Land & Lot Loans – To 80% Loan-to-Value!

Prior to 2008, I personally did dozens of lot loans, and a shockingly high percentage of them went into foreclosure after 2008. This is because lot owners aren’t exactly emotionally connected to a hunk of dirt – so if values fall, borrowers often walk.

Since 2008, we have told about 2,757 borrowers that we don’t do land loans…but that changed today. We have an investor who will lend up to 80% loan-to-value, which – to be honest – shocks me. But – if they’ll buy it, we’ll sell it.

There are caveats, though, such as a $500,000 loan limit – ruling out most of coastal California (unless someone wants to finance a 4-foot-by-4-foot square for a doghouse, but even that would run close to $1M right now in San Francisco).

Other Caveats: (1) Investors only (no owner-occupied); (2) Raw land only (no structures with value); (3) Zoning or “best use” must be “residential”; (4) 20 acres maximum; and (5) Full doc only.

II. Today’s Financial Conditions Have Never Been Seen Before – It Is Why So Many Predictions Are Wrong

In 1994, a group of geniuses (the founders told us as much) founded a massive hedge fund called Long-Term Capital Management (LTCM). They were going to use ALL of their genius-ness to ingeniously speculate in complex financial derivatives to ingeniously make billions in a fail-safe way that only geniuses could do.

In 1998, however, LTCM blew up (despite all that genius) and went into bankruptcy, putting at least 14 major Wall Street institutions at risk of failure. The geniuses then convinced the Fed that the risk of these failures was too much for America and that the only way to save America was to bail out LTCM. So – the Fed facilitated a massive bailout. The founders lost some money, to be sure, but it was far less than they and their lenders would have ever lost without the bailout.

In the decade preceding the 2008 financial crisis, former Treasury Secretary Bob Rubin collected $120M in bonuses (that was real money back then) while working at Citibank and speculating in bonds that crashed in value in 2008.

The Fed bailed out Citibank without ever clawing back Mr. Rubin’s huge bonuses earned from speculating in the risky bonds that brought Citi down (famed author Nassim Nicholas Taleb calls this the “Rubin Trade”).

Other Wall Street execs saw this and thought… “Hey, wait a minute, I can make huge bonuses with crazy risky bets and then keep them all when my institution inevitably fails? Sign me up!” See Fannie & Freddie, AIG, and Silicon Valley Bank as other examples.

“The Fed Put.” The above stories are examples of what analysts call “The Fed Put” or a belief that the Fed will bail out institutions on the verge of failure – after making risky bets. This belief fosters much more risky behavior, inflates asset values because investors believe they can’t lose, and distorts markets. We saw “The Fed Put” in spades during COVID. More importantly, “The Fed Put” did not exist prior to the 1987 stock market crash (the first time we saw it).
Government Debt at Record Levels. Our total government level is over 125% of the size of our entire economy (125% of GDP). This is a record, and it too massively distorts our economy so much, as it costs $1 trillion per year in interest (comprising half of our federal deficit). In contrast, our federal debt levels were about 30% of the size of our economy in the 1970s – making rate increases affordable. If rates shot up over 10% today, however, we’d go broke… or have to print a lot of money.
Total Government (local, state, and federal) Spending as a % of GDP = 44%. It was around 33% in the early 1980s. This, too, is a huge drag on the economy, as government spending does not create wealth (despite politicians’ best efforts to convince us it does). Even worse, much more government spending used to go towards actual goods, services, and improvements (parks, highways, bridges, defense, justice, police, etc.), but now an enormous portion is just transfer payments (pensions, Medicare, Social Security) and interest on debt.
Financialized Economy. In the olden days, America actually made things and offered services. Nowadays, however, Wall Street dominates our economy instead, with insurance, lending, stock and bond trading, and investment banking replacing manufacturing.
China and India. The U.S. used to dominate the world economy along with Japan and Europe – giving us much more control over our own destiny. But that was before the rise of China and India, two mighty economies that now wield their own massive influence.
The Fed’s Balance Sheet/Quantitative Easing (QE). This factor is huge, as the Fed began buying up bonds and securities to shore up prices after 2008 in ways we’ve never seen before (COVID was even worse). This significantly distorts asset prices, fosters inflation, and gives the Fed much too large of a role in our economy. The most recent bout of QE is likely fostering inflation and higher rates now in fact – something that caught me by surprise, for example.

I could go on with many more examples. But my main point is that with so many new variables in play, it is very hard to predict anything.