Ask Eric!

[ERICOPOLY]

I was turned down by Wells Fargo again for a mortgage.

 

They won't lend me a figure amounting to 1/7 of my net worth to secure a home with 30% down payment.  Farkin' Bastages.

 

This time they came up with a more creative excuse...

 

They don't "like" hedge funds (MPIC) and they "frown" on private equity (Dhandho).

 

Interestingly, my investments in MPIC were given a value of ZERO and my investment in Dhandho Holdings was given a value of ZERO.  The reason being is that it is possible that they might have to wait 90 days to redeem the funds from MPIC, and possibly another 11.5 years for Dhandho. 

 

The MPIC funds alone are enough to cover the mortgage, even after a 20% impairment.  Oh... heaven forbid... waiting 90 days.

 

I guess they would rather lend to 55 year olds on 30 yr amortizations... because don't you know, they will work until 85 to pay it off.

 

You know, in Canada, there is a company called Home Capital Group, they offer mortgages to people in your situation, where traditionnal lenders do no want to help you. There are probably some players in that niche in the US too?

 

I thought I'd give traditional lenders one more shot before I'd go to hard money route.  There is a mortgage out there, it's just that the terms are getting worse.

 

What a bunch of jerks though... their big hangup is that MPIC is "illiquid" because of the potential 90 day lockup.  Yet they'll lend to people all day long who might get fired and not find work again for years.

 

And don't they make money if they take the house from me in foreclosure and flip it?  I even offered them 50% down and they still said no.  What the f*** is their problem?

 

And yes, for you Wells Fargo fans, they did try (once again) to get me to move my assets to Wells Fargo in order to qualify me for a loan with their "private bank".  Plus, with all the cash piling up in my checking account (getting ready for the down payment) a branch employee from Los Altos (where I opened the account) called to ask if I'd like to invest in one of their other products that earns more return than my checking account.  So they're working hard at selling me even while being relatively useless at the same time.

 

Their problem is that they might get it pushed back on them. They don't care about the 30 years argument, they sell the loan off anyhow so as long as it's up to the rules than they did just fine.  Blame regulators for slowing the recovery, banks can only operate in that framework.

 

They don't need to sell the loan.  They didn't offer me the loan with terms they are willing to put on their balance sheet.  They didn't offer anything at all!

 

There is a lot of room between the lowest quoted mortgage rate (underwritten to Fannie/Freddie) and the hard money usurious rates.  They don't even try to gather any of that spread.

 

Why not offer me a hard money rate or something slightly less?  It doesn't hurt to ask.

 

It doesn't even have to be a long fixed rate term -- everything is negotiable.

[ERICOPOLY]

In other words, why would they put a credit card balance on their books but not a secured mortgage?

 

[ukvalueinvestment]

I think part of the answer is that (big) banks are not set up to look at loans in a granular way.  Individually you may be a great deal but let's face it, Brian Moynihan or John Stumpf don't really care about individual deals.  They care about how they generate billions of assets at the right price in way that they can easily put in their systems in a way that satisfies regulators and shareholders who are scared of anything non vanila.

 

Unfortunately, lending Ericopoly money doesn't really tick any of their boxes.

[rpadebet]

I was turned down by Wells Fargo again for a mortgage.

 

They won't lend me a figure amounting to 1/7 of my net worth to secure a home with 30% down payment.  Farkin' Bastages.

 

This time they came up with a more creative excuse...

 

They don't "like" hedge funds (MPIC) and they "frown" on private equity (Dhandho).

 

Interestingly, my investments in MPIC were given a value of ZERO and my investment in Dhandho Holdings was given a value of ZERO.  The reason being is that it is possible that they might have to wait 90 days to redeem the funds from MPIC, and possibly another 11.5 years for Dhandho. 

 

The MPIC funds alone are enough to cover the mortgage, even after a 20% impairment.  Oh... heaven forbid... waiting 90 days.

 

I guess they would rather lend to 55 year olds on 30 yr amortizations... because don't you know, they will work until 85 to pay it off.

 

You know, in Canada, there is a company called Home Capital Group, they offer mortgages to people in your situation, where traditionnal lenders do no want to help you. There are probably some players in that niche in the US too?

 

I thought I'd give traditional lenders one more shot before I'd go to hard money route.  There is a mortgage out there, it's just that the terms are getting worse.

 

What a bunch of jerks though... their big hangup is that MPIC is "illiquid" because of the potential 90 day lockup.  Yet they'll lend to people all day long who might get fired and not find work again for years.

 

And don't they make money if they take the house from me in foreclosure and flip it?  I even offered them 50% down and they still said no.  What the f*** is their problem?

 

And yes, for you Wells Fargo fans, they did try (once again) to get me to move my assets to Wells Fargo in order to qualify me for a loan with their "private bank".  Plus, with all the cash piling up in my checking account (getting ready for the down payment) a branch employee from Los Altos (where I opened the account) called to ask if I'd like to invest in one of their other products that earns more return than my checking account.  So they're working hard at selling me even while being relatively useless at the same time.

 

Their problem is that they might get it pushed back on them. They don't care about the 30 years argument, they sell the loan off anyhow so as long as it's up to the rules than they did just fine.  Blame regulators for slowing the recovery, banks can only operate in that framework.

 

They don't need to sell the loan.  They didn't offer me the loan with terms they are willing to put on their balance sheet.  They didn't offer anything at all!

 

There is a lot of room between the lowest quoted mortgage rate (underwritten to Fannie/Freddie) and the hard money usurious rates.  They don't even try to gather any of that spread.

 

Why not offer me a hard money rate or something slightly less?  It doesn't hurt to ask.

 

It doesn't even have to be a long fixed rate term -- everything is negotiable.

 

Big bank branches are parts of a bulk loan processing machine. They will lend when your loan fits a particular template/checklist. The idea is mainly to sell your loan and not to keep it on the books even if they can make a higher profit by  making you a "non-standard" loan and keep it on their books.

 

Did you ever have any luck ordering a gourmet burger from McDonalds? Even if you said you would like to pay 10x the regular cheese burger price for it? These banks are somewhat similar to that. Even if the branch managers and loan officers are smart enough to understand that you are offering them a better deal, they are most likely institutionally constrained  to limit their "rationality".

 

You would most likely need to go to specialized local lenders to get your gourmet burger order filled.

[abitofvalue]

Haha.  Not to be laughing at Eric's mortgage headaches' but can you'll imagine Eric trying to explain his options / embedded leverage strategies to the typical branch employee?  "what don't you don't get? The BAC long is completely hedged by the puts and the result is embedded non-recourse leverage which also generates a tax-loss while letting me maintain my exposure on the long side.  Now give me my damn loan!!"  the poor employee probably doesn't understand half the words Eric is saying..

[oddballstocks]

I was turned down by Wells Fargo again for a mortgage.

 

They won't lend me a figure amounting to 1/7 of my net worth to secure a home with 30% down payment.  Farkin' Bastages.

 

This time they came up with a more creative excuse...

 

They don't "like" hedge funds (MPIC) and they "frown" on private equity (Dhandho).

 

Interestingly, my investments in MPIC were given a value of ZERO and my investment in Dhandho Holdings was given a value of ZERO.  The reason being is that it is possible that they might have to wait 90 days to redeem the funds from MPIC, and possibly another 11.5 years for Dhandho. 

 

The MPIC funds alone are enough to cover the mortgage, even after a 20% impairment.  Oh... heaven forbid... waiting 90 days.

 

I guess they would rather lend to 55 year olds on 30 yr amortizations... because don't you know, they will work until 85 to pay it off.

 

You know, in Canada, there is a company called Home Capital Group, they offer mortgages to people in your situation, where traditionnal lenders do no want to help you. There are probably some players in that niche in the US too?

 

I thought I'd give traditional lenders one more shot before I'd go to hard money route.  There is a mortgage out there, it's just that the terms are getting worse.

 

What a bunch of jerks though... their big hangup is that MPIC is "illiquid" because of the potential 90 day lockup.  Yet they'll lend to people all day long who might get fired and not find work again for years.

 

And don't they make money if they take the house from me in foreclosure and flip it?  I even offered them 50% down and they still said no.  What the f*** is their problem?

 

And yes, for you Wells Fargo fans, they did try (once again) to get me to move my assets to Wells Fargo in order to qualify me for a loan with their "private bank".  Plus, with all the cash piling up in my checking account (getting ready for the down payment) a branch employee from Los Altos (where I opened the account) called to ask if I'd like to invest in one of their other products that earns more return than my checking account.  So they're working hard at selling me even while being relatively useless at the same time.

 

Their problem is that they might get it pushed back on them. They don't care about the 30 years argument, they sell the loan off anyhow so as long as it's up to the rules than they did just fine.  Blame regulators for slowing the recovery, banks can only operate in that framework.

 

They don't need to sell the loan.  They didn't offer me the loan with terms they are willing to put on their balance sheet.  They didn't offer anything at all!

 

There is a lot of room between the lowest quoted mortgage rate (underwritten to Fannie/Freddie) and the hard money usurious rates.  They don't even try to gather any of that spread.

 

Why not offer me a hard money rate or something slightly less?  It doesn't hurt to ask.

 

It doesn't even have to be a long fixed rate term -- everything is negotiable.

 

Big bank branches are parts of a bulk loan processing machine. They will lend when your loan fits a particular template/checklist. The idea is mainly to sell your loan and not to keep it on the books even if they can make a higher profit by  making you a "non-standard" loan and keep it on their books.

 

Did you ever have any luck ordering a gourmet burger from McDonalds? Even if you said you would like to pay 10x the regular cheese burger price for it? These banks are somewhat similar to that. Even if the branch managers and loan officers are smart enough to understand that you are offering them a better deal, they are most likely institutionally constrained  to limit their "rationality".

 

You would most likely need to go to specialized local lenders to get your gourmet burger order filled.

 

Or a community bank where executives are making the lending decisions.  For larger banks yes, they are looking for standard loans in a wholesale fashion.

 

People like to slam community banks and discuss a world where there are just a few giants, but imagine trying to live in that world where you aren't a perfect standard fit?

[merkhet]

Or a community bank where executives are making the lending decisions.  For larger banks yes, they are looking for standard loans in a wholesale fashion.

 

People like to slam community banks and discuss a world where there are just a few giants, but imagine trying to live in that world where you aren't a perfect standard fit?

 

Interesting. So are banks basically like newspapers in a way? You'll have a few stalwart giants and a smattering of local regional players?

[oddballstocks]

Or a community bank where executives are making the lending decisions.  For larger banks yes, they are looking for standard loans in a wholesale fashion.

 

People like to slam community banks and discuss a world where there are just a few giants, but imagine trying to live in that world where you aren't a perfect standard fit?

 

Interesting. So are banks basically like newspapers in a way? You'll have a few stalwart giants and a smattering of local regional players?

 

That's a pretty good description.  The large newspapers are general information that applies to anyone.  Then you have smaller regional papers and niche papers that apply to very small groups of people.

 

Community banks that are successful find local niches and figure out ways to serve them. 

[rpadebet]

If all else fails, maybe the board members can get creative here by pooling resources and lending Eric some mortgage money in exchange for a standard type interest rate + TARP type warrants on his portfolio....  8)

[Liberty]

If all else fails, maybe the board members can get creative here by pooling resources and lending Eric some mortgage money in exchange for a standard type interest rate + TARP type warrants on his portfolio....  8)

 

:o

 

I'd NEVER want to be on the other side of a deal that Eric does.

[JBird]

http://www.telegraph.co.uk/finance/economics/11137589/Ben-Bernanke-I-tried-to-remortgage-but-was-turned-down.html

[ERICOPOLY]

http://www.telegraph.co.uk/finance/economics/11137589/Ben-Bernanke-I-tried-to-remortgage-but-was-turned-down.html

 

That's too funny.

 

He should have refinanced before the W2s stopped showing up.  That's his tactical mistake.

 

Even though he'll now have speaking engagements, it's "self-employed".  They'll assign it zero value until he's been doing it for two full years.  Haha! 

[james22]

Haha.  Not to be laughing at Eric's mortgage headaches' but can you'll imagine Eric trying to explain his options / embedded leverage strategies to the typical branch employee?  "what don't you don't get? The BAC long is completely hedged by the puts and the result is embedded non-recourse leverage which also generates a tax-loss while letting me maintain my exposure on the long side.  Now give me my damn loan!!"  the poor employee probably doesn't understand half the words Eric is saying..

 

Funny!

[JBird]

http://online.wsj.com/articles/mortgage-lenders-bend-the-rules-for-some-wealthy-clients-1413907113?mod=WSJ_hpp_MIDDLE_Video_second

[Liberty]

So Eric, are you going to sell your Model S and buy a P85D with Autopilot?

[justinbaka]

Eric, was just reading through some of your posts and was just amazed at the clarity of your thought process in regards to investment. It's simple and uncluttered (I thought your thought process in regards to Fairfax was especially simple and logical, yet I wouldn't think about it that way until you mentioned it).

 

Since its "Ask Eric Anything", was just wondering why aren't you choosing to be a professional investor since you seemed to enjoy researching and reading? (you do have 6000 posts in this Board alone) In fact, you are proposing to do the opposite in delegating the investing decisions to other investment managers.

[compounding]

So Eric, are you going to sell your Model S and buy a P85D with Autopilot?

 

Due to recent announcements by Eric on the forum I expect him to trade it in for a Chevy Malibu before the end of 2014  :)

[muscleman]

Eric, what were your most important bets that provided such spectacular growth of your net worth?

[ERICOPOLY]

They had a cool half-time gimmick at the UCLA basketball games where a college kid was able to try to sink a half-court shot for a semester of free tuition.  Eventually, somebody makes that shot and gets the tuition.  He isn't ready to play on the team though.

 

[vinod1]

Eric.

 

You once wrote "Options look really risky if you shoot for the moon, risk of losing everything, but if you think of buying them with very long term expirations and operate with the mindset of retrieving a good portion of your options premium after a sizeable rally, then the risk profile is considerably different."

 

Could you please elaborate on what you mean by "operate with the mindset of retrieving a good portion of your options premium after a sizeable rally"?

 

How do you retrieve a portion premium? Sell higher strike calls on the same stock?

 

Thanks

 

Vinod

 

[ERICOPOLY]

Eric.

 

You once wrote "Options look really risky if you shoot for the moon, risk of losing everything, but if you think of buying them with very long term expirations and operate with the mindset of retrieving a good portion of your options premium after a sizeable rally, then the risk profile is considerably different."

 

Could you please elaborate on what you mean by "operate with the mindset of retrieving a good portion of your options premium after a sizeable rally"?

 

How do you retrieve a portion premium? Sell higher strike calls on the same stock?

 

Thanks

 

Vinod

 

I believe I was reflecting on what I'd seen over the prior few years.  It seemed crazy to be spending $3 on an at-the-money WFC call option when the stock was trading at $10.  It felt like that $3 decaying would just eat too far into the gains.  However once the crisis let up a bit, the stock was soon trading at $20 and you could write a $25 strike call for $3.  So even though the implied volatility had dropped a whole lot after stock price recovery, the price being so much higher meant you could still grab back that $3 that one presumed would be lost to decay.

 

The same pattern emerged with BAC.  It was $2 for the at-the-money LEAP when the stock was at $5, but it was also $2 once again for the $10 strike when the stock passed $8.50 a few months later on the road towards $10. 

 

The risk is still there that the rally will never happen... but this kind of approach reduces the decay risk if you are going into expensive at-the-money options during times of extreme fear (high volatility).  There tend to be violent rallies.  Perhaps this is why the options are priced so high during times of distress -- the buyers know that if things turn the right way the stock prices will be substantially higher and thus writing covered calls down the road will be a way to mitigate the extremely high prices paid for the initial set of calls.

 

Of course, you then have to wait for the written calls to mature, and by that time the stock may have sagged again.  Another opportunity to buy more at-the-money calls and repeat the cycle. 

 

This is not meant to be an endorsement or a suggesting that it will always work out better than continuing to hold or just outright selling of the initial set of options.  It was merely me thinking out loud about how I've noticed that during every bout of extreme fear, the options in absolute dollar terms were not much different during the crisis than after the rally. 

 

Or if you instead exercised the $5 BAC calls that you paid $2 for, you could have just continued to hold those common shares while buying new $5 strike puts.  And thus (in perfect hindsight) you never in the end really paid that much for the leverage because the $5 puts were cheap in 2014.  Today, you can roll those $5 puts again out to 2017.  By then, the stock may be over $20 and it will get very very easy to recover that initial $2 that you spent on your first at-the-money BAC options in late 2011.  You would recover that initial $2 by selling covered calls (with stock then over $20) -- probably the $25 strike would be over $2.

 

 

[Liberty]

They had a cool half-time gimmick at the UCLA basketball games where a college kid was able to try to sink a half-court shot for a semester of free tuition.  Eventually, somebody makes that shot and gets the tuition.  He isn't ready to play on the team though.

 

Modesty is a nice quality. But you've been playing the game for 10+ years getting Michael Jordan level stats. Not exactly comparable to a single lucky shot :)

[vinod1]

Eric.

 

You once wrote "Options look really risky if you shoot for the moon, risk of losing everything, but if you think of buying them with very long term expirations and operate with the mindset of retrieving a good portion of your options premium after a sizeable rally, then the risk profile is considerably different."

 

Could you please elaborate on what you mean by "operate with the mindset of retrieving a good portion of your options premium after a sizeable rally"?

 

How do you retrieve a portion premium? Sell higher strike calls on the same stock?

 

Thanks

 

Vinod

 

I believe I was reflecting on what I'd seen over the prior few years.  It seemed crazy to be spending $3 on an at-the-money WFC call option when the stock was trading at $10.  It felt like that $3 decaying would just eat too far into the gains.  However once the crisis let up a bit, the stock was soon trading at $20 and you could write a $25 strike call for $3.  So even though the implied volatility had dropped a whole lot after stock price recovery, the price being so much higher meant you could still grab back that $3 that one presumed would be lost to decay.

 

The same pattern emerged with BAC.  It was $2 for the at-the-money LEAP when the stock was at $5, but it was also $2 once again for the $10 strike when the stock passed $8.50 a few months later on the road towards $10. 

 

The risk is still there that the rally will never happen... but this kind of approach reduces the decay risk if you are going into expensive at-the-money options during times of extreme fear (high volatility).  There tend to be violent rallies.  Perhaps this is why the options are priced so high during times of distress -- the buyers know that if things turn the right way the stock prices will be substantially higher and thus writing covered calls down the road will be a way to mitigate the extremely high prices paid for the initial set of calls.

 

Of course, you then have to wait for the written calls to mature, and by that time the stock may have sagged again.  Another opportunity to buy more at-the-money calls and repeat the cycle. 

 

This is not meant to be an endorsement or a suggesting that it will always work out better than continuing to hold or just outright selling of the initial set of options.  It was merely me thinking out loud about how I've noticed that during every bout of extreme fear, the options in absolute dollar terms were not much different during the crisis than after the rally. 

 

Or if you instead exercised the $5 BAC calls that you paid $2 for, you could have just continued to hold those common shares while buying new $5 strike puts.  And thus (in perfect hindsight) you never in the end really paid that much for the leverage because the $5 puts were cheap in 2014.  Today, you can roll those $5 puts again out to 2017.  By then, the stock may be over $20 and it will get very very easy to recover that initial $2 that you spent on your first at-the-money BAC options in late 2011.  You would recover that initial $2 by selling covered calls (with stock then over $20) -- probably the $25 strike would be over $2.

 

Thanks for the detailed explanation and example. This is very helpful.

 

Vinod

[ERICOPOLY]

They had a cool half-time gimmick at the UCLA basketball games where a college kid was able to try to sink a half-court shot for a semester of free tuition.  Eventually, somebody makes that shot and gets the tuition.  He isn't ready to play on the team though.

 

Modesty is a nice quality. But you've been playing the game for 10+ years getting Michael Jordan level stats. Not exactly comparable to a single lucky shot :)

 

I need an Asha Bhosle in the background if I'm to keep on the hit parade.  The board stopped giving away ideas on a silver platter.  I'm like the Milli Vanilli of investment talent.

[Liberty]

They had a cool half-time gimmick at the UCLA basketball games where a college kid was able to try to sink a half-court shot for a semester of free tuition.  Eventually, somebody makes that shot and gets the tuition.  He isn't ready to play on the team though.

 

Modesty is a nice quality. But you've been playing the game for 10+ years getting Michael Jordan level stats. Not exactly comparable to a single lucky shot :)

 

I need an Asha Bhosle in the background if I'm to keep on the hit parade.  The board stopped giving away ideas on a silver platter.  I'm like the Milli Vanilli of investment talent.

 

Well, from what I can tell, for you to press the big green 'GO' button on your desk (and not just park capital in something that would merely beat the market by a handful of percents, which would be underachieving for you), you want a massive no-brainer. These don't come around every year or even every other year..

 

Capital allocation isn't like sports. You get better with age. I'm sure that at some point in the future there will be another BAC or ORH/FFH that will roll around, or you'll smell another quick MBIA settlement, and you won't be able to stay away from the table ;)