Let Rent-Seekers Fail

[petec]

I love how the topic of the thread changed from "Let rentiers fail" to "Let renters fail".  ::)

 

Ha!

[meiroy]

 

So you want real inflation? You need to engage the P&L baby. You need to have more money out there chasing so many goods that the economy cannot produce. You give money not to some stiff suit but some Duck Dynasty Arkansas hillbilly motherfuckers that don't know what a Robinhood is. Inflation index that shit and then watch the sparks fly.

 

Wouldn't it be siphoned by external economies that lack their own local demand?

[DTEJD1997]

The Airbnb problem these people are having seems like a miniature version of one of the key flaws of WeWork. The Airbnb'ers took on long term debt to fund an asset that had short term cash flows.

 

Mike

 

I don't think that is quite correct.  "WeWork" simply had a flawed business model right from the get go.  They didn't make a profit, not even close.  I seem to remember that at it's height, WeWork was losing $1 for every $1 of revenue they brought in.  WeWork wasn't making money, wasn't ever going to make money.

 

Contrast that to a typical Airb&b host.  They would make money when people were staying in their properties.

 

The problem with the Airb&b folks was that they:

 

1). Did not keep enough of a cash buffer.  This is common in America today. I know people making $100k a year, who live paycheck to paycheck.

 

2). The Airb&b people have too much debt, not enough of an equity cushion.

 

The end result is the same, both are going out of business....but WeWork wouldn't have made it, even if Covid-19 hadn't come along. 

[SharperDingaan]

The Airbnb problem these people are having seems like a miniature version of one of the key flaws of WeWork. The Airbnb'ers took on long term debt to fund an asset that had short term cash flows.

 

Mike

 

But what exacttly is the problem. Airbnb apartments are just standard apartments. For a long time they made what? 2x - 3x their mortgage? Now they can rent long term and cover the mortgage. It seems very pandemic related. If there is so much property in excess of demand then rental prices should go down. Last time I looked I see big rent inflation everywhere.

 

Just to throw some things out ....

 

In the US, Airbnb ownership  is a very smart thing to do.

Put bluntly, it is an asymmetric bet against the US banking system, with very little downside

 

US HELOCS/mortgages are for the most part non-recourse.

Both the ALM mismatch risk, and cash flow mismatch risk, are borne by the bank - not the unit owner.

And the more units the owner has - the more effective the risk transfer is.

 

A SMART unit owner, may initially finance with 20% down.

When times are good, apps do the marketing, cash flow is at 2-3x plus, and SMART owners repay themselves as fast as possible.

The dumb, and the greedy, just plough the surplus cash flow into more units - with a little 'empire building' help from social media.

In the short-term. More demand for the same supply, raises price, raises equity, raises more demand.

In the medium-term. High unit values fuel new-build construction, and the good times roll.

 

Great thing with 80% is that as cash flow shortfalls have to be financed and unit values collapse, 80% quickly becomes 90-95%.

THE SMART SIMPLY WALK AWAY. They've already got their money back, and this is now the banks problem - not theirs.

Non recourse lending is great!

 

At the extreme, we get a condo market collapse, and the new builds become public housing.

Owned by the smart money, and guaranteed by the public purse.

Circle of life.

 

Takeaway?

Risk is your friend. But only play with house money, a keep taking as many $ off the table as soon as you can.

Otherwise known as asset striping.

 

SD

 

 

 

 

[meiroy]

 

FICO scores.

 

[thepupil]

US HELOCS/mortgages are for the most part non-recourse.

Both the ALM mismatch risk, and cash flow mismatch risk, are borne by the bank - not the unit owner.

And the more units the owner has - the more effective the risk transfer is

 

As someone who has recently taken out an 80% LTV 1st mortgage and a 80-98% second lien mortgage in the past 12 months (in Maryland), my reading of the mortgage documents is that both instruments are RECOURSE and are personally guaranteed.

 

Maryland, specifically:

https://www.nolo.com/legal-encyclopedia/deficiency-judgments-after-foreclosure-maryland.html

https://www.tuckerlawpllc.com/blog/deficiency-judgments-in-maryland.cfm

 

In fact, most states are (by the letter of the mortgage document) recourse states for residential lending.

https://www.creditsesame.com/blog/loans/guide-recourse-non-recourse-loans/

 

There are some non-recourse states:

Non-recourse states include Alaska, Arizona, Washington, Utah, Idaho, Minnesota, California, North Carolina, Connecticut, North Dakota, Texas and Oregon.

 

Sharper, I'm not trying to pick a fight here, but I will again ask you to prove the statement you're making.

 

By the way, I generally agree with you about being a borrower, I took out my loans in good times to preserve liquidity and maximize flexibility. I feel much better for having taken them out, it's allowed me to have many years of liquidity and be ready for a big and long drawdown rather than money tied up in an 80 year old pile of bricks and sticks.

 

But the mortgage docs say I'm on the hook for my debt and I think that is the case throughout much of the U.S., with the exception of primary homes in the states above, and with the exception of many commercial mortgages that are explicitly non-recurse outside of standard "bad boy" carve-outs.

[KJP]

 

 

In the US, Airbnb ownership  is a very smart thing to do.

Put bluntly, it is an asymmetric bet against the US banking system, with very little downside

 

US HELOCS/mortgages are for the most part non-recourse.

Both the ALM mismatch risk, and cash flow mismatch risk, are borne by the bank - not the unit owner.

And the more units the owner has - the more effective the risk transfer is.

 

 

Why do you believe that most HELOCS/mortgages (given the context is AirBnb, I assume we're talking about residential mortgages) in the US are non-recourse?  That is not my understanding.  See, for example, the 50-state survey of foreclosure law available here, which says that 36 out of the 50 states permit deficiency judgments:  https://www.nclc.org/images/pdf/foreclosure_mortgage/state_laws/pr-foreclosing-dream.pdf

 

I believe those figures generally apply to owner-occupied dwellings.  In general, there is less protection in the US for investment property loans.  So, again, what is your basis for saying that most AirBnb's hosts in the US can buy a property with non-recourse debt?

[rb]

 

So you want real inflation? You need to engage the P&L baby. You need to have more money out there chasing so many goods that the economy cannot produce. You give money not to some stiff suit but some Duck Dynasty Arkansas hillbilly motherfuckers that don't know what a Robinhood is. Inflation index that shit and then watch the sparks fly.

 

Wouldn't it be siphoned by external economies that lack their own local demand?

Sure. But the your currency devalues and you get... inflation.

[SharperDingaan]

No worries. I have no problem with exposing the risk, but I'm not going to do the math for everyone.

We KNOW that this can and DOES happen. Something very similar occurred in the US, and it initiated the GR2 of roughly 2007. This is just similar sh1te, in a different wrapper.

 

Bankers argued that debtors wouldn't walk away, because it would damage their credit rating.

And were wrong, repeatedly.

 

It is well known that while Individuals are frequently very smart, they become progressively 'dumber' as they collect into larger 'homogenous' groups (ie: group think, mob mentality. etc). The defense is as much diversity, and independent thought, as possible. Coupled with ability to act.

 

Obviously, not what many want to hear.

.... but great for making a market  ;)

 

SD

 

[Spekulatius]

FICO scored can be repaired in a couple of years. It’s not the end of the world to have shot credit. Pay your CC a couple of years and you are good.

[meiroy]

 

 

What? You bail out on properties, stick it to the banks and somehow all you need is to pay your CC for a couple of years and you get your score back? OK I'm not getting this conversation.

 

[Nomad]

I love how the topic of the thread changed from "Let rentiers fail" to "Let renters fail".  ::)

 

Ha!

 

Slightly different than my original meaning  ;D

 

I will edit to "Let Rent-Seekers Fail" to remove the ambiguity created by the French etymology of the word "rentier."

[Gregmal]

There are plenty of critical life situations, such as job applications, mortgage/rental application, etc, where they very clearly ask you things like "have you ever been charged with a felony, have you ever declared bankruptcy"... worrying about a credit score, I agree, is stupid. Worrying about running into other problems is wise though.

 

For instance, I won't touch a renter who has filed bankruptcy. I will on a case by case basis overlook a shitty credit score.

[meiroy]

 

If you bail out on payments for several of the above fictitious properties your credit history is going to be in the shits, why is it *stupid* to care about that?  don't get it.

 

[Gregmal]

Because

 

1) credit scores can be repaired

2) they really only matter in ranges, IE for 90% of shit a 490 and a 570 are the same, so is a 740 and a 800, managing a credit score is really only something neurotic rich people fixate on.

3) no one cares, and no application for anything to my knowledge, asks you "what was the lowest your credit score has ever been" or "3 years ago, what was your FICO"

 

 

I know a few people whom had abysmal credit scores, starting turning things around, paid a consultant to repair their scores, got current and stayed current for a few months, and went from mid 500s to high 600s/low 700s. They are easy to manipulate.

[meiroy]

 

Thanks.

[thepupil]

I think your credit score is important.

 

4/4 of my jobs have done a credit check and a background check. I have a fiduciary duty (note that I'm not working now so my increasingly frequent post are not me completely shirking that duty) . A black mark on credit is a no go for my job. it can recover, but it could still be a pain in the ass. Likewise, it is standard to do background checks and credit checks on all important partners in my job. we won't do business with someone who has shit credit, or at the very least, we want to know why if someone has anything that is less than perfect.

 

It is true, that you can extinguish debts through bankruptcy and start over, to an extent. It is also true that certain types of retirement/ERISA accounts aren't exposed to creditors (varies by state: 401k/403b, IRA's in most states, HSA etc.), so one can have very positive net worth and "walk" from recourse debts, but it would a) kill your credit score b) hurt your future job prospects c)if you have substantial income, you will  likely have a payment plan to pay off some portion of your debts.

 

I'm not saying that no one has over modified a loan or taken advantage of banks or whatever, and again I'd reiterate that I run my own life at a fair amount of leverage, but you generally can't walk away from debt in a recourse state without significant and potentially highly detrimental consequences.

[BG2008]

I think your credit score is important.

 

4/4 of my jobs have done a credit check and a background check. I have a fiduciary duty (note that I'm not working now so my increasingly frequent post are not me completely shirking that duty) . A black mark on credit is a no go for my job. it can recover, but it could still be a pain in the ass. Likewise, it is standard to do background checks and credit checks on all important partners in my job. we won't do business with someone who has shit credit, or at the very least, we want to know why if someone has anything that is less than perfect.

 

It is true, that you can extinguish debts through bankruptcy and start over, to an extent. It is also true that certain types of retirement/ERISA accounts aren't exposed to creditors (varies by state: 401k/403b, IRA's in most states, HSA etc.), so one can have very positive net worth and "walk" from recourse debts, but it would a) kill your credit score b) hurt your future job prospects c)if you have substantial income, you will  likely have a payment plan to pay off some portion of your debts.

 

I'm not saying that no one has over modified a loan or taken advantage of banks or whatever, and again I'd reiterate that I run my own life at a fair amount of leverage, but you generally can't walk away from debt in a recourse state without significant and potentially highly detrimental consequences.

 

I second this.  Especially for the ultra-competitive jobs with 6 figure salaries, they do extensive background checks on your credit.  I have heard horror stories where candidates have to take care of $150 credit card disputes from 5 years ago.  If you are offering someone $250k a year, why bother with someone who has a 500 credit score.  That there is telling you a whole lot about personal responsibility. 

[SharperDingaan]

Just to follow up.

 

It is just more inconvenient, and more costly to obtain a non-recourse loan in the US, but not particularly difficult.

A very brief google search pulls up at least one bank, and a few mortgage brokers. Sure, they are unlikely to be the choice of johnny or suzy, but if you want non-recourse financing, you can get it. To the predatory borrower the extra cost is just insurance, and even tax deductible! https://www.sensefinancial.com/non-recourse-lenders/

 

The sad thing is that it is 'easier' to bail out a failing bank, than it is a failing home owner reliant upon airbnb cash flow to pay the mortgage. The airbnb landlord layer creates a toxic overlay, magnifying volatility; because as soon as a lender forecloses, it triggers a selling waterfall with no floor - as there are no buyers. The only back stop big enough to arrest the waterfall, is state purchasing as public housing; probably NOT what most had in mind.

 

The opportunity is what this can do for somebody seeking election.

In the DB pension industry, underfunded pensions (liabilities > assets) are common, and it doesn't collapse the DB value proposition.

All a 'wise' authority need do; is target a specific area, work with the banks in that area to temporarily allow a LTV > 100% to non airbnb landlords, and offer to buy X units at 50% of the current market. Let the banks foreclose on the airbnb landlords.

 

Instant public housing at a deep discount to market. Lots of ordinary voters saved from foreclosure.

And all these votes concentrated in a target area, and grateful to the 'wise' authority.

Airbnb landlords portrayed as leeches.

 

SD

 

 

 

[thepupil]

The very basic google search result  is for lower LTV (35-50% down payments) first lien loans on investment properties owned inside an IRA. This is because you can’t own levered real estate in an IRA with a recourse guaranty because that would represent self - dealing between the IRA and owner of the IRA. There are very strict rules when you own real estate in an IRA. You can’t work on the property yourself for example and must outsource everything.

 

https://www.theentrustgroup.com/investments/real-estate/strategies/non-recourse-loans

 

  A non-recourse loan is a loan in which you, as the IRA holder, are not personally liable for repaying the loan. You, the IRA holder, cannot personally guarantee the loan.  This is viewed as extending credit. 

 

I maintain the vast majority of residential mortgages taken out by small time folks, particularly for primary residences are recourse to the borrower.

 

Show me where I can refi my 98% LTV primary residence mortgages to a non recourse one and I’ll send you a big thank you note and a fruit basket.

[Gregmal]

To be fair, the jobs you guys are referring to...I dont think, if we drew a line down the middle and threw people into categories, that the folks who end up at those jobs EVER have to worry about not making rent or missing a minimum payment on the credit card. Of course there is the occasional feel good story, but its so rare that when it does happen they end up making a movie about you with Will Smith as the lead(and that wasn't even a real banking job). I'd be curious how many people on the GS IB team come from HNW families.

 

For the folks that do have to worry about stuff like this, I dont think theyre concerned about those opportunities. Often in those dire times, I'd imagine its in their interest not to worry about managing the credit score and just focus on keeping a healthy financial position, which are not necessarily one in the same.

[Nomad]

https://www.bloomberg.com/news/articles/2020-05-05/fed-is-propping-up-companies-it-had-warned-banks-not-to-touch

 

 

For years, the Federal Reserve warned that too many highly risky companies were engaging in fuzzy accounting that bumped up their earnings -- making it easier for them to obtain loans. The practice was driving up corporate debt to excessive and worrisome levels, regulators chastised.

 

But now, in its latest effort to keep credit flowing, the Fed has done a remarkable about-face.

 

...

 

The Fed’s historic action, lending directly for the first time since Word War II, came after Congress set aside capital to to support lending to smaller businesses. The first announcement, on March 23, allowed companies with high-yield bonds or leveraged loans to participate as well. In weighing their credit strength, the Fed said that it would consider their Ebitda. But the market was left confused by whether that meant adjusted or standard Ebitda.

 

The latest statement on April 30 clarified what the Fed meant: Adjusted would be accepted.

[DooDiligence]

https://www.bloomberg.com/news/articles/2020-05-05/fed-is-propping-up-companies-it-had-warned-banks-not-to-touch

 

 

For years, the Federal Reserve warned that too many highly risky companies were engaging in fuzzy accounting that bumped up their earnings -- making it easier for them to obtain loans. The practice was driving up corporate debt to excessive and worrisome levels, regulators chastised.

 

But now, in its latest effort to keep credit flowing, the Fed has done a remarkable about-face.

 

...

 

The Fed’s historic action, lending directly for the first time since Word War II, came after Congress set aside capital to to support lending to smaller businesses. The first announcement, on March 23, allowed companies with high-yield bonds or leveraged loans to participate as well. In weighing their credit strength, the Fed said that it would consider their Ebitda. But the market was left confused by whether that meant adjusted or standard Ebitda.

 

The latest statement on April 30 clarified what the Fed meant: Adjusted would be accepted.

 

Give Trump another 4 years & we'll all be banana farmers.

[rb]

https://www.bloomberg.com/news/articles/2020-05-05/fed-is-propping-up-companies-it-had-warned-banks-not-to-touch

 

 

For years, the Federal Reserve warned that too many highly risky companies were engaging in fuzzy accounting that bumped up their earnings -- making it easier for them to obtain loans. The practice was driving up corporate debt to excessive and worrisome levels, regulators chastised.

 

But now, in its latest effort to keep credit flowing, the Fed has done a remarkable about-face.

 

...

 

The Fed’s historic action, lending directly for the first time since Word War II, came after Congress set aside capital to to support lending to smaller businesses. The first announcement, on March 23, allowed companies with high-yield bonds or leveraged loans to participate as well. In weighing their credit strength, the Fed said that it would consider their Ebitda. But the market was left confused by whether that meant adjusted or standard Ebitda.

 

The latest statement on April 30 clarified what the Fed meant: Adjusted would be accepted.

I'm putting this thing up here again. Only this time it has scotch in it.

[Jurgis]

https://www.bloomberg.com/news/articles/2020-05-05/fed-is-propping-up-companies-it-had-warned-banks-not-to-touch

 

 

For years, the Federal Reserve warned that too many highly risky companies were engaging in fuzzy accounting that bumped up their earnings -- making it easier for them to obtain loans. The practice was driving up corporate debt to excessive and worrisome levels, regulators chastised.

 

But now, in its latest effort to keep credit flowing, the Fed has done a remarkable about-face.

 

...

 

The Fed’s historic action, lending directly for the first time since Word War II, came after Congress set aside capital to to support lending to smaller businesses. The first announcement, on March 23, allowed companies with high-yield bonds or leveraged loans to participate as well. In weighing their credit strength, the Fed said that it would consider their Ebitda. But the market was left confused by whether that meant adjusted or standard Ebitda.

 

The latest statement on April 30 clarified what the Fed meant: Adjusted would be accepted.

I'm putting this thing up here again. Only this time it has scotch in it.

 

You definitely should start selling these things.