A Yen for a Mortgage
By John Mauldin | May 03, 2014

For some time I have been saying that I was going to close the mortgage on my new apartment and then hedge it in yen. I promised to tell you the story, including what type of loan I got and how I am doing the hedge. This week I was finally able to pull the trigger. This topic will also let us re-examine why I think the Japanese yen is a screaming short. I am going to make this a shorter letter, as Amsterdam is calling, and it is a beautiful day. This is not a big think piece, but I think many of you will find it interesting. It outlines how I put my economic thinking into actual practice, and names names, if you will, of those who helped me do it.

A little background might be in order for those who want to know about the house. Others might skip to the next heading, An ARM and a Leg. I bought my last home in 1991 and sold it around 1998. I bought during the savings and loan crisis, which gave us the Resolution Trust Corporation, which sold me my hew home. I paid about 35% of the original asking price only two years earlier, at the high-water mark, so I got a good deal. (Which was partially offset by the fact that I had to bring a check to the closing from the home I sold to get the new one.) Homes in some parts of Texas were literally being auctioned on the courthouse steps and paid for with credit cards.

For that home, I actually offered $50,000 less than several other offers on the table, but I attached a large nonrefundable cashier’s check, as a deposit, to the offer, while other bidders wanted the harried RTC clerk to make some much-needed repairs (the pool was green, fire ants had chewed through wiring, there had been flooding, etc.). But he had a monster stack of homes on his desk to sell, and my offer involved the least work, so he simply took it. I didn’t make all that much when I sold the home seven years later, by the way, but I did OK.

Rental properties in Texas at that time and up until recently have been good deals, in my opinion. For me, the cost of renting was much lower than the total cost of buying a home. About six years ago I moved to downtown Dallas after 40 years on the Fort Worth side of the metroplex. I moved first into a high-rise (with some of the kids) and then later rented a larger home in Highland Park during the Great Recession, when larger homes simply couldn’t find buyers. It was stunningly cheap for the value. I was quite happy with my long-term set-up, but in January the owner called from California and offered to let me out of my lease if I would move in 45 days so he could sell the home in the spring. The market had finally come back, and homes in the “Park Cities” were selling within a few weeks of going on the market.

I was not really interesting in moving, but I had been to an apartment that a good friend of mine (David Tice of Prudent Bear fame) had renovated, in what is called the Uptown area of Dallas. He bought two apartments on the 22nd floor of a high rise, basically taking the whole south side, then knocked down interior walls and made one large, open apartment He really did it quite nicely. I fell in love with his place, which is rather unusual for me, as I have been in fabulous homes all over the world; and while I admired many of them, none had ever “spoken” to me. But the views of downtown Dallas and the surrounding area just seemed so full of energy to me; and as a writer, I need to feel the energy. It recharges me. (I know, some people want beaches or mountains or a cave, and I have written this letter from many corners of the planet, but I do like a place with energy.)

So I called David’s realtor. Amazingly, two adjoining apartments were just coming on the market. They were basically apartments that had been bought on spec during the crisis, and the market had now come back enough that the owners were ready to sell. One of the apartments had never been lived in or rented. They were the two three-bedroom apartments on the east side of the building, but they had the downtown views as well as northern ones.

Dallas has plenty of high rises, but oddly there are very few larger apartments except for penthouses. And the penthouses command a LARGE premium for what is still just basically floor space. I checked all the local similar offerings to get an idea of relative value, and I again put in a below-market offer for the two apartments. After a lot of negotiating by my realtor, Nancy Guerriero, my offer was accepted. Then the hard part began, and that was getting a mortgage. Because I was going to renovate and because there was a tenant in one of the apartments, I could not get anything like a traditional mortgage. My mortgage broker, Ron Schulz, must have shopped several dozen banks. Basically, banks don’t like high rises and homeowners’ associations, as their local experience has not been good. Without going into details, I had to get three different loans to do the deal, and finally got help from a local banker, Joe Goyne, president of Pegasus Bank. Joe is a throwback to the old personal bankers we used to have here in Texas.

We started on the design almost as soon as I committed to the place. I was lucky in that my niece, Jen Mauldin, had trained with one of the largest architectural design firms in the country and done major design projects all over the world (the estates of Abu Dhabi princes, commercial developments in Macau, high-roller suites in Vegas, Ritz-Carltons, etc., plus lots of very nice homes). She had gone out on her own and was available. We set budgets and timelines. (Cue laughing from all my friends. They were right to laugh.) The planned 120 days of construction stretched into 180+ days – and forget about the budgets. Then there was the shock when it developed that new mortgage rules basically meant that I had to go to a 70% loan instead of the 80% I had been told I would get.

Plus, I was a rookie and did not check a “small” detail. I asked if I could get my construction costs rolled into the new loan. The answer was yes, but what they meant was that I could get the construction loans rolled in but not my out-of-pocket costs, because Texas has a law that you cannot get money

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