Did the down market ruin a good year? Was the drop in volume so precipitous that there's no way you'll recover your objectives for the year? Well, you are not alone......
Come join the crowd around the bar. It's not a pity party, and you are only allowed one Rob Roy. No drowning your troubles in booze. We are here to learn and to prosper! We wrote about the Sub Prime problems in a series beginning here. If you missed it, read it. A neat three part series.
Now let's update things.
I knew the Sub Prime problem was coming thanks to Joan Trice, owner of AppraisalBuzz.com, organizer of the annual Valuation 200X conferences. Valuation 2007 is coming up in a couple of weeks in Las Vegas.
A true Oracle is Joan! She learned of the problem from her good buddies circle, mostly Chief Appraisers of large national and international lenders. Many of them will be at Valuation 2007.
They were worried in the Fall of 2006. Those friends of Joan's came to the conclusion that the Subprime and Alt A portfolios were the equivalent of junk bonds of the 1980's...gee, I knew that too... they had been routinely packaged as Mortgage Backed Securities and sold with ratings much higher than they should have been, resulting in huge profits along the daisy chain.
The daisy chain being from the mortgage broker who sold the borrower on a bad deal, all the way up to the investment companies who were the ultimate purchasers...investment companies who agreed to manage large capital accounts for individuals, estates, various corporations with lots of money to invest...much of it overseas.
Yeah, I knew the stuff was junk.
But I'm not smart like Joan and her friends. I thought it would be a tempest in a tea pot. After all, Sub Prime and Alt A angst backed securities were just a fraction of the market, and only a fraction of those would wind up in default. In the over all scheme of things the market should be able to absorb it's losses and move on. That's what I thought, that's what I argued with Joan.
I was wrong . . .click here to continue reading:
What I didn't allow for was the loss of confidence. More correctly, I didn't allow for there being ANY confidence in those angst backed securities in the first place. Professional portfolio managers were buying "pigs in a poke" when they bought those angst backed securities.
Surely if I knew that, they knew that. Surely prudent professional portfolio managers would allow a higher loss reserve on those suckers to allow for the risk.
But they didn't! They were shocked; Just shocked that they had been duped!!! They joined the ranks of the "Nobody saw this coming" crowd at the bar, hosted by the CEO of Countrywide. (Don't join that crowd at that end of the bar my friend, come down here with us....no pity party here!)
That crowd at the other end of the bar claimed they were blindsided by this development. Well. If the pros were surprised, what does that do to the confidence of the owners of all that capital who entrusted it to those pros to invest?!
Chains were yanked, and yanked hard!
"Stop buying those junk angst backed securities" the capitalists screamed, " and all other mortgage backed securities, until your replacement figures out what is safe and what is not!"
And so the liquidity crisis of 2007 was born.
The mortgage pipe line abruptly shut down in mid August as investors, the ultimate purchasers of mortgage backed securities, withdrew from the market.
The originators of that pipeline, regulated lenders as well as non regulated mortgage brokers, are finely attuned to the end purchaser. When the buyers disappear, the lenders stop lending.
The buyer withdrawal lasted six, eight weeks. Then they began coming back into the market, renegotiating prices, separating angst backed securities from the traditional quality 80 percent LTV stuff that they thought they were buying in the first place.
The mortgage pipeline began flowing again. Not as strong a flow as before...not likely to return to that "irrational exuberance" stage anytime soon, but flowing again.
Now the fun for you and me begins!
Let's figure this stuff out...what happened to our business? I'll give you my data, you check it against yours.
- The first four months of 2007 Acorn was up over the previous year by roughly 12 percent, better than my 2007 projections.
- May was up 7 percent...uh oh...trouble coming!
- June was off 11 percent,
- July off 11 percent,
- August off 17% (the liquidity crisis began mid August),
- September off 34 percent (that's a kick in the teeth!)
- October month to date is off 22 percent, but the second half of October is only down 5 percent...indicating that the liquidity crisis is easing.
Check your data. Does it roughly track mine? I'm betting it does. If so, look what you've learned! You can depend on your business volume to track the market! That's a great business management tool!
I knew at the end of May that Acorn was going to have a tough year. I started alerting my Bright Horses to that prediction. The idea was slow to catch on. Understandable. It was their first experience with a downturn...a nice seven year run of uninterrupted growth. You can't accept it until you've been through one.
But the main point here is that you can trust your business to tell you what's going on, and what will happen. You can predict the future!
You can that is, if you've been following the Runt Rants columns over the last year.
Ahh...you haven't you say? Well, read them! There's still time!
In the last year here in Appraisal Scoop
- We discussed how to grow your business, preparing for times like the summer of '07
- We discussed how to analyze your business using a good accounting software and daily attention to the performance.
- We've discussed that you are in a flat world now, and global sneezes will likely give you a cold.
- We've discussed how to build your business to sustain shocks such as the Summer of 2007 and to continue to prosper.
- Most important of all, I've told you, whatever you do, never join that pity party at the other end of the bar.
Times like the Summer of 2007 are what we have been preparing you for, there are opportunities out there for you to take advantage of! That's why you are only allowed one Rob Roy!
- It's time to reassess your business, develop new strategies, new products.
- It's time to take to the streets, marketing your business and what you can do for your Clients and your community.
- It's time to show that you are indeed a professional, a business owner, controlling your own destiny for professionals thrive in bad times, not just good times.
If you've been reading Runt Rants, taking notes, developing the ideas presented, that's exactly what you are now doing. If you haven't, there's still plenty of time.
Enough for now. Next time we'll talk about the Sub Prime and Alt A likely scenarios, and how that might affect your business in 2008.
The author is the owner of Acorn Appraisal Associates, a 22 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities. [email protected]
I have the right to remain silent. Anything I say will be misquoted and used against me
Recent Comments