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Ten Commandments for 21st Century Real Estate Finance
Ten Commandments for 21st Century Real Estate Finance
I. WRITE UPON THY HEART THE LAW THAT 'REWARD' AND 'RISK' SHALT ALWAYS APPEAR IN THE SAME SENTENCE.
II. MAKE NEITHER MARKETS NOR REGULATORS INTO IDOLS, AND FOLLOW NOT FALSE PROPHETS OF SIMPLISTIC BIAS.
III. BE SOBER AND WATCHFUL, LEST THE ENEMY OF MASSIVE LOSS APPROACH LIKE A THIEF IN THE NIGHT.
IV. HONOR THY FATHER AND THY MOTHER'S ANCIENT COUNSEL: KEEP IT SIMPLE, STUPID!
V. IF THOU WILT NOT DO THY OWN CREDIT ANALYSIS, THEN VOW TO INVEST NOT AT ALL.
VI. THOU SHALT NOT ADULTERATE THY PORTFOLIO WITH EXCESSIVE LEVERAGE.
VII. THOU SHALT NOT BEAR THE FALSE WITNESS OF HIDDEN ASSUMPTIONS IN THY INVESTMENT UNDERWRITING.
VIII. THOU SHALT NOT COVET FOR THE SHORT TERM, YEA, BUT SHALT LAY UP THY TREASURES FOR LENGTH OF DAYS.
IX. IN ALL THINGS, YIELD NOT TO THE TEMPTER'S SNARE OF PANIC.
X. REMEMBER
THAT, AFTER THY EXILE IN THE WILDERNESS, IF THOU HEEDEST THESE
COMMANDMENTS, THOU SHALT ONCE AGAIN RETURN TO THE LAND OF MILK AND
HONEY.
Conclusion
"Having
examined the metastasis of sub-prime mortgage lending, the disguising
and selling of risk, and the bias toward growth, we have still not
fully answered how we arrived at the present sorry condition.
The
recurrence of bubbles over the course of history has been the subject
of instructive and entertaining narrative.10 But, as it turned out, this
was not merely of historical interest. Many recent events should have
been considered warning signs betraying weakness in our financial
system. Since 1990, we have had the savings and loan crisis, a related
bank capital crisis, and a series of 'derivatives crises' associated
with the collapse of the Mexican peso in 1995, and of the Thai Baht in
1997, which led to the fall of Long Term Capital Management. Then
there was the 'dot-com' collapse in 2000 and the shakeout in the
telecom industry.
The weakness was clearly not due to
a lack of technical skills or analytical capabilities. Nor was it for
want of information (although incomplete information did play a role in
selling of sub-prime loans to unsophisticated borrowers and the selling
of AAA paper to investors). For at least two decades, the 'best and
brightest' have flocked to our business schools, and the top graduates
have disproportionately gone into the 'investment industry'.
Our
shortcomings have been less due to the quantitative skills taught in
our universities and deployed in finance than to our inattention to
developing good judgment.11 Though there have been failures in applying
what is available in financial theory (e.g., an understanding of
systemic risk; the fundamental relationship between household income
and housing affordability; the basics of underwriting credit), these
have been not been failures of knowledge, but of behavior.
Some
of our choices could be better, were we to commit to a broader
understanding of decision-making, good and bad. The case study method of learning is intended to promote this, but it often devolves
to mere calculation. Decisions should not be just the application of
mathematical formulae, but activities of a personal intelligence. In
solving a mathematics problem, everyone should come to the same
conclusion; insightful decisions should enable a person to break away
from the herd.
Judgments
also require standards. A panel of Counselors of Real Estate prepared
the ten rules which precede this article. I commend them to you."
10. See, for example, the classic John A Mackay, Extraordinary Popular Delusions and the Madness of Crowds, Harmony Books (New York, 1980), originally published in 1841. See also John Kenneth Galbraith, A Short History of Financial Euphoria, Penguin (New York, 1994). More recently, Charles P. Kindleberger and Robert Z. Aliber, Manias, Panics, and Crashes: A History of Financial Crashes, John Wiley & Sons (Hoboken, NJ, 2005).
11. Previous writing on this subject have included, Hugh F. Kelly, "Can Universities Teach Real Estate Decision Making?", Real Estate Review, v20, n.2, Summer 1990; "Dimensions in Real Estate Research," Real Estate Review, Fall 2001, and "Judgment: Imagination, Creativity, and Delusion," Existenz. v.3, n.1, Spring 2008.
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I love it, how many times my book, The Eminent Domain Revolt, has been trashed on this site. And remember how I always said the scrutiny regime was ending, that there would be an individually enforceable right to housing, and that Lindsey v. Normet minimum scrutiny would be overturned as we changed from the scrutiny regime to maintenance regime?
Well, this case has done that. This is the beginning of the end of housing evictions. "Affirmative burdens" in this case, is the government's conclusion that housing is an important fact, using the Barnette test. That will be brought out in discovery, which is what this judge is saying.
Now read The Eminent Domain Revolt and understand the new Constitutional regime under which we are living--the one I established.
11) def. - "Taking no risk"... is a contradiction in terms.
This Kelly is the same guy who said in Oct. 2007 that
the credit crisis "is a product failure..which will be corrected in a year."
Slatin Report "Another Fine Mess" 10-17-07
Now he's a paid consultant to Silverstein in the Port Authority case.
Kelly's "on the record" opinion?--
The "V-shaped" recovery in the NYC CRE market is a lock, so make the taxpayers pay Oligarch Silverstein to build the towers....(so that Silverstein can get richer even when the buildings sit empty)
"BUILD IT AND THEY WILL COME!".
What commandment is that?
Duh.....
Any concept (finance or political) that can't be explained on one page (8 1/2 x 11 - 12-font) is doomed to failure. If its not simple - it's bullshit.
HAMP Loan Modifications and the Fifth Amendment
http://tinyurl.com/yeq7kzg
Federal Court: Denial of Loan Modifications May Constitute Violation of Fifth Amendment
So the last thing a special servicer would want to hear is that a Federal District Court in California has opened the door to a novel new foreclosure defense related to constitutional law. While this case deals specifically with single family residential loans, the RMBS market is much larger than the CMBS market, and at least one far-reaching rule change - the IRS's 2009 modification of the REMIC provisions - can be traced to controversy that first arose in the RMBS market.
The case involves non-judicial foreclosure proceedings on a single family home in Ramona, California. The borrower defaulted on the mortgage in November 2007. In February 2008, a notice of default was recorded and served. And in December 2008, a notice of sale was recorded and served, setting a date for the public auction of borrower's home. The borrower has alleged that their Fifth Ammendment rights to due process have been violated, and a federal court has refused to dismiss the case.
http://tinyurl.com/yaplnpt
Many times I told your readers that we were moving out of the scrutiny regime and into the maintenance regime, which I had developed in my book The Eminent Domain Revolt.
In particular, I said that housing would be raised above Lindsey v. Normet minimum scrutiny. That is what this decision does. The judge is asking the plaintiffs to show that the government ITSELF applied the Barnette "important facts" test in developing the mortgage modification program, and that the government ITSELF concluded that housing is an important fact.
In my book I said that the right to housing would be found under the Due Process Clause of the Fifth Amendment. This prediction has now been borne out.
We will soon see the elimination of housing evictions in this country, which is what I had also predicted.
I hope your readers will now get rid of their petit bourgeois vanity and ignorance and pay attention to the facts and the law.
You forgot the 11th commandment:
Thou shalt not invest in commercial real estate.
Good stuff for the office wall. Perhaps rendered in Olde English script?
As an old real estate broker and investor I still rely on the one-page proforma. Same one I've used for the past 30 years. Works every time. Google it (http://tinyurl.com/yho2gmk). There are many of them but all similar. Any real estate analysis that takes more than a page is suspect. Too many nooks and crannies to hide bad data.
I think you forgot the all important 11:
11: Thou shalt base DCF models on contractual recurring cashflow.
But then again, I always have to throw in my $0.02.