On October 14, 2011, The Norris Group returned with its award-winning event I Survived Real Estate. An expert line-up of industry specialists joined Bruce Norris to discuss current industry regulation, head-scratching legislation, and the opportunities emerging for savvy real estate professionals. 100% of the proceeds support the Orange County Affiliate of Susan G. Komen for the Cure. This event would not have been possible without the generous help of the following platinum partners: ForeclosureRadar and Sean O’Toole, Housing Wire, the San Diego Creative Real Estate Investors Association and President Bill Tan, Investors Workshops with President Shawn Watkins and Angel Bronsgeest, Invest Club for Women and Iris Veneracion and Bobbie Alexander, San Jose Real Estate Investors Association and Geraldine Berry, Real Wealth Networks, Frye Wyles, MVT Productions, and White House Catering. The event video can be found on isurvived2011.com.
Bruce told a personal story to illustrate what America is about. He was married when he was 17, and he did not catch on to work very well at the time. He was fired 5 times very quickly because he did not know how to disagree with an owner. The first time he came home with cash, Marsha was really happy, but after that she knew it was severance pay. When they were 21, they had a chance to buy a home in Mira Loma, and he had rectified his problems with working. They bought a house, and they did not know what they were doing at the time. The toilets flushed the wrong way, the windows did not work. The Sunday morning they fixed Sunday dinner, they had a swamp cooler that coughed dirt all over their dinner when they started it up, so they had to eat out. However, the next day Bruce got to mow his own grass for the first time. This was the first day he felt like a man. This is what ownership meant to him; a transformation. He does not want to see our country lose this.
Bruce had the opportunity to talk to Rafael Bostick while he was in Washington, someone he really like but did not like his statement, “There’s a notion that being housed well is synonymous with being a homeowner. This narrative has to change.” Bruce does not want this to ever change. He wants investors to get financing, but we should not buy all the houses by any means. We should be allowed to assist to get things back to a normal market. Sheila Bair also stated, “Clearly there’s a strong correlation between the amount of skin in a game a borrower puts up front and how the loan performs.” It’s only common sense. Did you put 20% down, you’re committed to the house, and you walk away from the house which you’re going to lose a lot of money up front. Based on it being common sense, we now have a challenge for laws that are in process for 20% down being mandatory for the best rates. However, what if this thesis is wrong? What if 20% down does not get you a better record for avoiding foreclosure?
Bruce showed a 25 year chart during the presentation that showed foreclosure rates. He said if you start at 1986, we had a boom in real estate prices from ’86-’90, then we had a downturn, the worst downturn we ever had. You cannot distinguish a foreclosure rate of a VA nothing-down loan, an FHA 3% loan, and a 20% Fannie Mae loan. The lowest one historically happens to be a VA nothing-down loan. If you go all the way back to the 1950s, that is highest performing loan. One of the reasons you know they performed is by looking at the national price in gold and seeing that we never had a price decline nationally. Whatever we were doing was smart policy until the early 2000s. Whatever we did after that is what we should correct. Whatever we were doing before that is what we should go back to. However, one of the things that happens is we’re not in the mood just to fix, we have to revamp. Sean O’Toole also made his own chart showing how prices escalated beyond where they should be. First of all, we had interest rate drops. When people could not qualify, we gave them interest-only loans, then pay option loans, and then stated income loans. We finally figured out that we should not let people tell us what they make to get a loan.
One of the other things Bruce talked about regarding investors is it is hard to get investor financing for unknown reasons, but this is one of the programs The Norris Group offers. Bruce said they funded $15 million of a loan at 9.9% interest at a time when every loan was current. With the interest rate at 9.9%, there is a possibility that people were afraid to loan to the wrong group of people and that there is a connection to investor/speculator. The people who attended I Survived Real Estate were investors who wanted to buy something and keep it, and this is The Norris Group’s qualifying criteria for that success. They look at credit, but they do not make it the determining factor. The after-repaired market value must be supported by comps, and payment must be supported by comparable rents. We’re making rational decisions; we’re not loaning somebody with a payment of $1200 when the rents are $800. It is going to be at least the opposite of this. People have money down, and investors expect they’re going to have cash or skin in the game. To do this, they have to have cash reserves. If you put together a national program like that, you have the best securitized paper in America.
The effects of the current lending policies on investors are they limit the ability of full-time professional investors from assisting in the housing recovery. The Norris Group conducted a survey that showed that people would buy 1,000s of houses if they had the financing. The effects of the current lending policies also prevent the beginning investor from creating wealth for their families. Bruce has a feeling that social security and Medicare might be different in the future. One of the ways that it might not matter is if we can create our own wealth, and this would be a way to do it. The lending policies also prevent 1031 exchanges where financing is involved. You already have 12 loans, properties in another state, and you want to come back to California, you cannot do it. This is one thing that encourages bulk sales to the same people who caused the problem in the first place. One of the things being considered for current loans is to sell a lot of houses at a time to hedge funds. Bruce hopes we don’t do this because he does not think this solves the problem and the local investor would do a better job.
Temporary solutions increase the number of loans available to qualified investors to an unlimited number. We just need a window of about 3 years. Back in the 90s, FHA had a loan program called 203k where you could get the purchase and the repairs built into a loan. Everything that is being suggested used to be there. We already know how to solve things; we just have to go back to programs that worked. Allow simple assumptions of any Fannie, Freddie, or FHA loan for the next three years. A simple assumption originally was you wrote a check for a very small assumption fee without paperwork. In the 1980s, we had a ridiculous interest rate of 17%. However, you did not have any price decline because 60% of the transactions happened because no one needed a new loan. You were able to take financing from the past and bring it forward. This would be very smart to remember that this works. We need to allow equal access to all government-owned inventories for investors and owner occupants alike, and if you have a lot of rentals make reasonable cash reserves.
Cal Poly Pomona and Michael Carney put together a study, and one of the most unique things about the study is that they keep on appraising the same property every 6 months, something they have done for decades. It’s not like a median price or a Case-Shiller Index, it’s actually what the certain address was worth over the course of decades every six months. What Bruce did was he took Lancaster and Palmdale, two properties a piece and he took a look at the square footage they went for in 1990 when they were brand new. They appraised for $83 a foot, and now those same properties appraise for $74. You lost 11% in real dollar terms over 20 years. Now, if you convert that to the payment that is necessary; your payment in 1990 would have reflected a 10% interest rate, and today it is 4%. You have an 11% price discount and a 60% interest discount, so you’re making more money in that area in 2011 than you were in 1990. If you put that all together, you’re buying that house at a 70% monthly discount. This brings up the fact that maybe we need a nothing-down loan program.
One of the problems is some of the ideas are very politically difficult to sell. Common sense sometimes does not sell politically, but we do have a very large group of people who do not own a home or have a down payment only because if you look at a historical chart, you can let them in at a specific payment rate and they would still be okay. If they fail to make the payment and someone else can pick it up without really qualifying but they just write a check and make it current, this would solve 99% of the foreclosures. If you go to a trustee sale eventually just for this new loan program, you need to let the opening bid be the late payment. If that happened, everyone in the room at I Survived Real Estate would buy the remaining properties and take over the loan subject. You would have a nothing-down loan program that would feed huge volumes to get the owner occupancy rate. It is legit and not phony; you do not need to create anything that is bad paper or wink at a certain foreclosures. However, we can think out of the box or go back to where we were originally and say we already know how to solve the problem. We just need to get the politics out of the way and let us handle it.
The first person on the panel to come up was Doug Duncan, the Chief Economist and vice-president of Fannie Mae. He is responsible for managing Fannie Mae’s strategy division, economics, and mortgage-market analysis groups. Doug provides all economic housing and mortgage market forecasts and analyses. He serves as the company’s sod leader and spokesperson on economic and mortgage market issues.
The second person was Sean O’Toole. Prior to launching Foreclosure Radar, Sean successfully purchased and flipped more than 150 residential and commercial foreclosures. Leveraging 15 years in the software industry, Sean used technology as a key competitive advantage to build his successful real estate investor track record. Now he has passed those advantages on in ForeclosureRadar.com.
The next panelist was Eric Janszen. Sean O’Toole spent 15 years in high tech before getting into foreclosures, and he was always looking for people he thought had good insights. Eric wrote articles for a newsletter called “Always On.” Sean would wait for this newsletter to come because he thought the articles were so insightful and important. Eric spent 20 years in the high technology industry, did two stints in software startups as CEO, then moved on into venture capital. Foreclosure Radar would not have existed without him as he recommended getting out of the stock market in 1999, which Sean did. Eric recommended buying gold in 2002, which was close to what he did. He figured out that there was a housing bubble going on, knowledge which benefited Sean when he was flipping foreclosures. When Sean did not even know Bruce yet, Eric was the one who advised him to get out of the housing market in 2005, which he did. This was really the start of Foreclosure Radar. In September 2008, Eric told Sean to get out of the real estate market, something which he also told thousands of people who followed him at his website iTulip, which he started in the ‘90s to warn people about the .com bubble and brought back to warn people about the housing bubble.
Bruce’s goal was to talk about the economy that he watches and the world that he watches it in. He now has the habit of staying up until 11:00 or 12:00 at night just watching to see if there is a Greek default or what is going on over in Europe because there seems to be a correlation. Doug Duncan explained how his CEO Mike Williams had him lead off one of his quarterly meetings with Fannie Mae with an update about the economy. One of the opening remarks he made was you could look at it as the frat house party side effects. 11 million Greeks party into the night and bring down the global economy, targeting the 25-35 year old bracket. Doug does believe one of the primary risks that face us today is a Greek default. The current forecast is on Fannie Mae’s website on the 15th of every month, and here people can take a look at their opinions on the economy. Fannie Mae sees growth in the third quarter as being decent, possibly upwards of 2 ½%, but then receding back to under 2% through the end of 2012.
One thing they believe is certain is Greece will default. The question is whether they will default in an orderly manner or not. Will there be a plan for managing the losses and how the losses will be distributed. If it is orderly so that the banking system is recapitalized while that default takes place, the likelihood of putting the U.S. into a serious recession is low. If it is disorderly, then this is one of the primary risks Fannie Mae sees facing our own economy. Europe is our biggest trading partner. China is the second biggest partner, but they are Europe’s biggest trading partner. If there is a disorderly default and Europe goes into recession, the export business will recede, which is one of the things that has been keeping us growing. This will likely lead to a recession. The question is if we go into a recession, do we have at our disposal the normal monetary tools that we usually have. Doug’s personal view is that from a monetary policy perspective the Fed has exhausted the tools that they have. They made an explicit statement that would keep rates low through mid-2013, which is highly unusual. The general public understands this as shown in their surveys for consumers last month subject to Fed announcement. The percentage of people who expect rates to rise fell 12 percentage points. This shows the public is paying attention.
If you don’t have a monetary policy to help out a recession, then you would use fiscal policy. The survey consumers give information here as well. Fannie Mae gives 1,000 phone calls a month for 16 months. Last July they were making their phone calls while the debate debt ceiling was taking place. The percentage of people who said the economy was going the wrong way rose 6 full percentage points during that month. It culminated at the end of July, so in August they pulled in the first three months wondering whether or not the full effect of that debate had taken place. The percentage of people thinking it was going the wrong direction rose another 8%, so at that point 78% of the people in the country believe it is going the wrong way. This is a function of fiscal policy decision-making in Washington. They’re watching Washington’s actions with one eye, and they’re watching Europe melt down with the other eye and saying if they don’t act responsibly in this face, then that is our destiny. 78% of the people think we are going in the wrong direction.
Sometimes it is a little hard to take the end result that may be inevitable at some point seriously because we have a credit downgrade and an interest rate decline. You do not connect these two dots, but you think that we just had our rate lowered so now interest rates are going to be more expensive. This would be the first time in history the headline of an article has read “Interest Rates Back Over 3%.” When fiscal tools are used, Congress has recently been thinking in short term application. The stimulus bill was intended to be a boost to the economy in the short run, which would then run on its own. Fannie Mae’s forecast, however, would reflect that they do not believe this. Their expectations for growth were not actually stimulated by the activity. They take their signals from what happened in the housing market when there was a temporary tax credit. The advice to the executives of the company was that there would be a temporary price rise, but the market would take it all back and prices would continue to fall subsequent to that.
An $8,000 rebate was equivalent to a nothing-down loan most of the time on prices. It is not known how well this loan portfolio performed, but it would be interesting to know since it is in essence a nothing-down program without spending the $8 grand. It was pointed out to most of the bankers who had made loans under this program and held it in portfolio that the loan-to-value ratio they believed they had at the time they made the loan was higher after prices receded again, so they had more risk in their portfolio than they thought they did.
To find out more, tune in next week for I Survived Real Estate 2011, part 3. The Norris Group would like to thank their gold sponsors for the event: Adrenaline Athletics, Coldwell Banker Pioneer Real Estate, Conaway and Conaway, Delmae Properties, Elite Auctions, Inland Empire Investors Forum, Inland Valley Association of Realtors, Keller Williams of Corona, Keystone CPA, Kucan & Clark Partners, LLC, Las Brisas Escrow, Leivas Associates, Mike Cantu, Northern California Real Estate Investors Association, Northern San Diego Real Estate Investors Association, Pacific Sunrise Mortgage, Personal Real Estate Magazine, Raven Paul and Company, Realty 411 Magazine, Rick and LeaAnne Rossiter, Southwest Riverside County Board of Realtors, Starz Photography, uDirect IRA, Wilson Investment Properties, Tony Alvarez, Tri-Emerald Financial Group, and Westin South Coast Plaza. Visit isurvived2011.com for more details.
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