Chief Executive Officer the Inland Valley Association of Realtors
President of IVAR
Government Affairs Director for IVAR
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This week Bruce Norris is joined by three guests. The first guest is Mark Dowling, who has 20 years of real estate experience in community development. Mark serves as the Chief Executive Officer for the non-profit Inland Valley Association of Realtors, also known as IVAR. He was previously the vice president and partner of Del Oro Properties, a full-service real estate development company focusing on info housing. Mark also served for more than six years on the County of San Bernardino Planning Commission by serving as chairman. In 2010 he was part of the American Planning Association. The second guest, Steve Manos, majored in Business Economics at UCLA. He went into the real estate field in 1996. He became broker/owner in 2001, founder of Prima Vista Realtors, Cal Trust Mortgage, and Elicit Escrow. He has served over 1,000 transactions during the course of his career. Steve is currently the elected president of the Inland Valley Association of Realtors. He also serves as the director for the California Association of Realtors, and in 2011 he was director for the National Association of Realtors. The third guest, Paul Herrera, is the government affairs director for IVAR. He is a former reporter covering business in Naples Florida and at the Press Enterprise in Riverside as well as a former communications director in San Bernardino County Economic Development Agency.
Mark is involved in real estate on a regular basis. He is not involved so much in the transaction side, but he does talk to the agents who are. IVAR has about 4,000 realtor and real estate professional members. They are the largest association in this region, both in Riverside and San Bernardino County. Part of their job is to stay up on real estate issues and trends in order to help their members. Bruce wondered what the feedback he is hearing from agents in the field is as far as inventory goes. Mark said it is a challenge as there is a lack of inventory and they are seeing inventories now that are about six weeks total inventory available right now. This is not healthy at all as they need at least 3-5 months for a healthy market. This is a challenge for their agents. Bruce wondered what the makeup of the inventory we have would be, whether it is for sale by owners or predominantly short sales. Mark replied it is mostly the latter. Roughly 75% of the overall inventory is in the short sale market, no longer dominated by the REO markets that we used to see. We are also starting to see a lot of investor resales that would be considered standard sales. This includes people who have equity and people who have purchased homes that were in distress, put money into them, then decided to put them back on the market. It was all part of the recovery process.
Something interesting that has really changed has been very large companies with large amounts of money coming in to the marketplace with the intention of buying and holding. You have about half a dozen companies with between $100 million and $1 billion buying everything in sight. Mike Novak-Smith is one of the biggest REO agents in the country and had a recent listing that had 94 offers the first day. The winning bidder happened to be one of the aforementioned companies. They outbid every occupant owner and every other real estate investor; so price does not seem to be a big deal, it is just getting inventory that is. This is a new development. With an occupant buyer trying to buy in this marketplace in anything targeted by those companies or other investors, it would seem it would be a challenge to get into escrow. Mark said the work they are putting on the street and every new homeowner he works with shows that whatever you think the market was six months to a year ago is not that way anymore. You need to adjust your thinking as there is very little inventory. Most people come in and hear what Mark says, but they need to see it for themselves. Then, after the first or second month of looking and seeing what is available for the market seeing how fast it is no longer available and how quickly the people go under contract and become believers. They then get aggressive and start talking about either pulling back on what they are looking for or expanding what they are willing to go ahead and spend to get what they want. This is what Mark has been seeing as a trend over the past.
The number of sales historically is very high right now, the last number showing that it is up 20% year-over-year in most submarkets in this region. We are up around $570,000 annual sales, which we have not had since 1999. This is a strong sales year, but it is really hard to get a good sales year to continue if you do not have anything to sell. Bruce said he would be frustrated if he were a realtor as he is a buyer who supplies his own inventory. He has noticed on the selling side that something changed 60-90 days ago where all of a sudden everybody was interested in what they had. One of the challenges they have is the appraisal issue. If you have a good product that is priced very well, it is going to get aggressively offered on. Yet maybe the evidence is not there to support an appraisal. One of the tenants of appraising is the idea of substitution. You will buy a property for a certain price; and if it can be easily substituted by another one, then you will pay more than that. However, the question is what if you cannot substitute it. All of a sudden you have an escalating market.
Bruce wondered if we have an escalating market at this point, which Mark said the numbers do seem to indicate this. The numbers year-over-year for the region were up about 6%. It is the hardest thing to deal with when you are dealing with median price since this could be skewed inventory. There could also be Facebook IPO that makes a lot of people rich and they go buy a lot of houses. Regarding price ranges, Bruce wondered if the upper price ranges are still dormant or if they are starting to react okay as well. Mark said he recently had a listing that was for a little over $700,000, and they had a dozen people visit in five days and had an offer on it in a week. It was a short sale to which the bank came back to and said the house was worth more. They wanted a higher price on it, so they relisted it at a higher price. In another week, they had a bonified offer at the bank’s asking price. There are not as many problems, and the market is tighter depending on the region and the area. Based on that example, there is a lot more money out there than people think.
Bruce said he did not really realize what was going on until the same people were bidding on everything in sight when one person is buying at a trustee sale and another is buying at 100% of value. You know they cannot have the same business file that you do, so they are going to keep the properties as rentals. What is interesting about what is going on are the ramifications and unintended consequences. For example, Bruce said he has never had somebody with a goal of spending $100 million to $1 billion in Southern California then set that inventory on the sidelines as a rental. A buyer could make a decision to sell and impact the market all by themselves, but this has never happened before. To Bruce, the unintended consequences would be having a development and not knowing what their game plan is. You would not want to get in the way of them unloading 10,000 houses. Bruce thinks there would then be less of a tendency to take risk in the future. For developers, they will probably look at all this inventory and know when it is going to show up. This is kind of a game changer.
Bruce wondered how easy it is to get a loan these days. Mark said it is extremely difficult. It is much tighter than it was before, but it is not impossible. There is a lot of dotting of the I’s and crossing of the t’s as opposed to what we used to have 5-6 years ago where you could be a little bit looser with applications and fix the mistakes later on down the line. Now the process is very rigid as far as disclosures, what you are disclosing on your application as far as being truthful and upfront about everything. This also means not omitting information and especially making sure there are no mistakes on the origination end, which is good. The qualifying standards for most people are at a healthy level, and there are a lot of people out there who might think that they don’t qualify when they actually do. Affordability is off the charts, and the capability to qualify is probably at its lowest since you have all the people who are either upside down who cannot buy something or have not made a payment in a while. It is one of those interesting markets where the payment is less than the rent, so a lot of people cannot afford it.
Bruce wondered how long lenders are forcing people that lost a home in foreclosure to wait to qualify. The answer at this point is 3 years for FHA and two for conforming. What is interesting is if it were seven years for conforming, this is going to stay on your credit. All of these things we see are overlays from lenders, but not FHA’s policy. Bruce actually interviewed FHA, and when he asked them how long he would consider loaning to somebody with a bankruptcy or foreclosure, their answer was six months. If they could stop the overlay, you would have a completely different real estate market. However, the overlays occurred because they were afraid they would have to buy the paper back.
Bruce wondered what kind of an impact REOs are making in the marketplace at this point. It is not a negative impact since there is not enough of them on the market, although the people at IVAR wish there were more on the market because the problem with dealing with so many short sales is you are dealing with two negotiation processes. One is with the seller who really doesn’t care what they sell the house for. The other one is with the bank. Quite often you have a listing that is out there on a short sale that is listed for either over or under the market value, and the secondary real number comes from the bank 3-6 months later. With an REO, you have one negotiation where you deal with the asset manager and you get a real yes or no right away. You can also close within 30-45 days. Bruce wondered if any of this new legislation is going to fix the short sale process, but this still remains to be seen. There were rumors they were supposed to respond in a certain timeframe, but this does not mean they are going to respond with a specific answer. It only says they have to respond. If you don’t know all the information, you can get a response but it will be no.
Sometimes when you look at legislation you see that they did not really think it out because Bruce does not know how many man powers the lenders have been surprised by. When you look at this legislation and the stacks of things they do, you look at it and see that somebody is eating the money because it is a lot of contacts. With one person now in charge of that file, Bruce wondered how many files they now actually have. There was one person in one of the boot camps who was one of these people. He had 1,000 files; and you have to wonder how much attentiveness you could possibly do.
Bruce said when he looks at the bills that are in place as far as trying to help protect the homeowner in foreclosure. Being in the business, Bruce said he is sometimes lost as to what somebody’s rights are and what the process is that has to be followed. The Homeowner Bill of Rights has been around for a while and is a package of legislation that Kamala Harris put together as a series of bills. They mostly dealt with making it more difficult for banks to foreclose, and a number of paperwork requirements were introduced. These were all proposal legislation, so none of it really exists at this point. It is a lot harder to foreclose now than it was before, so Bruce wondered what legislation is in place right now.
There was a statute passed to where now the lender has to call the people. There is some new contact procedures that are a part of this, but there has not been a real overhaul of the foreclosure process. A lot of it is related to judicial opinions. There is a bank settlement that forces new requirements in order to stay out of the courts next week or next month. However, the Homeowners Bill of Rights would systematically change how this process works. When the California Association of Realtors analyzed it, they realized very quickly that the legislation does more to create new legal options and lawsuits in the system, which does not protect anyone’s “homeownership interests.” It comes down to whether simple errors, simple omissions, or a lost document is the end of the chase for the foreclosure process. People who make payments do not lose control of their homes, but there is more to the foreclosure process crisis. It is simply creating new losses in the system that has stopped that pipeline from moving forward. Foreclosures are a way in which lenders are able to access security on the loan debate. It is a perfectly legal process and the way it was created.
California is a non-recourse state. When you purchase a home and get a back loan for it, you and the bank own that property. If you are unable to fulfill those obligations, the bank can take control of the property. However, they cannot come after you and chase you down for the part that you could not pay. However, this was not true in every other state, so this is a pretty generous state as far as if you are not going to make the payment; you would have very few repercussions after the fact. In New York, this is not true since there they can chase you around for a while. Those kinds of laws, the non-recourse form we have in California, opens up lending, protects consumers, and protects everyone’s interests. The alternative would be if we made it into a more confrontational process and the banks would have to fight for that asset, we turn into a judicial foreclosure and turn it into a fight all the way through. The options change, and at some point it may not make sense if you make it extraordinarily difficult for the banks to access that security. Then at some point we move to a recourse loan or non-loan, which we are responsible for the whole way through. Some lenders do not look at this mess and ask why they would do something like this, especially with the risk of a 3% down payment.
Maybe we need a 40% down payment if we are going to take that ride ever again. This is what Bruce could see some of the people who are well-intended not having enough experience to realize that no lender will want to participate if someone stops making a payment or make the risk into a rate add-on to California loans, which has happened in the past. You could see higher interest rates on loans out here in California than you would in other states.
Bruce wondered what the common foreclosure alternatives are that the legislation wants to be available. When the legislation says foreclosure alternatives, they mean principal write-downs. This is specifically what is extraordinarily difficult and what FHFA does not allow on any of its loans. It is not an option that really sits out there and works because someone has to pay for it. For every single option that is proposed, there is a cost somewhere in the system to some group. You can look at these proposals and say if you create this new cost, it has to be paid for somewhere. If not right now, it is baked into the cost next time around. Whether it is next week or next month, every system cost is spread out. This is why we have interest rates and fees. We are just going to make it more difficult and more costly to access simple home loans.
There is a quote in some of the documentation he was given that says nothing will be interpreted to require a particular result of that process. Bruce said he feels like we are just going through the motions; but if you are really trying to get a principal reduction that was never going to happen in the first place, then could we just state that up front and save a lot of time. However, the answer is no. We have to go through the journey to get to the answer we would have given you on the first day. There are a lot of people with good intentions, and everyone seems to be focused on vocalizing how wonderful their intentions are. We all want to help homeowners, which we have talked about in a number of pieces of legislation focusing on the importance of helping consumers. We all want to do this, but the question is how you do it in such a way that you do not do long-term damage to a system that has helped homeowners and helped people achieve ownership for generations.
If you look at the track record of prices being stable, it was perfect until 2006 when we had some of those very generous loan programs where you could state things that were not true, and this was acceptable to everybody since no one cared. Outside of that, we have done a good job. Going back to before then would be good; but we are trying to go way beyond that to something that is unnecessary, and that is the hard part. The other thing is we are not differentiating sometimes between the types of people in foreclosure. The smallest percentage of the pile is somebody who signed something who did not know what they were signing. This is the small pile. A pretty big pile would be if you bought a house in California for $100 grand and then refied your way to $500 grand. Then you might ask if somebody could help you. The question would be why since, for example, you just received $400 grand for nothing, which seemed like a good deal. They are getting treated exactly as Group A; and Bruce said he does not understand this non-differentiation.
With some of the programs, if you create a system in which you are able to do a cash-out refinancing and essentially come away free and clear with both your property and the money you access at the back end, then you create a brand new set of perverse incentives. These incentives state that nobody should ever have equity in their home. If you have a chance to pull out money, pull it out. No one should ever have access to the money, and the other side will say that since that happened then there should be legislation preventing the access of equity. Bruce says he would not want this to ever happen, but rather there should be risk associated with that opportunity. This is a great opportunity. With most of the investors Bruce knows, a lot of their success came from accessing piles of equity and playing monopoly, which can go wrong. This is the other part that is really important.
There is nothing wrong with feeling pain with something you did that was not right in the business. That is how you learn. If you lied on a loan application, you did a stated income, you really could not make the payment, and it came out bad, then you do not have an end result that is not positive where you cannot own a house for three years; then we won’t have this problem again. However, if we write everybody a check and tell them it is all even and all okay, then what is next? Mark has to tell everyone there is life after foreclosure and after a short sale. You will feel better, be able to work easier, and there is a burden lifted off of you when you do that. Taking some personal responsibility for the actions through the past few years, although it may not be a popular thing to talk about, is better.
Bruce is on a task force for Riverside foreclosure in the city, and he is the wild card conservative and only investor. They were talking about things that they could do for the people in foreclosure. Bruce said one of the best things you could do is tell them that the lender has a legal right to chase the asset if they are not getting paid, there is in fact life after foreclosure, and you will own a property again. This is okay to tell people rather than having classes to say how you can teach people how to forestall this for as long as possible, and this is where you get the biggest Cash for Keys settlement. You see how it is getting more difficult to want to participate under the rules.
Another change that has been an issue are single points of contact. Bruce will buy at trustee sales, then show up at the door and tell them they are sorry they lost their home and tell them how they will cooperate with Cash for Keys. The owner then asks them what they are talking about and that they have a short sale that just got approved. This is one of the good changes. Bill 278 is being moved through by C.A.R. right now, which wants a lender for the short sale who then cannot go through the foreclosure. There has already been a negotiation, an accepted offer, and a process that is ready to go through. You have a willing seller, a willing buyer, and a deal essentially made. Now you are moving to the process, and we do not want to see the consumer or the buyer have the rug pulled out from underneath them. This bill is moving through and being supported by IVAR, and they are hoping it is done into law. There are some things that can be reasonably done to help people that are in foreclosure, and as a trustee sale buyer that is not a pleasant door knock when you get somebody surprised on the other side.
Tune in next week as Bruce continues his discussion Mark, Steve, and Paul and will discuss government eminent domain with them.
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