Radio | The Norris Group Blog

The Norris Group Blog

California Real Estate Headline Roundup

Archive for the ‘Radio’ Category

165-TNG Radio – Peter Schiff 3-13-10

Friday, March 12th, 2010

Peter Schiff

President of Euro Pacific Capital

(Full Bio)

Bruce Norris is joined this week by President of Euro Pacific Capital and author of Crash Proof 2.0, How to profit from the Economic Collapse, Peter Schiff. Peter is currently campaigning for the Connecticut Senate seat to replace Senator Dodd.

Europac.net is Peter’s website and the number to reach his group is 800-727-7922.

Mr. Schiff is one of the few non-biased investment advisors (not committed solely to the short side of the market) to have correctly called the current bear market before it began and to have positioned his clients accordingly. As a result of his accurate forecasts on the U.S. stock market, economy, real estate, the mortgage meltdown, credit crunch, subprime debacle, commodities, gold and the dollar, he is becoming increasingly more renowned. He has been quoted in many of the nation’s leading newspapers, including The Wall Street Journal, Barron’s, Investor’s Business Daily, The Financial Times, The New York Times, The Los Angeles Times, The Washington Post, The Chicago Tribune, The Dallas Morning News, The Miami Herald, The San Francisco Chronicle, The Atlanta Journal-Constitution, The Arizona Republic, The Philadelphia Inquirer, and the Christian Science Monitor, and appears regularly on CNBC, CNN, Fox News, Fox Business Network, and Bloomberg T.V. His best-selling book, “Crash Proof: How to Profit from the Coming Economic Collapse” was published by Wiley & Sons in February of 2007. His second book, “The Little Book of Bull Moves in Bear Markets: How to Keep your Portfolio Up When the Market is Down” was published by Wiley & Sons in October of 2008.

Mr. Schiff began his investment career as a financial consultant with Shearson Lehman Brothers, after having earned a degree in finance and accounting from U.C. Berkeley in 1987. A financial professional for over twenty years he joined Euro Pacific in 1996 and has served as its President since January 2000. An expert on money, economic theory, and international investing, Peter is a highly recommended broker by many leading financial newsletters and investment advisory services. He is also a contributing commentator for Newsweek International and served as an economic advisor to the 2008 Ron Paul presidential campaign. He holds FINRA Series 4,7,24,27,53,55, & 63 licenses.

In 2007, the crash was not obvious to many, but it was to Peter. Peter thinks he understood the economy better than most of the people in Wall Street and the government. Peter was better prepared because he was writing books about the economy, and he was working in the brokerage industry. He received many emails from other people who agreed with his views.

Peter believes the problem is that too many people learned Keynesian economics, and as a result, they had no understanding of how economies truly work. It is hard to see a bubble when you are inside one. Peter saw people buying houses at prices they couldn’t afford. He knew that lenders were letting people buy homes with no down payment, they were letting people lie about their income, and they weren’t documenting their assets. He knew the government was guaranteeing all that debt through Fannie and Freddie, and he understood the moral hazard of that behavior. He knew the Federal Reserve had interest rates much too low. He knew that the economy was in a mess, and that we were simply inflating a bubble. Peter claims you didn’t have to be a rocket scientist to see this problem coming; you just had to be an idiot, or too immersed in the bubble to see it coming.

Bruce saw many of the people who Peter debated, and they were very confident when they claimed Peter was wrong, and they still do. Many of these people still think that the economy is recovering right now, and that Ben Bernanke made the right choice by stimulating the economy. Peter thinks Bernanke made the problem worse. We are trying to reinflate a bubble, but this behavior is just going to make problems worse.

Bruce asks Schiff what he would label his State of the Union speech, if he was to give one. Peter does not think that the Union is currently sound. Right now, he is running for Senate in Connecticut as a Republican nominee. Peter believes that Chris Dodd enabled the housing bubble by giving support for Fannie and Freddie while they were making bad decisions. Schiff thinks we need to restructure our government, because it is spending too much and it is too big. Right now, the government is actually trying to expand rather than shrink, and that causes an increase in spending. We need to change our tax policy. Right now we are punishing hard work, savings and investment. We need to raise revenue through consumer spending. We need to remove many of the regulations that are distorting the free market. We cannot pretend that we can buy everything from China and Japan, and then pay for those products by borrowing money.

For inflation to occur, you need to have a central bank creating a lot of money. Typically, the catalyst for inflation is government spending. When governments spend more money than they collect in taxes, they often get the difference from their central bank, and this is happening right now. Not only do we have all the ingredients for inflation, but we also have the ingredients for hyper inflation. Unless the government makes changes, we will have hyper inflation.

Inflation has not been a big factor yet, but Peter believes that this is because we cannot see it. We should be currently experiencing deflation but we are not. Prices should be falling, which would be helpful to the economy, but the government is preventing price reduction through inflation. One thing that Keynesians don’t understand is that high unemployment causes high inflation. Keynesians think there is a trade off between high unemployment and low inflation; this is actually the opposite of the truth. Generally speaking, most countries will low levels of employment have low levels of inflation. When you have fewer people working and producing goods, governments print more money to stimulate the weak economy.

In the 60s and 70s, we believed in the Philip’s curve, which got us in trouble. Bruce asks if the path to hyper inflation will take over a decade. Peter says it is up to the Chinese and Japanese. They have to decide when they will stop loaning us money that we cannot pay back. Peter doubts that this inflation process will take a decade. He thinks it will most likely happen over the next several years.

When the world stops buying our debt, we will either have the Federal Reserve print money to buy our debt, or we will make radical cuts in government spending. Peter hopes that we choose to cut our spending, but based on the current officials we have in congress, he believes we will choose to print money. Many countries throughout history have made the mistake of hyper inflation, and it has led them to disaster. Unfortunately, our government officials have learned nothing from history.

Peter does not think that our generation will see another politician like Paul Volcker; someone who is willing to take the necessary actions to save us from more trouble. In the 80s, we were lucky to have the support of Volcker and Reagan. Reagan understood that the government was too big, and he understood the importance of the dollar value. When Volcker was raising interest rates, politicians were calling for his resignation, but Reagan supported him. Right now, the person who occupies the White House is the complete opposite of Reagan. Obama believes that the free market is causing problems, and that the government is the solution. Bernanke is also the complete opposite of Volcker, because Ben supports mass amounts of government spending.

Home prices in California are firming, but this is occurring because the government is sustaining those prices. Right now, the government is actually making the problem worse. Builders are still making new homes, because the government is making it easy for people to buy homes with 3 percent down payments and low interest rates. If the market were in charge, prices would be falling so low that no one would want to buy and no one would be building new homes. What builders are doing is adding more homes to the incredible supply we already have. Once the government removes its influence, the collapse will be even bigger. We are still suckering people into buying homes that they cannot afford, and they are still able to extract equity from their homes which will soon disappear.

Peter believes that real estate prices need to fall, because the prices need to reflect a true market. In a true market, the average person should be able to put down 20 percent on a house, and then qualify for a mortgage without government guarantees. Also, people should have enough savings to pay for the other costs that come with owning a house. You need to have a reserve of cash for when emergencies, such as job loss, emerge. Prices need to fall to the point where people can do that, and Peter believes that this appropriate price rating is far away in California.

Keeping real estate prices artificially high is hurting the economy, because in order to inflate real estate prices, interest rates must remain artificially low. To do this, capital has to be sucked out of the real economy, which means that businesses cannot grow and expand. The more we keep home prices inflated, the more Americans will lose their job. Eventually, we will have higher real estate prices, but more Americans will be unemployed.

Right now, there are a lot of people who own houses who should not. For example, in California, renters were sucked into the market based on the expectation of making profit. The principal motivation for buying a house, for many of these people, was to make money. People will eventually realize that owning a home is not like owning a lottery ticket. There are many home owners who need to go back to renting. It is more flexible to rent, and it is typically less expensive.

Peter also thinks that many people bought larger homes they did not need during the real estate bubble, because they expected home prices to double. People expected their houses to appreciate to twice their purchasing amount. Once prices stop going up, people stop buying huge homes based on speculation, and they will simply buy what they need. Because of this market speculation, builders built too many mcmansions.

Peter also believes that California’s other big problem is that it is bankrupt. Companies are leaving, so the unemployment rate will be much higher in a couple years. When you are unemployed you cannot buy a home.

The only thing Peter believes will save California real estate is hyper inflation. However, Peter would not consider that to be a realistic solution. Hyper inflation may allow people to live in their expensive homes, but their other expenses, like air conditioning and eating, will become more expensive as well. Peter thinks that houses will still have their value, but people will be huddled in blankets; looking pathetic.

Bruce asks Peter, “When you get to the senate, can you change certain real estate policies, which will allow investors to receive financing? Investors are willing to put 20 to 30 percent down, but they cannot currently get financing for investing.”

This is because the government is directing all it’s financing to homebuyers and college student. Peter wants to stop the government from subsidizing anyone’s mortgage. This way, loans will go to the most credible borrowers, and the investors will surely be the most credible borrower. Peter would prefer to have an investor, who has the money, buy a property and maintain it, rather than keep an individual in his or her property when they don’t have the equity to maintain it.

Renting makes sense for a lot of people. Peter was a renter for nearly his entire life, because he made plenty of money and he felt it made more sense. In Florida, he rented a nice place for much cheaper than what he could have owned. He recently decided to buy for multiple reasons: 1) He was tired of moving around; 2) He paid 40 percent less than the owner who bought it in 2002. 3) It was 60 percent less than what the property was listed for 2 years ago. It would have cost him more money to build the home.

People ask Peter if they should buy real estate for financial reasons, and he tells them “absolutely not”. If you are thinking about real estate as an investment, then Peter thinks you should rent.

Peter believes that interest rates will increase at some point, because the government is artificially suppressing them right now. The longer we keep interest rates low, the higher they will end up. Many people feel encouraged to buy homes when interest rates are low, but Peter has the opposite perspective. Peter would rather buy interest rates when they are high, because prices are typically low when interest rates are high.

Bruce mentions that last time, prices did not decrease as the interest rates increased. Peter claims that this happened as a result of government interference. The Federal Reserve kept rates low in order to allow people to overpay for houses. Lenders also allowed people to buy a home without a down payment. These two factors encouraged people to buy, and as a result, people gained a positively speculative mentality towards real estate prices. The mania of real estate profit further encouraged home purchases.

You can no longer get an ARM, and only qualify at the teaser level. People were once able to get loans with 2 or 3 percent payments.

Peter’s website is www.europac.net

You can learn about his brokerage business at that website. Peter can help you invest your money around the world.

Peter’s recently published book is “Crash Proof 2.0”.

If you want to help Peter get to senate, his campaign website is www.schiffforsenate.com

Tags: bruce norris, deflation, depression, down turn, economic, economist, economy, education, Euro Pacific Capital, FED, Federal Reserve, free market, health care, hyper inflation, inflation, investing, Peter Schiff, Phillips curve, real estate, recession, republican, the norris group, unemployment
Posted in Radio | No Comments »

164-TNG Radio – Robert J. Samuelson 3-6-10

Friday, March 5th, 2010

Robert J. Samuelson

Author and Columnist

(Full Bio)

This week Bruce is joined again this week by Robert J. Samuelson. Robert is an award winning columnist and author. He has been writing a column for The Washington Post since 1977, and for Newsweek since 1984. He has recently published a book named The Great Inflation and Its Aftermath: The Past and Future of American Influence.

One of the main claims in Samuelson’s recent book is that the rise and fall of inflation was the most significant event in the past 50 years. When most people think of the fall of inflation, they think of a very short time. One of Samuelson’s key points is that there was nothing usual about the last 25 years. Samuelson thinks the fall of inflation was even more important than the rise of inflation.

In the early 80s, inflation was reaching 15 percent, mortgage rates were around 15 percent, and the prime rate for good bank customers was over 20 percent. When inflation came down, interest rates came down slowly, because no one believed that inflation would come down. Asset prices, beginning with the stock market, began to increase during this time. The Dow Jones industrial average was between 800 and 900. There was an explosion in the stock market over the next 20 years. By 2000, the Dow was over 10,000. Stock market wealth within households went from about $1 trillion in the 80s to over $11 trillion at the end of the 90s.

Later, this increase in stock values lead to an increase in real estate values. For many years, consumers spent more of their income and borrowed more. There were only 2 modest recessions during this time in 1991 and 2001. This increase in wealth made people very careless. It conditioned them to take risks which they should not have taken, because they believed the economy had entered into a state of prolonged prosperity.

If you have a feeling of preordained success about an investment, you are probably ignoring a lot of the risk factors you would normally pay attention too. People thought that risk had gone down because of lower inflation. They also felt that they understood risk better. People then began to take more risks because of these two false assumptions. Lenders began to lend money to people with high levels of debt, and they did it with silly and destructive interest rates. People assumed that stock prices would increase forever. For many years, Samuelson warned people that things would not continue to increase forever. Some of those people looked at Samuelson with pity, because he wasn’t taking part in the stock market increase.

Great gains inspire perverse behavior. There were people who owned 50 and 60 homes, who did not have a normal job, with a $30,000 negative cash flow per month. They would show you their list of properties with pride, because they were worth $4 million. They assumed they would be able to sell all their properties to people who were even dumber than they were. These kinds of people were sure that their investments couldn’t go wrong.

Before the bubble burst, people had high expectations for success, which allowed them to grumble about things not being good enough. The paradox at that time was that they could only have grumbled if they expected themselves to be heading towards paradise. The fact that things had been so good for them allowed them to criticize the actual conditions. When historians look back at this time, they will likely conclude that the times were not that good, even thought they really were; the times just weren’t as good as people thought they should be.

Roughly 2/3 of today’s population are too young in 1980. They were either not alive, or they were in their pre-adult years. They were not aware of the 70s and the high inflation, but even the people who lived during that time forgot about it.

Samuelson knows a columnist who wrote about Reagan’s leadership qualities. Samuelson does think that Reagan was a good leader, but the columnist did not address inflation at all. This history is the lost history. Professional historians and economists have engaged in an act of amnesia. This is scary because people will be more likely to make the same mistakes in the future. Samuelson thinks it is good to have the truth for the sake of truth, but also because if we don’t know the truth we will likely repeat our mistakes. There are prominent economists who are claiming that a little more inflation would be okay. Samuelson believes that if we encourage a little inflation, we will end up with a lot of it.

When society is used to good times, it can be difficult to ask for sacrifices, depending on what sacrifice you are asking for and why. Today, we have made more promises to people than we can afford to keep. Most of these promises are to retirees through social security, Medicare, and Medicaid. The cost of paying for those programs, when the baby boomers retire, will be staggering. Our children will be saddled with very high taxes, high budget deficits, or great cuts in other services. If we explain this to people, perhaps they would be willing to make some sacrifices. They may have to cut back on benefits for retirees, and raise the eligibility age for those programs. There may also be some sort of tax increase. None of our political leaders have made the case for sacrificing for our own interest. They seem to be waiting for a crisis to happen, which will force them to do things they should have done on their own.

There seems to be a popular conception that hyperinflation will likely occur in the next 20 years. However, based on our current scenario, Bruce does not see this occurring any time soon. Bruce and Samuelson are more considered with short term deflation. Samuelson doesn’t understand how you get higher inflation when you have empty shopping malls, 10 percent unemployment, and surplus factory capacity. As long as the people running economic policy in this country don’t come to the conclusion that higher inflation is better, we shouldn’t have it in the near future. When Samuelson says near future, he means 3 to 5 years.

In the long term, some people say that we will have to inflate because we have so much debt. The problem is that it is not easy to inflate your way out of debt. Forty percent of inflation turns over in a year or two. If you raise the inflation rate, you don’t really erode the debt, because you just have to refinance it at higher interest rates. In theory it seems like a practical choice, but in reality, it is not realistic.

Economists make the mistake of assuming that the economy responds in a mechanical way to credit, interest rates, government spending, and taxes. These things are significant, but Samuelson doesn’t think they are everything.

What happened in Japan was that they had an economic model, from the 50s to the middle 80s, which worked well for them. They had an export led economy, and they had an undervalued exchange rate. Their domestic economy was not very dynamic, but their exports kept growth and investment high. That model didn’t work in 80s because the exchange rate appreciated dramatically, and their exports became less competitive. This caused the Japanese to settle into a low growth mode, and they haven’t found a different economic model that works better. Contrary to what people learn in college economics, monetary and fiscal policy cannot change that kind of problem. The Japanese efforts to expand their economy through large budget deficits and loose monetary policy didn’t work. Their policy was dynamic internationally, but not domestically, and Samuelson thinks that is the problem in Japan.

If deflation became anticipated, it would be very destructive. Samuelson doesn’t think that modest price decreases would be that bad for a little while. However, if people think that prices will decrease forever, then they won’t borrow money, because their debt burdens will rise. They will postpone buying because the car they could buy today will be expected to fall even more in the future. This mentality will reduce demand, and then unemployment will increase.

Bruce asks Samuelson about what has changed in the baby boom generation’s expectation for retirement. Samuelson claims that this question is a little above his competence, because he is at the very edge of the baby boom generation. Samuelson feels that his retirement has become much less certain. He has saved a fair amount of money, but one thing he has learned is that markets don’t always increase. For example, if you have $100,000 on Thursday, six months from Thursday you may only have $100,000 minus 30 percent of its value. If you thought that money amount would be adequate to supply you through retirement, you may discover later on that it isn’t. That whole generation is probably feeling that same way about their retirement savings. Bruce thinks this mentality will cause a scenario that will not be inflationary. The economists that Samuelson talks to claim that people have short memories, so if we get into a fast growing economy for a few years, then their mentality of fear will disappear. However, Samuelson tends to agree with Bruce in his belief that these setbacks will leave people with a scarred mentality.

Samuelson wrote that the baby boom generation was the benefactor of large chunks of profit. They had the stock market increase, and then they had the real estate increase. This caused the baby boom generation to accumulate a lot of equity. Most of the GDP growth after 2002 came from equity growth and the extraction of it. Bruce wonders what is going to fuel the GDP growth going forward. This makes Bruce think, “How will we get inflation if we will have difficulty obtaining a moderate GDP growth?” Samuelson says that in an ideal world, the source of growth for the next 10 years would come from higher exports, fewer imports, and investment related to those thins. Also, more investment into our energy infrastructure might help as well. Specifically, natural gas could help us a lot now that we know we have more than we previously thought. Also, oil production can make a big difference for our potential economic growth.

After the Great Depression, a pact was made between the government and big business. Bruce asks if Samuelson sees another pact being made today. Samuelson does not see another pact being made today. The pact that occurred in the past was informal and unstable. After World War II, businesses did not want to be reviled in the same way they had been during the Great Depression. Because of this, businesses submitted to social and economic regulation in return for continued market freedom. What we should have today is a generational pact in which the baby boomers agree to reduce their benefits, so that we can take those burdens off of the young. This will allow them to start businesses, have children, and live in such a way so that a significant chunk of their income isn’t being drained to support their grandparents. Bruce completely agrees with this. There are plenty of people who can afford to pay for their own retirement, instead of having their grandchildren be taxed for it.

Robert Samuelson has created one heck of a book: The Great Inflation and Its Aftermath: The Past and Future of American Influence.

Tags: author, bruce norris, columnist, deflation, demand, economic policy, foreclosures, gdp, inflation, monetary policy, podcast, politics, real estate, retirement, robert j samuelson, robert samuelson, stagflation, stimulus, the great inflation and its aftermath, the norris group, trust deeds, unites states
Posted in Radio | No Comments »

163-TNG Radio – Robert J. Samuelson 2-27-10

Friday, February 26th, 2010

Robert J. Samuelson

Author and Columnist

(Full Bio)

This week Bruce is joined by Robert J. Samuelson. He is an award winning columnist and author. He has been writing a column for The Washington Post since 1977, and for Newsweek since 1984. He has recently published a book named The Great Inflation and Its Aftermath: The Past and Future of American Influence.

In discussing the similarities between the Great Depression and the great inflation, Samuelson wrote, “What ultimately governed their decisions was the conventional wisdom at the time. The policies had been set with egos at stake. They were presumed to be correct.”

Bruce asks what the conventional wisdom in the 1960s was in regards to creating a healthy economy. The conventional wisdom in the 60s was called Keynesianism. This term was coined from John Maynard Keynes; a British economist who died in 1946. Keynesianism lead people to believe that professional economists had concurred the business cycle. Economists had figured out how to forecast the economy, and they had the tools to counteract recessions. Economists believed they could maximize economic growth, and keep unemployment at very low levels. This mentality lead people to believe that they could bring about endless prosperity.

The Philips Curve was named after the Australian economist A.W. Philips. Philips postulated that there was a fixed trade off between higher inflation and lower employment. You could pick which poison/benefit you desired to receive by raising one and lowering the other.

Walter Heller was chairman of Kennedy’s council of economic advisors. Kennedy was a person who truly listed to his advisors. Bruce asks if the economic thought of the time was played out in Kennedy’s policy. Although Kennedy was a practical politician, he was open to new ideas. His advisors argued that the policies which Eisenhower followed in the 1950s were behind the times. Heller argued that economists could prevent recessions, keep unemployment lower, and maximize economic growth. Kennedy was a skeptic at first because he had been raised to believe that the government should balance its budget, and inflation was a bad thing. Heller argued that we could use federal budget deficits to manipulate the economy, and even if a little inflation resulted, it wasn’t a terrible thing because you would have lower unemployment and people would adjust to it. Since the economy of Kennedy’s first two years did not do incredibly well, and because he was genuinely curious, he was open to the idea of inflation. The ideas that Heller sold to Kennedy were embraced by most economists.

This theory of a stable trade off between inflation and unemployment was obviously wrong. Economists could not create a fixed rate of inflation. In fact, we got an ever-accelerating rate of inflation. When Kennedy first became president, the inflation rate was between 1 and 2 percent, but by the end of the 60s, it was 6 percent, and by the end of the 70s, it was 14 percent. Having this rising inflation made the economy less stable. Between the end of the 60s and the early 80s, we had 4 recessions of increasing severity. The recession of the early 80s had a peak unemployment rate of 10.8 percent. The net result of this economic experiment was that everything turned out to be completely the opposite of what the economists had promised. It promised stable inflation, but didn’t get stable inflation. It promised fewer business cycles and recessions, but we got more business cycles and recessions. It promised lower average unemployment, but we got higher unemployment.

The general idea of inflation is starting to become popular again. The chief economist of the International Monetary Fund recently put out a paper saying, “Maybe a little bit of higher inflation is okay.” Hearing this, Samuelson thought, “Haven’t they learned anything in the last 50 years?”

We were in a desperate position in 2008, and the idea of the economic stimulus program was desirable. However, Samuelson does not think that this program was executed well. The economy was in the process of falling off the edge. The idea of people being able to manipulate the business cycle seems ultimately self defeating. We have to intervene, but we have to be more restrained in our interventions. When interventions succeed, they create conditions that strike back at us.

If Robert wanted to make a formula for creating inflation, the most important ingredient would be to not care about inflation; to not care about keeping the money supply stable. This old fashioned idea that stable money is a responsibility of the government seems to be an ancient relic of the barbarian past. Robert thinks that responsibility is extremely important. The mindset of decision of makers, and the public, is the most important thing. Also, creating too much easy credit is a precondition for most sustained inflations. You can have easy credit, an easy monetary policy, and an expansive money supply, and not get inflation if there are other things off-setting the monetary stimuli. However, if you have people in charge who don’t care about inflation then you are preconditioned to have higher inflation.

Bruce will return to this topic in the next segment.

Samuelson remarked that the learning curve of successive presidents and their advisors is remarkably flat. It amazes Bruce that we have very intelligent people running our government, yet there has been no progressive learning curve. The same mistakes were made as new presidents came into power. Bruce wonders what role politics played in swaying the economic policy of the 70s. In the 60s, economists persuaded political leaders that it was possible to have sustained economic growth, with few recessions, and low unemployment. Once those ideas were accepted by political leaders, it became a part of the fabric of the public’s expectation. When these ideas did not accomplish their purpose, other people tried to achieve the same goal using different policies. Essentially, they continued to use bad policies to prop up a structure which was already collapsing. Unfortunately, our leaders were not able to admit and act as thought they were incapable of solving our financial problems. It fell to Ronal Reagan to deliver the news that their promises could not be fulfilled.

Arthur Burns was the Federal Reserve chairman from 1970 to 1979. He was an economist from Colombia University. He was also the head of the National Bureau of Economic Research. His major mistake was that he bought into Keynesianism. Once he bought into it, he did not take the actions he needed to prevent inflation. In Samuelson’s book, he stated, “What was politically convenient, was also rationalized intellectually.” He was pressured from Nixon, and he was politically expected to fulfill the goal of constant economic growth with no business cycles. At some point, the Federal Reserve would have to stop the rising inflation, so they would tighten credit and reduce the money supply. This would cause a recession, which made the people upset, and so they would start the inflation process again. The Federal Reserve couldn’t decide how to solve the financial problem, and they ended up choosing to do nothing constructively.

Samuelson believes that if you have expectations of higher inflation, then you will get higher inflation. This kind of thinking makes businesses and workers act in such a way as to produce it. Businesses start thinking that they can pass on any price increases, and workers assume that they can get increased wages to pay for their higher cost of living. This mentality causes a wage/price spiral. Unless the government steps in and stops this mentality, it will continue.

At the end of World War II, there was a huge burst of inflation, because during the war we had wage/price controls. As soon as the artificial suppression of the wages and prices was removed, there was a huge increase in inflation. However, we did not get double digit inflation in the late 40s or the 50s. This makes Samuelson ask the question, “Why didn’t that happen?” This wasn’t because policy became oppressive; it was because people didn’t expect the wages and prices to continue to increase. People at that point in time didn’t think that the U.S. was going to have inflation for forever, so they didn’t act that way.

At the end of the 70s, people were scared by inflation. They feared that the government could not control inflation, and they didn’t understand inflation. They didn’t know whether their wages would keep up with rising prices, they didn’t know if their savings would be eroded by rising prices, and they didn’t know how high interest rates were going to go. In the early 80s, mortgage rates got up to 15 percent.

Bruce Norris refinanced his house to become a real estate investor at age 17. People didn’t know if that kind of inflation would continue. Opinion polls showed that people did not think the future would be better than the past. The fears then, and the fears now, are not that much different from each other.

Samuelson believes that the fear, anxiety, and pessimism induced by inflation were the main reasons Ronal Reagan was voted as president in 1980. The vote wasn’t about conservative vs. liberal politics. They didn’t know if Reagan could fix the problem, but they certainly knew that Carter couldn’t. This change in public perspective gave Volcker and Reagan a chance to try something new. They were the right pair to make those changes. Volcker was chairman of the Federal Reserve board at the end of the 1970s. Volcker was chosen to be chairman of the Federal Reserve, because Carter had hired the previous chairman to take the position of Treasury Secretary.

Volcker and Reagan shared the belief that the country could not prosper with double digit inflation. Volcker decided that the government was not going to pump out money and credit. After that decision, interest rates increased, inflation slowed down, and the economy went into a horrific recession. Reagan did something that no politician would have done at the time; he supported Volcker’s decision. This caused Reagan’s popularity to plummet, but he continued to give Volcker his support, because he thought Volcker was making the right decision.

What was unique about Reagan and Volcker’s policy was that all of the adverse consequences were up front. No politician likes to have the news filled with negative information related to their presidency. From Samuelson’s perspective, any other politician who had been president would have told Volcker to stop. If Volcker did not stop, then they would have created legislation to change the nature of the Federal Reserve, so that it would be more accountable to its political masters.

Bruce encourages everyone to get “The Great Inflation and Its Aftermath: The Past and Future of American Influence”. Roger will be on The Norris Group’s Radio Show during the next segment.

Tags: author, bruce norris, columnist, deflation, economic policy, foreclosures, inflation, monetary policy, politics, real estate, robert j samuelson, robert samuelson, stimulus, the great inflation and its aftermath, the norris group, trust deeds, unites states
Posted in Radio | No Comments »

162-TNG Radio – Christopher Thornberg 2-20-10

Friday, February 19th, 2010

Christopher Thornberg

Principal at Beacon Economics

(Full Bio)

This week Bruce is joined by Dr. Christopher Thornberg. Dr. Thornberg is the founder of Beacon Economics, and he is one of California’s leading economic forecasters. He is one of the only economists who accurately predicted the crash and the recession that followed.

During the last show, Christopher discusses the proposal to allow a bankruptcy judge to determine what they should owe on their home. Bruce mentions that banks are not foreclosing on homes because if they did then their losses would be incredible. Thornberg says the proposal for bankruptcy judges was being pushed for a while, but it came to an end because the right side of Congress was strongly against it. Thornberg thinks that most homeowners, whether they were in trouble with their home or not, would not have been supportive of that proposal. A large number of the people in financial trouble today are in trouble, not because they bought homes at the peak, but because they refinanced at the peak. People took money out of their home to buy toys, like cars and televisions. If you walked into a bankruptcy court, and showed the judge everything you’ve done with your finances, he would allow you to keep your home, but you would lose everything else. Also, a lot of people committed fraud on their mortgage applications, so they would certainly lose their home. Realistically, people should be happy that we still have non-recourse loans, because they can take your house but they can’t take everything else.

Christopher says there are no smart economists claiming that the U.S. has potential for deflation. The deflation in Japan is being caused because of their tight monetary policy. The potential for inflation is driven by the money supply. The government pursues a tight money policy, which means they don’t expand the money policy very much. Japan had problems with inflation in the 60s, and that scarred their national psyche. They have become so scared of inflation that they have allowed deflation to occur. If Japan wanted to get rid of deflation, all they need to do is start printing money.

Japan has huge national debt, but they don’t want to inflate because that would make their cost of borrowing increase dramatically. If the United States started to inflate, and that inflation coincided with a $20 trillion federal debt, we would be in trouble. However, our existing debt would become much cheaper, because the interest rates are fixed.

In 2009, banks changed the way they deal with distressed debt. They don’t need to be aggressive about how they value loans, even though many of their loans are under water. As long as the bank can keep the loan current, they don’t have to acknowledge the potential loss in that loan. If we forced a mark-to-market mentality on banks today, we would probably collapse the banking system. There would probably be at least 6,000 banks going out of business if we forced banks to comply with their actual Tier 1 capital needs. We do not have the man power or the money necessary to bail out all the depositors in those institutions.

This is similar to what Japan allowed to happen in their bank system, but it is not the same. Japan created what Christopher calls “zombie banks”, and they made it difficult for anyone to raise debt. Our banks do not have to worry about that problem as much.

One of the nice things about the American economy in comparison to Japan, is that we still have a competitive market. Christopher has some friends who have become employees of different companies due to bank buyouts. Eventually, they quit and decided to start their own bank. These people are becoming new entrepreneurs who pick up the slack for banks who will not lend. Christopher thinks that these kinds of people will be our saviors.

A little inflation goes a long way. The U.S. could easily inflate the economy, which would pick up the asset values, and that would take a tremendous amount of pressure off of our banking systems. The Federal Reserve has made the stance that they are anti-inflation. Christopher believes that Bernanke needs to think more realistically, because a little inflation would be a huge relief for our financial system.

When we have inflation, we usually have an increase in wages. However, wage increases do not usually occur quickly.

In 1982, Bruce refinanced his house to be an investor at 17.5%. That is the long run consequence of that kind of activity.

Bruce asks Thornberg if he foresees the United States having positive GDP growth over 1 percent. Thornberg feels very confident that this will happen. The U.S. economy still has a lot of problems to deal with. However, if the government backs off the stimulus and allows the economy to re-grow and if we have less consumer spending, and more exports, then we will have a great opportunity to grow as a country.

When we talk about GDP, we are talking about the fundamental ability for an economy to produce goods. Our ability to produce goods and services increases by about 3 percent per year, and we’ve been maintaining this growth for decades. The question is, “What are we losing that productive output for?” Thornberg thinks we’ve been using that output poorly. We have been using our output to supply consumer spending and to bring in imports. Also, we have lost our focus on exports and business spending.

We have had a demand shift from less consumer spending to more exports. It takes a while for supply mechanisms to restructure themselves to meet those new demands. It is incorrect to say that demand creates supply. The question is, “How is the supply being altered by the basis of demand?”

The U.S. GDP growth was supported by a lot of equity extraction. Now many people must to save for their retirement. Bruce wonders how much that hurts that which represents 70 percent of GDP engine. This is the point that Christopher has been trying to make. If we hadn’t had the big equity bubble, and if we hadn’t seen an extreme increase in consumer spending, then our ability to supply would have shifted to exporting and business spending.

California has a $1.9 trillion economy, and a $20 billion deficit. Our problems are political and not economic. Christopher thinks we simply need our leadership to make some basic decisions on how California will finance the ending of our debt problem. We don’t have a government that spends a lot of our money. The problem is that we spend it in the wrong places. At the same time, we are not a high tax state. We put high taxes on small bases, which makes us an unfriendly tax place for specific constituencies. Christopher thinks that we simply do not have the political will to get rid of our debt problem.

Christopher thinks that Prop 13 is a fiscal injustice. It amazes him that Prop 13 was even allowed to exist. Prop 13 under the fairness clause, which states that if you are receiving similar services then you should be paying similar dues. Prop 13 should have been rejected in the California Supreme Court. Thornberg thinks we need to get people to vote against this proposition, but we probably won’t make this happen.

Christopher does not currently know, for sure, if we have positive or negative migration in California. However, based on some of the recent reports he has read, California is seeing negative migration. This is largely due to the weak state of the labor markets. The good new is that once we get out of our mess, we will have a weak dollar and lower home prices. Christopher is optimistic that once we are done with this mess, California will show outstanding growth.

The United states has becomes the world’s largest debtor nation. The good news is that the dollar has to go down at some point in time. China, India, Russia and Brazil have made an explicit policy to keep the U.S. dollar strong. They do this by taxing their citizens in order to buy U.S. treasuries. This is a strategy that will someday end, and this will cause the U.S. dollar to fall. This means that they will buy a U.S. treasury, but they will probably lose at least 15 percent of the value in their investment, because of the decline of our value. They are taxing Chinese peasants to subsidize American consumption. They could stop investing like this if they wanted to, but that would immediately severely damage their currency. People keep saying that China is overcoming us, but that just isn’t true. If you owe the bank $10,000, the bank owns you. If you owe the bank $1,000,000, you own the bank. This is exactly what is going on with China. We own them, not the other way around.

Bruce asks what privileges we have as the world reserved currency status. Thornberg says that we get what is called “seniorage”. This means that we can print money, and other people will want to hang onto that money. As a result, we get a subsidy kick out of it. In reality, this is not that important of a status.

We’ve left our worries of private bank debt behind. The new worry in the financial markets is sovereign debt. A lot of nations have increased their spending to levels that aren’t sustainable. People are worried that we will see similar losses in sovereign debt as we saw in banking debt. As a result of this, more people are investing in the U.S. dollar, which is causing the U.S. dollar to improve. Unfortunately, Christopher does not believe this will help us recover.

Tags: Beacon economics, bruce norris, California, Christopher Thornberg, forecast, foreclosure, investing, investor, market, podcast, Radio, real estate, the norris group, update
Posted in Radio | No Comments »

161-TNG Radio – Christopher Thornberg 2-13-10

Friday, February 12th, 2010

Christopher Thornberg

Principal at Beacon Economics

(Full Bio)

This week Bruce is joined by Christopher Thornberg. Christopher is an expert in the study of regional economies, real estate dynamics, and business forecasting. In 2006, he co-founded Beacon Economics which is an economic research and consulting firm that specializes in real estate markets, local economic development, and public and private policy issues. Christopher has also been part of the Norris Group’s award-winning fundraising series, I Survived Real Estate.

Christopher and Bruce discuss the current state of the market and whether the market is truly experiencing a comeback or is it completely manufactured. Christopher goes into detail about Bernanke and his current handling of the market. Government actions has delayed the inevitable and Christopher and Bruce discuss what the different strategies have been and how effective they have been and how much longer we should expect to see these manipulations.

Bruce and Christopher talk about Fannie Mae and FHA and the growing issues with FHA’s portfolio. The Mortgage Bankers Association estimates 20% of the their loan portfolio is in trouble.

A complete transcription of the show coming soon.

Tags: Beacon economics, bruce norris, California, CALIFORNIA FORECLOSURES, california real estate, Christopher Thornberg, deflation, fannie mae, FHA, forecast, foreclosure, inflation, investing, investor, loan portfolio, market, podcast, Radio, real estate, real estate investing, real estate investor, the norris group, update
Posted in Radio | No Comments »

160-TNG Radio – Philip Tirone 2-6-10

Friday, February 5th, 2010

Philip Tirone

The Mortgage Equity Group, Inc. and www.7Stepsto720.com

(Full Bio)

This week Bruce is joined by Philip Tirone. Philip is the president of the Mortgage Equity Group, and author of Seven Steps to a 720 Credit Score.

At the beginning of the second quarter of 2010, the Fed may not be the MBS-arm. This role may go back to the private sector. If this happens, Philip believes it would cause a disaster which would lock up the entire industry. The Federal Reserve has been helping the problem. The Fed will go from buying nothing to buying $800 billion in order to prop up the economy. Philip believes the Federal Reserve will reach a time in which they will no longer be able to continuously buy. However, both Bruce and Philip agree that the Fed’s limit will not be reached before April.

Right now, people have the mentality that they should not refinance unless they can get a value under 5 percent, but rates are at their lowest in over 60 years. Philip believes that if the rates increased to 6 percent, then the public would have a significant shift in their desire to buy. Philip thinks that if this increase occurs, some people will simply wait for rates to return to the previous low value. Unfortunately, if the government removes its influence from the market, Philip thinks there is a chance that the rate may return to a rate much higher than 6 percent. Bruce believes this sort of change would be very harmful.

We do not currently have enough buyers in the market, because the government is still paying people $8,000 to buy homes. This tax credit has helped realtors greatly in making deals.

For every 1 percent increase in the mortgage rate, the buying power is reduced by 15 percent. Fannie Mae and Freddie Mac are maxing out the back end ratio at 45 percent. The government is trying to stimulate the housing market by keeping rates low, and by buying billions of dollars of debt.

Philip thinks the back end ratio is preventing more loans than the front end, because the front end is simply like a point of interest, but the back end is like a deal breaker.

In Riverside, the home payment does not typically exceed rate. You would think this would make it easy for these citizens to qualify, but many of them have car payments and credit card debt which takes away their qualifying ability. This sort of problem is not something you can change over night, and it is causing a large number of losses in the number of home buyers.

The media has done a good job at scaring people into believing that they are underwater. In Philip’s area, with FHA, you can buy a $750,000 home with only 3.5 to 4 percent down. The problem is that people have now been conditioned to believe that they are incapable of qualifying for a loan. Some people believe that loan qualification currently requires a 30 percent down payment.

Philip has seen many people make strategic defaults on their payments. Philip recently talked to a man who had $150,000 in debt, and was underwater on his payments by $5,000. This man decided he was going to negotiate with all of his money lenders. He stopped paying his debts with the realization that his credit would go down. He then called his lenders and told them that he was will to negotiate for 15 cents on the dollar, payable over six months. He then began to receive threats from the lenders. His home lender threatened to get him put in jail. Nothing happened for 5 or 6 months, but later on he was able to settle for 22 cents on the dollar with his credit card debt. He later said that everyone he talked to about modifications was giving him a different story. Each industry had something different to say about modification. Philip doesn’t even think that the major banks like Bank of America currently understand everything about loan modifications.

Two years ago, strategic defaults would have been looked down on, but now many people consider it acceptable. Bruce has even heard that some college campuses are encouraging people to strategically default. Presently, about 11 percent of people are delinquent on their payments, but if we allow people to strategically default, then things could get worse. Philip thinks that the problem is that we are rewarding people that are behind on their mortgage payments. Those people gave their lenders their word that they would pay, but they have not kept their promise. Philip thinks that people who are current on their payments are getting angry, because they feel like all bad borrowers are being rewarded, but they are being damaged for doing the right thing. Philip thinks some of these good borrowers want to take revenge on the banks via strategic default. Bruce can understand that mentality, but this debt that is being incurred from these defaults is hurting us all in the future.

The fact that it is sometimes significantly cheaper to rent can be demotivational for some home owners. Another problem is that lenders are not being aggressive in foreclosing on properties. For example, Bruce knew someone who had not made a payment for 2 years, and their property went to sale. This person bought the home for $400,000, and then refinanced for $800,000. After the two years without payment passed, the lender opened the trustee sale at $400,000, but no one bid on the property. The lender then canceled the trustee sale and contacted the severely delinquent borrowers in attempt to make a deal. In the end, these two-year delinquent borrowers had all of their back debt forgiven, a $400,000 principal deduction, and a 2 percent interest deduction. When people hear those kinds of stories, it encourages people to strategically default as well.

Philip has asked people, through his blog, about whether or not they know someone who is not making payments on their home. Philip has received many comments from these people. When Philip hears people tell these stories he thinks, “Would you treat your kids this way?” Now that he is a father, he frequently thinks about the values he is teaching his children. Considering this, he would not want to encourage his children to damage other people through strategic default.

Bruce thinks there is big moral problem that develops when you reward people for making bad financial decisions. If a person loses a home, they will learn to not over borrow. When we reward people who are losing their homes, they will learn to expect someone else to take care of the problems they create. People view the real estate bubble busting in a different way that they view the stock bubble busting. Bruce knows people who lost 90 percent of their stock value within 6 months, but they couldn’t complain to someone about receiving bailout money. We have not treated our real estate problems in this way.

Some people did not put money down on their homes, so they did not truly have a financial commitment to their house. The lenders are the people who are really taking the hit on foreclosed homes. Bruce thinks many of those lenders deserved to take that hit, but rather than paying for the foreclosure problems out of their own pockets, they are making tax payers cover their mistakes.

Bruce asks if lenders are doing loan modifications for jumbo loans with the same program as Fannie Mae, or if they are making individual decisions. Philip says that the banks are making individual decisions for jumbo loan modifications, and he does not understand the reasoning behind their choices. Philip believes that banks are lying to borrowers, because they are giving different explanations for their decisions to different people.

Bruce was recently on a debate panel for REOMAC. He asked a lender about a specific trustee sale result. In this trustee sale, there was a $1.1 million loan go to sale for $400,000. After discussing this trustee sale, Bruce asked the lender, “When did you have to realize that loss?” Bruce asks Philip when lenders have to acknowledge a loss, because right now there are a huge number of delinquencies that are not in the default process. Bruce wonders if banks are allowed to keep loan amounts at the same value until a certain time. Banks get concerned when they have REOs on their books, because that causes their reserve requirements to expand dramatically. Banks can have a loan that is delinquent and not have to expand their reserves. So if these banks have an audit coming up, they have to get REOs off their books, but if they do not have an audit, then they are less concerned. This is why people are being allowed to stay in their homes without paying for over a year.

Credit scores dramatically affect your loan rates. Philip is doing a refinance for a man who makes over $500,000 per year, and he has a credit score of 685. The only reason why he has a credit score of 685 is because his credit card company will not report his proper credit limit to the bureaus. This credit card company is affecting his credit score by somewhere between 40 and 80 points. The money he owes is very insignificant.

Philip’s website is www.philiptirone.com. His phone number is 310-453-1901. He will handle any kind of mortgage throughout California.

Join us next week as we interview Christopher Thornberg!

Tags: 7 steps to a 720 credit score, 720 credit, AMCs, appraisal, bruce norris, California, debt, down payment, equity, foreclosure, investing, investor, jumbo loans, liquidity, loan modification, moan mod, Mortgage Equity Group, Philip Tirone, Philip X. Tirone, podcast, Radio, real estate, refinance, regulation x, reo, strategic default, the norris group, walking away
Posted in Radio | No Comments »

159-TNG Radio – Philip Tirone 1-30-10

Friday, January 29th, 2010

Philip Tirone

The Mortgage Equity Group, Inc. and www.7Stepsto720.com

(Full Bio)

This week Bruce is joined by Philip Tirone. Philip is the president of the Mortgage Equity Group, and author of Seven Steps to a 720 Credit Score.

Philip got in the business in 1997; near the beginning of the boom. For the first 9 years of Philip’s loan career, he continuously saw regulators loosen the business guidelines. The people that he worked with were making substantial incomes from 2004 to 2006. There were some loan agents in Philip’s office who were driving Bentleys. Most of those people are now out of Philip’s business, because they matched their income with their expenses, and they lost their wealth during the recession. This reminded Bruce of a recent trustee sale he attended in which many of the homes being sold were previously owned by mortgage brokers.

Three years ago, a mortgage banker was someone who lent their money to property buyers. The second tier of mortgage banking in which a regional firm lends their own money through a warehouse line. Bank of America, Wells Fargo, and Washington Mutual portfoliod their high risk loans. These high risk loans were what caused other big banks to fail.

Mortgage brokers are individuals who can go to banks and take loans. Many banks have retail divisions, in which people can walk off the street, and they have whole sale divisions, in which banks would sell mortgages at lower rates to people who could sell mortgages. Whole sale mortgages allow mortgage banks to sell their loans at a lower rate to people who will bring them business.

Presently, 99 percent of loans being done right now are going to the government through Fannie Mae and Freddie Mac. Fannie and Freddie are the mortgage backed security outlet. Because loans are being heavily regulated, there is little difference between mortgage bankers and mortgage brokers. This is because there are no longer a large variety of loan programs with different fees; everyone is selling the same product.

The value of a mortgage broker is more appreciated for large mortgages, because they know how to get the deals. Unfortunately, those loans have dried up. The amount of financing being done over $729,000 has probably decreased by over 80 percent. This is partially because mortgage brokers could use stated income loans. There were some scenarios where stated income loans were not a bad idea. For example, a company owner with $5 million in the bank, who wants to buy a $3 million property with 30 percent down, is a good applicant for a stated income loan. Stated income loans did not always mean “no proof” loans. When Philip first got into the business, bankers would check out bank statements. Little by little, stated income became a no document program.

Bruce Norris estimates that over 1,000 foreclosures will occur within the next 30 days on houses valued above $1 million. It is not easy to refinance a bill that expensive, and there are not enough people to buy expensive homes like that.

Another presently occurring problem is poor appraisals. Philip refinanced for a man who bought a loan for $850,000. The value of his property increased to over $1 million. When he ordered the appraisal, the appraisal value came in at $850,000. The borrower was very frustrated with his property’s devaluation, but he didn’t choose to try and sell the property immediately. Later on, he asked for another appraisal, and the appraisal value came in at $1,170,000. These mistakes are making investors want to pull their hair out. We are bringing in appraisers from outside areas who don’t know about the areas they are working in. The AMCs are supposed to behave as a wall between lenders and mortgage bankers, but the reality is that the lenders who were defrauding the banks are not in the business any more.

Bruce asks Philip to discuss the different regulations that have come into the industry. The regulation in the loan industry is so overdone right now; it is literally causing people in the industry to do 2 to 3 times as much work. Regulation X states that mortgage bankers must give extremely precise estimates. These estimates must be so precise that if the escrow fee comes even $200 above the estimate, then the lender must pay for it. This need for precision in estimates is causing people to require over-disclosure. People are complaining about how expensive the fees are, and Philip has to explain that we are in a terrible scenario with over regulation. Any time new regulations come out the loan process is slowed down. For example, one month ago Philip submitted a loan on a $2.5 million property with a 5 year fixed loan, but he later decided that he wanted a 3 year fixed loan. Once he chose to make that change, everything in the loan process had to stop. The underwriter couldn’t underwrite it. If you send the corrections through email then you have to wait at least 3 days. If you are an investor selling a property, you will not be able to sell any faster than within 30 days.

Throughout Philip’s career, refinances and purchases have equally dominated the industry. Currently, more people are doing refinancing because of the great rates.

In 2005 and 2006, about 85 percent of the people who came to Philip were able to get loans. In 2009, only about 15 percent of Philip’s potential customers were able to get loans. Bruce asks what happened to those people who made them incapable of getting loans. Philip says that it is a combination of bad personal scenarios and bad lending policies. Some have severely damaged their savings. In the majority of the cases, the lending guidelines are the cause of trouble. Philip could get great approval for a buyer with a statistically low default risk, but now mortgage bankers are not allowed to back anyone with a default ratio over 45 percent. These policies also prevent refinancing for people who could safely take on extra debt. Some people are being restricted from getting a loan, because they bought a car that slightly tipped them over the 45 percent risk scale. A great borrower could increase their lease by 42 dollars, and then disable themselves from getting a loan. Philip advises people who are looking for a loan to not put anything on their credit card. Even paying off a collection account can damage your credit score.

Jumbo loans include anything over $729,000. These loans do not have typical 30-year fixed loan rates. A five year fixed loan will have an interest rate in the low 5s, and ten year fixed loan rates will be in the high 5s.

Philip’s website is www.philiptirone.com. His phone number is 310-453-1901. He will handle any kind of mortgage throughout California.

Reserve requirements for banks have changed significantly for those involved in jumbo loans. Jumbo loans must be backed by six months’ income or 12 months’ payment, but this can vary depending on the situation. Reserve requirements are not as black and white as credit scores.

Bruce and Philip will continue this discussion next week.

Tags: 7 steps to a 720 credit score, 720 credit, AMCs, appraisal, bruce norris, California, debt, down payment, equity, foreclosure, investing, investor, jumbo loans, liquidity, Mortgage Equity Group, Philip Tirone, Philip X. Tirone, podcast, Radio, real estate, refinance, regulation x, reo, the norris group
Posted in Radio | No Comments »

158-TNG Radio – Greg Norris 1-23-10

Friday, January 22nd, 2010

Greg Norris

The Norris Group

(Full Bio)

This week Bruce is Greg Norris, Bruce’s oldest son. He has been working for The Norris Group since 2004. He was the project manager of TNG’s Rosamond building project. His current job involves buying bank owned properties and trustee sales.

Before he began working for TNG, Greg was an electrician. He got training from a union program in Los Angeles. He started as an apprentice, but he eventually reached the position of general foreman. He then quit his job as an electrician and began to work as a project manager.

Greg’s experience in construction has helped him a lot in the real estate buying and selling business. He knows what it takes to finish a job on time, and he is able to quickly weed out bad construction workers. He also has the ability to quickly recognize repair problems on a house.

If you want to learn how to check a house for repairs, Greg suggests that you take the TNG home repair course. The TNG course will give you some shortcuts to quickly estimate repair issues. He also thinks you could learn a lot from going to a job site with a general contractor who could give you his perspective on repairing homes.

Depending on the inventory you are working with, repairs can be fairly repetitive. Some REOs require very light rehabs, but Greg usually only buys REOS that require heavy rehabilitation. Homes that need heavy rehabilitation is very repetitive, because you typically have to start with the home’s shell and rebuild it.

Greg is so efficient at estimating repairs that he doesn’t often spend time taking notes on his homes. The reason why he is so proficient is because he has experienced a lot of repair repetition. When he first started buying auction properties for Bruce, he was observing 40 to 60 homes per day. When you’ve seen that many houses, you get to the point where you can estimate home value before you even walk inside. However, it is impossible for Greg not to miss things, but he is not concerned about these unknown factors so long as he is 90 to 95 percent accurate on his repair estimation. He also puts a little cushion into his asking price if he feels there are going to be expensive unknown costs.

The age of the property significantly changes the risk factor for unknown repair costs. You need to pay attention to what repairs were made by previous owners. Old houses are more likely to have plumbing and electrical problems.

Because REO inventory has decreased, more detailed remodels, in which room additions and other add-ons are included, are sometimes necessary. These kinds of additions sometimes require building permits that not everyone can get their hands on. These scenarios may not happen very often, but Greg has encountered homes in which the previous owner attempted to do a remodeling job and failed. Choosing to make major corrections, such as in Greg’s example, will depend on your ability to determine what kinds of remodels are considered more desirable in the market. Greg has observed many homes, so he has the ability to quickly perceive what buyer’s will like.

When Greg is selecting a contractor, he always checks out the contractor’s license, they are required to go through an application process, and they must have workers compensation. After their credentials are approved, they make a bid on Greg’s work. The most competitively priced contractor will be picked.

Not many contractors have all their licenses and insurances. Many of them are handymen, and they prefer to do things without licenses. With the kind of work that Greg does, he cannot take the risk of hiring unlicensed contractors.

If you want to check if a contractor has a license, insurance and workers’ compensation, you can get information online from the California State Licensed Contracting Board. You can look up any licensed contractor through that website, and it will tell you if they have workers’ compensation. However, the website will not tell you if every worker has workers’ compensation. Unfortunately, you cannot always monitor that. As long as they have a workers’ compensation policy, Greg is protected, because that contractor will have to cover for his company’s injuries.

Bruce asks Greg how important it is to pay your contractor on time. Greg believes that it depends on the contractor. When you are beginning a relationship with a contractor, it can be scary for them to accept late payment, especially if they have been previously defrauded. As you develop a good relationship with a contractor, they will likely become less concerned with your ability to pay within a short period of time. The contractor needs to know that you are looking out for their welfare. Greg has developed such a great relationship with his contractor that he considers him to be a business partner, and Greg knows that his contractor is willing to do jobs quickly without worrying about being underpaid.

Greg says that contractor prices have decreased from the housing peak. They are not trying to put 20 to 50 percent on a job. They are actually just happy to have a job at all. However, he is not sure just how badly the housing decline damaged them.

Most of Greg’s general contractors do most of their work by themselves, but if they choose to use sub-contractors, they are required to choose from a list of Greg’s preferred sub-contractors. If they do not use a preferred sub-contractor then they will be in violation of their contract. If the general contractor wants to use his own sub-contractors, then the sub must go through Greg’s application process. If the general contractor decides to pay his subs directly, then he will take on the liability if those subs have trouble on the job. If that general contractor hires a sub who is hurt, then that sub will be covered by his own workers’ compensation policy.

Greg feels that he has really mastered his plan for housing construction. When changes do occur he often does not know about it, because Greg’s general contractor does such a good job at taking care of the problem. It took a long time for Greg to find all of his fantastic work partners, but now that they are used to his system, they probably would not want to work for anyone else. As a matter of fact, some of Greg’s contractors have tried doing jobs for other people using his construction strategy, but they came back later and told him that his plans don’t work with other employers. Greg’s construction experience gives him an edge as a project manager, and this education makes it easier for his contractors to work with him.

Greg uses the word Gucci to describe the new housing market that TNG has began to invest in. Greg is starting to see higher valued homes enter into trustee sales. This is not the kind of product that Greg typically works with, but he is interested in this area of the housing market and he is learning about it very quickly.

When someone walks into a TNG property, Greg wants them to see that everything is in order. TNG homes are staged and well repaired, so that makes buyers feel more comfortable with buying the property. It was difficult for Greg to get attention from realtors for a while, because people perceived that they were over repairing. The extensive repairs that were being done on Greg’s properties made it difficult for buyers to compare his properties to others in the area. Now some realtors frequently check with Greg to see if he has new inventory, because TNG properties have gained a reputation for being easy sellers. Greg’s buyers are even starting to overpay for his houses, because there are no comparable matches to TNG properties. Many buyers want the kind of finish that TNG homes have, but since they cannot find that kind of product from anyone else, they will buy TNG properties for higher prices.

Greg believes that staging is very important for making sales happen quickly. When people step inside a TNG property they can see from the staging job that it will be a good home to live in. He would give his staging model an 8 out of 10 for effectiveness. He does not spend any more than 500 dollars on staging per house, but he believes that he gets much more money than that in the resulting sale price.

When buyers shop for homes, one of the first places they look for is realtor.com. Realtor.com is a great starting place for home shopping, because all of the selling properties on the MLS are dumped onto it. TNG does a lot of advertising on realtor.com, so that they will show up higher on the list of “for sale” properties. Some experienced buyers don’t waste time on realtor.com, because they know that a lot of time can be wasted by trying to find a home by yourself. These people often prefer to work with realtors, because they know that a realtor can find a good home quickly.

When TNG receives an offer on a property, Greg often requires them to shorten free look periods and quickly purchase appraisals. He also asks them to get their home inspections done quickly if they desire to get one. When a person shows that they are willing to spend their money quickly, it shows Greg that they will likely finish escrow. Greg often checks out his buyers’ loan package, so that he can be sure that they are not lying on their application.

Bruce asks if lenders have become increasingly cautious. Greg says that their level of caution depends on the area they are working in. When TNG worked in Moreno Valley, he was fighting appraisals quite often, because there was a lot of evidence for what an REO was worth but very little evidence for what a repaired home was worth. Currently, the decreased pricing trend is beginning to reverse. Greg does not know if prices will continue to increase, but he feels that they likely will, because ownership payments are often lower than rent payments in that area. Most of Greg’s Moreno Valley buyers had FHA financing.

Greg has not received any feedback from realtors who claim that buyers are coming into the market because of the tax rebates. No realtor has ever asked Greg to hurry through the sale process, because their buyer wanted the 8,000 dollar check. However, the realtors may not be telling Greg that information because they have no need to.

If an investor is having trouble selling his or her home, Greg would advise them to go to the MLS and check out the competition. Find out what other properties are selling for, and compare the condition of your home with theirs. Sometimes homes are located in bad areas, such as near a railroad. Greg would never risk buying a property that is back to a railroad, or is in any other undesirable.

The 90 day FHA rule was just lifted. Greg is unsure of how much this will affect the market. He thinks that prices at the whole-sale level will come up, because now investors will not have to wait as long to resale. Greg is concerned about whether or not FHA appraisers will allow prices to appreciate, because they have always factored in depreciation into their appraisal values.

Tags: bruce norris, California, construction, expert, flipper, foreclosure, hard money, investing, investor, podcast, Radio, real estate, rehab, renovation, reo, the norris group, trust deed investment
Posted in Radio | No Comments »

157-TNG Radio – FBI 1-16-10

Friday, January 15th, 2010

FBI Mortgage Fraud

The FBI

Paul Bertrand,
Supervisory Special FBI Agent, Los Angeles Mortgage Fraud Task Force

(Full Bio)

This week Bruce is joined by Paul Bertrand. Paul is a supervisor for the Los Angeles Mortgage Fraud Division in the FBI.

When Bruce thinks of fraud in real estate, he thinks of a borrower lying on a loan application, but there is much more to loan fraud than that. Paul’s division likes to focus on larger, organized groups who can devise a complex scheme. Many of these schemes have the purpose of defrauding banks. Paul prioritizes his actions based on the number of transactions and the dollar amount involved in the scheme. He tries to identify who the most damaging schemers are based on the volume and size of a schemer’s transactions.

Mortgage fraud has evolved over the last 3 years. Traditional straw buyer schemes with artificial appraisals have decreased, but since then, other kinds of fraud have been developed. Every time one kind of fraud decreases, another kind develops.

A couple years ago, banks stopped lending money to people trying to buy homes. After this happened, Paul began to see more builder bailout and home equity lines of credit schemes. As equity decreased, foreclosure rescue schemes began to increase. These foreclosure rescues involved the filings of fictitious bankruptcies. As that went away, Paul began to see an increase in loan modification schemes. Now, Paul is beginning to see more short sale schemes, especially short sale schemes involving real estate agents.

California has the highest volume of fraud. However, there are other parts in the country like Las Vegas with similar problems.

From 2005 to 2007, misstatements of income, for the purpose of qualifying for a home loan, were highly prevalent. Sometimes people would not qualify for a full doc loan, so they would be told to attempt to qualify for a stated income loan. These people would often be told what level of income they would need for a loan, so the borrowers would put that required amount on their loan application. Bruce thinks this sort of fraud involves a team effort. If Paul found a particular loan broker who had dozens of false income statements, then Paul might try to figure out if the broker was involved in the fraud.

Bruce asks Paul how he gets his fraud information in a timely basis, and whether or not people who commit fraud think that they are inventing something new. Paul gets lots of complaints from banks who are victims of fraud. The FBI offers classes on real estate and fraud. Paul does not know if people who are involved in fraud often think that they are doing something new.

If a person is committing fraud for ownership, they are probably committing fraud because they want to live in the house and intend to pay for it, but they are not capable of normally qualifying for a loan. The chances of default on these schemes are significantly less than in an organized scheme in which the schemers intend to defraud the bank. Paul focuses mostly on the fraud for profit schemers, rather than the fraud for housing schemers.

The National Mortgage Fraud Team is a unit at the FBI headquarters. This unit is in the financial crimes section. That unit is made up of a unit chief, who oversees the mortgage fraud program for the whole country, and several specialized supervisors who are responsible for different sections of the country. These people provide policy guidance to the country. They also collect information from Paul’s division, so that they can comprehend the way fraud is occurring in his area.

In short sale fraud, a listing agent will often convince his clients to negotiate a short sale with the bank without telling them that there are legitimate buyers who will pay for their home at market value. In this kind of fraud, the agent will approach a lender and negotiate a short sale for an investor who is related to the agent. In a short period of time, this property will be flipped to a legitimate buyer who will pay at the market value. The profit from this deal will then be split between the people involved in the fraud.

The FBI has no problem with a short sale in which the buyer pays for a home and is then able to sell it for a profit. Just as long as the deal did not involve lying, and if all aspects of the sale were fully disclosed, then the transaction will probably not be labeled as fraudulent.

A typical short sale candidate, in Riverside, would be someone who owes more on their house than their house is worth.

Bruce gives Paul an example of a short sale:

A $400,000 dollar loan on a $250,000 house. The agent negotiates for the lender to list it at $190,000. A disconnected buyer buys it for the listing price, and then sells it for a profit. The lender does not know that the intent was to resell the home for a profit.

Bruce asks if this example presents a problem. Paul says it might. In this case, there are two banks involved. One of these banks owes $400,000, and the other bank would the one that the investor is using to purchase the home. The second bank would usually be giving a cash offer. Paul says that if everything in the deal is fully disclosed, then there would be no problem. If the first bank was told that it was being purchased as an owner occupant, then that would present a problem. Investors sometimes worry that these kinds of investor deals could be interpreted as fraud, because these deals are frequently being performed. Investors sometimes make offers, but they may have no idea what the lender was told by the listing agent. People will know if they are making deals that are being hidden. The real problem being addressed here is whether or not the lender is being ripped off.

There was a time when sellers would receive tax bills for the difference between what they owed and what the short sale went through at, but this is not currently happening.

A flipping scheme consists of tricking a bank into funding a loan for the purchasing of a property. Usually this involves a straw buyer and an over appraisal. These homes are then sold at the highly appraised value. This causes banks to be defrauded out of the difference in the mortgage money paid to the seller.

When an investor buys a home that needs work, the appraisal on the fixed home will be higher than the unfixed home, but this should not be detected as fraud.

When you have lots of foreclosures, people create foreclosure rescue schemes. Foreclosure rescue schemes usually involve a lie to the person who’s home is already in distress in order to get money from them. These homes will ultimately foreclose either way. Today, people will promise a loan modification or a low fixed rate in exchange for a fee. As soon as the fee is paid, the person committing fraud will do nothing.

In California, it is no longer legal to ask for a fee in advance of a deal. California made advanced fees illegal last summer.

It is hard to get people in foreclosure any help, because there is no advance fee. A legitimate company could be trying to do good modification work, but if a lender doesn’t cooperate, then that company will not get paid. Unfortunately, rules are made to protect consumers, but they probably do not get a lot of help at this time. On the other hand, lenders are more open to offering help than perhaps any other time in history.

To get a loan modification, you must present a lender with some sort of hardship. Today, people are beginning to “dumb down” their assets and income in order to get a modification. People are now making false claims of identity theft as well. They will try to claim that they never purchased x home, and that they were used as a straw buyer, so that they can get out of their home.

Bruce has discovered that people are making plans to swap short sales, and then deed their homes back to each other at another time. This kind of plan can be labeled as fraud.

Bruce asks if people have been trying to burn their own homes in order to get out of loans. Paul does not believe that this sort of fraud has been increasing.

Bruce asks what kind of process occurs when a person is claimed to be guilty of fraud. The first stage in convicting someone of fraud is the complaint. After the complaint has been filed, an interview of people who are knowledgeable of the case is performed. Business records are then gathered and surveyed. After the FBI thinks they have enough information to make an accusation of fraud, the perpetrator is presented to a grand jury, or an affidavit is written to get a criminal complaint. This criminal complaint will then allow the FBI to get an arrest warrant. However, by the time someone is arrested by the FBI, they have already been charged with a crime. Most people know that they are being investigated for mortgage fraud before the FBI gets to the point of arrest. Paul believes that 2010 will be a busy year for mortgage fraud.

If you want to find out more about the FBI and mortgage fraud, the FBI’s website is www.fbi.gov

Tags: bruce norris, California, fbi, federal bureau of investigations, foreclosure, fraud, investing, investor, mortgage fraud, mortgage fraud division, paul bertrand, real estate, REAL ESTATE PODCAST, real estate radio, reo, short sale fraud, the norris group
Posted in Radio | No Comments »

156-TNG Radio – Randy Grigg 1-9-10

Friday, January 8th, 2010

Elite Auctions

Randy Grigg

(Full Bio)

This week Bruce is joined by Randy Grigg. Randy is the president of Elite Auctions. He spent 30 years as a pest management consultant, and gained a large portfolio of rental properties during that time.

Bruce begins by asking how Randy’s auction properties get purchased, and what the sellers’ perspective is towards their property values. Randy is soon going to have his largest auction. He has two trustee sale buyers that his company is working with. These two people have 50 unsold properties in their inventory. Most of their properties are lower quality houses. Right now, nice properties in nice areas have more demand. Bruce has noticed that trustee sale properties are typically cleaner than REOs, but the trustee properties that Randy will soon sell are in moderate condition. Some of them are beat up, but their landscaping is still in decent condition.

Many trustee sales are still occupied when the sale takes place. Bruce has noticed there is a common perception that these occupants are beating up the property, but he does not believe this is generally the truth.

Randy has typically been a low volume auctioneer. There are 4 nice properties that he will be selling at his next auction. His two clients will be selling 22 properties with him. This auction will be taking place at the end of January.

The trustee sale business is a highly competitive market, and most of the competitors are educated investors. There is also a much smaller range of profit to be gained in a trustee sale, and this profit can easily be lost in overhead costs. Trustee investors will often buy at 80 to 85 percent of market value with all cash. This is the model that The Norris Group uses, but in order to do that, you must be very good at minimizing expenses. Sometimes a trustee buyer has access to a property on the day he buys it. This allows trustee buyers to quickly plan for selling through methods like auctions.

Advertising has changed since Randy began his auction business. In the past, Randy had to spend $8,000 per house, because the print advertising is very expensive. Recently, people have started searching for properties through the internet. This has made it much cheaper for Randy’s business. His business posts properties to about 100 websites, and then sends emails to 100,000 Realtors.

Bruce once tried selling his properties through auctions, but he discovered that it took a lot of effort. He tried advertising his properties using street signs, and it did not work well. Bruce thinks that he has never worked harder than the 45 day period he spent trying to set up his real estate auction.

When Randy heard that The Norris Group was going to try doing real estate auctions, he was worried at first. Fortunately for his business, it is not as easy as most people think to begin an auction business, and most people eventually fail. There is a costly learning curve that is required for setting up a good auctioning business model. Randy lost 20 percent on his properties when he first started, but that process of trying and failing helped him to learn. There are many ways in which an auction can fail to have a good result. The first phone call that a potential buyer makes can completely lose their interest if they do not receive the proper response. Many people call on auction ads, and they receive a recording.

Bruce attended an auction one year ago in which 93 stilted duplexes were being sold. The sellers had placed their ads in the wrong place of the L.A. Times. Bruce tried calling the company, but all he got was a recording. By the time he arrived at the auction, the seller was closing the gates. Bruce talked to the seller and he discovered that he was the only person who had ever showed up to this auction.

Randy’s auctions are held in front of the home being auctioned. He has to analyze each house individually in order to understand what kind of buyer he wants to attract. If he wants an owner occupant buyer, he always advertises the phrase “45 days to close”. He also tells buyers that if they can close within 30 days then the sellers will agree to pay their escrow fees. The escrow fees are $400, but the cost of holding the home for two weeks is much more. Randy offers a 45 day closing, a free home warranty, and a guaranteed clear title. A home warranty does not cover foundation problems, but it does help relieve some of the buyer’s concerns. People often worry that they will not have a clear title when they buy a property from an auction, so Randy always mentions that they will.

Randy does not invest much time in open houses for his auctions, because he has discovered that establishing urgency is the key. He has a two hour, two day open house which takes place on the weekend. The auctions always take place within the working week.

The key to getting a potential buyer to come to an auction is to make them feel comfortable with the process. Randy usually has a mortgage broker present at the sale. If the buyer has not been prequalified, he encourages them to do so. He tells them that an auction sale is just like a normal transaction except they get to choose their price. You have to make people believe that they can get a good deal at an auction. Randy also offers a cash prize for people who guess what the final auctioning price will be. Their guesses allow Randy to more adequately gauge a property’s true market value. Randy does not hold auctions on the weekend, because holding auctions during the week attracts more serious buyers.

Randy has discovered that his quality buyers in Bakersfield discover his auctions through paper advertisements, because there are a lot of people who read the news there. However, buyers from other areas typically discover Randy’s auctions through the internet. Knowing where your audience comes from will help you to know how to advertise.

Bruce asks Randy what he considers to be a safe number of bidders in each auction. Randy has found that his auctions do better when there are not a lot of bidders. When lots of bidders come, they become more competitive and over price the property. Unfortunately, the high bidder often realizes 3 weeks later that he does not want the property, because he will pay too much. Randy’s typical preference for an auction is 5 to 10 buyers. Having fewer bidders will cause the property to sell closer to market value, and it will more likely be a successful sale. High bids might make clients happy, but if their property does not finish the selling process, then the selling value does not matter.

When Bruce has sold his properties through auction, most of his failures came as a result of defects in the property’s location and condition. Sometimes Bruce’s own selling expectations have brought about his auction failures. Sellers must have reasonable expectations for their selling prices.

There have been occasions when Bruce though his house would sell at a low value, but ended up selling for a much higher value. It is hard to predict what will happen at an auction.

When Bruce tried to hold his own auction, the only house that sold was the one in the worst condition. Two of his houses were priced very highly, and one of his potential buyers could not get financing. Bruce asks Randy if the property’s condition is a major factor in whether or not a house will sell. Randy usually makes minor repairs on his auction properties. He tries to make his properties better than the average REOs in that area. Bruce thinks that is a very smart decision. Bruce made many repairs and upgrades to his properties, but this caused trouble with appraisals, because his homes were in much better condition than the comps in his market.

Randy’s son Mike enjoys working as the president of the California Auction Association. He is still on the board for the CAA. Mike won the bid-calling contest this year for the CAA. He prefers doing charity auctions, because there are a lot of items, and that makes his job more fun.

If you are interested in doing auctions with Randy, his website is www.sellwithauction.com, and his office number is 661-325-6500.

The number for Elite Auction is 661-325-6500, and their website is www.sellwithauction.com

Tags: auctions, bruce norris, California, creative financing, Elite Auctions, flipping, foreclosure, grigg, hard money, investor, jack miller, podcast, Radio, real estate, real estate auctions, seller financing, short sale, the norris group, trust deed investing
Posted in Radio | No Comments »

The Norris Group Blog

Equipping California Real Estate Investors for Tomorrow's Challenges

The Norris Group Blog

California Real Estate Headline Roundup

Archive for the ‘Radio’ Category

165-TNG Radio – Peter Schiff 3-13-10

Peter Schiff

President of Euro Pacific Capital

164-TNG Radio – Robert J. Samuelson 3-6-10

Robert J. Samuelson

Author and Columnist

163-TNG Radio – Robert J. Samuelson 2-27-10

Robert J. Samuelson

Author and Columnist

162-TNG Radio – Christopher Thornberg 2-20-10

Christopher Thornberg

Principal at Beacon Economics

161-TNG Radio – Christopher Thornberg 2-13-10

Christopher Thornberg

Principal at Beacon Economics

160-TNG Radio – Philip Tirone 2-6-10

Philip Tirone

The Mortgage Equity Group, Inc. and www.7Stepsto720.com

159-TNG Radio – Philip Tirone 1-30-10

Philip Tirone

The Mortgage Equity Group, Inc. and www.7Stepsto720.com

158-TNG Radio – Greg Norris 1-23-10

Greg Norris

Greg Norris

The Norris Group

157-TNG Radio – FBI 1-16-10

FBI Mortgage Fraud

The FBI

Paul Bertrand,
Supervisory Special FBI Agent, Los Angeles Mortgage Fraud Task Force

156-TNG Radio – Randy Grigg 1-9-10

Elite Auctions

Randy Grigg

Recent Posts

Archives

Here are some helpful links

E-Mail
Password

Equipping California Real Estate Investors for Tomorrow's Challenges

Training Portal Login

The Norris Group Blog

California Real Estate Headline Roundup

Archive for the ‘Radio’ Category

Peter Schiff

President of Euro Pacific Capital

Robert J. Samuelson Author and Columnist

Robert J. Samuelson Author and Columnist

Christopher Thornberg

Principal at Beacon Economics

Christopher Thornberg

Principal at Beacon Economics

Philip Tirone

The Mortgage Equity Group, Inc. and www.7Stepsto720.com

Philip Tirone

The Mortgage Equity Group, Inc. and www.7Stepsto720.com

Greg Norris

Greg Norris

The Norris Group

FBI Mortgage Fraud

The FBI

Paul Bertrand, Supervisory Special FBI Agent, Los Angeles Mortgage Fraud Task Force

Elite Auctions

Randy Grigg

Recent Posts

Archives

Here are some helpful links

Robert J. Samuelson

Author and Columnist

Robert J. Samuelson

Author and Columnist

Paul Bertrand,
Supervisory Special FBI Agent, Los Angeles Mortgage Fraud Task Force