Effor.com

I’ve read many stories in the past few weeks about how hard it is to get a loan now.  All the stories are saying the same thing - banks aren’t lending, people can’t get loans, so the economy is tanking because people can’t borrow money to buy things.

Bullshit.  This past summer I had to replace my air conditioner (I chose a Trane heat pump and got rid of the natural gas furnace at the same time) and my refrigerator.  The heat pump (a Trane XLi15) cost about $7500 and the fridge was over $2000.

I don’t happen to have $10,000 just laying around so I shopped for financing and got 0% interest for 18 months on the heat pump, and 0% interest for 12 months on the fridge.   The interest rate on both loans will jump to over 18% after the intial promo runs out.

In looking at my budget, I probably won’t have both of them paid off before the promo rate runs out and the high interest part kicks in, so I decided to get a HELOC in order to pay the initial finance companies the reamining balance just before the 0% promo expires.

My house is worth about $200,000, and I only owe about $50,000 on the mortgage because when I moved to TN I used the proceeds from our house in MO as a down payment on this one.  So I’m not in over my head and I’ve got equity - even if the housing market here drops drastically.

Anyway, I called you my bank (First Tennessee) and they took an application over the phone.  They also called my employer to verify my salary and how long I’d been with the company.  They ran a credit check and asked a lot of questions about how much money I wanted ($10,000 line of credit) and what I wanted it for.

They called me back a few days later and said I was approved for a $25,000 HELOC, because they didn’t want to mess with a $10,000 line.  If you’ve read this far, here’s the kicker:

My interest rate is 1% BELOW Prime (as published in the WSJ).  Prime had been at 5% for a few months, but just this week (thanks to the Fed jacking up inflation by lowering it instead of raising it!) it dropped to 4.5%.  So my interest rate is currently 3.5%

And the 1% below prime margin is fixed.  I know the prime rate will go up and down, but my loan will always be 1% below prime.  And with Bush and Helicopter Ben at the controls, the interest rate isn’t going up anytime soon.  (And do you honestly think Obama or McCain will change the Fed cheap money policy?)

To sum it up, I not only got the money I was looking for, I got the money at an interest rate that is stupidly cheap.  First Tennessee is borrowing money from the Fed at 1.5% and loaning it to me at 3.5% - so they make 2% of every dime I borrow.

So the next time you read a story about how the banks aren’t lending money, or how tight credit has gotten - print it out and use it to wipe your ass - because that’s all it’s good for.

To say it another way, it’s easy to get a loan at ridiculously cheap rates - if you can afford to pay it back.  I’m assuming that if I owed more on my house than what it’s worth then the bank wouldn’t let me borrow any more against it - rightly so!

If you don’t have a job, you shouldn’t qualify for a loan.  If you are upside down on your house then you shouldn’t qualify for a loan against it.  If you make $40K/year and want to buy a $400,000 house, then you shouldn’t qualify for a loan.

In other words, banks are lending money - and they’re lending it at VERY low rates.  As long as you can afford to pay them back, which is how it should be.

If you can’t afford to pay them back, don’t bitch and moan about the banks not lending any money, because it’s simply not true!  And you’re stupid for thinking that they should loan you money that you can’t pay back.

So SHUT UP with the “tight credit” and “hard to qualify for a loan” stories.  You won’t get any sympathy from me.

gk

I was responding to some comments to a post I made to www.seekingalpha.com a few minutes ago, when I said something that I think needs to be explained further.  I mentioned “leverage” and since that’s been in the news (especially regarding financial stocks) quite a lot over the past few months, I decided to expound on it a bit.

In the comment I referenced above, I said “Let’s say you have $1 million equity in your house, and you take it out in a HELOC. You take that $1 million and put 10% down on 10 other $1 million properties - and you depend on the renters to make your payments.“

That’s leverage.  I just took $1 million in assets (my home equity) and used it to gain control on $10 million in assets.  I used the words “gain control” rather than saying “to buy” because I don’t actually own them - the bank I borrowed the other $9 million from actually owns those properties.

It’s an important distinction, because what happens to my $10 million in assets if just one renter falls behind on their payments?  Suddenly I can’t make my mortgage payments.  It’s only 10% less income, but it causes me to suddenly have to sell the whole $10 million in leveraged assets - because I can’t make the payments.

That’s what happened to Bear Stearns.  They had some assets which they leveraged (borrowed against) in order to buy (with other peoples money) other assets.  When one small part of the initial asset didn’t make their payment, the whole house of cards fell.

In my example, I used a leverage ratio of 10 to 1.  Bear Stearns was leveraged over 30 to 1.  I’ve sen some arguments from pundits (including Ben Stein) where they say the markets have over reacted; that a 10 percent jump in the rate of defaults doesn’t warrant a 20 or 30 percent drop in the stock price of financial companies. 

They’re wrong.  And they’re wrong for the reason above.  When you’re that highly leveraged; when you have 20 (or more) dollars of debt for every dollar of assets; you are hosed when just one percent of the underlying assets doesn’t pay up.

Suddenly you can’t make your payments on all the debt you’ve borrowed.  And since you really didn’t make much of a down payment anyway, you have no equity in the investment.  If you had some equity, you’d have a little breathing room.

But you don’t.  You need every dollar that you’ve counted on to make those payments - because you’ve leveraged your equity. 

And what happens when the value of thoseleveraged assets turns out to be too high?  You’re fucked.  Not only are you highly leveraged, but the base value of thoseassets has dropped, so now you are more leveraged than you were just a monthago.  And so you’re even more vulnerable when there’s a small rise in loan defaults and bankruptcies.

It’s a wild, wild world right now.  I can’t think of a single bank or REIT that I’d touch with a 10 foot pole.  Go ahead and Google the news results for the 3rd quarter of last year.  Check out all the stories that claimed that the 4th quarter was the “kitchen sink” quarter.  Be sure to read how damn near everyone thought that the banks and investment houses have finally fessed up and come clean.

Now watch the headlines during the week ahead.  Let’s se how many additional write-downs there are.  A lot of people have written me saying that I’m overestimating the impact of the sub prime stuff.  Many have told me that all of those losses for the upcoming rate adjustments (for the Option ARM’s and ARM’s written in 2005 through 2007) have been accounted for, and that there’s no where to go but up.

They may be right, but I don’t think so.  I don’t think people truly understand the impact of leverage.  I don’t think they truly understand that just a 3 or 4 percent drop in the base asset (mortgages) can cause a company to disappear.  

I’m not putting my money back into the market until I’m sure that risk has been priced in.  Given the (in my view) extremely optimistic earnings forecasts for 2008 and 2009, that risk is being ignored right now.  I may be wrong (I often am!) but I think I’ll be getting 2 or 3 percent in my money market funds while the optimists are losing 10 to 20 percent (or more) trying to bottom fish the market.

Any questions?

gk