently?
How about a note appraiser? He does not own the note and does not want to buy it. Rather, he offers his professional, experienced and detached opinion as to the note's value. He is several steps removed from the interested parties. Think his view of value might be different from the contractual parties?
How about heirs? They invested nothing, and now the note is part of an estate they are about to receive distributions from. If they have varying needs in life, varying levels of life or business experience, perhaps live in different cities, can you see the potential for value meaning different things to these folks?
If a noteholder himself has a wonderful business opportunity and needs cash, may he see the value of his note very differently if that opportunity did not exist?
When we sell our house, in our minds, our home is the best in the neighborhood and deserves a higher price. It's just the way we view our possessions. It's human nature.
But, we all know, "Beauty is in the eyes of the beholder."
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The internet is the only thing man has made that he does not understand. Eric Schmidt, CEO, Google.
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DEBT
On May 14, 2013, The Federal Reserve published these comparative figures for national household debt, including mortgages, credit cards, auto and student loans:
2008 - $12.7 Trillion Dollars
2013 - $11.2 Trillion Dollars
This looked like good news to me that we as citizens knocked $1.5 Trillion off our personal debt.
It got me wondering how our government has fared over the same period. A little Google search came up with these numbers:
2008 - $9 Trillion Dollars
2013- $16.9 Trillion Dollars
Are you asking yourself the same question I am asking myself ?
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LAMBORGHINI
Car manufacturer Lamborghini is 50 years old. To celebrate, it showed off the "Egoista" - a one of a kind, one time only, one seat concept car.
Walter De Silva, head of the design team, summed up "Egoista" this way: "This is a car made for one person only, to allow them to have fun and express their personality to the maximum. It represents hedonism taken to the extreme; it is a car without compromises."
Though not for sale, Egoista is based on Lamborghini's super car Veneno. Three models were made. The price tag? $3.9 million dollars.
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Well done is better than well said. Ben Franklin.
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Seniors Get Easier Loan Underwriting
Freddie Mac recently announced some policy revisions that allows seniors to use certain retirement accounts to suppement their incomes in order to qualify for mortgage underwriting, without actually drawing down on those accounts.
They report that baby boomers are heading into retirement in a tidal wave - 8,000 per day for the next 18 years. Wow, that's a whole bunch of people.
Freddie says the good news about these folks is typically they may have solid home equity and good credit. But, when it comes to refinancing or applying for a new mortgage, many can't qualify under the tight debt to income ratio. Allowing use of existing retirement accounts helps loosen the standard. Freddie gives this example:
A retiree has $800,000 in a retirement account he may access without penalty, but he has not touched it. It's value will be discounted to arrive at a conservative number. They use 70%, bringing the value down to $560,000. They then assume a 30 year withdrawal, 360 months, which equates to $1555.56 monthly. This number is then added to other qualifying income to determine the debt to income ratio.
If you fall into this category of retiree and have been disqualified for a refi or loan, ask about using your retirement plan to recalculate your ratios. You may get a different result.
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Contrarian Housing Views Are Still Out There
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If you are interested in reading views about our housing market that may differ from what you read and hear everyday, check out Nin-Hai Tseng's May 17 article "Signs of a New Housing Bubble in Several Areas."
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There are people in our culture who love to be offended, because they draw power from it. Bernard Goldberg.
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Thanks for reading today - see you next month.
Denny Stanz
CA Broker # 01915404
760-245-5366
760-245-5367 fax
dennystanz@verizon.net
