Saturday, May 27, 2006
interesting post on fed....this is a confusing topic on which I am trying to learn more. My instinct tells me that the government is a huge elaborate ponzi scheme! Now, your average schmo running a ponzi scheme never runs out of money...the fed is not your average schmo! They wont run out of money since they are in charge of printing it. Unlike the other yocals out there, my goal is not to prove the fed is a bunch of corrupt mongers. No, I merely want to ensure investment in real estate will always flourish due to their actions and the inability to the public to monitor the effects of their actions.
Link to below site is: http://www.converge.org.nz/pirm/fr_paul.htm
THE US FEDERAL RESERVE SYSTEM
George Porter
In writing this article it was assumed that readers will have already read the preceding article The Secret Government which provides background necessary for an appreciation of the nature and significance of the US Federal Reserve System. The System refers to the US Federal Reserve Bank as well as those banks that own the Federal Reserve itself.
The founding of the Federal Reserve, the Central US Bank, has proved to be one of the most significant events in world history. This single move resulted in the massive accumulation of wealth in the hands of a small number of individuals, financial institutions and corporations whose combined power allows them to exercise effective control of the US and the world economy, and in turn to exercise political leverage sufficient to determine the course of history.
While this overwhelming concentration of power continues, nothing can change the direction of the world economy. The world is not in the hands of a people-centred democratic system, but of a small oligarchy holding power and passing it on from generation to generation.
How to bring world government under democratic governance must become the central mission of civil society leaders over the next decade.
This whole question of the control of the world economy is a complex and fascinating subject. It has taken authors on the subject up to 600 pages to do justice to the issues involved. This article can do little more than summarise the main issues involved and whet your appetite to seek out one or more of the books listed in the bibliography at the end of this site.
Recently, there has been a flood of publications based on extensive research into the Federal Reserve System and those exercising control over world monetary policy. It is only recently that widespread interest in the history of the US Federal Reserve has been aroused.
The US Central Bank is a banking system in which a single bank has a monopoly on the issue of currency. It exists as a result of government favours which is the key to its power. Such a bank has a direct inflationary effect.
Pressure for a US Central Bank was building up around the turn of the 19th century. In 1908, President Theodore Roosevelt, responding to public concern over the continuing instability of the US monetary system and to lobbying by influential bankers, set up the National Monetary Commission to report on the establishment of a central bank to control the issue of currency, determine interest rates and related matters crucial to economic policy.
The leading bankers of the day supported the concept of a central bank, but they had their own agenda - a central bank with the power of a government bank, financed and owned by private interests under private control. Senator Nelson Aldrich, a leading banker, was appointed chairman of the Commission which duly recommended a central bank along the lines favoured by his accomplices on the Commission.
As a 'central bank' was not popular at the time, the term was dropped in favour of Federal Reserve, but a central bank it was to be. Capital was subscribed by a chain of new regional Federal Reserve Banks whose capital was subscribed to by private banks controlled by the same bankers who promoted the formation of a central bank.
The Federal Reserve, established in 1913, was made to look respectable by placing it under the control of a Board appointed by the President. The President appointed the Chairman to a 14 year term - a device to ensure his political independence. In effect, of course, the Fed was owned by the commercial banks that owned the shares. These were the five main New York banks. Also influential was the Bank of England whose shareholders owned the majority of the stock of the New York banks.
Accordingly, the Federal Reserve Bank of New York sets interest rates and directs market operations. It controls the daily supply and price of money throughout the US. Its stockholders are the real directors of the entire system and include the wealthy financiers who have controlled the US and world political and economic destinies since 1914.
The system now has deep roots worldwide through layers of secret societies such as the Mount Pelerin Society, the Business Roundtable, the Bilderburg Group, and the Freemasons, all based in London.
The original capital of US$143 million was subscribed by the shareholders of the Federal Reserve Banks. Only about one half was subscribed in cash, if at all - perhaps just book entries.
David Icke, in his book '...and the Truth Shall set You Free', describes the Federal Reserve System in the following words:
The Federal Reserve is a cartel of private banks, of which the Bank of New York is the most powerful. To this day it controls the U.S. economy and thereby affects all of our lives. Through its U.S. offshoots and connections like J.P. Morgan and Kuhn, Loeb, and Co. the Rothschild empire controlled the principal New York banks and, through them, the Bank of New York. This gave them control of the Federal Reserve System and the American Economy. This Federal Reserve cartel is nominally controlled by the government-appointed Federal Reserve Board, which is another way of saying the Elite control it. The cartel lends money that doesn't exist to the U.S. government and has thus ensured that the country - and therefore the people - are drowning in debt to the banks. By 1910, the behaviour of the banks had made them deeply unpopular with the people. The Elite had to think of a way of persuading the public to accept a banking coup on the American nation while thinking the power of the banks was being curtailed. So when the bill the bankers had written was introduced by their front politicians they publicly and vehemently opposed it. This gave the impression that the bill was bad news for the banks and it was passed into law in 1913, in the belief that it curtailed the power of the money manipulators. It didn't. It gave them total control. Just to be safe, the Federal Reserve Bill was put before Congress shortly before Christmas, 1913, when many Congressmen were already at home with their families for the holiday.
Now the Elite controlled the U.S. government's borrowing and interest rates, and it could create booms and busts whenever it wished. The way they introduced the Federal Income Tax was even more outrageous, although you have to admire their cheek. For this to be passed into law, it required the consent of at least thirty-six states because there had to be an amendment, the sixteenth, to the United States Constitution. Only two states agreed. In a democracy you would think this bill would be ditched. Not so. This is no democracy! The Secretary of State, Filander Knox, informed Congress that the necessary agreement had been achieved and Federal Income Tax became 'law'. Or rather, in reality, it didn't. The Internal Revenue Service (IRS), the private company which collects Federal Income Tax and takes away the property of those who do not pay, has been stealing from the American people for decades and continues to do so. The forced collection of Federal Income Tax is illegal to this day. It was never properly passed into law...
The power over political and human events on this planet was increased by leaps and bounds as this funny money system expanded its grip on the world. This gave the Elite's bankers the power to manipulate wars and revolutions, almost at will, in league with other elements within the Brotherhood network, which expanded and became even more focussed on its goals during the same period that the banking system emerged.
Edward Griffin in his book The Creature from Jekyll Island has also highlighted the manipulative cunning of the banking cartel:
The final solution on behalf of the banking cartel is to have the federal government guarantee payment of the loan should the borrower default in the future. This is accomplished by convincing Congress that not to do so would result in great damage to the economy and hardship for the people. From that point forward, the burden of the loan is removed from the bank's ledger and transferred to the taxpayer. Should this effort fail and the bank be forced into insolvency, the last resort is to pay off the depositors. The FDIC is not insurance, because the presence of "moral hazard" makes the thing it supposedly protects against more likely to happen. A portion of the FDIC funds are derived from assessments against the banks. Ultimately, however, they are paid by the depositors themselves. When these funds run out, the balance is provided by the Federal Reserve System in the form of freshly created new money. This floods through the economy causing the appearance of rising prices but which, in reality, is the lowering of the value of the dollar. The final cost of the bailout, therefore, is passed to the public in the form of a hidden tax called inflation.
Tools of the Trade
In economists' and bankers' talk, the official purpose of the Federal Reserve, as enshrined in the Federal Reserve Act, is to provide elasticity to the supply of money: to increase supply, to counter underlending and, conversely, decrease supply to counter overlending.
The Federal Reserve has three main tools to help it provide such elasticity. The first is the power to raise or lower the 'reserve ratio' which determines the amount of money banks must hold in reserve to meet their obligations to their borrowers. For instance, if a bank has $100,000 and the reserve ratio is set at 20%, the bank must hold $20,000 in reserve in case its depositors want their money back. Whereas previously, the reserve ratio had been raised in times of over-lending to encourage banks to reduce lending, the Federal Reserve lowered it, and has kept it to a steady 16 or so percent ever since. But even this can be avoided by banks through the use of the Federal Reserve Market. The 'Federal Reserve Market' refers to bank to bank borrowing of surplus reserves to meet the Federal Reserves weekly audit of banks' reserve ratios. If a bank has lent too much, it simply borrows from a bank which has a reserve surplus, or from the Federal Reserve itself. Such loans are only temporary, usually overnight, and their purpose is simply for the sake of keeping up appearances.
The Federal Reserve's two other tools for controlling seasonal and cyclical elasticity are the 'discount rate' and 'direct market operations'.
The discount rate is the rate at which the Federal Reserve sells or lends money to banks. In theory the rate should be lowered when business is good to prevent banks from over-lending, and then raised again when economic times are bad to prevent them from lending too little. Hence, in theory, when economic times are good, banks don't over-lend and cause inflation, and when economic times are bad banks keep lending to keep the wheels of the economy turning to speed recovery.
In practice, the so called 'discount window' has, with few exceptions, always been jammed wide open, allowing banks to buy and borrow money cheaply. In this process cheap Federal Reserve money is multiplied many times over through inter-bank lending and borrowing. In Secrets of the Temple: how the Federal Reserve Runs the Country, William Greider gives the following description of this process.
"If the Fed injected $1 billion in new reserve deposits, the banking system could immediately commit $840 million of it to new loans, setting aside 16 percent to satisfy the reserve requirement. The $840 million in new loans would instantly create $840 million in new deposits. It didn't matter which banks got the deposit accounts; the new deposits would immediately be the basis for new lending . The banks would set aside 16 percent of the $840 million and lend out another $706 million. Those loans would immediately become new deposits again and permit still more new lending, another $593, and so on in diminishing sums. This multiplying process in which new credit became new money continued until the banks exhausted the additional lending capacity created for them by the new reserves added by the Fed. The original $1 billion injected by the Federal Reserve became more than $5 billion in new deposits..."
Open market operations involve injecting money directly into the economy to enable borrowers to pay back old loans and take out new loans. The Federal Reserve does this by buying government securities, such as bonds, from non-bank sources. Hence, a government bond which deprived the economy of a thousand dollars in return for only fifty dollars interest per year, can, in theory, be converted back into a thousand dollars again.
How the Federal Reserve pays for the government securities it buys is especially interesting. It uses the securities it buys as assets to offset the cost of buying them in the first place.
Hence, the Federal Reserve can afford to buy as many government securities as it likes because it can balance the liability incurred by buying them against their worth, or, to put it more simply, pay for what it has bought with what it has bought.
So the Federal Reserve effectively buys government securities with money it never had in the first place. Even bankers will refer to such transactions as magic and alchemy; they would certainly be deemed illegal if practised by a private enterprise.
But in reality open market operations simply mask an even uglier truth. Whenever the United States government wants to spend or pay back more money than it has, it simply prints more. It does this indirectly through the Federal Reserve but the effect for the average American is the same, inflation.
This is how it works. The government wants more money so it prints off some bonds which it sells to the public and other non-bank sources. Demand is high for government securities, so the government not only sells all the bonds it printed, but gets a good price for them as well. The reason why demand is so high is that the Federal Reserve will in turn buy these bonds off the people who originally bought them from the government, for more than they were originally worth. It will also buy bonds directly off the government when supply threatens to exceed demand and lower prices.
It may now come as no surprise that the Federal Reserve is the biggest buyer of government securities. And since supply regularly outpaces demand, this inevitably creates more money than existed in the first place as the Federal Reserve pays for bonds without diminishing its own reserves of money, but makes the unseemly spectacle of printing money to pay off bills invisible. Hence the cause of inflation is conveniently hidden.
The speculative buying and selling of government securities to the Federal Reserve has become so profitable that the 'government securities market' is now the largest financial market in the world. So what appears to be a way of directly supplying the real economy with cash has also, to some extent, become a way of supplying government security brokers and speculators with yet more paper profit.
By now a general theme should be emerging; the 'reserve ratio', 'discount rate' and 'open market operations' have not been used to counter harmful expansions of lending, as was officially intended. A low reserve ratio and a high discount rate have allowed banks to borrow and lend to their heart's content while open market operations have allowed the United States Government to pay its bills by artificially increasing demand for its bonds and other securities. The ultimate result of this is inflation. While the banks can compensate for inflation by buying and borrowing greater amounts of cheap money (which, incidentally, causes even more inflation) and increasing loan interest rates, the average American cannot. Hence, as the amount of money in circulation grows, so the proportion of money owned by the average American decreases.
Another important factor should not be overlooked here. The United States Government is selling debt (government securities) to get out of debt; trading its way out of short term debt by creating even larger long term debt. Each year it must sell more bonds than it sold in the previous year, to pay out the interest owed on the growing generations of older bonds. Each year the Federal Reserve must buy more bonds than it bought in the previous year, creating more money than existed before.
A Lasting Contribution to History
The Federal Reserve's most famous contribution to world economic history was the Great Depression. In the roaring twenties, contrary to the expectations of those who were told that the Federal Reserve would encourage investment in the real economy and, conversely, discourage over investment on Wall Street, farmers continued to struggle to survive under high interests rates while the supplies of money which should have increased demand for their commodities poured into Wall Street.
When, on top of this, the Federal Reserve simultaneously lowered the discount rate, and bought $340 million worth of government securities, most of the resulting glut of money inevitably ended up on the New York Stock Market, causing the bubble that had been built up over the previous decade to burst.
As the New York Stock Market crashed in 1924, vast sums of investors money simply disappeared, depriving the economy of investment. Banks raised their interest rates to make up for their losses, discouraging borrowers. Then, when even conventional Federal Reserve wisdom would have suggested that a massive injection of money was needed to keep the economy's monetary circulation from collapsing, the Federal Reserve sat back and did absolutely nothing. The Federal Reserve Board of Governors decided, instead, to let economic natural selection take its course. Consequently, the Great Crash turned into the Great Depression.
Why did the Federal Reserve sit back and watch such hardship unfold; why didn't it counter the imbalance which it had been responsible for creating in the first place?
The answer is that the crash was inevitable, there was simply too much money with nowhere to go. But this did not mean that the banks of the Federal Reserve System, the supposedly vital organs of the economy, had to suffer. The greed which spread from loan happy banks to borrowers was paid for by the borrowers, while the banks, always ones for making the best out of every opportunity, bought what was still worth buying at bargain basement prices.
Economic natural selection or survival of the fittest in this case meant survival of the bankers. This explains why the major New York banking houses came out of the depression owning more of the United States economy than ever before while the majority of Americans and came out of the depression owning less than ever before.
Superficially, the fact that even banks went broke during the Great Depression seems to contradict this explanation but most of these broke banks were banks who had either been foolish enough not to join the Federal Reserve System in the first place, or too small in the scheme of things to matter, such as the small rural banks of the United States hinterland.
Over-lending has become so institutionalised that many banks seem to lend intentionally to borrowers who cannot afford to pay them back, in the hope that the government will bail out their client with government-backed loan guarantees. In The Creature from Jekyll Island, a classical example is summarised as follows.
In 1970 Penn Central Railway became bankrupt, the banks which loaned the money had taken over its board of directors and had driven it further into the hole, all the while extending bigger and bigger loans to cover the losses. Directors concealed reality from the stockholders and made additional loans so that the company could pay dividends to keep up the false front. During this time, the directors and their banks unloaded their stock at unrealistically high prices. When the truth became public, the shareholders were left carrying the bag. The bail-out, which was engineered by the Federal Reserve, involved government subsides to other banks to grant additional loans. Then Congress was told that the collapse of Penn Central would be devastating to the public interest. Congress responded by granting $125 in loan guarantees so that banks would not be at risk . The railway failed anyway, but the bank loans were covered.
The US Federal Reserve System has facilitated control over the world economy by the 'Elite'. In the process, through causing inflation and the oversupply of money, there has been, and will continue to be, a massive transfer of 'wealth' to those who are already rich, at the expense of the rest of society. The gap between the excessively wealthy and the poor is escalating and will continue to do so while the current economic 'system' continues.
The world economy is, accordingly, unstable and at risk.
Who Pulls The Strings
The initial drive to create an American central bank came from Europe, where old banking dynasties such as the House of Rothschild had profited greatly from the existence of central banks such as the Bank of England, Banque de France and Reichsbank of Germany.
Paul Warburg, a representative of the Rothschild banking dynasty, came over to America from Germany and became the unofficial architect of the Federal Reserve. His blue-print for the Federal Reserve was elaborated and discussed with other bankers on a private island owned by J. P Morgan .Jr, who, in addition to being a member of the global banking elite in his own right, was also a representative of the interests of the House of Rothschild in America.
Morgan once directed the Council on Foreign Relations, a branch of a secret society dedicated to British cultural and political supremacy, and insisted that his junior partners show allegiance to Britain in their financial dealings.
Benjamin Strong, Morgan's protégé and one of the bankers present at the highly secret meeting on Morgan's private island, became the first Governor of the Reserve Bank of New York (he was the joint nominee of Morgan and 'Kuhn, Loed and Company', the Banking house which Paul Warburg had joined upon arriving in America). Within a relatively short time this branch of the Federal Reserve became its unofficial headquarters. When Norman Montagu became the Governor of the Bank of England, he and Strong joined forces, frequently visiting one another and spending their holidays together.
In 1927 Norman secretly came to Strong with a problem. While he could instantly flood the underground vaults of the Bank of England by pressing a button on his desk in the event of an attempted theft, he could not stop the Bank of England's gold reserves from being whittled away by a high American dollar and interest rates. A higher American dollar and interest rates encouraged gold owners to, in effect, take their gold out of the Bank of England's vaults and deposit it in American banks instead. Strong agreed to reverse this trend by causing inflation to erode the strength of the American dollar.
Hence the Federal Reserve simultaneously lowered the discount rate, and bought $340 million worth of government securities at a time when a glut of money already existed, which caused gold to flow back to England and inadvertently (or so we are lead to believe) caused the stock market crash which sparked off the Great Depression.
The US Federal Reserve system has facilitated control over the world economy by an 'Elite'. In the process, through causing inflation and the oversupply of money, there has been, and will continue to be, a massive transfer of 'wealth' to those who are already rich at the expense of the rest of society. The gap between the excessively wealthy and the poor is escalating and will continue to do so while the current economic 'system' continues.
The world economy is, accordingly, unstable and at risk.
Link to below site is: http://www.converge.org.nz/pirm/fr_paul.htm
THE US FEDERAL RESERVE SYSTEM
George Porter
In writing this article it was assumed that readers will have already read the preceding article The Secret Government which provides background necessary for an appreciation of the nature and significance of the US Federal Reserve System. The System refers to the US Federal Reserve Bank as well as those banks that own the Federal Reserve itself.
The founding of the Federal Reserve, the Central US Bank, has proved to be one of the most significant events in world history. This single move resulted in the massive accumulation of wealth in the hands of a small number of individuals, financial institutions and corporations whose combined power allows them to exercise effective control of the US and the world economy, and in turn to exercise political leverage sufficient to determine the course of history.
While this overwhelming concentration of power continues, nothing can change the direction of the world economy. The world is not in the hands of a people-centred democratic system, but of a small oligarchy holding power and passing it on from generation to generation.
How to bring world government under democratic governance must become the central mission of civil society leaders over the next decade.
This whole question of the control of the world economy is a complex and fascinating subject. It has taken authors on the subject up to 600 pages to do justice to the issues involved. This article can do little more than summarise the main issues involved and whet your appetite to seek out one or more of the books listed in the bibliography at the end of this site.
Recently, there has been a flood of publications based on extensive research into the Federal Reserve System and those exercising control over world monetary policy. It is only recently that widespread interest in the history of the US Federal Reserve has been aroused.
The US Central Bank is a banking system in which a single bank has a monopoly on the issue of currency. It exists as a result of government favours which is the key to its power. Such a bank has a direct inflationary effect.
Pressure for a US Central Bank was building up around the turn of the 19th century. In 1908, President Theodore Roosevelt, responding to public concern over the continuing instability of the US monetary system and to lobbying by influential bankers, set up the National Monetary Commission to report on the establishment of a central bank to control the issue of currency, determine interest rates and related matters crucial to economic policy.
The leading bankers of the day supported the concept of a central bank, but they had their own agenda - a central bank with the power of a government bank, financed and owned by private interests under private control. Senator Nelson Aldrich, a leading banker, was appointed chairman of the Commission which duly recommended a central bank along the lines favoured by his accomplices on the Commission.
As a 'central bank' was not popular at the time, the term was dropped in favour of Federal Reserve, but a central bank it was to be. Capital was subscribed by a chain of new regional Federal Reserve Banks whose capital was subscribed to by private banks controlled by the same bankers who promoted the formation of a central bank.
The Federal Reserve, established in 1913, was made to look respectable by placing it under the control of a Board appointed by the President. The President appointed the Chairman to a 14 year term - a device to ensure his political independence. In effect, of course, the Fed was owned by the commercial banks that owned the shares. These were the five main New York banks. Also influential was the Bank of England whose shareholders owned the majority of the stock of the New York banks.
Accordingly, the Federal Reserve Bank of New York sets interest rates and directs market operations. It controls the daily supply and price of money throughout the US. Its stockholders are the real directors of the entire system and include the wealthy financiers who have controlled the US and world political and economic destinies since 1914.
The system now has deep roots worldwide through layers of secret societies such as the Mount Pelerin Society, the Business Roundtable, the Bilderburg Group, and the Freemasons, all based in London.
The original capital of US$143 million was subscribed by the shareholders of the Federal Reserve Banks. Only about one half was subscribed in cash, if at all - perhaps just book entries.
David Icke, in his book '...and the Truth Shall set You Free', describes the Federal Reserve System in the following words:
The Federal Reserve is a cartel of private banks, of which the Bank of New York is the most powerful. To this day it controls the U.S. economy and thereby affects all of our lives. Through its U.S. offshoots and connections like J.P. Morgan and Kuhn, Loeb, and Co. the Rothschild empire controlled the principal New York banks and, through them, the Bank of New York. This gave them control of the Federal Reserve System and the American Economy. This Federal Reserve cartel is nominally controlled by the government-appointed Federal Reserve Board, which is another way of saying the Elite control it. The cartel lends money that doesn't exist to the U.S. government and has thus ensured that the country - and therefore the people - are drowning in debt to the banks. By 1910, the behaviour of the banks had made them deeply unpopular with the people. The Elite had to think of a way of persuading the public to accept a banking coup on the American nation while thinking the power of the banks was being curtailed. So when the bill the bankers had written was introduced by their front politicians they publicly and vehemently opposed it. This gave the impression that the bill was bad news for the banks and it was passed into law in 1913, in the belief that it curtailed the power of the money manipulators. It didn't. It gave them total control. Just to be safe, the Federal Reserve Bill was put before Congress shortly before Christmas, 1913, when many Congressmen were already at home with their families for the holiday.
Now the Elite controlled the U.S. government's borrowing and interest rates, and it could create booms and busts whenever it wished. The way they introduced the Federal Income Tax was even more outrageous, although you have to admire their cheek. For this to be passed into law, it required the consent of at least thirty-six states because there had to be an amendment, the sixteenth, to the United States Constitution. Only two states agreed. In a democracy you would think this bill would be ditched. Not so. This is no democracy! The Secretary of State, Filander Knox, informed Congress that the necessary agreement had been achieved and Federal Income Tax became 'law'. Or rather, in reality, it didn't. The Internal Revenue Service (IRS), the private company which collects Federal Income Tax and takes away the property of those who do not pay, has been stealing from the American people for decades and continues to do so. The forced collection of Federal Income Tax is illegal to this day. It was never properly passed into law...
The power over political and human events on this planet was increased by leaps and bounds as this funny money system expanded its grip on the world. This gave the Elite's bankers the power to manipulate wars and revolutions, almost at will, in league with other elements within the Brotherhood network, which expanded and became even more focussed on its goals during the same period that the banking system emerged.
Edward Griffin in his book The Creature from Jekyll Island has also highlighted the manipulative cunning of the banking cartel:
The final solution on behalf of the banking cartel is to have the federal government guarantee payment of the loan should the borrower default in the future. This is accomplished by convincing Congress that not to do so would result in great damage to the economy and hardship for the people. From that point forward, the burden of the loan is removed from the bank's ledger and transferred to the taxpayer. Should this effort fail and the bank be forced into insolvency, the last resort is to pay off the depositors. The FDIC is not insurance, because the presence of "moral hazard" makes the thing it supposedly protects against more likely to happen. A portion of the FDIC funds are derived from assessments against the banks. Ultimately, however, they are paid by the depositors themselves. When these funds run out, the balance is provided by the Federal Reserve System in the form of freshly created new money. This floods through the economy causing the appearance of rising prices but which, in reality, is the lowering of the value of the dollar. The final cost of the bailout, therefore, is passed to the public in the form of a hidden tax called inflation.
Tools of the Trade
In economists' and bankers' talk, the official purpose of the Federal Reserve, as enshrined in the Federal Reserve Act, is to provide elasticity to the supply of money: to increase supply, to counter underlending and, conversely, decrease supply to counter overlending.
The Federal Reserve has three main tools to help it provide such elasticity. The first is the power to raise or lower the 'reserve ratio' which determines the amount of money banks must hold in reserve to meet their obligations to their borrowers. For instance, if a bank has $100,000 and the reserve ratio is set at 20%, the bank must hold $20,000 in reserve in case its depositors want their money back. Whereas previously, the reserve ratio had been raised in times of over-lending to encourage banks to reduce lending, the Federal Reserve lowered it, and has kept it to a steady 16 or so percent ever since. But even this can be avoided by banks through the use of the Federal Reserve Market. The 'Federal Reserve Market' refers to bank to bank borrowing of surplus reserves to meet the Federal Reserves weekly audit of banks' reserve ratios. If a bank has lent too much, it simply borrows from a bank which has a reserve surplus, or from the Federal Reserve itself. Such loans are only temporary, usually overnight, and their purpose is simply for the sake of keeping up appearances.
The Federal Reserve's two other tools for controlling seasonal and cyclical elasticity are the 'discount rate' and 'direct market operations'.
The discount rate is the rate at which the Federal Reserve sells or lends money to banks. In theory the rate should be lowered when business is good to prevent banks from over-lending, and then raised again when economic times are bad to prevent them from lending too little. Hence, in theory, when economic times are good, banks don't over-lend and cause inflation, and when economic times are bad banks keep lending to keep the wheels of the economy turning to speed recovery.
In practice, the so called 'discount window' has, with few exceptions, always been jammed wide open, allowing banks to buy and borrow money cheaply. In this process cheap Federal Reserve money is multiplied many times over through inter-bank lending and borrowing. In Secrets of the Temple: how the Federal Reserve Runs the Country, William Greider gives the following description of this process.
"If the Fed injected $1 billion in new reserve deposits, the banking system could immediately commit $840 million of it to new loans, setting aside 16 percent to satisfy the reserve requirement. The $840 million in new loans would instantly create $840 million in new deposits. It didn't matter which banks got the deposit accounts; the new deposits would immediately be the basis for new lending . The banks would set aside 16 percent of the $840 million and lend out another $706 million. Those loans would immediately become new deposits again and permit still more new lending, another $593, and so on in diminishing sums. This multiplying process in which new credit became new money continued until the banks exhausted the additional lending capacity created for them by the new reserves added by the Fed. The original $1 billion injected by the Federal Reserve became more than $5 billion in new deposits..."
Open market operations involve injecting money directly into the economy to enable borrowers to pay back old loans and take out new loans. The Federal Reserve does this by buying government securities, such as bonds, from non-bank sources. Hence, a government bond which deprived the economy of a thousand dollars in return for only fifty dollars interest per year, can, in theory, be converted back into a thousand dollars again.
How the Federal Reserve pays for the government securities it buys is especially interesting. It uses the securities it buys as assets to offset the cost of buying them in the first place.
Hence, the Federal Reserve can afford to buy as many government securities as it likes because it can balance the liability incurred by buying them against their worth, or, to put it more simply, pay for what it has bought with what it has bought.
So the Federal Reserve effectively buys government securities with money it never had in the first place. Even bankers will refer to such transactions as magic and alchemy; they would certainly be deemed illegal if practised by a private enterprise.
But in reality open market operations simply mask an even uglier truth. Whenever the United States government wants to spend or pay back more money than it has, it simply prints more. It does this indirectly through the Federal Reserve but the effect for the average American is the same, inflation.
This is how it works. The government wants more money so it prints off some bonds which it sells to the public and other non-bank sources. Demand is high for government securities, so the government not only sells all the bonds it printed, but gets a good price for them as well. The reason why demand is so high is that the Federal Reserve will in turn buy these bonds off the people who originally bought them from the government, for more than they were originally worth. It will also buy bonds directly off the government when supply threatens to exceed demand and lower prices.
It may now come as no surprise that the Federal Reserve is the biggest buyer of government securities. And since supply regularly outpaces demand, this inevitably creates more money than existed in the first place as the Federal Reserve pays for bonds without diminishing its own reserves of money, but makes the unseemly spectacle of printing money to pay off bills invisible. Hence the cause of inflation is conveniently hidden.
The speculative buying and selling of government securities to the Federal Reserve has become so profitable that the 'government securities market' is now the largest financial market in the world. So what appears to be a way of directly supplying the real economy with cash has also, to some extent, become a way of supplying government security brokers and speculators with yet more paper profit.
By now a general theme should be emerging; the 'reserve ratio', 'discount rate' and 'open market operations' have not been used to counter harmful expansions of lending, as was officially intended. A low reserve ratio and a high discount rate have allowed banks to borrow and lend to their heart's content while open market operations have allowed the United States Government to pay its bills by artificially increasing demand for its bonds and other securities. The ultimate result of this is inflation. While the banks can compensate for inflation by buying and borrowing greater amounts of cheap money (which, incidentally, causes even more inflation) and increasing loan interest rates, the average American cannot. Hence, as the amount of money in circulation grows, so the proportion of money owned by the average American decreases.
Another important factor should not be overlooked here. The United States Government is selling debt (government securities) to get out of debt; trading its way out of short term debt by creating even larger long term debt. Each year it must sell more bonds than it sold in the previous year, to pay out the interest owed on the growing generations of older bonds. Each year the Federal Reserve must buy more bonds than it bought in the previous year, creating more money than existed before.
A Lasting Contribution to History
The Federal Reserve's most famous contribution to world economic history was the Great Depression. In the roaring twenties, contrary to the expectations of those who were told that the Federal Reserve would encourage investment in the real economy and, conversely, discourage over investment on Wall Street, farmers continued to struggle to survive under high interests rates while the supplies of money which should have increased demand for their commodities poured into Wall Street.
When, on top of this, the Federal Reserve simultaneously lowered the discount rate, and bought $340 million worth of government securities, most of the resulting glut of money inevitably ended up on the New York Stock Market, causing the bubble that had been built up over the previous decade to burst.
As the New York Stock Market crashed in 1924, vast sums of investors money simply disappeared, depriving the economy of investment. Banks raised their interest rates to make up for their losses, discouraging borrowers. Then, when even conventional Federal Reserve wisdom would have suggested that a massive injection of money was needed to keep the economy's monetary circulation from collapsing, the Federal Reserve sat back and did absolutely nothing. The Federal Reserve Board of Governors decided, instead, to let economic natural selection take its course. Consequently, the Great Crash turned into the Great Depression.
Why did the Federal Reserve sit back and watch such hardship unfold; why didn't it counter the imbalance which it had been responsible for creating in the first place?
The answer is that the crash was inevitable, there was simply too much money with nowhere to go. But this did not mean that the banks of the Federal Reserve System, the supposedly vital organs of the economy, had to suffer. The greed which spread from loan happy banks to borrowers was paid for by the borrowers, while the banks, always ones for making the best out of every opportunity, bought what was still worth buying at bargain basement prices.
Economic natural selection or survival of the fittest in this case meant survival of the bankers. This explains why the major New York banking houses came out of the depression owning more of the United States economy than ever before while the majority of Americans and came out of the depression owning less than ever before.
Superficially, the fact that even banks went broke during the Great Depression seems to contradict this explanation but most of these broke banks were banks who had either been foolish enough not to join the Federal Reserve System in the first place, or too small in the scheme of things to matter, such as the small rural banks of the United States hinterland.
Over-lending has become so institutionalised that many banks seem to lend intentionally to borrowers who cannot afford to pay them back, in the hope that the government will bail out their client with government-backed loan guarantees. In The Creature from Jekyll Island, a classical example is summarised as follows.
In 1970 Penn Central Railway became bankrupt, the banks which loaned the money had taken over its board of directors and had driven it further into the hole, all the while extending bigger and bigger loans to cover the losses. Directors concealed reality from the stockholders and made additional loans so that the company could pay dividends to keep up the false front. During this time, the directors and their banks unloaded their stock at unrealistically high prices. When the truth became public, the shareholders were left carrying the bag. The bail-out, which was engineered by the Federal Reserve, involved government subsides to other banks to grant additional loans. Then Congress was told that the collapse of Penn Central would be devastating to the public interest. Congress responded by granting $125 in loan guarantees so that banks would not be at risk . The railway failed anyway, but the bank loans were covered.
The US Federal Reserve System has facilitated control over the world economy by the 'Elite'. In the process, through causing inflation and the oversupply of money, there has been, and will continue to be, a massive transfer of 'wealth' to those who are already rich, at the expense of the rest of society. The gap between the excessively wealthy and the poor is escalating and will continue to do so while the current economic 'system' continues.
The world economy is, accordingly, unstable and at risk.
Who Pulls The Strings
The initial drive to create an American central bank came from Europe, where old banking dynasties such as the House of Rothschild had profited greatly from the existence of central banks such as the Bank of England, Banque de France and Reichsbank of Germany.
Paul Warburg, a representative of the Rothschild banking dynasty, came over to America from Germany and became the unofficial architect of the Federal Reserve. His blue-print for the Federal Reserve was elaborated and discussed with other bankers on a private island owned by J. P Morgan .Jr, who, in addition to being a member of the global banking elite in his own right, was also a representative of the interests of the House of Rothschild in America.
Morgan once directed the Council on Foreign Relations, a branch of a secret society dedicated to British cultural and political supremacy, and insisted that his junior partners show allegiance to Britain in their financial dealings.
Benjamin Strong, Morgan's protégé and one of the bankers present at the highly secret meeting on Morgan's private island, became the first Governor of the Reserve Bank of New York (he was the joint nominee of Morgan and 'Kuhn, Loed and Company', the Banking house which Paul Warburg had joined upon arriving in America). Within a relatively short time this branch of the Federal Reserve became its unofficial headquarters. When Norman Montagu became the Governor of the Bank of England, he and Strong joined forces, frequently visiting one another and spending their holidays together.
In 1927 Norman secretly came to Strong with a problem. While he could instantly flood the underground vaults of the Bank of England by pressing a button on his desk in the event of an attempted theft, he could not stop the Bank of England's gold reserves from being whittled away by a high American dollar and interest rates. A higher American dollar and interest rates encouraged gold owners to, in effect, take their gold out of the Bank of England's vaults and deposit it in American banks instead. Strong agreed to reverse this trend by causing inflation to erode the strength of the American dollar.
Hence the Federal Reserve simultaneously lowered the discount rate, and bought $340 million worth of government securities at a time when a glut of money already existed, which caused gold to flow back to England and inadvertently (or so we are lead to believe) caused the stock market crash which sparked off the Great Depression.
The US Federal Reserve system has facilitated control over the world economy by an 'Elite'. In the process, through causing inflation and the oversupply of money, there has been, and will continue to be, a massive transfer of 'wealth' to those who are already rich at the expense of the rest of society. The gap between the excessively wealthy and the poor is escalating and will continue to do so while the current economic 'system' continues.
The world economy is, accordingly, unstable and at risk.
Saturday, May 13, 2006
Hi,
I hope you enjoy my blog. It is often many article of interest for real estate investors. As mentioned in a post in the past, my only equity position outside of real estate is a single reit in timberland. Here is an article from www.nreionline.com
If you like any of my articles or have any comments, please post them so I can share in any ideas you have when you read my blog.
Timberland article below:
Money Does Grow On TreesBy Toccoa SwitzerMay 1, 2006 12:00 PM
What does a pine tree plantation have in common with a commercial office building? Both are real estate investments, use land or real property to generate sustainable cash flows, and appreciate in value.
Yet, commercial timberland and commercial real estate investments fall under two separate asset classes. Timberland is classified as an alternative investment vehicle — part real estate, part commodity and part fixed income — explains Charlie Daniel, president and CIO of Atlanta-based RMK Timberland Group, which buys, sells and manages timber assets for large institutions.
RMK is one of 20 Timber Investment Management Organizations, or TIMOs, that have emerged over the last 25 years. Unlike real estate investment trusts, TIMOs are not publicly traded. They function like private-equity firms, creating pooled funds for multiple investors but also manage separate accounts for larger clients.
Timberland provides excellent diversification, and inflation-hedging attributes to mixed-asset portfolios. The investment moves inversely to stocks and bonds with little correlation to commercial real estate. The returns also tend to keep up with the rate of inflation, which suggests it is an effective vehicle for the preservation of capital during inflationary times.
According to Kendall Thomas, a trustee with the Austin Police Retirement System in Austin, Texas, 10% of the $400 million pension fund is allocated to timberland. Although the fund previously had 30% to 40% of its portfolio invested in domestic bonds, it reduced that exposure to only 11% and diversified into other investments, one of which is timberland.
“It's hard to put your arms around timberland at first, but it doesn't take long to see that it is a good investment,” says Thomas. “Our returns have averaged 10% to 11% over the last 10 years.”
By the numbers
Although timberland is one of the oldest forms of investments, the National Council of Real Estate Investment Fiduciaries (NCREIF) didn't start tracking timberland returns until 1987. The number of properties included in the Timberland Index has grown substantially due to the unprecedented growth in the number of timber funds, especially in the last 10 years. There were only 95 properties included in the index in 1994, but by 2005 that number had grown to 235.
Since its inception in 1987, the Timberland Index has posted an average annual return of 15.3%, compared with 11.6% for the S&P 500 during the same period. But many industry insiders say the 10-year annualized return of 8.3% is probably more indicative of future return potential (see chart on page 100). Rising interest rates and a slowdown in residential construction are likely to impact timberland returns in the near term.
However, Mark Wilde, an analyst with Deutsche Bank, doesn't foresee a dramatic decrease in lumber prices. “Housing demand may ease, but we don't see housing falling off the table,” says Wilde.
The real concern among many industry insiders is the enormous amount of capital pouring into the asset class. Current bidding wars for timber tracts continue to push transaction prices upward, making it difficult to generate higher returns. Wilde refers to timberland as the “asset du jour.”
Timberland returns are derived from net operating income and capital appreciation. Timber sales drive net operating income while land value and the growth of the trees contribute to capital appreciation. Historically, two-thirds of the timberland yields stemmed from capital appreciation due to the large increases in historical valuations.
With inflated acquisition prices, investors are likely to see a subtle shift in the make-up of their timberland returns. “In the future, we are likely to see the income component increase to 30% to 40%, with capital appreciation accounting for 50% to 70%, given lower expectations for future returns,” says Kurt Akers, director of research for Global Forest Partners, a New Hampshire-based TIMO.
Roots of timberland investment
Many pension funds started investing in timberland after passage of the Employee Retirement Income Security Act (ERISA) in 1974. To comply with ERISA's then new fiduciary requirements to maximize portfolio returns, pension fund managers diversified by investing in equities, commercial real estate, oil and gas and timberland. They identified timberland as a steady, relatively safe long-term investment, delivering equity-like returns with bond-like risk.
Today, institutions own approximately $22 billion in timberland. The bulk of this amount, $15 billion to $17 billion, is managed by TIMOs. The real estate investment trusts control the balance. Dr. Mike Clutter, a professor at The Warner School of Forestry at the University of Georgia, says that institutions are lining up to sink another $5 billion into the asset class. “There is a lot of capital chasing timberland right now,” he says.
Due to the long-term nature of timberland investments, most TIMO funds require at least a 10-year commitment with options to extend. Also, access to these funds is not cheap. Minimum investments for separate accounts range from $20 million to $100 million.
Commingled funds often require a minimum investment between $2 million and $5 million, although a few require as little as $250,000. In general, management fees run around 1% of assets. Also, managers typically take a percentage of profits, usually based on a performance hurdle.
Changing landscape
RMK Timberland Group is one of the largest TIMOs in the country, managing more than $1.4 billion in timberland assets for institutional investors. RMK and other TIMOs have stepped up their acquisition strategy to buy large tracts of timberland from forest product companies such as Bowater, Weyerhaeuser and International Paper. In the last decade, millions of acres have transferred from industrial to institutional ownership.
The Manomet Center for Conservation Sciences, one of the nation's oldest environmental research organizations, recently compiled a study that focuses on the impact of the massive turnover of timberland ownership in the Northeast. According to the study, forest product companies sold 23.5 million acres in the Northeast over the last 25 years.
On a national scale, the disposition trend is even more dramatic. In 1981, forest product companies owned approximately 58 million acres of U.S. timberland. By 2005, they owned less than 21 million acres, more than a 60% reduction. The disposition trend continues today with International Paper's recent announcement that it will sell 5.1 million acres to two separate investor groups, and another 287,000 acres to conservation groups.
Dr. Lloyd Irland, a forest economist and one of the authors of the Manomet study, says it is difficult to predict to what extent forest product companies will sell timberland in the next 10 to 20 years. “Ten years ago, anyone predicting the industry would sell this much land in such a short period of time would have been laughed out of the room,” says Irland.
Why has there been such a pronounced shift in ownership of timberland from industrial to institutional investors? For decades, the publicly owned forest product companies operated under a production-driven philosophy, constantly harvesting timber to feed their capital-intensive paper mills. These vertically integrated businesses were more concerned with subsidizing their mill operations than maximizing the potential of their timber holdings.
Selling their timber holdings to institutional investors appears to have been a win/win scenario for paper companies. Many have used sale proceeds to pay down debt obligations and to make capital investments while retaining long-term wood fiber supply contracts with the new institutional owners.
In such an arrangement, the paper companies negotiate to buy a certain amount of timber each year from the new owners. Essentially, they eliminate the day-to-day responsibilities of managing timberland assets without cutting access to raw materials.
Investment advantages
Managing timberland is a highly sophisticated business. Intensive forestry management involves maintaining and rebuilding timber inventories over time. Timberland management is also affected by supply and demand on a local and regional basis. As a result, TIMOs employ teams of foresters and consultants from around the country to manage their timberland holdings.
Robin Jolley, the CEO with American Forest Management, works with several TIMOs in the Southeast. While TIMOs are concerned with maximizing returns for their investors, Jolley says that they also put a strong emphasis on stewardship.
Many of the properties are certified under the Sustainable Forestry Initiative (SFI), Forest Stewardship Council and/or Tree Farmers Program. “The common thread found in these certifications,” explains Jolley, “is that sustainable and sound environmental practices are employed and recognized.”
TIMOs and their institutional investors have distinct advantages over industrial owners. First, the new ownership structure is more tax efficient. Institutions are not subject to the same tax burdens as corporations that own timber. Pension funds such as the Austin Police Retirement System pay no income taxes on their timberland holdings.
Secondly, institutions gain the full benefits of cash flows and value appreciation, while public companies are required to carry long-term timberland assets at book value on their balance sheets.
Another advantage is the lack of pressure from Wall Street. Forest product companies may have been compelled to harvest timber prematurely just to meet short-term quarterly earnings goals. TIMOs have no immediate performance hurdles. Their goal is to produce sustainable long-term revenues rather than a short-term return on capital. Therefore, it is not uncommon for TIMOs to warehouse timber assets during periods of low market prices. They simply delay cutting their trees until market prices improve.
The flexibility to time harvesting according to market conditions is what makes timberland stand out from other investments. Trees grow regardless of fluctuations in the economy. “The biological component is what is truly amazing about timberland as an investment,” says Daniel of RMK Timberland Group. “You can recognize a healthy return without actually harvesting any timber. Also, as trees grow and mature, they graduate to more valuable product classes.”
According to the USDA's Forest Products Laboratory, the forest products industries generate more than $240 billion per year. They also contribute 7% of the manufacturing portion of GDP. Timber products range from toilet paper and packaging to lumber. Over the long term, total U.S. forest product consumption is projected to increase by 38% by 2050, according to a USDA study.
To meet demand for the wide array of forest products and to enhance their risk-adjusted returns, TIMOs diversify on a broad geographical scale. Many funds own natural forests and timber plantations throughout the United States. The three largest areas of ownership concentration are the Northeast, Southeast and the Pacific Northwest.
Timber inventories include multiple age classes and a variety of tree species. These diversification methods mitigate market risks as well as physical risks such as fire, disease and pest infestation.
Future growth prospects
TIMOs generate income from sources other than timber harvests. Hunting leases and conservation easements contribute to timberland's bottom line and often cover real estate taxes and insurance expenses. Federal incentives to combat global warming are also in the works. Basically, landowners will be paid to grow trees since forests absorb carbon dioxide.
Interest among individual investors in timberland is on the rise. Although institutions are still the main investors in timberland funds (see chart on page 99), Bill Boden, chief investment officer with Timbervest, an Atlanta-based TIMO, says his firm has observed increased interest from individuals seeking to round out their portfolios with timberland. “Approximately 10% to 15% of our last commingled fund came from high-net-worth individuals,” says Boden.
For the individual investor, the tax benefits to holding timberland are attractive. According to Boden, the revenue from the actual sale of timber qualifies for capital gains treatment. The tax code also gives timberland owners a tax deduction, known as depletion, which is the annual cost assigned to harvested timber. Unlike land, the timber cost basis is recovered more quickly using a depletion allowance.
As demand grows, Timbervest continues to scout the country for investment-grade properties. Other TIMOs have taken a more global approach, focusing on emerging markets. Currently, Global Forest Partners has investments in Argentina, Brazil, Chili, Uruguay, Australia and New Zealand, in addition to its domestic holdings in the Southeast.
The Austin Police Retirement System has positions in three timberland funds, two domestic and one international. “Land has always been a hedge against inflation,” says Thomas, “and if you get paid an 8% to 10% return to grow trees while your land continues to appreciate in value, then it makes sense to invest in timberland.”
Toccoa Switzer is based in Charlotte, N.C.
Flap over spotted owl hit forest industry hard
It's hard to believe that a 16-inch bird weighing one and a half pounds could turn an entire industry on its head. But that's exactly what occurred in 1990. The northern spotted owl was thrust into the national spotlight when the Department of Interior listed it as “threatened” under the Endangered Species Act of 1973.
Under this provision, timber companies on federal lands were required to restrict logging on those acres where it might jeopardize the continued existence of the spotted owl or adversely modify their habitat. Private landowners were also required to avoid action that would harm, kill or interfere with the reproduction of the species.
Although it was a victory for environmentalists at the time, this decision virtually shut down 80% of logging operations in national forests throughout the Pacific Northwest. It is estimated that timber production on federal land in the region dropped from 5 billion board feet per year to approximately 1 billion board feet per year. With the reduction in domestic supply, timber prices soared as did the value of privately owned timberland unaffected by the restrictions. The chain of events resulted in record-breaking timberland returns in the early 1990s. Eventually, prices and returns inched downward as production capacity shifted to the southern United States.
Despite ongoing protection, the spotted owl population is still on the decline. According to Joan Jewett, spokesperson for the U.S. Fish & Wildlife Service, there were 5,000 to 8,000 pairs of spotted owls in California, Oregon and Washington in the late 1980s. Today, the population is estimated at half that total. Recently, the barred owl has also been identified as a major contributor to declining spotted owl numbers. No word yet on how the government will resolve that issue.— Toccoa Switzer
I hope you enjoy my blog. It is often many article of interest for real estate investors. As mentioned in a post in the past, my only equity position outside of real estate is a single reit in timberland. Here is an article from www.nreionline.com
If you like any of my articles or have any comments, please post them so I can share in any ideas you have when you read my blog.
Timberland article below:
Money Does Grow On TreesBy Toccoa SwitzerMay 1, 2006 12:00 PM
What does a pine tree plantation have in common with a commercial office building? Both are real estate investments, use land or real property to generate sustainable cash flows, and appreciate in value.
Yet, commercial timberland and commercial real estate investments fall under two separate asset classes. Timberland is classified as an alternative investment vehicle — part real estate, part commodity and part fixed income — explains Charlie Daniel, president and CIO of Atlanta-based RMK Timberland Group, which buys, sells and manages timber assets for large institutions.
RMK is one of 20 Timber Investment Management Organizations, or TIMOs, that have emerged over the last 25 years. Unlike real estate investment trusts, TIMOs are not publicly traded. They function like private-equity firms, creating pooled funds for multiple investors but also manage separate accounts for larger clients.
Timberland provides excellent diversification, and inflation-hedging attributes to mixed-asset portfolios. The investment moves inversely to stocks and bonds with little correlation to commercial real estate. The returns also tend to keep up with the rate of inflation, which suggests it is an effective vehicle for the preservation of capital during inflationary times.
According to Kendall Thomas, a trustee with the Austin Police Retirement System in Austin, Texas, 10% of the $400 million pension fund is allocated to timberland. Although the fund previously had 30% to 40% of its portfolio invested in domestic bonds, it reduced that exposure to only 11% and diversified into other investments, one of which is timberland.
“It's hard to put your arms around timberland at first, but it doesn't take long to see that it is a good investment,” says Thomas. “Our returns have averaged 10% to 11% over the last 10 years.”
By the numbers
Although timberland is one of the oldest forms of investments, the National Council of Real Estate Investment Fiduciaries (NCREIF) didn't start tracking timberland returns until 1987. The number of properties included in the Timberland Index has grown substantially due to the unprecedented growth in the number of timber funds, especially in the last 10 years. There were only 95 properties included in the index in 1994, but by 2005 that number had grown to 235.
Since its inception in 1987, the Timberland Index has posted an average annual return of 15.3%, compared with 11.6% for the S&P 500 during the same period. But many industry insiders say the 10-year annualized return of 8.3% is probably more indicative of future return potential (see chart on page 100). Rising interest rates and a slowdown in residential construction are likely to impact timberland returns in the near term.
However, Mark Wilde, an analyst with Deutsche Bank, doesn't foresee a dramatic decrease in lumber prices. “Housing demand may ease, but we don't see housing falling off the table,” says Wilde.
The real concern among many industry insiders is the enormous amount of capital pouring into the asset class. Current bidding wars for timber tracts continue to push transaction prices upward, making it difficult to generate higher returns. Wilde refers to timberland as the “asset du jour.”
Timberland returns are derived from net operating income and capital appreciation. Timber sales drive net operating income while land value and the growth of the trees contribute to capital appreciation. Historically, two-thirds of the timberland yields stemmed from capital appreciation due to the large increases in historical valuations.
With inflated acquisition prices, investors are likely to see a subtle shift in the make-up of their timberland returns. “In the future, we are likely to see the income component increase to 30% to 40%, with capital appreciation accounting for 50% to 70%, given lower expectations for future returns,” says Kurt Akers, director of research for Global Forest Partners, a New Hampshire-based TIMO.
Roots of timberland investment
Many pension funds started investing in timberland after passage of the Employee Retirement Income Security Act (ERISA) in 1974. To comply with ERISA's then new fiduciary requirements to maximize portfolio returns, pension fund managers diversified by investing in equities, commercial real estate, oil and gas and timberland. They identified timberland as a steady, relatively safe long-term investment, delivering equity-like returns with bond-like risk.
Today, institutions own approximately $22 billion in timberland. The bulk of this amount, $15 billion to $17 billion, is managed by TIMOs. The real estate investment trusts control the balance. Dr. Mike Clutter, a professor at The Warner School of Forestry at the University of Georgia, says that institutions are lining up to sink another $5 billion into the asset class. “There is a lot of capital chasing timberland right now,” he says.
Due to the long-term nature of timberland investments, most TIMO funds require at least a 10-year commitment with options to extend. Also, access to these funds is not cheap. Minimum investments for separate accounts range from $20 million to $100 million.
Commingled funds often require a minimum investment between $2 million and $5 million, although a few require as little as $250,000. In general, management fees run around 1% of assets. Also, managers typically take a percentage of profits, usually based on a performance hurdle.
Changing landscape
RMK Timberland Group is one of the largest TIMOs in the country, managing more than $1.4 billion in timberland assets for institutional investors. RMK and other TIMOs have stepped up their acquisition strategy to buy large tracts of timberland from forest product companies such as Bowater, Weyerhaeuser and International Paper. In the last decade, millions of acres have transferred from industrial to institutional ownership.
The Manomet Center for Conservation Sciences, one of the nation's oldest environmental research organizations, recently compiled a study that focuses on the impact of the massive turnover of timberland ownership in the Northeast. According to the study, forest product companies sold 23.5 million acres in the Northeast over the last 25 years.
On a national scale, the disposition trend is even more dramatic. In 1981, forest product companies owned approximately 58 million acres of U.S. timberland. By 2005, they owned less than 21 million acres, more than a 60% reduction. The disposition trend continues today with International Paper's recent announcement that it will sell 5.1 million acres to two separate investor groups, and another 287,000 acres to conservation groups.
Dr. Lloyd Irland, a forest economist and one of the authors of the Manomet study, says it is difficult to predict to what extent forest product companies will sell timberland in the next 10 to 20 years. “Ten years ago, anyone predicting the industry would sell this much land in such a short period of time would have been laughed out of the room,” says Irland.
Why has there been such a pronounced shift in ownership of timberland from industrial to institutional investors? For decades, the publicly owned forest product companies operated under a production-driven philosophy, constantly harvesting timber to feed their capital-intensive paper mills. These vertically integrated businesses were more concerned with subsidizing their mill operations than maximizing the potential of their timber holdings.
Selling their timber holdings to institutional investors appears to have been a win/win scenario for paper companies. Many have used sale proceeds to pay down debt obligations and to make capital investments while retaining long-term wood fiber supply contracts with the new institutional owners.
In such an arrangement, the paper companies negotiate to buy a certain amount of timber each year from the new owners. Essentially, they eliminate the day-to-day responsibilities of managing timberland assets without cutting access to raw materials.
Investment advantages
Managing timberland is a highly sophisticated business. Intensive forestry management involves maintaining and rebuilding timber inventories over time. Timberland management is also affected by supply and demand on a local and regional basis. As a result, TIMOs employ teams of foresters and consultants from around the country to manage their timberland holdings.
Robin Jolley, the CEO with American Forest Management, works with several TIMOs in the Southeast. While TIMOs are concerned with maximizing returns for their investors, Jolley says that they also put a strong emphasis on stewardship.
Many of the properties are certified under the Sustainable Forestry Initiative (SFI), Forest Stewardship Council and/or Tree Farmers Program. “The common thread found in these certifications,” explains Jolley, “is that sustainable and sound environmental practices are employed and recognized.”
TIMOs and their institutional investors have distinct advantages over industrial owners. First, the new ownership structure is more tax efficient. Institutions are not subject to the same tax burdens as corporations that own timber. Pension funds such as the Austin Police Retirement System pay no income taxes on their timberland holdings.
Secondly, institutions gain the full benefits of cash flows and value appreciation, while public companies are required to carry long-term timberland assets at book value on their balance sheets.
Another advantage is the lack of pressure from Wall Street. Forest product companies may have been compelled to harvest timber prematurely just to meet short-term quarterly earnings goals. TIMOs have no immediate performance hurdles. Their goal is to produce sustainable long-term revenues rather than a short-term return on capital. Therefore, it is not uncommon for TIMOs to warehouse timber assets during periods of low market prices. They simply delay cutting their trees until market prices improve.
The flexibility to time harvesting according to market conditions is what makes timberland stand out from other investments. Trees grow regardless of fluctuations in the economy. “The biological component is what is truly amazing about timberland as an investment,” says Daniel of RMK Timberland Group. “You can recognize a healthy return without actually harvesting any timber. Also, as trees grow and mature, they graduate to more valuable product classes.”
According to the USDA's Forest Products Laboratory, the forest products industries generate more than $240 billion per year. They also contribute 7% of the manufacturing portion of GDP. Timber products range from toilet paper and packaging to lumber. Over the long term, total U.S. forest product consumption is projected to increase by 38% by 2050, according to a USDA study.
To meet demand for the wide array of forest products and to enhance their risk-adjusted returns, TIMOs diversify on a broad geographical scale. Many funds own natural forests and timber plantations throughout the United States. The three largest areas of ownership concentration are the Northeast, Southeast and the Pacific Northwest.
Timber inventories include multiple age classes and a variety of tree species. These diversification methods mitigate market risks as well as physical risks such as fire, disease and pest infestation.
Future growth prospects
TIMOs generate income from sources other than timber harvests. Hunting leases and conservation easements contribute to timberland's bottom line and often cover real estate taxes and insurance expenses. Federal incentives to combat global warming are also in the works. Basically, landowners will be paid to grow trees since forests absorb carbon dioxide.
Interest among individual investors in timberland is on the rise. Although institutions are still the main investors in timberland funds (see chart on page 99), Bill Boden, chief investment officer with Timbervest, an Atlanta-based TIMO, says his firm has observed increased interest from individuals seeking to round out their portfolios with timberland. “Approximately 10% to 15% of our last commingled fund came from high-net-worth individuals,” says Boden.
For the individual investor, the tax benefits to holding timberland are attractive. According to Boden, the revenue from the actual sale of timber qualifies for capital gains treatment. The tax code also gives timberland owners a tax deduction, known as depletion, which is the annual cost assigned to harvested timber. Unlike land, the timber cost basis is recovered more quickly using a depletion allowance.
As demand grows, Timbervest continues to scout the country for investment-grade properties. Other TIMOs have taken a more global approach, focusing on emerging markets. Currently, Global Forest Partners has investments in Argentina, Brazil, Chili, Uruguay, Australia and New Zealand, in addition to its domestic holdings in the Southeast.
The Austin Police Retirement System has positions in three timberland funds, two domestic and one international. “Land has always been a hedge against inflation,” says Thomas, “and if you get paid an 8% to 10% return to grow trees while your land continues to appreciate in value, then it makes sense to invest in timberland.”
Toccoa Switzer is based in Charlotte, N.C.
Flap over spotted owl hit forest industry hard
It's hard to believe that a 16-inch bird weighing one and a half pounds could turn an entire industry on its head. But that's exactly what occurred in 1990. The northern spotted owl was thrust into the national spotlight when the Department of Interior listed it as “threatened” under the Endangered Species Act of 1973.
Under this provision, timber companies on federal lands were required to restrict logging on those acres where it might jeopardize the continued existence of the spotted owl or adversely modify their habitat. Private landowners were also required to avoid action that would harm, kill or interfere with the reproduction of the species.
Although it was a victory for environmentalists at the time, this decision virtually shut down 80% of logging operations in national forests throughout the Pacific Northwest. It is estimated that timber production on federal land in the region dropped from 5 billion board feet per year to approximately 1 billion board feet per year. With the reduction in domestic supply, timber prices soared as did the value of privately owned timberland unaffected by the restrictions. The chain of events resulted in record-breaking timberland returns in the early 1990s. Eventually, prices and returns inched downward as production capacity shifted to the southern United States.
Despite ongoing protection, the spotted owl population is still on the decline. According to Joan Jewett, spokesperson for the U.S. Fish & Wildlife Service, there were 5,000 to 8,000 pairs of spotted owls in California, Oregon and Washington in the late 1980s. Today, the population is estimated at half that total. Recently, the barred owl has also been identified as a major contributor to declining spotted owl numbers. No word yet on how the government will resolve that issue.— Toccoa Switzer
Friday, May 12, 2006
you can definitely get burned in this game. Never let some body talk you into buying above YOUR price....read below.
By Kathy Price-Robinson, Special to The Times
A group of friends who set out to buy, fix up and "flip" a Palm Springs tract house haven't found the riches they were seeking.
But the four Newport Beach residents — all experienced remodelers — learned some lessons about themselves, about working with others and about real estate investing. It was actually a great experience," said Ron Haughey, 42, director of financial operations for Hyundai Motor America, "the finance guy" among the group.
Among other things, they learned:
• Not everyone enjoys remodeling by committee.
• The real estate market is fickle and can shift in just a few months.
• High-end upgrades don't necessarily reap big profits.
• Timing is everything, and it's harder to sell during the holidays.
• The surest way to make a profit in speculative remodeling is by getting spectacular bargains on fixer- uppers.
"You make your money when you buy the house, not when you sell it," realized Nina Smith, 38, a software saleswoman who owns rental properties. "We didn't get a good enough deal on this house."
In August, the four bought a three-bedroom, two- bathroom, 1,900-square-foot home that seemed like a good-enough deal at $425,000. Houses in Palm Springs had been appreciating consistently, and other homes on the same street were listed for considerably more.
The 1964 rental was priced lower because of its condition: broken windows, animal-stained carpeting, and aging cabinets, counters and fixtures. For the purchase and all subsequent expenses, the costs were divided equally. All four names went onto the 5.5% 30-year adjustable-rate mortgage. (Each friend had a FICO score above 775.) All four names went on the title as tenants in common, with a 25% undivided interest each. For the deposit, each contributed $2,500. And at the end of escrow, each wired their share: $10,500.
The plan was to spend $60,000 fixing up the house, then sell it in two months for about $650,000. According to Haughey's calculations, the profit would be $60,000 after all expenses, taxes and commissions, or $15,000 for each partner.
The initial planning was easy and pleasant. The four had remodeled their own homes over the years and, for this job, planned to hire subcontractors and handymen they already knew who would be willing to drive to Palm Springs.
Each partner assumed responsibility for a portion of the project. Smith supervised the scraping of the acoustical ceilings, interior and exterior painting, fence repair, baseboards and appliances.
Haughey was in charge of the floor tile, carpeting in bedrooms, pool repair, electrical upgrades and the budget. The third friend, Jeanine Scalero, a 37-year-old attorney, handled the landscaping, windows and doors, including a new sliding door that would give the living room a bigger view of the pool area.
And the fourth, 43-year-old medical equipment salesman Steve Smith (no relation to Nina), was "the design guy." He took on a complete overhaul of the kitchen and baths.
Spirits were high when the project began. The friends worked full time during the week and then spent weekends in Palm Springs on their project. They visited tile stores, drove around neighborhoods looking at paint colors, dined at their favorite local restaurants and generally enjoyed their time together.
But as the renovation went forward, the budget crept up to $67,000, mainly because the kitchen and bathrooms cost more than expected. The kitchen got a luxury makeover with oak cabinets, some with frosted glass doors, plus brushed aluminum hardware and granite counters.
After the house was finished in late October, it was listed with Scalero's father, Victor, a licensed broker in Rancho Mirage who typically sells in new-home developments.
Until the talk turned to setting the sales price, there had been no major disagreements on financial issues. But at this point, the partners disagreed.
Haughey, who said he's conservative by nature, had based his financial projections on a sales price of $650,000, but he would agree to a listing price up to $675,000. The others, though, were so impressed with the beauty of the remodel that they wanted to go higher — $725,000. Eventually, they compromised on $695,000 and had dreams of pocketing about $22,000 each. The house went on the market in early November.
It turns out that Haughey had a better handle on the market than the others. Though they held open houses each weekend, their intended market — "snowbirds" drawn to Palm Springs' balmy winters — do not flock to the area until after the December holidays
In early January, the group agreed to lower the price to $669,000. When the house still did not sell, the foursome decided to stage it, moving in some of their own furniture to give it a more lived-in feeling, and to sign up with a major real estate company in the area, Prudential California, to get the residence better advertised.
Their new agents, Brian and Diane Walker, suggested lowering the asking price to $649,000, and the foursome agreed. The monthly carrying cost was $2,800, or $700 each.
According to Brian Walker, the market had "softened" a lot between the time the house was purchased in August and it was listed with him in late January. "If they could have sold it in August," he said, "it would have been good."
The house is now listed for $629,000, and if it sells for that, each partner will pocket just $5,000. "It's not risk-free," Nina Smith said of her first foray into speculative remodeling. "I need to better educate myself on finding a better property."
And if the house doesn't sell for the current price? "We have all discussed Plan B," Scalero said. "The possibility of turning it into a vacation rental. We've been told that weekly rentals go for around $1,500."
By Kathy Price-Robinson, Special to The Times
A group of friends who set out to buy, fix up and "flip" a Palm Springs tract house haven't found the riches they were seeking.
But the four Newport Beach residents — all experienced remodelers — learned some lessons about themselves, about working with others and about real estate investing. It was actually a great experience," said Ron Haughey, 42, director of financial operations for Hyundai Motor America, "the finance guy" among the group.
Among other things, they learned:
• Not everyone enjoys remodeling by committee.
• The real estate market is fickle and can shift in just a few months.
• High-end upgrades don't necessarily reap big profits.
• Timing is everything, and it's harder to sell during the holidays.
• The surest way to make a profit in speculative remodeling is by getting spectacular bargains on fixer- uppers.
"You make your money when you buy the house, not when you sell it," realized Nina Smith, 38, a software saleswoman who owns rental properties. "We didn't get a good enough deal on this house."
In August, the four bought a three-bedroom, two- bathroom, 1,900-square-foot home that seemed like a good-enough deal at $425,000. Houses in Palm Springs had been appreciating consistently, and other homes on the same street were listed for considerably more.
The 1964 rental was priced lower because of its condition: broken windows, animal-stained carpeting, and aging cabinets, counters and fixtures. For the purchase and all subsequent expenses, the costs were divided equally. All four names went onto the 5.5% 30-year adjustable-rate mortgage. (Each friend had a FICO score above 775.) All four names went on the title as tenants in common, with a 25% undivided interest each. For the deposit, each contributed $2,500. And at the end of escrow, each wired their share: $10,500.
The plan was to spend $60,000 fixing up the house, then sell it in two months for about $650,000. According to Haughey's calculations, the profit would be $60,000 after all expenses, taxes and commissions, or $15,000 for each partner.
The initial planning was easy and pleasant. The four had remodeled their own homes over the years and, for this job, planned to hire subcontractors and handymen they already knew who would be willing to drive to Palm Springs.
Each partner assumed responsibility for a portion of the project. Smith supervised the scraping of the acoustical ceilings, interior and exterior painting, fence repair, baseboards and appliances.
Haughey was in charge of the floor tile, carpeting in bedrooms, pool repair, electrical upgrades and the budget. The third friend, Jeanine Scalero, a 37-year-old attorney, handled the landscaping, windows and doors, including a new sliding door that would give the living room a bigger view of the pool area.
And the fourth, 43-year-old medical equipment salesman Steve Smith (no relation to Nina), was "the design guy." He took on a complete overhaul of the kitchen and baths.
Spirits were high when the project began. The friends worked full time during the week and then spent weekends in Palm Springs on their project. They visited tile stores, drove around neighborhoods looking at paint colors, dined at their favorite local restaurants and generally enjoyed their time together.
But as the renovation went forward, the budget crept up to $67,000, mainly because the kitchen and bathrooms cost more than expected. The kitchen got a luxury makeover with oak cabinets, some with frosted glass doors, plus brushed aluminum hardware and granite counters.
After the house was finished in late October, it was listed with Scalero's father, Victor, a licensed broker in Rancho Mirage who typically sells in new-home developments.
Until the talk turned to setting the sales price, there had been no major disagreements on financial issues. But at this point, the partners disagreed.
Haughey, who said he's conservative by nature, had based his financial projections on a sales price of $650,000, but he would agree to a listing price up to $675,000. The others, though, were so impressed with the beauty of the remodel that they wanted to go higher — $725,000. Eventually, they compromised on $695,000 and had dreams of pocketing about $22,000 each. The house went on the market in early November.
It turns out that Haughey had a better handle on the market than the others. Though they held open houses each weekend, their intended market — "snowbirds" drawn to Palm Springs' balmy winters — do not flock to the area until after the December holidays
In early January, the group agreed to lower the price to $669,000. When the house still did not sell, the foursome decided to stage it, moving in some of their own furniture to give it a more lived-in feeling, and to sign up with a major real estate company in the area, Prudential California, to get the residence better advertised.
Their new agents, Brian and Diane Walker, suggested lowering the asking price to $649,000, and the foursome agreed. The monthly carrying cost was $2,800, or $700 each.
According to Brian Walker, the market had "softened" a lot between the time the house was purchased in August and it was listed with him in late January. "If they could have sold it in August," he said, "it would have been good."
The house is now listed for $629,000, and if it sells for that, each partner will pocket just $5,000. "It's not risk-free," Nina Smith said of her first foray into speculative remodeling. "I need to better educate myself on finding a better property."
And if the house doesn't sell for the current price? "We have all discussed Plan B," Scalero said. "The possibility of turning it into a vacation rental. We've been told that weekly rentals go for around $1,500."
Sunday, May 07, 2006
below is letter from a trust deed investor. This is an avenue i will plan on getting into in the future. Today the wife just started reading rich dad poor dad and she herself is starting to get interested in real estate!
we'll see if she has any desire for staying power.
now for article
Replacing Active Real Estate Income with Passive Real Estate Income Through High-Interest Trust Deeds
Your tired of hassling with tenants, contractors, leasing agents, brokers and attorneys. You have owned income producing property for the last 20 - 30 years, and you’re ready to leave behind the day to day problems and enjoy life. The kids are on their own and you want to travel at will and spend winters in a warmer climate or summers in a cooler one. You only have one problem; if you sell your real estate holdings and invest the proceeds in CDs, your income will be cut by 80% or more. The stock market looks too high and too risky.
"If only I could replace my monthly income without depleting my nest egg," you think, "and without losing sleep over the stock market."
Well, there is a way to make this happen: by investing in trust deeds, or private mortgages loans. Simply put, trust deeds are short-term loans to real estate investors secured by the value of the real property as collateral. Investors who invest in trust deeds typically make a 12 to 18 per cent return, paid out monthly, with a minimum investment of just $50,000 and relatively low risk. As a result, they are able to enhance their lifestyle significantly without threat to their principal, or built a large nest egg, safely, in a relatively short period of time.
Case in Point
I'll give you an example: my wife's parents. My father-in-law has had a couple of concerns. First, he's significantly older than his wife--he is 77, she is 65. Second, women have a longer life expectancy than men. Statistically, my mother-in-law will live 13 to 15 years beyond my father-in-law. My father-in-law has an old-fashioned Sears pension which cuts in half when he dies, and Social Security, which also cuts down by about one-third when he dies. These diminished resources would fail to provide adequately for my mother-in-law.
The two of them decided that they needed more income, or some way to increase their capital base. At the time, they owned an apartment complex in Alvin, Texas, which was a good investment, but wasn't producing any income after the expense of vacancies, repairs, management, and so forth. So they sold the apartment complex and invested the proceeds in three different mortgage liens through my company. From the $200,000 they invested, we created a monthly income of about $3000. We did a projection showing that over 13 years, we'll be able to replace every lost dollar of pension income and social security income, should he pass on first, double the principal in real terms.
In addition, my in-laws can now live higher than they did. In fact, they just decided to take a $10,000 trip to Europe, rather then the usual $2,000 cruise out of Galveston. They're glad they didn't opt for Plan B, an annuity, with a return of only 8 per cent and the guarantee that when you die, you'll lose your total investment. Now my in-laws have a 14 to 18 per cent return, plus their original investment.
How Trust Deeds Work
Private mortgage loans are never greater than 65 per cent of the appraised value, secured by income producing property only (apartments, homes, office buildings, warehouses), and only made on investor property. A lot of notes on the market are connected to primary residences. With Texas homesteads, for example, there are many different laws involved, many of which benefit the borrower. Most mortgage companies originating private mortgages lend only to professional real estate investors, not owner-occupants of residential properties, thereby by-passing the problems with homesteads. The companies make a profit by charging borrowers origination fees for the loans, while the investors collect all the interest.
We personally examine and select properties carefully to make certain that they truly are worth the appraised value. We look at the property as much or more than we look at the borrower, knowing that the property will always be there. Property doesn't get divorced, property doesn't declare bankruptcy, property doesn't have financial problems. Property is the basis of wealth in the United States, in nine out of ten families.
Should we have to foreclose, we can sell the property at 10 or 15 per cent off and still make a profit. We can put it on the market at 25 per cent off and still make a profit. But defaults are rare. Our portfolio for the last 20 years shows a 4 per cent default rate. When a default occurs, the mortgage company picks up the slack. They’ll handle the foreclosure, any property rehabilitation necessary, and the property sale.
Many of my clients start with a small portion of their portfolio to see how it works. Once they put in an initial $50,000, and it works real well, they're eager to invest a greater amount of money because their comfort level rises. They receive the monthly income checks, become familiar with the process, all the safeguards that we use, and then they call me up and say, "Do you have anything else available?" Over the course of time, they increase their investment to a point where their comfort level meets their income need.
Low Risk
The risks are fairly limited if solid procedures are followed. All mortgage documentation will be standardized by the mortgage company originating the loan, so the investor will know that the mortgage note and deed of trust are drawn up to his benefit.
The risk is going to be somewhat higher than government insured money market funds, or government bonds. But it will be substantially lower than stocks, gold, silver, or any assets that you hope will increase in price--assets that could go up or down in value.
An Individual Decision
Deciding how much of your portfolio might ultimately go into mortgage liens is an individual decision. I personally have 75 to 80 per cent in mortgage liens, which represents the proceeds from the sale of my automotive business. Before I became actively involved in the private mortgage business, I was an investor, looking for a way to replace the income from the business with a less time-intensive instrument. I spent two years researching the possibilities. My father-in-law has 50 to 60 per cent of his portfolio invested in mortgage liens through our company. It depends on the size of your portfolio, what you're trying to accomplish.
I can't recommend mortgage liens highly enough. I've studied finance and investment for many years, have been an investor in many different vehicles, and it's all a trade-off between risk and return. The mortgage lien, when properly executed, is absolutely excellent; I don't know any investment available to the public that has that match of investment return versus risk.
You may hear about people who go into venture capital funds and make 40, 50 per cent, but most individuals can't take part because they don't have the minimum investment--usually one million dollars or more--required. Minimum investment with most private mortgage originators is fifty thousand dollars. You won't make a 40 or 50 per cent return, but you will make a solid, guaranteed 14 to 18 percent, which is superior to most other investments. That amount of yield can go a long way toward making your retirement both secure and more comfortable than you ever dreamed.
If you have any doubts, just ask my in-laws--when they get back from Europe.
Don Konipol is owner of Wolverine Mortgage Partners, LLC and manager of the Managed Mortgage Investment Fund, L.P. in Houston, Texas. . Contact him at (832) 577-8838 or dkonipol@yahoo.com
we'll see if she has any desire for staying power.
now for article
Replacing Active Real Estate Income with Passive Real Estate Income Through High-Interest Trust Deeds
Your tired of hassling with tenants, contractors, leasing agents, brokers and attorneys. You have owned income producing property for the last 20 - 30 years, and you’re ready to leave behind the day to day problems and enjoy life. The kids are on their own and you want to travel at will and spend winters in a warmer climate or summers in a cooler one. You only have one problem; if you sell your real estate holdings and invest the proceeds in CDs, your income will be cut by 80% or more. The stock market looks too high and too risky.
"If only I could replace my monthly income without depleting my nest egg," you think, "and without losing sleep over the stock market."
Well, there is a way to make this happen: by investing in trust deeds, or private mortgages loans. Simply put, trust deeds are short-term loans to real estate investors secured by the value of the real property as collateral. Investors who invest in trust deeds typically make a 12 to 18 per cent return, paid out monthly, with a minimum investment of just $50,000 and relatively low risk. As a result, they are able to enhance their lifestyle significantly without threat to their principal, or built a large nest egg, safely, in a relatively short period of time.
Case in Point
I'll give you an example: my wife's parents. My father-in-law has had a couple of concerns. First, he's significantly older than his wife--he is 77, she is 65. Second, women have a longer life expectancy than men. Statistically, my mother-in-law will live 13 to 15 years beyond my father-in-law. My father-in-law has an old-fashioned Sears pension which cuts in half when he dies, and Social Security, which also cuts down by about one-third when he dies. These diminished resources would fail to provide adequately for my mother-in-law.
The two of them decided that they needed more income, or some way to increase their capital base. At the time, they owned an apartment complex in Alvin, Texas, which was a good investment, but wasn't producing any income after the expense of vacancies, repairs, management, and so forth. So they sold the apartment complex and invested the proceeds in three different mortgage liens through my company. From the $200,000 they invested, we created a monthly income of about $3000. We did a projection showing that over 13 years, we'll be able to replace every lost dollar of pension income and social security income, should he pass on first, double the principal in real terms.
In addition, my in-laws can now live higher than they did. In fact, they just decided to take a $10,000 trip to Europe, rather then the usual $2,000 cruise out of Galveston. They're glad they didn't opt for Plan B, an annuity, with a return of only 8 per cent and the guarantee that when you die, you'll lose your total investment. Now my in-laws have a 14 to 18 per cent return, plus their original investment.
How Trust Deeds Work
Private mortgage loans are never greater than 65 per cent of the appraised value, secured by income producing property only (apartments, homes, office buildings, warehouses), and only made on investor property. A lot of notes on the market are connected to primary residences. With Texas homesteads, for example, there are many different laws involved, many of which benefit the borrower. Most mortgage companies originating private mortgages lend only to professional real estate investors, not owner-occupants of residential properties, thereby by-passing the problems with homesteads. The companies make a profit by charging borrowers origination fees for the loans, while the investors collect all the interest.
We personally examine and select properties carefully to make certain that they truly are worth the appraised value. We look at the property as much or more than we look at the borrower, knowing that the property will always be there. Property doesn't get divorced, property doesn't declare bankruptcy, property doesn't have financial problems. Property is the basis of wealth in the United States, in nine out of ten families.
Should we have to foreclose, we can sell the property at 10 or 15 per cent off and still make a profit. We can put it on the market at 25 per cent off and still make a profit. But defaults are rare. Our portfolio for the last 20 years shows a 4 per cent default rate. When a default occurs, the mortgage company picks up the slack. They’ll handle the foreclosure, any property rehabilitation necessary, and the property sale.
Many of my clients start with a small portion of their portfolio to see how it works. Once they put in an initial $50,000, and it works real well, they're eager to invest a greater amount of money because their comfort level rises. They receive the monthly income checks, become familiar with the process, all the safeguards that we use, and then they call me up and say, "Do you have anything else available?" Over the course of time, they increase their investment to a point where their comfort level meets their income need.
Low Risk
The risks are fairly limited if solid procedures are followed. All mortgage documentation will be standardized by the mortgage company originating the loan, so the investor will know that the mortgage note and deed of trust are drawn up to his benefit.
The risk is going to be somewhat higher than government insured money market funds, or government bonds. But it will be substantially lower than stocks, gold, silver, or any assets that you hope will increase in price--assets that could go up or down in value.
An Individual Decision
Deciding how much of your portfolio might ultimately go into mortgage liens is an individual decision. I personally have 75 to 80 per cent in mortgage liens, which represents the proceeds from the sale of my automotive business. Before I became actively involved in the private mortgage business, I was an investor, looking for a way to replace the income from the business with a less time-intensive instrument. I spent two years researching the possibilities. My father-in-law has 50 to 60 per cent of his portfolio invested in mortgage liens through our company. It depends on the size of your portfolio, what you're trying to accomplish.
I can't recommend mortgage liens highly enough. I've studied finance and investment for many years, have been an investor in many different vehicles, and it's all a trade-off between risk and return. The mortgage lien, when properly executed, is absolutely excellent; I don't know any investment available to the public that has that match of investment return versus risk.
You may hear about people who go into venture capital funds and make 40, 50 per cent, but most individuals can't take part because they don't have the minimum investment--usually one million dollars or more--required. Minimum investment with most private mortgage originators is fifty thousand dollars. You won't make a 40 or 50 per cent return, but you will make a solid, guaranteed 14 to 18 percent, which is superior to most other investments. That amount of yield can go a long way toward making your retirement both secure and more comfortable than you ever dreamed.
If you have any doubts, just ask my in-laws--when they get back from Europe.
Don Konipol is owner of Wolverine Mortgage Partners, LLC and manager of the Managed Mortgage Investment Fund, L.P. in Houston, Texas. . Contact him at (832) 577-8838 or dkonipol@yahoo.com
Saturday, May 06, 2006
IRS audits more corporations, wealthy taxpayers
WASHINGTON (AP) — More corporations and wealthy taxpayers had their tax returns audited by the Internal Revenue Service this year, helping the agency haul in a record $47.3 billion in unpaid taxes.
IRS Commissioner Mark Everson said the audit rate of high-income individuals and families, those who report earning $100,000 or more, is "still too low."
"I haven't set a specific target," Everson said. "Our No. 1 area of emphasis has been to increase our work in high-income individuals and corporations. We do that because of the sense of fairness that resonates throughout the rest of the system."
The IRS audited 1 in 63 wealthy individuals and families, a figure the agency said marked the highest rate in 10 years. By comparison, about 1 in 117 taxpayers who earned less than $100,000 were audited.
Overall, about 1 of every 107 individuals faced an audit, more than last year, when 1 in 129 taxpayers had their tax returns examined.
The record amount collected this year includes nearly $4 billion garnered through a settlement with taxpayers who used a tax shelter designed to hide unusually large income gains.
The tax collectors audit taxpayers through face-to-face meetings and mailed correspondence. They also match documents provided by third parties against returns filed by taxpayers.
Audits of corporations and small businesses also climbed compared with last year.
An average of 20% of corporations were audited during the fiscal year that ended Sept. 30. The largest of those, with assets of $250 million or more, faced the highest audit rate, about 44%.
The number of small businesses that faced an audit also rose after a significant dip the year before. About 1 in 126 small businesses, those with assets less than $10 million, were audited this year.
The IRS released the statistics while emphasizing that the gains were not made at the expense of customer service. The IRS measurement of customer satisfaction, as measured by a private contractor, was 95%.
The number of taxpayers who got through to an IRS employee on a toll-free telephone line slipped to 83%, from 87% the year before. Everson said that was a deliberate reduction, which did not decrease customer satisfaction.
WASHINGTON (AP) — More corporations and wealthy taxpayers had their tax returns audited by the Internal Revenue Service this year, helping the agency haul in a record $47.3 billion in unpaid taxes.
IRS Commissioner Mark Everson said the audit rate of high-income individuals and families, those who report earning $100,000 or more, is "still too low."
"I haven't set a specific target," Everson said. "Our No. 1 area of emphasis has been to increase our work in high-income individuals and corporations. We do that because of the sense of fairness that resonates throughout the rest of the system."
The IRS audited 1 in 63 wealthy individuals and families, a figure the agency said marked the highest rate in 10 years. By comparison, about 1 in 117 taxpayers who earned less than $100,000 were audited.
Overall, about 1 of every 107 individuals faced an audit, more than last year, when 1 in 129 taxpayers had their tax returns examined.
The record amount collected this year includes nearly $4 billion garnered through a settlement with taxpayers who used a tax shelter designed to hide unusually large income gains.
The tax collectors audit taxpayers through face-to-face meetings and mailed correspondence. They also match documents provided by third parties against returns filed by taxpayers.
Audits of corporations and small businesses also climbed compared with last year.
An average of 20% of corporations were audited during the fiscal year that ended Sept. 30. The largest of those, with assets of $250 million or more, faced the highest audit rate, about 44%.
The number of small businesses that faced an audit also rose after a significant dip the year before. About 1 in 126 small businesses, those with assets less than $10 million, were audited this year.
The IRS released the statistics while emphasizing that the gains were not made at the expense of customer service. The IRS measurement of customer satisfaction, as measured by a private contractor, was 95%.
The number of taxpayers who got through to an IRS employee on a toll-free telephone line slipped to 83%, from 87% the year before. Everson said that was a deliberate reduction, which did not decrease customer satisfaction.
Real estate insiders go bearish in blogs
In mostly anonymous postings, agents are reporting big problems in the markets.
By Les Christie, CNNMoney.com staff writer
April 18, 2006: 9:57 AM EDT
NEW YORK (CNNMoney.com) - If the secret worries of real estate professionals are any indication, home prices could be heading for a swoon.
When Brad Inman of Inman News, which tracks the real estate industry and is widely read by industry insiders, recently gave real estate agents the opportunity to blog about market conditions, they almost uniformly described them as bad – and getting worse.
"Normally, brokers and agents tend to sugarcoat the news; they don't want to affect consumer confidence," says Inman. "By letting them post anonymously, we gave them a way to really share their thoughts."
Most responded with tales of high inventories, slow sales and languishing prices.
Here's a sampling of their comments:
"Portland, Oregon is mixed . . . more inventory, sitting longer. . . . Sellers no longer king." Posted by anonymous.
"Minneapolis/St.Paul . . . 15 houses per buyer. If we had buyers. Huge inventory in every price range. More foreclosure properties coming on daily." Posted by anonymous.
"East Central Florida Coastal area inventories up four times year to year and sales down 75%." Posted by Ramon Rivera (Not all bloggers craved anonymity).
"Some Realtors, Mortgage Brokers & some clients have been more testy than in months previous. Something is in the air." Posted by S. Crowe.
"Northern Ca. Let's not beat around the bush here. There is a slow down!! Home prices are not going up. Sales are down." Posted by anonymous.
Inman grants that there could be an element of self-selection, with agents suffering a slowdown more inclined to vent. But usually, comments from posters tend to be very diverse, with no clear consensus. "This round of blogging," he says, "has been conclusive; no one said the markets are great."
Stat support
Statistical evidence of a housing slowdown appears almost daily. On Tuesday, the Census Bureau reported that March housing starts were down to their second lowest monthly pace in the past year.
So far prices have not suffered any notable decline - the median home price nationally in the fourth quarter was up 13.6 percent from 12 months earlier, according to the National Association of Realtors.
Still, NAR chief economist, David Lereah, is on record predicting price appreciation will drop to the mid-single digits. And NAR has recorded an uptick in inventory, though not enough to be troubling.
NAR spokesman, Walter Molony, characterizes conditions today neither as a seller's nor a buyer's market. "Probably, balanced is a better word," he says. "There has been a steady rise in inventory since last fall, but, broadly speaking, it's still a little tight."
Rates are going up
What argues against any big fallout is that, absent a serious economic crisis in which unemployment spikes or wages plummet, real estate markets generally do not fall very far or very fast.
But this time markets have to contend with rising mortgage rates - the average 30-year mortgage rate, at 6.49 percent, is now near a 4-year high, lowering home affordability.
That will have a bigger impact in hot markets, where many buyers would not have been able to afford their purchases without resorting to financing through low-downpayment, low-interest ARMs (30 percent of recent sales or more in some markets). As rates rise, some could face close to a doubling of monthly mortgage payments. And if their home value has fallen, they could wind up underwater, owing more than their house is worth.
How much potential for disaster there exists can be debated. According to Lereah, the next few years will feature a stable, more balanced, healthier market.
Even some of Inman's bloggers are not totally bearish. One poster wrote, "Northern CA - oddly enough, higher priced inventory (luxury homes) still moving."
Another one opined, "Wilmington, NC, market still active, except on barrier islands, where inventory of $300-500K condos over-supplied. . . . good to great condition, well-priced properties move quickly."
Still, these shaky endorsements come nowhere near the unbridled optimism of a year or two ago.
As for Inman, he sums up his blog-induced sentiments rather succinctly. "It scares me," he says.
In mostly anonymous postings, agents are reporting big problems in the markets.
By Les Christie, CNNMoney.com staff writer
April 18, 2006: 9:57 AM EDT
NEW YORK (CNNMoney.com) - If the secret worries of real estate professionals are any indication, home prices could be heading for a swoon.
When Brad Inman of Inman News, which tracks the real estate industry and is widely read by industry insiders, recently gave real estate agents the opportunity to blog about market conditions, they almost uniformly described them as bad – and getting worse.
"Normally, brokers and agents tend to sugarcoat the news; they don't want to affect consumer confidence," says Inman. "By letting them post anonymously, we gave them a way to really share their thoughts."
Most responded with tales of high inventories, slow sales and languishing prices.
Here's a sampling of their comments:
"Portland, Oregon is mixed . . . more inventory, sitting longer. . . . Sellers no longer king." Posted by anonymous.
"Minneapolis/St.Paul . . . 15 houses per buyer. If we had buyers. Huge inventory in every price range. More foreclosure properties coming on daily." Posted by anonymous.
"East Central Florida Coastal area inventories up four times year to year and sales down 75%." Posted by Ramon Rivera (Not all bloggers craved anonymity).
"Some Realtors, Mortgage Brokers & some clients have been more testy than in months previous. Something is in the air." Posted by S. Crowe.
"Northern Ca. Let's not beat around the bush here. There is a slow down!! Home prices are not going up. Sales are down." Posted by anonymous.
Inman grants that there could be an element of self-selection, with agents suffering a slowdown more inclined to vent. But usually, comments from posters tend to be very diverse, with no clear consensus. "This round of blogging," he says, "has been conclusive; no one said the markets are great."
Stat support
Statistical evidence of a housing slowdown appears almost daily. On Tuesday, the Census Bureau reported that March housing starts were down to their second lowest monthly pace in the past year.
So far prices have not suffered any notable decline - the median home price nationally in the fourth quarter was up 13.6 percent from 12 months earlier, according to the National Association of Realtors.
Still, NAR chief economist, David Lereah, is on record predicting price appreciation will drop to the mid-single digits. And NAR has recorded an uptick in inventory, though not enough to be troubling.
NAR spokesman, Walter Molony, characterizes conditions today neither as a seller's nor a buyer's market. "Probably, balanced is a better word," he says. "There has been a steady rise in inventory since last fall, but, broadly speaking, it's still a little tight."
Rates are going up
What argues against any big fallout is that, absent a serious economic crisis in which unemployment spikes or wages plummet, real estate markets generally do not fall very far or very fast.
But this time markets have to contend with rising mortgage rates - the average 30-year mortgage rate, at 6.49 percent, is now near a 4-year high, lowering home affordability.
That will have a bigger impact in hot markets, where many buyers would not have been able to afford their purchases without resorting to financing through low-downpayment, low-interest ARMs (30 percent of recent sales or more in some markets). As rates rise, some could face close to a doubling of monthly mortgage payments. And if their home value has fallen, they could wind up underwater, owing more than their house is worth.
How much potential for disaster there exists can be debated. According to Lereah, the next few years will feature a stable, more balanced, healthier market.
Even some of Inman's bloggers are not totally bearish. One poster wrote, "Northern CA - oddly enough, higher priced inventory (luxury homes) still moving."
Another one opined, "Wilmington, NC, market still active, except on barrier islands, where inventory of $300-500K condos over-supplied. . . . good to great condition, well-priced properties move quickly."
Still, these shaky endorsements come nowhere near the unbridled optimism of a year or two ago.
As for Inman, he sums up his blog-induced sentiments rather succinctly. "It scares me," he says.
