Rick Fitzgerald -The MultiFamily Expert

Multifamily investments and lending came to a standstill in the past week as the commercial real estate market tries to understand the impact on future lending and criteria.

The multi family portfolio is impacted simply under the “guilt by association” influence. J. Christopher Hoeffel, president of CMSA (Commercial Mortgage Securities Association) remarked in a conference that the underlying default rate of the CMBS market is only .47%

That’s less than ½ of one percent in case you don’t have your calculator handy. And that is for all property types. Multifamily investment types are even less.

What it all means is multi family investments just got a little tougher for investors to finance. Banks are holding cash back despite all the efforts and talk the Feds have been putting out there. The LIBOR rate or the rate that banks lend to each other sky rocketed indicating nobody willing to part money right now.

The Multi family Fannie Mae and Freddie Mac lending programs are still committed but the lending standards are not for the faint at heart.

Working with a mortgage professional can help overcome the changes.

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I was blogging awhile back with a reporter with the St Louis newspaper who maintained that the early year hike in oil prices were only due to the economic conditions. My contention that the hike was intentional due to trading manipulation and resulted in the largest consumer fraud in history. I was partly wrong as the bank investment fiasco has exposed even more fraud. Legal fraud.

But I digress.

Yahoo’s article has just a small statement about oil trading today.

Phil Flynn, analyst and oil trader with Alaron Trading Corp. in Chicago, said the late-session surge in oil appeared to be the result of a large investment fund scrambling to cover their short positions, or bets that prices would fall.

"When people sense that someone is short, it's like blood on the streets. It just accelerates the rally," Flynn said.

Anyone ever hear of SemGroup? You might want to bone up on how this little company made it big in oil trading to understand how we the consumers get the shaft. SemGroup was considered to be a primary cause of the wild price hikes. They and a handful of other companies operate alike included within this investment bank fraud.

We pay in higher oil prices and then the bailout for the investment banks that helped perpetuate the fraud. Even their bank made millions from the BK.

Tulsa World article on the company:

http://www.tulsaworld.com/webextra/content/2008/SemGroup/default.aspx

The bankruptcy article detailing the fraud:

http://www.tulsaworld.com/news/article.aspx?articleID=20080911_351_A1_ADepar657201

Now they get a default reprieve from banks who will be selling bad loans to the government:

http://www.tulsaworld.com/news/article.aspx?articleID=20080922_49_SemG883115

Does it make you mad? Bloomberg has a good article on the sudden rise of oil today:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aa2880cO2dNU&refer=home

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The SEC blocked the short selling of a number of financial stocks in order to protect them and instill some investor confidence to those who have or want long term holdings. The vast majority of investors purchase stock for the long term motivation of profit.

So what is “short selling”?

Short selling is a long time tradition of the stock market. Although complex, the basic theory is the practice allows the market to gauge the true value of stock. Keeping the stock’s value honest by always having someone betting against its value rising too high without merit and preventing large price drops on over valued stocks. (Not sure what happened on the dot.com bust).

Short sell transactions can be complex transactions so let’s put one into laymen’s terms:

Investor A short sells Apple stock. Because he has shown the ability to cover his bets, he obtains $20,000 worth of stock valued at $20 a share. Now he has $20,000 with an agreement to buy it back at market value for one week. If it goes down, he wins. If it goes up he loses.

He just knows the stock’s value is going down this week because he read on the internet that IPods will be banned for use by children under 12 because they have been shown to cause a hearing loss.

In fact, ABC news reports a study that showed children losing their hearing due to listening to IPods. Apple’s stock went down on the news and he buys it at $10 a share.

$20 x $1,000 = $20,000

$10 X $1,000 = $10,000

$10,000 profit

One of the major dark sides of the practice is the use of rumors and misinformation to artificially cause a fall of the stock price. Although the Apple example isn't real, news stories have been planted that do create temporary drops.

Another is the “naked short sale” which occurs when Investor A hasn’t shown they can cover their bets or taken actual ownership. Apparently we had a number of short sellers trying to profit quickly in the financial sector.

In this case, the government stepped in to stop the practice altogether eliminating anyone whose interest is “betting against” the stocks rise. Short sellers are “outraged” although this applies only to financial stocks. My suggestion is they go buy some Chinese stock and maybe the American consumer can help them make a short sell profit overseas.

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By now you know the Feds have bailed out AIG. They are one of the largest insurers in the world protecting a wide range of investments and owning a variety of very good assets.

Unfortunately, if you own the biggest diamond in the world today and you have to sell it right now there would be a considerable loss in its market value.

That’s what happened to AIG. Their inability to borrow against its assets or sell them to raise sufficient capital doomed the company. AIG requires the highest credit risk score because it offers default protection insurance on hundreds of billions of dollars worth of investment securities around the world. Just like a businessman with bad credit you’re out of luck and maybe business. Any possible chance they could not cover the defaults is a disaster. We have credit bureaus as consumers and they have:

http://en.wikipedia.org/wiki/Credit_rating_agency

AIG's insurance fund is sort of like the FDIC offering depositors protection with very little cash. The FDIC doesn’t expect the entire banking system to fail at once and neither did AIG but the FDIC has a sugar Daddy with a lot of money. AIG had a couple big diamonds. The losses and expected losses were far more than AIG had available to cover thus creating the problem.

AIG was “too big to fail”. Our previous meltdown would have been just a “mostly meltdown”. So us taxpayers needed to loan AIG some money. If you are going to loan someone $85 Billion, you might want to secure that loan just a bit. And 79.9% of your company and assets sounds about right.

If you know anyone who wants a big diamond let me know. AIG could use the help.

How this affects the market is anyone’s guess. Our Multifamily Fannie Mae and Freddie Mac loan programs are still hanging on. The cost to protect against a security investment default for banks just got a lot more expensive.

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Market investing takes another back seat to the government today. One veteran trader said, "no one on the planet could have anticipated this week". The market continued its historic upheaval today with the government bailout of AIG.

Although the government declared it was not "nationalizing" AIG, it does in fact own 79.9% as well as control dividends. Taxpayers may never know how critical the decision was to stabilize the market.

Call it what you want, but the government stepping in to in effect take control of AIG would have been insane a few months ago.

The takeover of a public company whose ownership and control has no relationship to the government is indeed historic. It is basically a two year plan to sell assets and hopefully arrange some sort of plan to payoff the government. AIG will pay 11.5% of interest on the loan until its back on its feet.

In almost a heart beat, one of the most respected companies in the world has succumbed to the financial meltdown.

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