The Black Swan: The Impact of the Highly Improbable

Nassim Nicholas Taleb (essayist and mathematical trader) writes in a sometimes stilted and perhaps condescending fashion - but his book is entertaining, and for the most part interesting.  He truly rakes over the coals the experts  on Wall Street who make predictions based on historical data (perhaps this could include the buying and selling of mortgage backed securities?) because they use trends, and ignore the improbable.

His outlook is to first acknowledge the black swan; and then employ it, to his advantage.  His belief is that we neither make huge gains nor have huge losses through the historical, only through the improbable, or unthinkable.

The name "The Black Swan . . ." is taken from the fact that for years the world knew there were NO black swans; using the metaphor "black swan" meant nonexistent.  Then Black Swans  were discovered in Australia. 

Taleb's black swan is " . . .  a large-impact, hard-to-predict, and rare event beyond the realm of normal expectations."  September 11, 2001 is referred to as a "black swan".

Real Estate investors know that now is the perfect time to buy real estate with the foreclosure market being what it is, but it is a dreadful time to get a loan for real estate.  As a large-impact, unpredicted and rare event, it seems to qualify as a black swan.  So, if we acknowledge it, how to use it?

Borrowers are certainly being given every opportunity to get refinanced on loans in default in ways that no one would have ever thought possible - the FHA Secure program will allow a refinance to people ONLY IN DEFAULT and allow them to keep the second mortgage they have now.  Lenders are developing programs that will allow a cltv of 125%; refinancing what was an 80% first mortgage up to 100% value and allowing the second to stay, increasing the loan to 120% of the value of the property.  I wouldn't want to owe 25% more than my house was worth, but it beats foreclosure.

For real estate investors (and I'm not recommending speculation here . . . take note) there are properties that were manipulated by developers and builders that could present a powerful black swan advantage in the price they're getting now, and the equity they afford.  I've seen condos in Atlanta that were listed for $1,000,000 sell for $250,000 in bank sales in the last month.  They're a bargain at $250K even if the market takes a couple of years to recover.

This is the time to think outside the box - and stay on the lookout for the black swan.