On October 14th, 2011, The Norris Group returns with its award-winning event I Survived Real Estate. An expert lineup of industry specialists join Bruce Norris to discuss current industry regulation, head-scratching legislation, and the opportunities emerging for savvy real estate professionals. 100% of the proceeds support the Orange County Affiliate of Susan G. Komen for the Cure. This event would not be possible without the generous help of the following platinum partners: Foreclosure Radar and Sean O’ Toole, Housing Wire, The San Diego Creative Real Estate Investors Association and President Bill Tan, Investors Workshops, Invest Club for Women and Iris Veneracion and Bobbie Alexander, San Jose Real Estate Investors Association and Geraldine Berry, Real Wealth Networks, Frye Wiles Web and Branding, MVT Productions, and White House Catering, who will provide the 3-course meal for this black tie event. Visit iSurvived2011.com for more details.
Bruce is joined this week by Gary Thomas. Gary is the current National Association of Realtors 2011 first vice-president. He is also owner of Evergreen Realty in Villa Park, and he has served the industry in many roles including being the president of the California Association of Realtors in 2001. Gary began his career in 1975 at a time when California real estate did something unusual from 1975-1980. It actually separated itself from the national price by doubling. Gary was right in the middle of all this in the prime location where it happened the strongest in Orange County. At this time, it was very easy business. Bruce remembered reading on a California Association historical website someone’s surprise that prices could accelerate at such a fast pace when interest rates were 13 ½%. What was interesting was not only were prices escalating, but the interest rates were going up as well. It was like you had a double whammy. If you did not make a decision, then you were not only going to pay more, but you were going to pay more per month. The one thing that did help during the time when the interest rates ballooned up to 18% was they had what was known in California as the Wellencamp Decision, where a buyer of an existing home could take over the loan without having to qualify or without getting permission from the lender. What they did was they put a second trust deed behind the first, so the effective rate was much lower than the 18% that you would have to get if you went out and got a brand new first trust deed.
At the time, 60% of transactions in California did not require a new loan in ’81-’83. If you did not have that in place, you would not have had a market, and it would have been disastrous. What is interesting about understanding the history of how we survive certain things because back in the ‘80s when we had the crazy interest rates, we did not have a price decline. We have the tools at hand, and one of the things we have is most of our loans are government-owned or controlled. They could probably think about the solutions of the past, and one of the things that can be done is to create a loan program where the due on sale clause has a moratorium or literally does not exist to where you could bring it forward into the future. You would end up having a much safer real estate market going forward, and you would also have the ability to have people have nothing down right now without a big risk. A lot of what is going on is finger-pointing and thinking everybody needs to have a giant down payment to be safe. This is never been true. It’s really about getting sound underwriting decisions and whether the people can afford to pay for the property at what they qualify for or not. A down payment does not really make that much difference. The problem is it seems like it should make a difference as it sounds like that could be a right decision. Shelia Bair said that when she said that when somebody puts 20% down, they are more committed to the property and it makes common sense until you look at a chart. If you look at a chart for foreclosures over a course of decades, you find out that there is virtually no difference between a 20% down loan payment and a VA nothing down loan. If you look at the VA loan program or the FHA loan program where FHA has very little down, both of those programs are working well. This is what is so frustrating to somebody on the outside not with a political axe to grind is you say, “Couldn’t we make some common sense decisions?”
We do not need to look at the years between 2002 and 2006 and say it is going to replicate in the future. All the decisions made at the time were probably the only time they will be made where a lender did not care if they got paid back because they got rid of the paper. Prior to that and for decades, somebody actually cared that they got paid back. Whatever programs were in place at the time in 2002-2006 worked. It’s like we are trying to solve 2002-2006 with these programs. This is not what we should be doing, especially in a time right now where people are struggling to get down payments because they are coming off of no gains on real estate. It’s also possible they have lost value in the stock market as well, so there is a combination of things that put investors and customers at a disadvantage by not having the kind of down payment that some within the administration or within government would think that they need to have. It’s understandable to have the desire to not create another group of foreclosures, but what they are probably going to do is create a generation that is going to be a renter. This is not as beneficial as people may think; if you look at statistics you see that people who own homes generally do much better both from a wealth standpoint as well as a way of living. Their children have better test scores, they do better in school, and they generally as less apt to have a criminal background. It’s much better within communities to have stable homeownership than it is to have a renter class.
There was a recent Time Magazine cover that said Rethinking Home Ownership by Owning a Home May No Longer Make Economic Sense. This drove both Bruce and Gary crazy. In the county where Gary is, prices are less damaged than they are in Riverside, which is down 60%. Interest rates are 4%. For somebody to say on the cover of a magazine that it does not make sense to tie up a fixed house payment at a sub-4% interest rate for the next thirty years is really an astonishing statement. What is going to happen is a few years from now people are going to look back and kick themselves for not having bought, even if they absolutely timed the bottom prices because of the interest rates. Once interest rates begin to rise, trying to time it to the bottom is going to erase that difference very quickly. You can go from 4-5%, which doesn’t sound like a big deal, but it is actually a 25% rise. This is a big discount in a price. In 1975, Gary would have seen an interest rate be at 8%, and by the time 1980 came it was doubled. These are bragging rights. If you have a 4% mortgage rate 5-10 years from now, there are going to be people looking at it and confused. It is going to feel like a good decision. When someone talks about on the cover of a magazine that something does not make economic sense, this is not really why most people own.
If Gary went home to a rental instead of a home that he owned, for one he would not feel like doing anything to the property because you just don’t have the pride of ownership and would have to ask for permission to do anything. This is what is special about America; we should not short change the feeling that comes from owning your own little square of the world. The first house Bruce bought really stands out for him because he was married, was 20 years old, and bought a house that had a lot of problems. However, on Saturday morning after closing on Friday, Bruce had the opportunity to mow his own grass on his own house. Gary had bought a brand new house with an FHA loan after he had been married for about three years. He had the same experience as Bruce, but because his house was brand new he got to build a patio and patio covers, put the yard in, and put in the sprinkler system. For this same reason this house is the one that stands out in his mind. There is more to having a home than the economic side of it.
Ron Phipps said we are at a turning point, not just because our livelihood is at stake but because home ownership is at stake. The privileges we have had, our parents had, and our grandparents had are being eroded. Our children face having those privileges denied to them as well. This is a pretty strong statement, but it seems everything is coming together to try and discourage homeownership or try make it much less accessible for most people. All the way from the QRM, where they are proposing that qualified residential mortgages, which would get the best rate, would have to have a 20% down payment. However, this does not make any sense, and people have been avidly going in to make sure this doesn’t happen. There has been a coalition for this, and the members involved are civil rights groups, consumer groups, lenders, and almost every kind of group. The civil rights groups are looking at it and thinking a whole class of people will be disenfranchised if you go down this road. The mortgage interest deduction keeps coming up under attack talking about whether they want to trim it or reduce it. You can go on and on with all the things that are going on to stop the 20% down from happening. The jumbo loan limits have just been reduced, which not only affects the absolute top of the loan limit, but it also affected almost every place in the country because it went from 115% of the price in a market area to 110%. It’s going to affect everybody across the board, and people do not realize this.
You take everything into consideration, and it is just one thing after another where it seems like people are trying to fix the ills of 2002-2006 in 2011 and 2012 when we don’t need it now. In Riverside, for example, it would be hard to find a PITI house payment that would be more than the rental equivalent. They probably have a prototype if they want to see what a nothing-down loan program would perform like, which would be the $8,000 rebate timeframe. This would be close to nothing down; somebody paid it down and received it back. They would most likely not have a serious foreclosure problem with the pile of loans. They would not have had a serious problem ever since the whole downturn started since the newer loans are all performing well. There are some loans also that were recast where the borrower went back in and tried to save it, but part of the problem is still when they purchased the loan and what they got into at the time. It looks like people are going to have to give up a lot of the goodies of real estate because there is going to be a commission of physical responsibility that is going to save $2.5-4 trillion from somewhere, and everyone is going to be asked to do their share. The question is whether the National Association of Realtors has really thought about having to give certain things up as well as what should be given up and what should not.
Everything that you change has an effect that multiplies. Take for example the mortgage interest deduction. One of the things that has been discussed is to take it away from vacation homes or second homes. This not only hurts the resale or sale of homes in vacation areas, but the ripple effect of what that does to the economy in those particular areas. This includes all the way from service sector jobs to anything you want to think of. If people are not buying in those areas, it affects everybody. It not only affects the person who owns it, but it also affects a lot of people. This is the unfortunate as they don’t think through the ramifications of doing anything fully. This would counter to producing jobs. An unintended consequence is a big topic. Sometimes Bruce just shakes his head when he sees decisions made where there could not have been anyone with a deep knowledge of the industry allowed to participate and have the decision emerge. For instance, the Dodd-Frank Bill and the QRM, Bruce got the sense they were handed a past bill with almost the mandate to make it happen. Typically what happens is when a bill is written or a regulation, the people who write it then send it out for comment. Typically comments are made on anything that affects the industry, homeownership, or property rights. Any interested groups will then right on it. Whether they take it into consideration or not when they mandate the regulation is really up to them. Groups such as Gary’s try to be engaged, but they cannot always affect the outcome the way they would like. This is very frustrating because the people who write the bill do it in a vacuum without consulting anybody with academic minds and without any real world experience, and they come out with something without thinking about the unintended consequences.
The Norris Group recently held an interview with the president of MERS, and the reason Bruce did it was because he was just in front of the Senate in Congress. Bruce read his deposit word for word with the yellow maker, so when he watched the Senators ask him questions; it was obvious no one had read it. It is frustrating when a bill is created without the input of an industry that could give input. For example, if the outcome they want is to have fewer foreclosures, then others could advise them the route to take to accomplish it instead of the route that they were choosing without input. Bruce thinks part of it is payback. We really went through a time where real estate was going gangbuster, and many were shaking their heads saying things could not continue the way they were. Therefore, part of what is going on is an overreaction to what was happening as well as misdirection. One of the things Bruce has been fortunate to go and talk to Fannie Mae, Freddie Mac, and FHA about is how to deal with the situation and getting rid of certain homes. One of the things that would be frustrating would be if they decided to bulk sell them to hedge funds since they were great participants in making things happen in the first place.
In 2005, neither Bruce nor Gary knew what a mortgage-backed security or a collateralized debt obligation. They had no idea how they were being funded and spread around until 2007 and 2008. It was really confusing how things were working. We had an industry definitely was benefiting by the new rules, but we did not realize the unintended consequences of what was going to happen. Unfortunately, this is what we are dealing with now.
One of the most important agendas for this coming year for the National Association of Realtors is trying to make sure we get back to a healthy housing market and get some reasonableness back into government and how they’re dealing with things. If we can do this, it would be a homerun. A lot of other pieces of the industry want this too. One of the questions Bruce asked the president of the Appraisal Institute was how he would have liked to go to sleep in 2006 and wake up in 2011 as an appraiser. Your job would be a lot different.
Gary Thomas will be on the panel for I Survived Real Estate 2011, taking place on October 14th. The Norris Group would like to thank their gold sponsors for the event: Adrenaline Athletics, Coldwell Banker Pioneer Real Estate, Conaway and Conaway, Delmae Properties, Elite Auctions, Inland Empire Investors Forum, Keller Williams of Corona, Keystone CPA, Kucan & Clark Partners, LLC, Las Brisas Escrow, Leivas Associates, Mike Cantu, Northern California Real Estate Investors Association, Northern San Diego Real Estate Investors Association, Pacific Sunrise Mortgage, Personal Real Estate Magazine, Realty 411 Magazine, Rick and LeaAnne Rossiter, Southwest Riverside County Board of Realtors, Starz Photography, uDirect IRA, Wilson Investment Properties, Tony Alvarez, Tri-Emerald Financial Group, and Westin South Coast Plaza. Visit isurvived2011.com for more details.
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Tags: 20% down loan payment, bruce norris, California Association of Realtors, Dodd-Frank Bill, Evergreen Realty, fannie mae, FHA, freddie mac, Gary Thomas, I Survived Real Estate 2011, MERS, mortgage-backed security, national association of realtors, QRM, rental property, Ron Phipps, the norris group, The Norris Group Real Estate Radio Show, VA loan program, Wellencamp Decision