July 5 , 2007

FRAUD, GREED, DEBT AND MANGOES.................
South Florida Specialties

I am proud to report that my nearly destroyed mango tree, uprooted by Hurricanes Katrina and Wilma and then replanted and staked with rebar, has produced its first post hurricanes crop of beautiful, succulent fruit. It took two years of consistent and careful nurturing. A magnificent tree was saved and the sight of the ripening, purplish delicacies hanging from its branches inspires me every time I look out my kitchen window. The canopy of brilliant orange Poinciana flowers now floating above most of my yard adds to the effect. …. Priceless. Right there in my own yard, a graphic example of the theme I stress to my clients day after day…. A disciplined, patient approach will produce desired results. Looking for short cuts and immediate gratification will not. Which leads me to…

FRAUD IN REAL ESTATE

The rampant fraud and greed that contributed to the recent real estate bubble are beginning to impact the portfolios and financial plans of many investors throughout our nation. The first indications surfaced a couple of months ago, as economists began to express concerns about an increasingly troubled sub-prime mortgage market. As the variable rates on these mortgages (for borrowers with sub-par credit ratings) began rising, many of the over-extended borrowers began defaulting on their loans (gee, what a surprise!). Alarmed politicians began to point fingers at greedy bankers and mortgage brokers for being too loose in their lending standards and for encouraging perspective home purchasers to bite off more than they could chew. There is nothing as potentially dangerous to a family’s financial health as taking on too much debt.
              
Then the taint hit Wall Street right across the face, when it was reported that two Bear Sterns hedge funds, invested in sub-prime mortgages, were in deep trouble. They had lured many high net worth investors with their potential for superior returns, despite their high cost structure In this case, the managers had leveraged their bets by borrowing close to $10 billion. So when the market turned against the sub-prime market, things began to unravel. Bear Stearns swooped in with financing to stave off a bankruptcy by the two hedge funds, but the damage had already been done. The Wall Street Journal reported on Saturday that investors in at least one of the funds are almost certain to lose all of their money.

FRAUD IN SOUTH FLORIDA REAL ESTATE

Local newspapers reported this weekend that fraud is also found throughout the South Florida Real estate market. The Miami Herald noted that the taint stretches across the entire industry with unscrupulous players colluding at every level; Appraisers inflating estimates, Real Estate Brokers pumping up sales prices and mortgage brokers lending too easily at inflated prices. As a result, local investors and folks with poor credit are being left with huge losses or without their homes

BOTTOM LINE-SOME PERSPECTIVE

I’m not here to jump all over the Real Estate industry or investors’ inclinations to gamble and self-destruct. It was only a few years ago that the stock markets crashed and incidents of fraudulent activity tainted the entire Wall Street industry. It took a few painful years to clean things up, and many firms and individuals paid a very high price.

It is an entrenched, predictable pattern. When things are going well, investors get exuberant, and shrewd promoters and bad guys take advantage---that’s consistent in every industry. Some have become dissatisfied or impatient with their prudent, long-term investment plans even after earning double-digit returns over the past few years. These investors may find their entire financial future and retirement plans derailed due to impatience, debt and greed. It happens every day, every year and in every decade that I have practiced in--- and it never gets easier for me to watch it unfold.

The bottom line is that for financial success to occur, investors must stick with their plans; slow and steady, reasonable risk and diversified portfolios.

There is no way around it. As every backyard gardener knows, it is the patient, step-by-step approach that will reap the best rewards.

Austin A. Frye, MBA, JD, CFP®

If you know of someone who may enjoy reading this newsletter, click here.
Don't keep us a secret!

Securities and advisory services offered through LPL Financial-- Member FINRA/SIPC