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This post is from an email from John T Reed.  He’s one of my favorites and isn’t much on sugarcoating, so I love reading his stuff.  He sent this email to pitch his book, How to Protect Your Savings from Hyperinflation and Depression. It’s ok with me that he pitches, I’m a capitalist at heart.  I’m currently reading this book – just started actually, so I’ll report back later my impressions.  But I was so impressed with the email that I asked his permission to post here, and he agreed.   I have included links to the book.  He doesn’t sell on Amazon, so all proceeds go directly to the author.

Whatever your opinion or impression, education is always a good thing, and this article is chock full, so read on:

There must be huge cuts in federal spending right now. We’re not going to get them.
You have to protect yourself.

The U.S. national debt ceiling was set at $14.29 trillion in February, 2010. It looks like we are going to hit that ceiling in the next few months.

Politicians are starting to agitate about which way to vote. As usual, many are lying about it.

Not passing a law to increase that ceiling is tantamount to enacting a balanced budget amendment. Not raising the national debt ceiling means deficit spending ends immediately. It means the U.S. government would henceforth have to live within its means.

The means of the U.S. government are the $2.2 trillion it collects each year in taxes. Current federal spending is $3.5 trillion.

That means the U.S. government has to borrow the difference—$3.5 trillion – $2.2 trillion = $1.3 trillion. That difference is called the deficit. The U.S. government borrows by selling U.S. Treasury bonds.

If Congress refuses to raise the debt ceiling, the U.S. government is not allowed to sell any new bonds except to refinance old ones.

Some politicians are saying that not raising the ceiling risks the “full faith and credit” of the United States.

Not really. As I just said, we can still sell bonds for the purpose of paying off existing bonds.

The average term of U.S. bonds is 49 months. That means about 1/4 of the bonds come due each year.

1/4 of our current $14 trillion debt is $14 trillion ÷ 4 = $3.5 trillion. So if we do not raise the debt ceiling, we would only be able to sell $3.5 trillion of bonds this year and something similar in future years. The politicians want to sell an additional $1.3 trillion.

We would not have to default on any existing U.S. bonds if we do not raise the debt ceiling. So the “full faith and credit” of the U.S. government would not be in jeopardy if the debt ceiling was not raised.

Would not raising the debt ceiling have any other effect then?

Oh, yeah.

It would mean we would have to gradually cut federal spending by the amount of the deficit over the next twelve months. That’s $1.3 trillion which is $1.3 trillion ÷ $3.5 trillion = 37%.

So we would have to cut federal spending 37% by the end of the twelve months after the ceiling was reached.

If you applied that percentage across the board equally to every category of spending, it would mean that Social Security and federal retired pensions recipients would see their monthly checks go down by 37%. 37% of federal employees would have to be fired or have to accept a 37% pay cut including military, FBI, Border Patrol, and so on. Medicare would be cut 37% presumably meaning patients would have to pay that much because doctors and hospital probably would not accept such a cut and would refuse to treat the patients unless the patient or some other person paid the difference.

Congresspersons and the president would have to take immediate 37% pay cuts—so would their staffs.

Opponents of not raising the ceiling say the world would lose faith in U.S. government promises if the government reneged on Social Security, etc.

They should. Those bogus promises were made by politicians playing Santa Claus with taxpayers’ money. There is literally not enough money in the world to pay Social Security, federal pensions, medical care benefits and so forth that have been promised by federal politicians.

The net worth of the world is minus $34 trillion. The gross domestic product of the entire world is $70 trillion. The unfunded liability (money we should have put in the bank but did not) for Social Security and Medicare alone was $107 trillion in 2008. There is no hope that we can ever pay that.

Would a recovery and unemployment going down to 5% solve the problem? Not even close. That would only increase annual tax revenues by about $150 billion.

Would tax increases solve the problem? Not even close. Numerous experts like Former Fed Chairman Alan Greenspan have said that. If you could increase taxes 25%, which is probably impossible unless you broadened the base (made the 50% of Americans who no longer pay any tax other than Social Security tax start paying income tax), you would still only get about $500 billion more revenue. Not enough.

Selling all the national parks and federal buildings like the Smithsonian? Not even a dent.

If the U.S. continued to make on-time payments to bond owners, the “full faith and credit” of the U.S. would not be adversely affected. Indeed, I suspect the world bond market would feel relieved that the U.S. government was finally getting serious about living within its means and behaving in a way that will likely result in bond holders being paid back as promised.

No doubt, liberal politicians will say that seniors and the sick should take precedence over bond holders.

Okay. Go with that. But understand it takes you to the same place very rapidly. If the U.S. government defaults on the bonds instead of the Social Security and other federal entitlements, the world bond market will instantaneously impose their own debt ceiling. That is, they will refuse to buy any more U.S. bonds. In other words, defaulting on the bond payments would change the U.S. government’s credit from AAA to defaulted. To put it in laymen’s terms, the credit card of the Congress and the President would be cut to pieces and canceled.

The “full faith and credit” of the U.S. government would, in that case, indeed, be destroyed.

If and when the world bond market, which mainly consists of U.S. citizens and institutions, stops buying U.S. bonds, those same cuts I described above will have to take place immediately. Basically, there are two entities that can shut down the U.S. government selling bonds and engaging thereby in deficit spending:

• Congress and the President voluntarily
• the world bond market involuntarily

Same result no matter who initiates it.

Furthermore, remember the refinancing of maturing U.S. bonds I described above will also not happen if the bond market stops buying our bonds. In other words, we would have to pay off the $3.5 trillion of bonds that were due this year and we would only have $2.2 trillion of tax revenues to do it. And we could only use that $2.2 trillion to pay off maturing bonds if we totally shut down the entire U.S. government. Even if we did that, we would still have to default on the deficit spending—$1.3 trillion—portion of the maturing bonds because we would not be able to sell the bonds or collect the taxes needed to pay them.

This is a hell of a mess, isn’t it? Your elected officials have been building this mess since 1930—both parties albeit more the Democrats.

So what is probably going to happen?

On January 25th, Obama, Paul Ryan, and Michelle Bachman all delivered State of the Union addresses. Obama promised more of the same, calling spending on Democrat pet projects like green jobs “investment.” His concessions—three-year freeze on non-defense, discretionary spending except where union contracts exist, cutting back on the requirement to issue tons of 1099s, vetoing earmarks, were all symbolic trivia, no substance.

Ryan said the right things but almost in Federal Reserve code that only an expert on fiscal and monetary policy would truly understand. Bachman gave the best of the three talks with a more militant Tea Party list of plans,. Like Ryan, she was truthful, but failed to tell audiences exactly what it all meant because if she had there would be demonstrations in the streets today.

Surprisingly, the best State of the Union Speech on the 25th was made by John Stossel on Fox Business. He even had a little presidential podium only it said Stossel instead of The President of the United States. He also entered the room shaking everyone’s hand and had lots of flags. But after a pause, he began his speech with, “We’re in DEEP trouble.”

Stossel said almost exactly what I am saying about what has to be done. But it’s not going to happen.

They will probably vote to raise the ceiling. Republicans will probably demand some token spending cuts from the Democrats. They will probably refuse most of them. That will result in the debt ceiling arriving and the government not being able to sell bonds because refusing to vote on the ceiling is the same as voting against it.

During that post-hitting-the-ceiling period, Democrats will probably try to reprise the Clinton-era trick of saying the “Republicans shut down the government.” It worked for them back then. I doubt it would work again. If two sides do not agree, you cannot logically blame the lack of agreement to either side. Each side can explain their position and the public can decide which is more reasonable.

Both parties are guilty of succumbing to forgetting their campaign promises and going along with business as usual when they get to Washington. Republican House Speaker John Boehner called voting for the debt-ceiling increase “being adults” and Republican “strategist” David Winston called voting to increase the debt ceiling “governing.” Call it what it is: kicking the can down the road—again, stealing from our children and grandchildren, and making sure we have to do “nine” when a “stitch in time” would have saved them. Criminal careerism gets more to the heart of it.

Ultimately, they will all get together and raise the ceiling with some meaninglessly small cuts. If it’s not a trillion or more, that means the situation is still deteriorating.

Then the media will start discussing when we will hit our next debt ceiling. Once again, everything I said above will apply only the cuts required to match outlays with tax revenues will be bigger.

In other words, the choice is not 37% cuts now or more borrowing. It is 37% cuts now or bigger cuts next year or even bigger cuts the year after that, etc. etc.

37% is the best offer the American people are ever going to get. And they will almost certainly haughtily reject it.

Congress and the president will not vote to cut federal spending 37%. When they have to choose between personal political suicide or national financial suicide, they will choose national financial suicide. That means we will be hit with bigger cuts in the future. “It could happen tomorrow” is the first sentence in my book How to Protect Your Life Savings from Hyperinflation & Depression.

The back cover of that book says,

There is no grown-up in Washington or on Wall Street looking out for you. You have to be your own grown-up.

But the vast majority of Americans are behaving exactly as if they believed some Washington/Wall Street grown-up were taking care of them.

What can/should you do? Implement the “Action Plan to Protect You” in chapter 27 of How to Protect Your Life Savings from Hyperinflation & Depression.

John T. Reed

John T. Reed Publishing 342 Bryan Drive Alamo CA 94507 | 925-820-7262

www.johntreed.com

Copyright 2011 John T Reed Publishing
Reprinted with Permission

Foreclosure concentration December 2010According to foreclosure-tracking firm RealtyTrac, the number of foreclosure filings nationwide dropped for the second straight month in December. After falling 21 percent in November, filings were down by an additional 2 percent in December.

“Foreclosure filing” is a catch-all term, comprising default notices, scheduled auctions, and bank repossessions.

Like most months, a small number of states dominated December’s national foreclosure figures. 6 states accounted for more than 50 percent of all bank repossessions.

  1. California : 17% of all repossessions
  2. Florida : 11% of all repossessions
  3. Arizona : 6% of all repossessions
  4. Michigan : 6% of all repossessions
  5. Texas : 6% of all repossessions
  6. Nevada : 4% of all repossessions

December’s foreclosure filings fell to its lowest levels since June 2008, but we can’t read into the report too much just yet. Foreclosure volume continue to be dampened by lawsuits and moratoriums related to controversy surrounding the so-called robo-signers.

Foreclosure activity may have lessened in December anyway, but we can’t know for certain.

Distressed properties are in high demand among home buyers, accounting for one-third of all home sales; typically sold at a steep, 15 percent discount as compared to non-distressed properties.

Buying foreclosures can be a terrific “deal”, whether for the end homeowner, or an investor planning to rehab and resell.

The Massachusetts Supreme Court recently upheld a decision in the controversial Ibanez case.  To oversimply, many lending institutions assigned mortgages to other entities without the assignment paperwork having been created and recorded.  These new entities initiated foreclosure proceedings.  The assignments would then be subsequently created and recorded.  This was common practice for many instititutions, and it continued for some time until challenged in court in the Ibanez case in Springfield in March 2009.

The Supreme court decision simply confirms the previous ruling, and is not really new information.  Some lenders will now need to initiate foreclosure proceedings all over again, running up costs substantially.  And this brings us to the $64,000 question:

What if you bought that house that was foreclosed improperly?  And then put a lot of money into it?  Do you own it?  What if you bought it, rehabbed it, and resold it?  Who owns it?

If you as a real estate investor bought owners title insurance at the time, you should be covered, at least financially.  The situation may generate additional headaches, but they won’t be insurmountable.  The title insurance should take care of most of the problems.  Certainly if you used a hard money lender, they bought lenders title insurance.

But if you didn’t?  What a mess!!!  This ruling doesn’t cover only those properties being foreclosed going forward, there is no clear guideline for how far this could go backwards in time.

So another lesson learned:  Real estate investors should alway buy owners title insurance.  It may seem expensive, and just one more cost to your deal, but compared to paying for a house that the court says you don’t own, it’s a drop in the proverbial bucket.

Below is a link to the ruling.  And for those of you are going to respond and tell me that my explanation up above lacks detail and is not 100% accurate because I left out the minutiae, yes, you’re correct.  But it was to illustrate a point.  There are lots of sites available tearing apart the details of the Ibanez ruling.

http://www.scribd.com/doc/46471786/Ibanez-Case

Foreclosures per household, November 2010

According to foreclosure-tracking firm RealtyTrac, the foreclosure filings fell 21 percent in November to 262,339 units nationwide. A foreclosure filing is defined as default notice, scheduled auction, or bank repossession.

November marked the first time since February 2009 that the number of monthly filings failed to surpass 300,000 units.

There were other notable November statistics, too, included:

  • November’s 21 percent month-to-month decrease was the largest in RealtyTrac’s recorded history
  • November’s 14 percent year-to-year decrease was the largest in RealtyTrac’s recorded history
  • Nevada led the nation in foreclosure activity for the 47th straight month

However, we can’t read into November’s RealtyTrac report too much; ultimately, history may treat it with an asterisk. Controversy surrounding the so-called robo-signers forced some of the biggest banks to institute a temporary halt to foreclosures in November. Foreclosure activity did fall last month, but the moratorium makes the figures look better for housing than if there had been no interference.

The halt in foreclosures is also why Utah leaped into the #2 state for foreclosures nationwide. Perennial foreclosure-leading states like California, Michigan and Arizona posted double-digit improvements in November whereas Utah did not.

Banks have since resumed foreclosure activity so December’s results may be a better gauge for how the market is truly performing.

Foreclosures tend to be sold at discount and low home prices can entice home buyers to make an offer. If you’re such a buyer and want to look at foreclosed homes, talk to a real estate agent first.

Although there’s a host of online search engines that specialize in foreclosures, a licensed agent may have access to broader inventory, plus the ability to negotiate it more effectively.

Foreclosures, cumulative by state (October 2010)

According to October data from foreclosure-tracking firm RealtyTrac, foreclosure filings topped 300,000 for the 20th straight month last month as 1 in every 389 U.S. homes received a foreclosure filing.

The generic term “foreclosure filing” is defined to include default notices, scheduled auctions, and bank repossessions. Versus the month prior, filings fell 4 percent, and as compared to October 2009, filings were essentially the same.

As usual, foreclosure density varied by region last month, with just 5 states accounting for close to half of the nation’s repossessed homes.

  • California : 14.8 percent of all bank repossessions
  • Florida : 14.4 percent of all bank repossessions
  • Michigan : 7.3 percent of all bank repossessions
  • Texas : 6.6 percent of all bank repossessions
  • Arizona : 6.0 percent of all bank repossessions

The other 45 states accounted for the remaining half.

It reminds us that, like everything else in real estate, foreclosures are local.

For today’s home buyers, though, foreclosures represent an interesting opportunity.

Homes bought in various stages of foreclosure are often less expensive than other, non-foreclosure homes and it’s one of the reasons why distressed home sales now represent 35 percent of all home resales.  But don’t confuse less expensive for less costly.  Foreclosed homes may also be in various stages of disrepair. Getting them into living condition can be expensive.

Your best real estate “deal”, therefore, may be that non-distressed home that’s in sound, move-in ready condition if you are a retail homebuyer.  But as investors, distressed homes are our greatest opportunity.

Foreclosures by Metro Area, Q3 2010

Foreclosures are a big part of the housing market, with distressed properties accounting for 35 percent of all home resales last month, according to the National Association of REALTORS®.

But for as common as foreclosures can be, they remain a localized concern. Data from foreclosure-tracking firm RealtyTrac shows that more than half of last quarter’s foreclosures came from just 19 metropolitan areas, with the Miami-Fort Lauderdale are accountable for the largest number of filings.

A “foreclosure filing” is defined as a default notice, scheduled auction, or bank repossession.

On a per-household basis last quarter, the Las Vegas area was hardest hit. 1 in every 25 households received some form of foreclosure notice.

The RealtyTrac report features other interesting figures, too:

  • California, Florida, Arizona and Nevada account for the top 10, and19 of the top 20 metro areas for foreclosures
  • Compared to Q3 2009, foreclosure activity dropped in 72 metro areas, including No. 2 Cape Coral/Fort Myers, FL
  • Foreclosure activity dropped 1 percent from Q3 2009 in the nation’s 20 most-populated cities

And, despite a 27 percent increase in foreclosures from the second quarter, Utica/Rome, NY posted the lowest foreclosure rate in the nation — 1 for every 8,003 households.  The next closest city, Charleston, WV, posted 1 for every 2,600 households, by comparison.

Foreclosures, like everything in real estate, are local. And buying them is “different” from buying a typical home resale. If you’re planning to buy a foreclosed home, speak with a real estate agent with specific experience with homes in foreclosure. Professional advice is helpful.

Foreclosure concentration, by state (September 2010)The number of foreclosure filings rose 3 percent in September, according to foreclosure-tracking firm RealtyTrac. The term “foreclosure filing” is a catch-all word for housing, comprising default notices, scheduled auctions, and bank repossessions.

September marked the 19th straight month that the number of filings topped 300,000, and the first month in which 100,000 repossessions were logged.

As usual, a small number of states dominated the national foreclosure figures, accounting for more than half of all repossessions.

  1. California : 17% of all repossessions
  2. Florida : 13% of all repossessions
  3. Michigan : 7% of all repossessions
  4. Arizona : 7% of all repossessions
  5. Texas : 5% of all repossessions
  6. Georgia : 5% of all repossessions

Thankfully for home sellers, mortgage servicers appear to be metering the pace at these newly bank-owned homes are made available to the public. RealtyTrac notes that, in doing so, servicers prevent “the further erosion of home prices”.

That said, distressed properties still sell at a steep discount.

In the second quarter of 2010, the average sale price of homes in the foreclosure process was 26 percent lower than the average sale price of homes not in the foreclosure process. It’s no surprise, therefore, that, based on RealtyTrac’s preliminary data, 31 percent of all homes sold in September were “distressed”.

There’s lot of good deals out there, in other words, but they come with certain risks.  Real estate investors are sometimes buying to fix up and resell, and the pace of foreclosures is driving down the sales price of retail purchases also.  In MA and NH, even when you price a finished home below the comps in the area, you can still take a steep discount when it comes to finding a buyer.  They are picky, and they have a lot to choose from.  So be sure you take all your costs into account when making your offers.

Foreclosures per capita, August 2010

Pro’s and Con’s here for real estate investors.  More foreclosures make buying easier, but a plummeting market makes the back-end sale tougher.  So this is generally good news……

According to foreclosure-tracking firm RealtyTrac, the number of foreclosure filings climbed 4 percent in August from the month prior. A foreclosure filing is defined as default notice, scheduled auction, or bank repossession.

Despite the number of filings surpassing 300,000 for the 18th straight month, RealtyTrac’s report shows some bright spots for housing.

  1. The number of default notices served per month fell for the 7th time this year
  2. Foreclosure activity in Nevada, the nation’s leading foreclosure state, is down 25% from last August
  3. Foreclosure activity has not materially increased since early-2009, pointing to a stabilization

In addition, each of the 10 leading metro areas for foreclosures posted year-over-year declines for the second month in a row.

But, perhaps, most important, is that mortgage lenders and servicers appear to be managing their REO more effectively, making properties available for sale at a measured pace as opposed to flooding markets with new homes.  As noted by RealtyTrac, the probable reason is “to prevent further erosion of home prices”.

For home sellers, it’s a welcome development.

Foreclosures have had a hand in falling home values in Massachusetts and across the country. And, although it’s self-serving for banks to meter the release of homes under ownership, everyday homeowners benefit, too.  Fewer homes on the market helps to provide a floor for housing values.