Learning from the lessons of Lincoln.

President Obama feels a close kinship with Abraham Lincoln. To be sure there are many similarities. Both were born outside Illinois (Obama in Hawaii and Lincoln in Kentucky.) Both men became lawyers and served in the Illinois State Legislature.

US National Debt continues to skyrocket with new budget.

Each served only a single term in Congress before ascending to the Presidency. And both men were (are) powerful orators who catapulted onto the national political scene and became commander-in-chief with no previous military experience.

President Obama often looks our 16th president as a model and source of inspiration, and as inspirational models go he makes a good choice. I would encourage number 44 to look to Mr. Lincoln even further however, for inspiration in substance as well as form. President Lincoln also governed during very turbulant times in our history. And as he so eloquently put it:

This quote is as relevant today as it was 140 years ago. Most people agree that our current crisis was brought about in great part by horribly irresponsible abuse of debt – by our banks and other financial institutions, by our government, and by the American people (as we argued in Save the World.)

So what are we doing? We are discouraging thrift, taxing the wage payer and spending WAY more than we earn. We, the American people, shoulder a hefty chunk of responsibility for our current mess, but we also seem to know when the party is over and how to make the necessary choices. The household savings rate hit 5% in January according the Department of Commerce, the highest level in almost 14 years. Meanwhile our government is ramping up its deficit spending to the tune of $1,750,000,000,000. Our government “for the people” needs to take a cue “from the people” – they owe it to us.

When people are doing well they travel more, go out to nice dinners, buy new cars. When times are tough we eat in, enjoy “staycations,” and just do the regular maintenance to keep our cars running well a few more years. We seem to understand that discretionary spending is a luxury of strong economic times. Shouldn’t we expect the same of our government?

Savings and Long-Term Investment is the Path to Sustainable Recovery

There is no shortage of opinions on how we ended up in this global economic meltdown: greedy Wall Street executives, lack of government regulation, capitalism was doomed to consume itself. Who always seems to get off scot-free is the American consumer. Ok, maybe not scot-free since the average American is certainly suffering, but the free-spending, debt-addicted consumer shoulders a hefty portion of responsibility for our current troubles (As we stated in “It Wasn’t My Fault.”) Post Depression through about 1980 the savings rate averaged around 8%. All through this period America thrived and the standard of living rose considerably. New financial products were created allowing people to take advantage of the American Dream, and still we saved.

From 1980 through 2005 we kind of lost our rational compass. The saving rate dropped below 1% and even went negative at time. (Meaning as a nation we were spending more than we were making.) This fueled tremendous economic growth but even a 5th grader could see that it’s not sustainable. (And we’re all smarter than a 5th grader, right?) All through this period the pundits howled about the low American savings rate and how much more the rest of the world saved. We were becoming a nation of debtors.

Suddenly the party ended and in December 2008 the savings rate climbed back to 3.6%, and is forecast to go much higher throughout 2009. This is a good thing, right? Personal savings is a primary domestic source of financing for capital investments – those investments that drive long-term economic growth.

But wait! Apparently the government now thinks we’re not spending enough. “Please Mr. and Mrs. Consumer, don’t pay down your existing debt, spend more money to save short-term jobs.” (I think it’s the politicians jobs their most worried about.) I get it. Americans think in very short time horizons. We want next month to be better than this month, and 5 years from now is too far off to worry about. But think about it; if overspending got us in to this mess in the first place, who in their right mind thinks it will get us out? (I’ll bet not your 5th grader.)

There is no short-term cure for a long-term problem. American’s need to save, and we need to invest. What we don’t need to do is spend more. Be more thoughtful about daily expenses. Invest in your retirement! (It’s coming sooner than you think.) Borrow money wisely and for good purposes. Buy or improve your real estate, start or run your company, get your kids, or yourself, an education, but stop paying 28% interest to buy a pair of jeans when you already have 10 pair in the closet. And if your 3 year old car is running fine, drive it for a few more years.

Let’s save the economy and our country’s future by saving ourselves and saving our money. We saved, grew and prospered for 35 years after WWII. We can have balance again and, more importantly, sustainable economic growth and prosperity.

Author’s Note: The irony of being in the private mortgage lending business and pushing people to save is not lost on me. I am a big proponet of the wise use of debt, and lower leveraged real estate investments can create tremendous long-term wealth for genertions to come. (That new bass boat however…)

“CMBS Market Begins to Show Fissures”

The following is an excerpt from the Wall Street Journal – WSJ (11-19-08):

The market for debt used to finance hotels, offices and shopping malls tumbled Tuesday on worries that the long-feared rise in defaults for commercial mortgage-backed securities had begun, possibly ushering in the next phase of the financial crisis.

According to a Citigroup Inc. report, the overall number of commercial mortgages packaged into securities that are 30 days or more past due rose to 0.64% in October from 0.39% at the end of last year, with most of the increase coming in October. The latest figure, though low by historic standards, marked the highest delinquency rate in two years.

The jump in soured commercial loans was mainly due to the financing drought and a lack of buyers. Property owners have been unable to refinance mortgages as they have become due, forcing defaults if existing lenders have been unwilling to extend loans under the same terms.
(You can read the full WSJ article here: CMBS Market Begins to Show Fissures – WSJ.com.)

Despite the dire headlines I can tell you that nobody in the industry is surprised by this.  The commercial mortgage market has lagged the devastation of the residential market but a downturn was inevitable.  Most commercial mortgages come due in 5 to 7 years, so all the commercial mortgages originated during the meteoric rise in real estate prices are starting to come due just as economic pressures come to bear and available financing disappears like the dinosaurs.

What the article just glosses over though is that delinquency rates are still at all time historic lows. Over-leveraged property owners with little equity are more likely to default, but those that have something to lose are not so willing to hand the keys back to the bank.  Solution?

Enter the Commercial Private Mortgage Lender.  Private lenders are not subject to the whims of the public debt markets and do not make their money by selling the paper to someone else. (The key implication of that last point is that we do not make stupid loans on the basis that we can offload the risk onto some other unsuspecting investors.)  A quick assessment of the property’s potential and it’s protective equity can be just the lifeline troubled property owners need.  The money is expensive; much more expensive than a conventional bank loan, but it’s far less than an equity partner. Private money is not the solution for everybody but it can save your property, and your financial life – and fortune. Risk is appropriately accounted for and everybody wins: borrower gets a low friction loan and the trust deed investors get a great return on their money.

The Best Opportunities Arise In Times of Difficulty

Warren Buffett’s prowess as a contrarian investor is well known and well admired, but for most of us it is difficult to act with the same courage of conviction as the Oracle of Omaha. His motto?

“We simply attempt to be fearful when others are greedy, and to be greedy only when others are fearful.”
- Warren Buffett

To be sure there is no lack of fear these days. Fear is what causes the markets to plunge 800 points the day after the government announces a $700 Billion bailout. Fear is what has caused American investors to pull so much money out of the market even as prices dropped to pre-2000 levels – locking in their losses. Fear is why so many people I know have blithely announced they’re “done with the market,” even as they watch their runway to retirement extend well beyond the visible horizon. It’s understandable. The size of the financial debacle is incomprehensible for most of us (though not necessarily unexpected.)

The problem is, as Warren tells us, now is the time for greed. Ok, not the unbridled, no-ethics kind of greed that got us here in the first place. I’m talking about the opportunity to make high quality investments at a great price. The world is on sale – now is the time to buy.You still need to be thoughtful about your investment dollars but the opportunities are endless. There are, however, a few key things to keep in mind even today.

1. Investment horizon:  Make sure your investment objective fits your time horizon.  For most of us our horizon should be relatively long – at least a few years if not longer.  Let’s face it, you’re not a day trader.  Find good, solid assets that will yield for the future, not for a new car next month.  If you have an IRA or a Roth, fund it to the max and grow your wealth tax free.
2. Diversify:  You need to hold a variety of assets and asset types in your portfolio.  Stock and bond mutual funds are fine, but look beyond these categories as well.  My favorite diversification asset (of course!) is still real estate, and there are many ways for the average investor to profit from real estate, even in an IRA or other retirement account.
3. Protect your principal:  Ok, I did say it’s time to be a little greedy, but not to be foolish.  Even in today’s “everything is on sale” environment you still need to make sure your investment capital is protected and you understand the risks you’re taking.

This is a great time wade in to a variety of investment opportunities.  It’s not clear we’ve hit absolute bottom yet – there may be further to fall – but there are some great assets out there and now is the time to accumulate a little for yourself.

PS. For those of you who don’t know or remember who Gordon Gekko is, check this out.  (Then go rent the movie!)

As Wall Street Titans Fall, Hard Money Lenders Step Up To Fill The Void

Wow! I’ve been saying for a long time that this current financial crisis is worse, and will last longer, than most of the public pundits or government officials will ever admit. (Especially in an election year.) But even I’m a little in shock at just how brutal the carnage has been. First Bear, then Fannie and Freddie, now Merrill Lynch is auctioned off, AIG is holding a sign saying “will work for food,” and Lehman Brothers is in bankruptcy! Wow! Even the largess of the US government (thanks to you and I the taxpayers) has hit its limits with this one. Whatever we may think of the Wall Street culture, it is a bit sobering to see so many financial titans go down so hard and so fast! They really screwed the pooch on this one. (The pooch, by the way, is likely to be us taxpayers again.)

The press will beat this to death so I won’t ramble on about how we got here, but if you thought credit has been tight lately for any sort of residential or commercial real estate deals, watch how fast the remaining commercial banks pull their limbs into their shells. Private money lenders are nearly the last bastion of real estate credit out there. Even some of the big hard money lenders are finding themselves capital constrained as the volume of high quality deals is skyrocketing.

Now there has truly never been a better time for hard money mortgage pool investors!