Monthly Archives: October 2008

Confessions of a Subprime Lender Book Review

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Confessions of a Subprime Lender
Buy Confessions of a Subprime Lender from Amazon.com

For the majority of people with even the slightest degree of economic intelligence, the real estate bubble’s collapse was like being a beach lifeguard and seeing a massive tidal wave off in the distance. It was frightenly visible, you knew it would create massive chaos when it finally touched down, and there wasn’t a damn thing you could about it. And now that the speculation on whether subprime lending will affect the overall economy is now a reality, we are seeing many people come out with excuses and try to put the blame on one specific group or the other. The truth of the matter however is that we all are to blame, and Confessions of a Subprime Lender by Richard Bitner clearly shows us why.

The book Confessions of a Subprime Lender is written by Richard Bitner, the former president of Kellner Mortgage Investments who was wise enough to get out of the business before things began to implode in the subprime lending industry. The book covers a wide range of topics such as the history of subprime lending, how conflicts of interest in the lending industry came about, how subprime mortgages work, why the industry was fundamentally flawed, and how just about everyone contributed to the problem in their own ways.

The book gives many examples of the horrible lending practices that occurred on a daily basis, and does a great job of painting the entire picture of what led to the real estate explosion and implosion. Everyone from loan officers, to realtors, to arguably the Federal Reserve receive their justified criticism for fueling the real estate bubble in this book. It’s also kindly written in an easy to understand manner so that average joes who aren’t mortgage savvy can easily pick up and book and read through it without any problems.

Overall Confessions of a Subprime Lender is a great read for anyone and everyone. If you love economics, real estate, investing, or even history (because this is history in the making), you’ll enjoy this book. You can tell from the instant you open it that you’re getting an insider view of what went wrong from a very knowledgeable man with a conscious. I’m not claiming Richard Bitner is a saint, but sometimes the best information comes from the criminal with all of the inside information.

Real Estate Investing Pros and Cons

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Real Estate Investing Pros and ConsAlthough it’s debatable whether real estate investing is superior or inferior to stock market investing, what isn’t debatable is that real estate provides a multitude of ways to make money in the long run. There are many reasons to choose real estate investing over stock market investing, and many reasons not to. Personally I believe both are great investments, as diversification is one of my investing rules to success. Have said that, here are some of the major pros and cons of real estate investing:

Pros of Real Estate Investing

A Tangible Asset
Real estate is a tangible form of investing; You invest in properties, and you can physically see and feel your investment. This is somewhat of a luxury, as you can rest easy knowing at the end of the day that your investment isn’t going anywhere (unless it’s a mobile home of course). With stock market investing, you only have a computer screen showing you what you own… unless you request to have hard copies of your shares.

True Value No Matter The Economic Health
When it comes down to it, no matter if you overpaid for a property or got a great price, you still own a piece of property. Real estate will always have value, even in the worst of times because real estate is one of our basic needs. People need homes to live in, businesses need places to conduct business, and real estate will always be in demand for that reason. This doesn’t mean you can’t lose money in real estate, but it does mean that if you hold a piece of real estate free and clear, you own an asset with true value.

Efficient Markets Don’t Truly Exist
With real estate investing you don’t really have efficient markets, or markets with true transparency like you do with the stock market. What I mean by this is that you can’t just easily come up with a value for a property; You can do your due diligence and reach an estimated fair value price, but it just doesn’t compare to the kind of research and information available on the stock market. This is a good thing though, as inefficient markets present great opportunities for bargain priced deals. Sometimes people just don’t know what is the right price to sell at, other times people are desperate and price their property extremely low. If you are familiar with your local real estate market you can easily identify these deals and invest in them.

Cons of Real Estate Investing

Not Liquid At All
Unlike the stock market, real estate investing is not a quick buy and sell atmosphere. Even if you bought a property and had a buyer lined up for it the next day, closing the deal would still take about a month on average. This can be a problem if you need liquid cash immediately, and it’s a definite disadvantage compared to stock market investing.

Steep Learning Curve
In real estate you have to be knowledgeable in many different ways, and you have to have experience (or the ability to learn quickly) to overcome many little oversights or difficulties that will often come up. Knowledge is required in every sub category of real estate: mortgages, titles, insurance, construction, negotiations, market familiarity, appreciation potential, income potential, etc.. you have to be somewhat of a jack of all trades if you want to invest properly or it could cost you everything.

Significant Liabilities
If you own shares of a publicly traded company, you are not held responsible for the company’s actions and thus cannot be held liable for any illegal activities. However with real estate investing, you are pretty much a target for the sue-happy type. You’ll need insurance to protect yourself from the shady tenants who try and reach in your pockets, or when someone accidentally hurts themselves on your property that was entirely their own fault.

Be Greedy When Others Are Fearful

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Warren BuffetIn times of uncertainty, when many fear the sky is falling and that there is no hope for recovery, the wise investors plant their seeds. The wise investors are not bothered that the seeds will not grow into anything for many years; This is expected and can be considered the price of admission for any good deal. This is because the wise investors fears not, for they know that when others are fearful, it is time to be greedy. When stability returns to the market, those who were fearful will turn into the greedy, and those who were once greedy will sell for large gains and return to fearfulness.

The famous investing philosophy to be fearful when others are greedy, and greedy when others are fearful comes from the king of wise investors, Warren Buffet. This philosophy is timelessly profound, can be applied to any form of investing, be it real estate, the stock market, etc., and is simple to understand.

When others are greedy, it commonly means a recession is soon to follow, or at the very least that a bubble exists. You should be putting into consideration all of the potential risks when you do investments in a time of greed. However when others are fearful, it usually means we are in a deep recession or soon near it. This is the time to be greedy, when prices are dropping like flies because people lose perception of value in the midst of all the chaos. During times of fearfulness is when all the bargains can be found, and where the seeds are planted.

Our economy will recover and collapse time and time again, that is for certain. What isn’t for certain is whether you will keep a clear head through it all and stay the wise investor.