On Friday, October 19, the Norris Group proudly presents its fifth annual award-winning event I Survived Real Estate. An incredible line-up of industry experts joins Bruce Norris to discuss perplexing industry trends, head-scratching legislation, and opportunities emerging for real estate professionals. Proceeds for the event benefit Make a Wish and St. Jude’s Children’s Research Hospital. This event would not be possible without the generous help of the following platinum partners: ForeclosureRadar and Sean O’Toole, HousingWire, the San Diego Creative Real Estate Investors Association and President Bill Tan, Investors Workshops and President Shawn Watkins and Angel Bronsgeest, Invest Club for Women and Iris Veneracion and Bobi Alexander, San Jose Real Estate Investors Association and Geraldine Berry, Fry Wiles, MVT Productions, and White House Catering. Learn more about the panel and how to attend at isurvivedrealestate.com.
Today on the show are three special guests. Lance Martin has been in the real estate business for 24 years as broker/owner of Coldwell Banker Pioneer Real Estate, which serves the Inland Empire. Lance is an expert in residential REO foreclosure sales and owns offices in several Southern California counties. Mike Novak-Smith is not only one of the largest REO agents in the Inland Empire but also the nation. Mike is in the top 1% of all real estate agents nationwide and is experienced in REO short sales, bankruptcies, asset management, and negotiating. He also specializes in the Inland Empire as well. Steve Silva owns several businesses including Market Point Realty and Las Brisas Escrow. Steve is an expert in residential REO sales as wells as being a real estate investor. Bruce goes back with all of them back to the ‘90s.
Since they were all involved as early as the ‘90s, Bruce wanted to compare the 2007-2012 experience with the 90s as far as what has been similar and what has been different. Lance said regarding the volume of REOs he dealt with that it was different. The volume he dealt with in the Inland Empire from 1993-2000 was relatively light. At the time it seemed there was a lot and they felt busy. However, there was nobody like Lance Martin or Mike Novak doing the type of volume and business that they did back in the 90s. As they started into the new cycle around 2006, the volume ramped up very quickly to places they had never seen. It has progressively been slowing down literally to a stop over the last four years. Today’s volume is pretty much nonexistent as there pretty much is no volume of REO inventory coming into the markets. Since January of this year the numbers have been so small. The main distinction between the 90s and today is there is a certain sense of predictability. You could look at some data in the 90s and see what was going to come out the other end of the cycle. Today, Lance said he does not know what you can look at and make any kind of educated idea of what is going to come out the other end. There are large numbers that do not seem to be moving into the marketplace.
Bruce wondered when foreclosures peaked for Mike, to which he said about early 2009. This was when he had the most amount of unsold inventory. From then they were fairly consistent in 2010 and 2011. This year it has gone way down and they are at about half of what they had last year at this time. Mike said he probably gets about one REO a week, which is not really enough to sustain any staff or overhead, especially when you are used to dealing with hundreds of them. As Lance said, in the old days they felt really busy but they did not have the technology such as emails and web-based systems. Today you can do a lot more in a day with the tools we can use. One of the things that happened in the 2007-2008 cycle was the prices dropped off a cliff, and this was very different than what happened in the 90s. Bruce and Steve Silva accidentally entered into a transaction because Steve was a listing agent, and some others decided to auction the property off. It was one of those things where he had tried to get them to be realistic on the price out of the gate, and they refused as it was two months behind the price it should have been. When it went to sale, Steve had offers that they had rejected. Bruce bought the property at an auction at 40% less, and they accepted it.
Since the price had gone down so fast, Bruce wondered if it was really hard for the lenders to understand they were about to take that kind of beating and this was why they dragged their feet. Steve said this was indeed the case, and he remembered back in 1989 when the whole thing first started. Back then they knew exactly what was going to happen and when it was going to happen. He was calling Fannie Mae and Freddie Mac and was talking to somebody in Pasadena who told him there was no way. Steve told him he was seeing these notices of default, and then the Executive VP from Pasadena called and told him and told him he had thirty properties for him and thanked him for calling him. This was all how Steve got started. Back in the day, there was a process; and this is something we cannot find today. We have no clue what is going to happen. Lance said there is a complete disconnect as it relates to the numbers that you can actually look at. This includes the hard data such as the notices of default and the notices of sales.
Lance was not in the REO business until about 1993, and he came into it with a whole different story. Although he could not share it, he experienced that exact same story in 2005 that Steve experienced in 1989. He was looking at that data, and it was similar to Steve calling back in 1989 and said things were changing while the Pasadena VP kept saying the market was strong and there was nothing coming. Literally, only about 3-6 months later, the data was starting to reflect what Steve, Mike, and he had been looking at. That disconnect of what appears to be very accessible data for people to get at did not seem to be quite hitting home with some of the larger players, who you thought would have been looking at the same data and drawing the same conclusions. Now, at least back in 2006 you could draw some conclusions since there was still a system in place. Now the system is so broken that Lance said he does not know what you can look at today and literally say “This is what is going to happen in 3-6 months.” It is really difficult to map out a business plan, but that is the difficulty that we are going to be going into the next 6-12 months.
Bruce wondered if it matters that the lenders changed from the 90s to who they are dealing with in 2006 and beyond. Bruce wondered if mortgage-backed securities have become a bigger problem, whether to get correct answers or a willingness to foreclose. Mike said the difference was in the 90s they generally dealt with who owned the house. They had their own REO department, and you were dealing with the people who could make the decisions. Now most of it is outsourced to third party companies, and it slows the process down because they have to go ask who really makes the decisions. Bruce wondered if it is hard to know who makes the decisions and if there is a conflict of interest with the people who have an interest in a mortgage-backed security, such as whether it is in some people’s best interest to foreclose while somebody else may have a junior tronch that is not going to work out so well. Lance said this may be the case, but he does not think this is really the problem. If you look at the contrast between the 90s down cycle and what we have experienced in the past 5-6 years is the shear amount of depreciation we have seen.
In the 90s, as bad as it felt, we only saw a 25% drop in property values. This was somewhat manageable as you had, for example, a $200,000 house that was selling for $150,000. As bad as that felt for those people who were $50,000 upside down, it did not encompass the entire marketplace. Now you look at where we are at today, and for the most part Southern California peaked in the summer of 2006. Some markets have come down 70% from the peak, and it has affected so many people. Everyone was using their houses as ATMs, and the values were just ridiculous. He does not know if the problem is with the type of financing or with the mortgage-backed securities portion of it. Lance believes the values came down so fast and so much that the magnitude of the problem is much larger than the system can bear. Bruce said from an investors point of view, whenever you have a new round of foreclosures, whether in the 90s or 2007, the lenders usually are slow to react to take an early loss. They are usually hanging on to get a number that is not realistic. In this particular case, they started losing 3-4% a month in the Inland Empire. There was probably even an absence of comps, and there were no buyers and had to go down to a level where it found somebody who was going to write a check.
Mike said at one point he had 300 active listings, and they only closed about 15 deals that month. This was because 90% of them were way over-priced, so it takes a while for reality to set in. The prices are going up now, and the appraisers are coming in low. It takes a while for it all to match. Sometimes the data is lagging. An appraiser can look at somebody willing to buy something and does not show evidence that anyone else has agreed to that same number. One of the things that is involved in the appraisal world is the concept of substitution. You buy one thing that seems to be at a high price, but when you try to substitute it for the same dollar amount, you can’t do this. That is how we are starting to have this escalation.
Bruce wondered if any of the alphabet soup loan mod programs have been successful. Lance said he is not sure. There is one possible exception that is too early to tell at this point, which is that HARP 2 will be successful. The HARP 2 refis that are going on and the program itself seems to be making more sense. The numbers that Lance has heard show that the volume of HARP 2 refinancing that is in the pipeline is increasing. This means the lending industry can do refis since we are not doing resales. Prior to HARP 2, they have been able to do HARPs for outside companies. Prior to that, every other company such as Hope for Homeowners and HAFA were a dismal failure and did more harm than good. HARP 2 is basically a program where you can refi a home that is over encumbered up to an unlimited percentage. There was confusion that the cap to loan value had to be 125-150%, but with certain guidelines you fill in you can refi that property under the HARP 2 program without the loan to value issue.
Bruce wondered when all of them noticed REOs started declining and when they realized it was not what they had anticipated. Lance said for him it was January 1, 2012. He said you could go back to September 2008 when you could see REOs going through the system when things were very busy with new assignments coming in and buyers engaged. Property values were dropping, but nonetheless the inventory was being moved. In September 2008, SB 1137 was passed by California and was the first foreclosure moratorium followed by the alphabet soup of modifications and Fannie/Freddie moratoriums. You can literally look at inventory levels and REO assignments coming through the system; track it to four years ago, and you can see that they have progressively shrank ever since. As of January of this year, they have practically stopped.
Bruce said what is interesting about the peak they experienced with REO listings is that they came off of a delinquency rate of 4.3%, and we got to 11.2%. The inventory should have doubled 2 ½ times, but instead it went the other way. Despite there being a lot of properties that were turning in the background, it is now not uncommon to have people two years behind them. During the decline, Mike, Steve, and Lance were meeting with all different people who had control of the inventory. Bruce wondered if they were in a position to actually know what was going to occur. Is there somebody in the know, or are they being told to tell you these things. Steve said they did not think anything was intentional, but they could not know. They finally had to ask the other people, “Do you know, or do you not know?” This question was asked to regional managers for the Western United States, and they said they had no idea. They did not even know if they were going to have a job the following month. These kinds of are being made at a level far above the people who at least Lance is talking with. The people he talks with at the banks where he does business do not know where and when this inventory is coming.
Bruce wondered what their last conversation was where they were given hope that the volume was going to go up instead of down. Lance said there was two things for him. Two years ago in August prior to the robo-signing scandal, one of the larger banks started gathering up a lot of agents to begin training. They never said to gear up and that there was going to be inventory, but it was obvious since they were in a room with 800 other REO brokers in Southern California. Everybody in that room left thinking they were going to have some inventory. Two months later, the robo-signing scandal kicked in and was occurring at the tail end of 2010 and all of 2011. The robo-signing scandal seemed to come to an end about 6 months ago in the first quarter of 2012. He was expecting to see some inventory happen then, but nothing happened. When Mike was at conferences in March, he was at five where they all said they expected there to be more inventory. Both he and Lance agree that the people they talk to just aren’t in the know and not really at the level where they get to be in on the decision-making and what is really going to happen.
Bruce wondered what the reaction will be when you have a listing that is an REO tomorrow and you put it in the MLS at full price. The answer is there are 5 to 10 offers within the first several hours. Most of the banks don’t want to see offers within 72 hours of the time it is listed. They want to give everybody an opportunity within 72 hours if it is anywhere close to a semi-desirable property. They will then have between 30 and 50 offers on it. The demand is ridiculous and part of this frustration because the buying side of the transaction is engaged and they want to buy. Investors want to buy and are willing to pay above retail.
The unemployment rate in the Inland Empire is above 12% right now. There are enough regular consumers in the Inland Empire who have enough confidence in their current employment situation and income that they want to buy. They love the prices, and they love the interest rates. The selling side of the equation is broken. The inventory is broken; we could sell 4-6, maybe even 10 times as many properties as we are selling currently. That is one of the frustrating things, which is it cannot come from the normal source, which is the private owner since they are upside down. The only exception would be if it is in the form of a short sale, which takes some time. Right now Moreno Valley has 300 properties currently in escrow. Approximately 300 properties a month have been sold forever. You could go back and look at 20 years worth of data, and you will see that the city has been able to absorb 300 closed transactions per month for 20 years. There are 200 properties for sale in the entire city today.
Back in 2008 Bruce did a search in the MLS where he would pull $100 grand and below. In the MLS when you pull a certain percentage that has too many properties over 500, it messes with the data. He had to back it down to $90,000. There were 500 properties listed in Moreno Valley under $90 grand in 2008. Now, there is only 200 total in the entire city. Back in 2006 at another boot camp Bruce was teaching at, he searched for properties under $300 grand in Moreno Valley. There were 3; and they were all 2 bedroom houses that were 800 and 900 square feet. If you search over $300 grand in Moreno Valley now, there is probably not 15 listings that are all 4,000 square feet. It is just a ridiculous time where you do not have enough inventory.
Bruce wondered if there is any band of inventory that might still take a price hit. Lance said he believers there is, specifically the ultra-inflated high end. The financing is difficult and it is still hard to get jumbo loans. In the Inland Empire that is a narrower bandwidth. The high-end marketplace is absolutely in tune for some more paying. The bottom-end entry level things will most likely see significant price increases, especially in the entry-level property. It is hard to find a $100,000 property in the Inland Empire now let alone a $210-$130,000 property. With all the jumbo price ranges, it is almost impossible to find a buyer that qualifies. There are also a lot of people who occupy a property who can no longer buy it, and the replacement buyer is not really waiting in the wings. In the lending world it is very difficult as well.
There was a transaction where somebody had an 800 FICO score, $1 million in the bank, and a sufficient income. Right at the end they were turned down for the loan and had to end up getting a $1,000,050 purchase down to $600 grand in order to receive a conventional loan. This then puts pressure on the upper-end market. It is also the one area that might still have pressure as well as in Orange County. In this city they thing the are immune, which is not true. Bruce said if he was in escrow at any time with 25 properties, 20 out of 25 of them would have some kind of appraisal issue. Steve said he has appraisal issues every day with the things he is selling. They will put it in the MLS for $200,000, it will be bidded up to $230,000, and it will only appraise for $200-$210,000. This is brutal for the FHA and lowdown payment conventional buyers since they are almost pretty much locked out.
Part of the definition of market value is to be what a willing buyer was willing to pay. This was the statement of something they needed to pay close attention to, especially if they had 25 offers. You would think this would be a statement that market value is changing. Interest rates are creating a payment that is usually saving a buyer $6 grand a year in housing costs. Appraisers are always a sensitive issue, and their hands are going to be tied. Appraisals are going to be driven up by cash buyers.
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Tags: bruce norris, harp, inventory, Lance Martin, Market Point Realty Services, Mike Novak-Smith, MLS, Pioneer Real Estate, ReMax, REO agent, sb 1137, Steve Silva, the norris group, The Norris Group Real Estate Radio Show