Updated: November 12, 2012 11:48AM
Dear Mr. Berko: I’m 43, and since losing my $105,000-a-year job in 2009, I’ve been making $60,000 a year fixing computer kinks and coordinating hardware for small businesses. My wife makes $18,000 a year from her online legal forms business and cares for our children. She lost her job in 2009 as a $70,000-a-year legal assistant with a large law firm. We filed a 2011 tax return, reporting $12,000 in income, but didn’t pay any taxes. If we paid federal taxes, we wouldn’t have enough money to pay our $285,000, 8.5 percent mortgage. We bought our home in 2002 for $315,000. We asked the bank to lower the rate, but it won’t. We tried to refinance, but the bank says our income doesn’t qualify us for a new mortgage. We can sell our home for $310,000 and use the equity to downsize, but we don’t qualify for a mortgage. We’ve shown the banks our individual retirement accounts, worth $200,000, and they’ve said, “That doesn’t count.” I’ve enclosed our IRAs because the broker wants us to sell everything and buy a variable annuity. He said it’s guaranteed and more dependable than the stocks we have in our IRAs. Could you help or advise us?
— TS, Cleveland
Dear TS: Holy tomatoes! Many stockbroksters today spend too much time in annuity school and wouldn’t know a common stock if it bit ’em on their bum. Your IRAs own excellent income/growth stocks. My advice is to move them to a discount brokerage that won’t charge fees for reinvesting dividends. But that 8.5 percent mortgage is a horse of a different color.
Homeowners and wannabe owners now compete against “crony government.” This is a 21st-century phenomenon in which Washington directs banks to lend billions of dollars to companies such as Blackstone (BX-$15), Kohlberg Kravis Roberts (KKR-$15), Oaktree Capital (OAK-$41) and Och-Ziff (OZM-$9.70) to purchase foreclosures around the nation. Blackstone, which owns thousands of foreclosures, announced it will buy 15,000 homes in the Tampa Bay area and place them on the rental market. Och-Ziff and Colony Capital are purchasing thousands of foreclosures in the Atlanta area, and Kohlberg Kravis Roberts, Oaktree Capital, Bank of America and Citigroup are buying thousands of foreclosures in California and Arizona and listing them as rentals. It’s happening in other states, too. And thanks to QE3 (the Fed’s program to buy at least $40 billion in mortgages a month), private equity firms such as Blackstone can borrow billions at 2 percent. And you can’t get an 8.5 percent mortgage reduced to 5 percent. Crony government!
These politically connected firms have contributed millions to members of Congress in the past year. Now it’s payback time, and the chickens are coming home to roost. These favored firms, armed with billions of public money, are shoving Trudy the Teacher, Ron the Roofer, Charlie the Car Guy and Barbra the Barber out of the housing market. In a few years, the Blackstones and Oaktrees will become lords of the manor (think medieval Europe) and will permit you to live in their homes for annually increasing rents. Unfortunately, these politically connected investors have better access to government mortgages (at 2 percent) than you and zero personal responsibility. How sweet!
And sweeter are the profits! Blackstone might pay $65,000 for a home appraised at $90,000, spend $15,000 to pretty it up and then rent it for $14,000 a year. Interest, taxes, depreciation and ongoing costs might total $5,000 annually, so Blackstone’s net income per rental would be $9,000. With a portfolio of 15,000 homes, which is the case in Tampa Bay, that would be a sweet $135 million in annual net income. But I see increasingly brighter clouds. As Blackstone and others swipe apples from the tree, home prices around the nation will rise and strengthen bank balance sheets, which is an intended consequence. But you’re stuck at 8.5 percent. However, if a qualified lawyer were to say “don’t make another mortgage payment,” I’d follow that advice. Meanwhile, BX, OAK, OZM and KKR could be attractive long-term investments.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at firstname.lastname@example.org.