Of course, now that we have access to the Internet any one of us can spend some time looking for the latest news about what others are preparing to do on a more macro level.
Today I find this article linked here about Goldman Sachs preparing to purchase gobs and gobs worth of private-equity investments.
A few points from the article below...
While the mainstream media reminisces about the heady days of the private equity bubble with all the fondness of a first-date discussion of past romances, Goldman Sachs is betting big that the unwanted, unloved deals of the past few years are still valuable.
This -- and the fact that Goldman has more money lined up for similar investments -- signals that the smartest investment bank in the world is bullish on the prospects of many of the recent buyouts, and is taking advantage of sellers willing to unload the illiquid equity stakes at a discount. That's bad news for the sellers but good news for the market: in spite of the aggressive leverage used and the market's downturn, the equity is still worth buying. The aftermath of the private equity boom appears to be playing out with a resounding "plink" rather than the crash that many had forecast.
Further evidence of how relatively well the aftermath of the LBO boom is playing out comes from the recently filed quarterly earnings of Century 21/Coldwell Banker parent Realogy. Taken private at the height of the private equity and real estate booms, this highly-leveraged deal would seem to be a great candidate for a blow-up. For now that doesn't appear to be the case. The company reported EBITDA of $161 million and a net loss of $27 million -- nothing to brag about but, given the size of the company, not a total disaster either, given that this is the toughest real estate market in recent memory.
So do I know what all this exactly means?? Nope but I find some of the wording somewhat positive. I know that at this point that I've basically fallen for all the 'doom and gloom' hype. All bad news all the time sort of takes its toll on me as it has for many others. Yet like I said at the top, I am learning as best as I can during this downturn. You see, I fully expect that real estate markets will one day, some day, bounce back and 'normalize' again and the cycle will begin anew.
Maybe the cycle won't have the record highs and the record lows the next time, and hopefully the future rise and fall won't be nearly as dramatic... but as one person worthy of my respect always says... my crystal ball is as cracked as anyone else's. I realize there is nothing I can do to affect the cycle on a macro level... all I can do is better prepare myself and my business in the future to be better able to serve my clients in the best possible manner.
So is what Goldman Sachs planning to do going to help 'dig out' the real estate market??
I've had a few interesting discussions with some folks that have tried their best to explain to me what may be happening right now at this moment... and how it may help to, at the very least, stabilize the market. Now don't take that as meaning that folks are going to move money around just to save any market... nope... investors are going to make opportunities for themselves (i.e. put large sums of money in their pockets) and it may lead to stabilization of said real estate markets.
Here goes my best explanation... anyone that feels the need to correct my line of thinking or add to it in any way is welcome to in the comments. I'm not an expert on this stuff (and I don't even pretend to play one on TV).
Investors will be looking to purchase portfolio's of non-performing loans from current holders of paper that qualifies as such, and do so for pennies on the dollar (let's say 25%). This will be done in huge volumes of dollars with thousands of non-performing loans in the mix. Keep in mind that the original holders of the loans have probably already written down the loans and taken huge losses (somebody has to bleed).
Now the new holders of the loans will contact the non-performing borrowers and inform them that they can inquire to get a new loan on their home for perhaps half the amount that they owe on the original purchase. Example... a buyer bought a home for $200k in 2006 using a crazy toxic loan program and now rates are resetting putting the borrower in jeopardy of foreclosure. The new loan holder is telling the borrower that if the borrower can get a loan for say $100k on a refinance that the borrower is good to go. Hopefully with a new mortgage that is affordable to them and life can go on.
Keep in mind that the new loan holder bought that $200k loan for $50k and is willing to now sell that $200k loan for $100k. If the borrower manages to get a new refinanced loan for $100k, the new loan holder (who will no longer hold the note if the property is refinanced at $100k) will come out with a $50k gross profit.
The home buyer in 2006 that is facing foreclosure might find themselves in a position to keep the home at a more affordable rate, less foreclosures take place, prices still ease as time goes along, but markets begin to stabilize as a result.
While the home purchased in 2006 probably doesn't appraise for the price in 2008, it likely will appraise for half the original purchase (probably higher than that amount actually). This means that lenders will be able to lend... maybe this leads to sellers will be able to sell... buyers will be able to buy (once a bottom is established in the local market buyers would probably be more likely to buy in greater numbers).
That was probably a overly simplistic explanation... I'm sure I left out technicalities. I wanted to share though because I'm finding those conversations very interesting (even if I don't fully understand all the technicalities). Could this actually be a plausible scenario that leads to market stabilization??