Craig Hill

Hard Money Lender for The Norris Group

(Full Bio)

This week Bruce is joined once again by Craig Hill of The Norris Group. Craig has worked with The Norris Group since the company opened in 1995. Craig has worked with the real estate investors, helping them access money for their deals and trust deed investors who want to get a very safe yield on their money. Prior to working with The Norris Group, Craig was in the hard money loan business for years prior to that; and the expertise he brought with him has proved him valuable to the success of the company.

Today’s radio show focuses on the borrower side of loans. Craig deals with calls all the time and goes through the terms of the loan, and there will be some callers who are connected to the advertisements of 4% and are completely shocked when Craig tells them it will be 12.5%. They do not understand this side of the world at all. However, Craig said these calls usually come from people who have never done it before, so usually whenever Craig gets into a situation like this he tries to ask them how they funded the last deal they did. You really have to establish that this is a different world, and if somebody has been a property buyer for a long period of time, they have a better understanding. Sometimes if you get that person who feels they can do it, it might be best for them to pursue a loan at their bank under a non-owner occupied program. Craig tells them they might be able to get it if they have perfect credit and other things. There are a lot of different ways to handle it, but Craig said The Norris Group usually deals with investors who do this for a living and have an understanding of what the costs are going to be.

The real education is to go ahead and try whatever you think is easier or less expensive because the lending world is really not working very well right now. Bruce worked with a major bank where the manager told him the frustration they have right now where they cannot fund owner-occupied loans inside of 75 days. In the investor world, if you do not have speed, you don’t find deals. They have to be able to close their loans quickly, and they have to rely on the fact that the deal will close. People are always asking how they can save money, so they either try to list the house themselves or find their own money source. People even hold seminars about how people can find their own money, but it is really not that easy. It is not that easy to get trusted with money. You always have to ask yourself whether it is really cheaper or not because there is always something attached to it, including a no answer when you thought you already had a yes. The Norris Group gets a lot of these kinds of calls where someone calls at the last minute and only has three or four days or less and they need to close it. Someone had told them something didn’t perform. It is so competitive out there now, so you have one loan that does not perform then you can forget about doing business with your agent again or anybody that agent knows. You have to see that this was really the cost of not getting a loan as it exceeded far the cost of getting one. It is not easy to watch over the years people going through a process of trust. As a person, to start from scratch is just not a reliable source.

Bruce came through the hard money business first as a borrower of considerable amount of money on a regular basis. He really did not consider the cost as onerous at all; he just needed access to it. With reliability comes the ability to grow. It’s the same way with The Norris Group business as a whole and just like how it is with an investor. If an investor has either his own money, such as a limited amount like $200, they really are working under constraints. Once they have access to somebody who might have, for example $1 million, they can start and tailor their business knowing they have access to $1 million. There is a cost to this, but you also have to look at the benefits of this. The benefits are you can up your marketing and do many more types of projects. It’s like being a construction lender without having a lender. A construction worker has to have some leverage, or he is only going to build ten homes. This has been the same way with The Norris Group; the borrower side has always grown along with the money side because the money side is there and the borrowers need the funds. This is what a hard money lender is.

When Bruce and Craig met, their meeting came about because Bruce was seeing more opportunities than he could personally handle. He had a fair amount of cash and a credit line, and all these were active on free and clear things. He had a chance to go to HUD auctions that were tossing out $.50 deals a half a dozen times per auction. He also had the chance to buy a track of homes at the same number. He looked around and saw how he could not take advantage of it, and this was the start of their meeting. When Bruce and Craig met, this was not the typical loan for a hard money loan business. It almost did not exist, and this was in about 1992 or 1993 when for hard money lenders the rule of thumb was a house was worth what you paid for it. If one next door sold for $100 that was fixed up, then you bought one that was exactly a model-match right next door for $50 or less, then you could borrow $30 or $40 on that one. At the same time, The Norris Group could lend somebody who had never made a payment $60 grand on the other one. When Bruce first came to Craig, he had to fight very hard to get the first few deals through because it was not done that way. Now, in a lot of ways hard money is synonymous with that exact function for investors. Back then, however, it did not even exist.

Bruce said he remembered for one of the properties he bought at a HUD auction that was appraised, they had not discussed what he had paid for it. He asked for it to go ahead and be appraised and would be able to borrow X-amount of percentage on the value. When Craig told Bruce the value, he asked Craig if it bothered him that he would be giving him money back more than he paid. The first thing Bruce thought of was they had a really unique opportunity there and Craig was probably dealing with his type of the world for the first time, and Bruce had access to a lot of dough for the first time. Bruce told Craig he could rest assured and made six payments on the first loans, and all of a sudden it dawned on the owner of the company that they had never had anybody do that prior, so they either understood that Bruce understood it or he was capable more than their other clients had been. This was an important transition for the hard money loan industry because it followed with Craig hoping there were more people like Bruce. Craig spent three or more years until he had all the other loan officers ask him when he thought it was going to be done. Some of them never transitioned into doing that and Craig strictly transitioned into doing only that because he got used to the facts from Bruce and others thinking the process was very efficient. They knew how to make the most happen with the least effort.

Bruce has always been surprised because he remembered thinking when 1995-97 passed and it was the end of the REO world, they were really thinking from where all the deals were going to come from, and they did. The private party purchasing and construction started, and all of a sudden The Norris Group was even busier. Craig said this has been the one important thing that there has always been a niche for good borrowers and private money. If good people are out there doing something and making a profit at it, whether it be buying off private parties or lots when the time is right, there is always an opportunity and a surprise that no matter what the real estate market is like, there is always a space for hard money loans. Bruce is so convinced about this now that he has had the chance to go back and rub shoulders with the people who make decisions in the normal world and see how they view investors. He came back with a self-assurance knowing there will always exist a need for a private loan business because we just make decisions that are common sense, yet the infrastructure prevents this. For example, The Norris Group is not afraid of a home that does not have a kitchen because they have dealt with 1,000 of them and have not been damaged by any of them because they know a kitchen can reemerge for a certain amount of money. In the loan process, they retain the money that would cause a kitchen to show up if the borrower stopped paying. You start putting the pieces of the safety together and think you can make the loan, but it does take private money to fund it quickly and accurately. Bruce does not think we are ever going to have a lot of competition from the other side.

Craig is amazed how much conventional lending will not do. There are so many hoops to go through, and the borrowers The Norris Group is loaning to have wealth and credit. They have everything where you think you can walk in and get any amount of loans you want, and they can’t even get loan #1. Craig received a call from a borrower not too long ago who owned about 4 houses free and clear for about $120-$140,000 each. This is his money he put into them, but the bank will not work with this because they consider it cash out. Craig wondered if he would be a stronger borrower if he leveraged at 100%. Here is somebody with perfect credit with four free and clear houses and the bank will not work with him because they see this as cash out. It does not make sense to him. Somehow this puts him in less of a safe position that he owes, for example, $200 grand at 50% and has $200 grand of liquidity to make sure it gets paid. This is a decision-maker you’re competing with and you think you will be okay. With The Norris Group on the other hand, their response is how quickly they can get their appraiser out there.

Some people are disappointed that there are more hoops than they thought. They attend a seminar and get told that hard money only looks at one thing, and then they go elsewhere like The Norris Group and see that this is not the case. They were not really told what was really going on. Because of the nature of loans and more recent history, Craig said one thing that is very difficult for people to understand is if you are brand new, it is very hard to delicate the whole process and think you are going to have a good result. You don’t even know how to protect yourself. This is the most frustrating thing Craig sees from some of the national seminars because it is almost like they are a part of a group and are dealing with a mentor, while The Norris Group takes a look at the deals and sees they are not deals. The number one thing The Norris Group wants is to make sure people have a deal, or they are going to talk them out of it. Bruce said this is an important thing for people to know that there are companies that are built that way and companies that are not. It has to go through some filters. If The Norris Group is going to make a loan on it, then there is probably a very high success rate for the investor.

There are several filters. For one, you might look at the sheer numbers and say it is not a deal, and then you have an appraiser who goes out with a lot of experience in investing and says that the numbers make sense but it is really a dangerous property for specific reasons. The filter The Norris Group has for people who borrow money from them is second to none. Bruce trusted himself and said he would actually have cause himself if he had found a deal. If someone like Rick Solis had gone out there and told him he really needed to take a second look, then he would. You really cannot put a value on this type of filter, and sometimes The Norris Group will get calls from people who are thinking of buying all cash, and Craig tells them to call him when they have their numbers. If they have something in escrow that they are thinking of doing, then they need to take a quick look at it because it is very easy to see where somebody can make a mistake.

For people who don’t have experience, they really don’t realize how expensive the journey will be, so there are surprises and repairs. All these things start taking away, whether it is a percentage here or there, and all of a sudden a deal at, for example, $.82 on the dollar that seems like it is going to make you a lot of money actually costs you a lot of money. If you get over 75% of what the house is worth in repairs and the purchase price, you are really starting to deal with a very thin margin. Craig will back out everything and start at 100%. He will ask them if they are going to sell it themselves or if they are going to have a commission, because now more people are paying incentives such as 2 or 3% of the closing cost. If you have something and then you have the cost of the loan, pretty soon they can see that what something is costing and being sold for is not leaving anything in the middle. You are going on a 6 month journey, and this is where the experience comes in. You are going to hire a construction crew you have never dealt with, and the odds of this not working out are higher than dealing with one you have dealt with twenty times. Everything that potentially goes wrong in the business is especially likely to occur to the first-time person. For that individual, having a deal is critical. The first step is the person needs to have a deal.

The second most frustrating thing for people is they really are told that they don’t need to have any money or need only a very little money. We are looking at things in terms of the borrower needs to have survivability and a successful outcome. Years ago Craig had a client who had a house and made payments like clockwork, then all of a sudden he stopped making payments. He called in and said he had a specific amount allocated for that, and Craig said it was quite a surprise. This was years ago; so more and more The Norris Group has had the philosophy that the really liquid cash is very important because it gives them survivability to only to protect The Norris Group and their investor, but it really protects their down payment and what they put into the property. It gives them the ability to get out of a situation instead of lose a situation. It is also really a benefit for them to make a monthly payment.

Craig has always been asked if the payments can be included in the loan, and he learned years ago from making an unwise transaction with his baseball cards that once the money was long gone he made payments on it every month. Every time he wrote the check it was a lesson to not do it again. In the same way, if you are making a payment on a property you realize that it is costing you money. Just because you might have payments for six months, you cannot just sit around and wait. You have to take action since the problem is not going to solve itself. The payments are either not a high priority or the borrower has a tendency to not think about making payments. The Norris Group used to do seconds for people so they would not have as much in, although this is something they do not do anymore. They realized that not everyone is disciplined. The Norris Group not only looks at the deals, but they also try to help people be disciplined so they have successful outcomes. You cannot try to do three if your limit really should be one. Stick with the one because you are really going to have a successful result on that one. One of Bruce’s favorite statements Craig has made is, “Lost another loan; made another client for life.” In this case, the client was told the truth they actually needed to hear to see that they now have confidence that they have a backup system they can trust and will not get hurt by their loan officer.

There is almost as many people out there who would thank The Norris Group for not doing deals, talking them out of a deal, or explaining how it works. It is very satisfying because what Craig tells people when he is talking to them is he can tell by their voice when they are a little disappointed, but he tells them he can deal with that. Being a little disappointed right now with Craig telling you no or what is the real deal is much better than the client having a deal three weeks from now where they are going to lose the deposit or having a deal nine months from now where you lost $20 grand. This is going to be a lot more disappointing. The philosophy at The Norris Group is to deal with it as it comes, and people are usually very appreciative of the fact that TNG tries to give them good advice.

Bruce mentioned the home shows and how one of the things he noticed was how frustrating they were because some of the reality was missing. On the show, you are shown a property in the beginning that needs a lot of repair. It’s a perfect opportunity for two investors, but then you come back four months later and they look like they want to get a divorce. Then, the realtor comes back in and tells them what they left out. Going from A to B is an expensive process, and it just shows there are deals that do not fit the level of experience of certain buyers. Craig always tells them when they get their first deal; he tells them they did not find the deal, it found them. There were several people who passed on that deal who were experienced investors, and the newer people need to stick with what they know and what is the simplest process. You have to leave the other things for the other people, and conversely in their group of clients they have a lot of clients who are experienced. They have one right now out in Orange County who is buying a property for $220,000 and are putting about $125 grand into it. This is a very experienced investor, but it is also a niche because not a lot of people are going to be able to accomplish what he is going to accomplish. You have two sides of the scale; one that can tackle these kinds of things, and the newer group that needs to stay away from this. Most often these are the deals that the new people find that other people had passed on originally.

Be sure to visit our website, www.thenorrisgroup.com, for more information on trust deed investing and our loan programs.

For more information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 170 podcasts in our free investor radio archive.

I Survived Real Estate 2011

(Full Bio)

On October 14, 2011, The Norris Group returned with its award-winning event I Survived Real Estate. An expert line-up of industry specialists joined Bruce Norris to discuss current industry regulation, head-scratching legislation, and the opportunities emerging for savvy real estate professionals. 100% of the proceeds support the Orange County Affiliate of Susan G. Komen for the Cure. This event would not have been possible without the generous help of the following platinum partners: ForeclosureRadar and Sean O’Toole, Housing Wire, the San Diego Creative Real Estate Investors Association and President Bill Tan, Investors Workshops with President Shawn Watkins and Angel Bronsgeest, Invest Club for Women and Iris Veneracion and Bobbie Alexander, San Jose Real Estate Investors Association and Geraldine Berry, Real Wealth Networks, Frye Wyles, MVT Productions, and White House Catering. The event video can be found on isurvived2011.com.

Bruce continued the discussion on risk-taking. Debra said you have a lot of uncertainty in the lending community right now waiting for regulation and waiting to understand the government’s role. Doug said he had been surveying 1,000 people a month for 16 months and publishes the report on his website, so he asks what their expectation is on interest rates and prices. In the most recent quarter, Fannie Mae also asked them what they thought about stability when it came to unemployment. 26% of the people who were employed were worried about not being able to stay employed. 9% of the people in the workforce are already unemployed, so you have over one-third of the workforce that is concerned about the base ability to pay anything. When you look at their expectation that interest rates are going to be essentially flat for the next two years, they expect house prices to fall during that time period. They are essentially asking, “Why would you tell us that right now is a good time to go out and borrow $200,000 and buy a house?” There is a lot of discussion about the HARP Program and why people are not considering this.

If you think about the practical aspect of what the household faces, you have to consider that they are asked to bring $4-$6,000 to the table. If they are worried about being unemployed in 6 months, they are essentially saying, “If the payback is $200 a month in savings, and it is a couple years before I receive the money back, what if in 6 months I don’t have a job?” So if you say you understand it, it makes sense, and you now need to roll it into the principle; it doesn’t sound like a good deal because you are asking me to take on extra leverage. So to the customer, at the end of the day there is a question of stable employment that is equally big to the supply of properties they have to work off still. That is as much a macroeconomic issue to Debra Still’s point about the uncertainty as it is about housing because the engine for job growth is small business. When small businesses are surveyed, the number one reason they say they are not hiring people is lack of sales. The number two reason is uncertainty about the tax and regulatory environment. Until macro-policy makers get back to focusing on what makes a good investment market for businesses to go into and hire people, we will most likely have a concentric circle between housing and the aforementioned problem. This means we need to reduce regulation and stop making every tax code have to be renewed every two years. We need to make some permanent decisions on whether you are going to advantage or disadvantage investment so that entrepreneurs have a clear view on whether they will be able to retain the capital gains that they make by investing in their business. These kinds of things have to be put in place to give it a strong investment environment, which will then lead to employment.

Eric Janzen reinforced Doug’s point by saying we have a general problem with under-investment in our economy. This means there is not enough capital going into investment versus consumption. The result of that is we are not planting seed corn in the housing market. This is also true in venture capital as is the case with a precipitous drop-off in early-stage companies, which are the companies that provide most of the jobs and all the growth as well as the exports and all the good things that come with it. It really comes down to what Doug said that we have to make investment decisions very clear and stop disadvantaging investment. Bruce wondered what the likelihood was of this happening in the next year. Eric said this was not a good year for these types of decisions, so the safest bet you can make is to assume nothing is going to happen in the next year. Doug said you would not get a better return on a bet than you would on investing.

Bruce asked what was standing in the way of letting investors participate more fully in taking the inventory down. At times in the past we had a 203k loan program that was available as well as more generous loans available to investors, but this ended in about 1995. Debra Still said the Mortgage Bankers Association supports relooking at the 203k program with some incremental safeguards versus the prior program. She said they would support clearing a lot of the inventory. Bruce said this would take care of one level, but there were people at I Survived Real Estate who would not want to go through the journey of that loan but would buy something as a rental; keep it for a long time, and do it in good size quantity. He wondered if there was any discussion on a deed restriction. Debra said one of the recommendations on the RFI that the MBI made was a 3-5 year whole provision. One of the things we have to consider is moving the extra inventory and look at investors to make it happen.

Bruce wondered about how the person who purchases, for example, 20 houses would fix them up and keep them. A company that buys 1,000 will probably try to make them livable, but this is not as helpful as making it nice. This is why the nothing-down program intrigues Bruce. Right now you have a chance to get people in at a very safe payment that is fixed. Later on when we have to pay more taxes, which we will, we will have room in our budget because that payment will seem like a car payment. However, if you don’t let people in, their rent payment is always going to approximate market. We are not going to give somebody a 30-year fixed rent rate. If you had people buying something at no-down at 4%, eventually you would have price support and would get rid of the inventory. Sean said if we could sell every house tomorrow at full-market value, it would crash the system. Doug reiterated saying the big picture problem is that at the end of the day someone will not be paid. It is just like the Greece situation. The political system is good at doling out benefits, but it is poor at doling out costs. A lot of what is happening is instead of the broad-based principle write-downs, which is something that could fix a lot of problems, we have adverse selection and an unfair distribution of results based on decisions made in households. Things are costly politically in addition to financially. There are some discussions of things which are small costs.

For example, some ideas have been floated about tax forgiveness for investors who would get a 3-year abatement of taxes on the rents that they receive if they were to invest in a property today. What this does is raise the rate of return to them, which in turn raises the bid price which they could be willing to put into the market and reduce losses to the institution which holds the loan. There is still a loss, but it is incremental and not as visible. It is actually moving some of the inventory. Therefore, you will most likely see a lot of program proposals and capital gains release. Debra said some of the recommendations are Fannie and Freddie looking at investor properties and making small incremental improvements to the HARP Program, which would include investors owning more than the limit of ten properties. This would also allow for higher LTVs or other loans after 2009. Principle write-downs are very challenging for mortgage lenders. You have to ask whether the tax payer is going to pay, the bank will pay, or will the investor pay. As Doug said, somebody is going to pay the bill.

Bruce wondered about the idea of refinancing owner-occupant or investor over encumbered mortgage. He wondered why we cannot simply refinance them at the current rate, whatever the LTV is. You have the loan anyway, so why can’t you just make it make sense so that people will be able to write out the loan. He wondered what the point was of having a 6% mortgage that is not getting paid when you could have a 3.5% mortgage that would. Debra said this is certainly one of the things on the list to discuss. One of the things we also need to consider is if you think about the capacity of the industry and the fact that the large depositories have a good portion of the properties, it would take the whole industry to participate to help move this big “elephant” through the system. Most lenders who do not already own the mortgage are going to want rep and warrant relief. The question is why a lender who does not already own a loan on an underwater property would make a deal unless they had some kind of rep and warrant relief. This is a big deal for part of the discussion.

Bruce also wondered about the idea of principle-only payments to get people back to an even level. Debra said if the loan is in a security, then the servicer has to advance principle and interest to the investor. The principle-only is still going to create a negative gap for whoever the servicer is because they are advancing to the investor principle and interest each month. Bruce wondered if the investor can make a new agreement, say he is going to lose a lot of money if the money does not get paid. Doug said he does not think there is anything that prevents two private parties who have a contract from reworking the contract. Sean wondered if it could trigger some CDO risk. You have to talk about the derivative risk and potentially magnifying losses. This was a problem years ago, and people have still not tried to go in and figure out how big the derivative risk is and where it lies. Debra said you have to wonder what you would do with mortgage liquidity if investors have to take the principle write-downs. The question is who is going to invest in mortgage-backed securities in the future, and what do you do to the future liquidity of the industry with some of the dramatic actions. Eric said if you look at the market data, the market has been continuing to decline. It spiked from about $300 billion to $1.2 billion, but the latest numbers show it’s back down to about $400 billion. You can exactly identify the point at which the market started to fall in the financial crisis. That market is probably not coming back for a long time until there is market clearing. There is also a hidden additional cost in forcing homeowners to pay mortgages against inflated home prices, which is that there is a string of payments that is going uneconomically to a home price that really should not have existed in the first place. Personal consumption expenditures are getting absorbed for a non-productive, non-economic purpose.

Bruce asked each one of the panelists if we get together a year from now, what is the one thing they would like to have accomplished for their industry. Debra said she would like for all mortgage lenders to work collaboratively with each other. If you think about the industry, there are large depositories, small community banks, and independent mortgage bankers. They need to work collaboratively with one voice, decide on a way forward, and not be fighting each other. In addition, they need to work collaboratively with regulators and the policy makers to make sure that we don’t overcorrect and make sure the regulators understand the unintended consequences of the massive amount of regulation. They should also make sure they end up in the right place one year from now with the whole regulatory environment.

Doug Duncan agreed with Debra and said a great deal of it is overkill based on evidence that the market is simply adjusting back to what is a sustainable homeownership rate. Underwriting standards have moved back to more traditional levels. If the homeownership rate is going to be lower, then by definition the investor and rental share has to be higher. This is why there is finally a turn to focus on ways that this can be advantaged.

From the appraisal side, Sara Stephens believes one of the most important things going forward and what she would like to see happen coming into 2012 is a real effort on the part of lenders and the people who regulate the appraisal business to take a look at the difference between an appraiser and a qualified appraiser. The difference is huge. She also wants the lenders and regulators to take a look at the expertise and the education that one has as compared to a person who is just simply earning a fee. Working with the appraisal institute and other professional organizations would certainly be important. The Appraisal Institute would like to work with the lending community, the brokers, and everyone who is involved in the mortgage lending process to make an effort to use the most qualified people who can give the most reliable conclusions.

Sean O’Toole said he would like to change the national discussion on what a home is worth. The sales comparable approach to appraisal versus income or cost basis is ridiculous. It certainly was not the cause of the problem, but it didn’t help keep the problem from getting out of control. We also have a poor understanding nationally of what a home or a piece of residential real estate is really worth. Bruce said if you think about the appraisal process, when Bruce was purchasing in Grand Junction Colorado in 1985, there was no taker in sight. The only comp was his comp. If you had three of these, this was the appraisal number. In Moreno Valley, 2-bedroom houses that were going for $300 had company, and the appraiser had all the evidence that this was the right decision. This is what Sean was talking about reconsidering the definition of market value to have some other factor that doesn’t let things get out of control, whether up or down. This would give us to have stability that in turn would allow lending to be a lot saner and change the whole game.

Gary Thomas said he would like to see clarity from the members of his organization on what they’re doing. Are we still going to have mortgage interest deductions? We need to consider all the things that are really holding everybody back because they really do not know what the future is. Buyers don’t know whether you’re going to still be able to write off the interest on a loan. They don’t know whether they are going to have to put 20% down, 10%, 0r 5%. There are so many unknowns out there that everybody feels like they are in quicksand. Having some stability from a regulatory standpoint would go a long ways towards making things better for the industry.

Eric Janszen said within the context of the American political system, the aftermath of bubbles is always predictable. It is the collective punishment of the innocent. We had Sarbanes Oxley after the dot come crash, which is the Accounts Full Employment Act. This time we have overregulation across the board. It needs to be counter cyclical, so at this point we need to as quickly as possible regain a clear, consistent, and unencumbered relationship between buyer and seller.

Bruce Norris ended by saying he wishes that everyone that we elected in any position of public office would set aside whether they are Democrat or Republican and become American for one year so we can get a lot of things resolved.

This is the final segment for I Survived Real Estate. Thank you to everyone who attended and have tuned in to our radio broadcast. The Norris Group would like to thank their gold sponsors for the event: Adrenaline Athletics, Coldwell Banker Pioneer Real Estate, Conaway and Conaway, Delmae Properties, Elite Auctions, Inland Empire Investors Forum, Inland Valley Association of Realtors, Keller Williams of Corona, Keystone CPA, Kucan & Clark Partners, LLC, Las Brisas Escrow, Leivas Associates, Mike Cantu, Northern California Real Estate Investors Association, Northern San Diego Real Estate Investors Association, Pacific Sunrise Mortgage, Personal Real Estate Magazine, Raven Paul and Company, Realty 411 Magazine, Rick and LeaAnne Rossiter, Southwest Riverside County Board of Realtors, Starz Photography, uDirect IRA, Wilson Investment Properties, Tony Alvarez, Tri-Emerald Financial Group, and Westin South Coast Plaza. Visit isurvived2011.com for more details.

For more information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 170 podcasts in our free investor radio archive.

Craig Hill

Hard Money Lender for The Norris Group

(Full Bio)

This week Bruce is joined again by Craig Hill. Craig has been with The Norris Group since its inception in 1995. He has helped The Norris Group invest in approximately $40 million worth of trust deeds.

Many investors do not understand the concept of putting up money for loans. This is a very unusual idea for many investors, and mentioning it to investors may make them feel like you are asking them to take a suitcase full of money to Vegas and spend it.

A trust deed is attached to real property, and that property covers a large gambit and many different lean positions. Many people falsely assume that a trust deed is the worst case scenario. Trust deeds have different yields and different risk rates. Bruce and Craig have been investing in trust deeds for a long time. Craig has found it is very difficult to persuade people to invest in trust deeds. Bruce feels that trust deeds are a better investment than a stock or a bond, because trust deeds allow him to have some control over the outcome of his investment.

Craig has been monitoring TNG’s investor base for a long time, and he has noticed that the longer these people work as investors, the more money they invest in trust deeds. The longer you invest in trust deeds, and the more you understand them, the more you appreciate them, because they have a great risk vs. return rate.

When trust deeds are mentioned, many people assume that you are investing in a second or third position loan. The Norris Group only invests in first trust deeds. Trust deeds can be used to lend on anything from a single family residence to raw land on a slope. TNG only lends on single family residences. These residences will be fixed by an investor, and then either sold or rented.

Borrowers interested in using TNG’s 12% return program are borrowing to flip a property. TNG also has a 9% yield to investor program. Borrowers using the 12% program will receive a larger yield, but their money comes out of the property, so they do not receive any more interest until they find another trust deed. If the 12% program users do not have a trust deed investment for just 2 months out of the year, then their yield will drop to the 9% level. Craig uses the 9% program almost exclusively, because his return remains consistent over multiple years, and he doesn’t have to waste time searching for more investments. Also, many of the trust deeds being invested in right now are at the bottom of the market, which provides a safe LTV. The LTV ratio will get more absurd later on.

Craig loaned a $40,000 trust deed on a $65,000 house in Apple Valley. During the peak of the market, that house was selling for approximately $250,000. This means that Craig now has a $40,000 loan on a property that was once $250,000. Even if this property only went up to half of the value it once was, that value would be $125,000.

TNG’s trust deed program has never had a property come back, but if a property did come back, there would still be many profitable options for TNG, because renting is very profitable in the current market. If a property comes back in today’s market, you then own a home free and clear, and you can collect rent from the property, which is even more valuable than the original trust deed payment.

People who are new to trust deeds are very concerned about what happens when they do not receive payments. When a new client comes to Craig, he shows the client all the loans TNG has, so they can see how few of the loan payments are late. If you went to Bank of America and asked to see their list of loans, you would find far more delinquent loans. People get too concerned about “what if” scenarios. They think of trust deeds like stocks that can dramatically devalue very quickly. When the “what if” scenario is a free and clear house, your level of risk is significantly lower than a stock.

Typically, people who invest in trust deeds have established some wealth. At some point, you don’t want to risk principle, and you want to get a safe return. Bruce does not know of a safer and more passive way to get a good yield.

90% of TNG’s trust deed properties are bought with cash, and then refinanced. Generally, TNG loans 60% of a property’s worth.

Craig always checks to see if the title on a property is ok, and he always purchases fire insurance.

If Craig is working with a new investor, he sends them a copy of the appraisal. Once the new investor looks at the appraisal, Craig will allow them to ask questions about the deal.

Some trust deed investors like to try and work on their own. This is hard to do if you do not have experience. The Norris Group has performed 2,600 loans, which have come from 20,000 conversations. This is the one industry where working with a broker makes more money than working on your own. Also, people who try to work on their own often come across legal issues due to usery.

Craig had the good fortune of being contacted by another lender who was going out of business. The lender was contacting Craig because he thought Craig could help his former clients. After receiving a list of 200 clients from the lender, Craig decided that only 2 of the listed clients were capable of fitting in with The Norris Group. The people who invest with The Norris Group are not speculators; many of them are full time investors and are highly educated.

When you invest in a pool, the leader of the pool can attach any property they want to onto your pool. This can be a good or a bad thing depending who is leading your pool, and their motivations for investing your money.

The Norris Group’s website is www.thenorrisgroup.com

You can download our trust deed investment booklet and other investor training material.

For more information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 170 podcasts in our free investor radio archive.

The Commerce Department reports new home sales increased 11% in March. A study shows that short sales and foreclosures equally damage FICO scores. A survey from Pew shows 81% of adults believe purchasing a home is the best long-term investment a person can make. Morgan Stanley believes home prices will fall 6-11% this year.

In The News:

Mortgage Bankers Association – “Study Examines the Impact of Homebuyer Education and Counseling on Mortgage Performance” (4-26-11)

“Potential homeowners who participate in prepurchase education and counseling programs may be more likely to pay their mortgages on time, although the evidence on this point is not consistent and compelling, according to a study released today by the Mortgage Bankers Association (MBA). The study also finds that those who participate in default counseling are more likely to have their loans modified.”

MSNBC - “Housing reality trumps dogma for some in GOP” (4-26-11)

“leading proponents of doing away with Fannie and Freddie aren’t predicting victory. As a precaution, they’re advancing eight bills taking bite-sized swipes at the issue. In the Democratic-led Senate, a sister measure by 2008 presidential candidate Sen. John McCain, R-Ariz., faces long odds, and the Banking Committee’s top Democrat and Republican are wary of quickly reshaping the market for financing home purchases.”

CNN - “Home prices in ‘double dip’” (4-26-11)

“Home prices in February sank 3.3% to just above the post-crisis lows reached in April 2009. It was the seventh straight month of declines. Home values are down 32% from their peak set in May of 2006, according to the S&P/Case-Shiller index of home prices in 20 cities.”

Housing Wire – “Harvard finds dwindling housing supply abolishes affordable rentals” (4-26-11)

“The Harvard University Joint Center for Housing Studies released a report Tuesday, analyzing conditions in the housing market from 1999 to 2010. The study found the price to rent a home is trending inversely to renters’ annual income, just one of many factors hindering growth in the rental space.”

Housing Wire – “FHFA: 30-year fixed-rate mortgage passes 5%” (4-26-11)

“The average interest rate on a 30-year, fixed-rate mortgage reached 5.06% in March, an increase of 9 basis points from the previous month, according the Federal Housing Finance Agency.”

Housing Wire – “Study finds recent housing counseling cuts made in the dark” (4-26-11)

“Republicans and Democrats struck a late-hour deal in April on how to continue funding the U.S. government. But among the cuts, was $88 million used to fund nonprofit counseling groups approved by the Department of Housing and Urban Development.”

Housing Wire – “Freddie Mac mortgage purchases plummet 31%” (4-26-11)

“The amount of monthly mortgages purchased for securitization by Freddie Mac fell nearly 31% in March to $26.9 billion. The government-sponsored enterprise reported its total mortgage portfolio decreased at an annualized rate of 4.7% during the month to $2.14 trillion.”

Los Angeles Times - “New home sales rose in March after weak winter” (4-25-11)

“New-home sales rose 11 percent last month from February to a seasonally adjusted rate of 300,000 homes, the Commerce Department said Monday. That follows three straight monthly declines. Still, the pace remains far below the 700,000 homes a year that economists view as healthy.”

New York Times – “Stimulus by Fed Is Disappointing, Economists Say” (4-24-11)

“Mr. Bernanke and his supporters say that the purchases have improved economic conditions, all but erasing fears of deflation, a pattern of falling prices that can delay purchases and stall growth. Inflation, which is beneficial in moderation, has climbed closer to healthy levels since the Fed started buying bonds.”

Housing Wire – “Short sales and foreclosures equally degrade FICO scores” (4-25-11)

“homeowners that entered short-sales found themselves with FICO scores in the 575-to-595 range — the same range reported for parties with foreclosures on their records.”

Housing Wire – “Homeownership still considered best long-term investment: Pew” (4-25-11)

“The housing crash seems to have had little impact on consumer confidence, as 81% of adults believe buying a home is the best long-term investment a person can make”

Housing Wire – “Distressed property index rises in March: Campbell/Inside Mortgage Finance”
(4-25-11)

“A distressed property index rose to 48.6% in March – the second highest level in the past 12 months while owner-occupant home purchases slowed during the same time period according to another index.”

Housing Wire – “Wells economist: Foreclosure supply points to ‘long, arduous’ recovery” (4-25-11)

“Despite better-than-expected new home sales in March, a Wells Fargo (WFC: 28.56 +0.07%) economist said builders will continue to struggle until the foreclosure wave begins to recede.”

Bloomberg - “U.S. Home Prices May Decrease 6% to 11% This Year, Morgan Stanley Says” (4-25-11)

“U.S. home prices will fall 6 percent to 11 percent this year, more than previously forecast, as mortgages become harder to obtain and distressed sales drive down values, according to Morgan Stanley. ”

Bloomberg - “Fed Officials Count on Untested Tool to Hold Off Inflation” (4-25-11)

“Raising the rate, currently at 0.25 percent, is intended to entice banks to keep their money on deposit at the Fed instead of loaning it out and stoking inflation.”

Bloomberg - “Sales of New U.S. Homes Probably Rose From Record Low as Market Struggled” (4-25-11)

“New-home sales, tabulated when contracts are signed, climbed 12 percent to a 280,000 annual pace last month, according to the median estimate in a Bloomberg News survey of 64 economists. Purchases slumped 17 percent in February to a 250,000 rate, the weakest in data going back to 1963.”

Looking Back:

One year ago, the CIRB reported that permits were pulled for 3,714 total California housing units in March. Commercial mortgage delinquencies fell to 0.63% in Q1 of 2010. The MARI saw a 50 percent increase in appraisal fraud in 2009. Homeownership rates in Q1 of 2010 decreased to the lowest levels since 2000.

For more information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 170 podcasts in our free investor radio archive.

FBI Mortgage Fraud Richard Ryan Supervisory Special Agent for the FBI (Full Bio)

This week Bruce is joined by Supervisory Special Agent Richard Ryan with the FBI. Ryan supervises a cadre of special agents and detectives from various law enforcement agencies throughout Southern California. Mr. Ryan oversees white collar crime in Los Angeles, which includes financial institution fraud, money laundering, and identity theft. During his career, he successfully worked major frauds, counter terrorism, gangs and criminal enterprises, and narcotics. In 2009, Ryan was deployed to Haiti for the search and rescue of U.S. citizens being held hostage for ransom.

Mortgage fraud is much more complex than a homeowner trying to get out from underneath their home, or someone looking to prey on another person’s equity.

There is a difference between fraud for ownership and fraud for profit. Mortgage and bank fraud involves profit. Homeownership or dehomeownership fraud often involves getting away from an underwater mortgage. Many people are trying to get away from their properties because of unemployment, having a bad loan, or having a fraudulently obtained loan. Many fraudulently obtained loans occurred while lenders were using no documentation loans.

Foreclosure rescue and loan modification schemes are a big problem right now. There are some companies honestly working with people to save their homes, but most of these companies are sponsored by the government. You should be cautious of foreclosure rescue companies that make you pay up front. Legitimate companies are more likely to bill you after they have completed their service.

Bruce heard a radio advertisement that said, “If you are trying to do a loan modification, without us assisting you in preparing your financial statement to look correct, you will probably not get your loan modification.” Ryan says that is completely false. That company is preying upon the emotions of people who are already desperate. They are pretending that their company is the only company that can help with loan modifications.

Many people are currently attempting to make their financial status look worse than it truly is to get a loan modification.

Fraudulently under-evaluating a property allows someone to flip it at a later point with a higher appraised value. This type of fraud involves a conspiracy of a homeowner and an appraiser. The appraiser gives an undervalued appraisal, and then encourages the bank to accept less than what it owed on the property. The property is then bought by the conspirators and sold for a price near market value.

There are many people who buy damaged properties with low values, fix them, and sell them at a higher value. The FBI encourages people to do this, because it is not manipulative, and not only does it provide a profit to the investor, but it helps raise the value of the entire neighborhood. There are perfectly legitimate reasons for buying a property at a low value and selling it at a higher one.

Sometimes there are conspirators in a short sale that are not going to receive any money. Occasionally, a homeowner will have a need to sell his home so he will personally ask a certain company to buy the property at a specific price. The conspiring homeowner will then have the opportunity to buy back the same property at a later date for a lower price. This is not considered a fair deal for the bank, and it is considered fraud.

Fraud occurs when skirting of reporting requirements occurs. Fraud occurs if you are not putting legitimate information on a loan application. It occurs if you are providing kick backs for a benefit to someone such as an appraiser or a notary.

Fraud evolves based on the conditions and environment of the day. We did not have short sales when people were making double digit profits every month in 2006. The banks were handing loans out prevalently. We are currently seeing a lot of foreclosures, short sales and vacancies. Ryan has also noticed a “squatting” trend developing in the world of fraud. Squatting is finding vacant properties, breaking into them, changing the locks, live in them without rent, and demanding the bank to give them $25,000 to leave.

Bruce says that owner occupants are not being punished when they allow their mortgage to become seriously delinquent and then destroy the property they are losing. Quite often, these people will dismantle things such as the cabinets, and decide that those cabinets should be theirs, even after they have lost the property. If someone is in bankruptcy and they strip the house for a profit they have committed fraud.

200 banks went into FDIC receivership last year. Many of these banks closed down because of their loan process. The FDIC is also a federal investigation agency that can detect loan fraud.

Insider fraud involves participants in the management of the bank who do perform certain actions to help themselves. Insider fraud can also involve a bank’s underwrite or loan processor.

The FBI has seen almost every kind of fraud. Bruce has people come to him with investment ideas, and their ideas sometimes involve fraud. Richard Ryan understands what a straw buyer is. There are some individuals who purchase homes but never make a payment. When the FBI interviews these people, the FBI discovers that these people had no idea that they were on title. They may have been told that they would receive $10,000 just to use their name to obtain a loan, and that their name would not be attached to the loan. Ryan has spoken to people who owned 30 properties without knowing it. These people are known as straw buyers.

Organized crime is very prevalent in mortgage fraud and bank fraud. Companies have purchased hundreds of homes underneath the names of the unknowing owners. Ryan met a person who owned his home outright, but had his home placed on the market without his knowledge, and had bids placed on the home. The real homeowner had no idea while the fraudulent homeowner was taking money from escrow and attempting to sell the house.

The FBI tries to conduct its investigations covertly. They do not want criminals to run and hide. The nice thing about mortgage fraud is that criminals cannot change their paper trail. You cannot unfile mortgage documents, and once those documents are filed there is a trail to follow.

The FBI has about 300 special agents dedicated to mortgage and bank fraud. Millions of schemes have been attempted, so the FBI is not well staffed to handle all these problems. However, if you do commit fraud, the FBI will come for you eventually.

There are currently around 3000 fraud investigations. California, Florida, Nevada and Arizona are the top places for mortgage fraud. The properties under investigation in California are typically much more valuable than the properties under investigation in Oklahoma.

For more information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 170 podcasts in our free investor radio archive.

Nearly 5% of Freddie Mac’s single-family mortgages are seriously delinquent. The FOMC chose to keep the federal funds target rate between 0 to 0.25%. Office buildings added 2.5 million square feet of occupied space in the 4th quarter, according to REIS. The U.S. Bureau of Labor Statistics reports jobless rates rose in 49% of all U.S. metro areas.

In The News:

Yahoo - “10 resourceful real estate tips for 2011″ (1-4-11)

“If your home has been on the market far too long, there’s a good chance you’re not facing market realities. The value of your home isn’t what the tax assessor says it is, or the sum on that two-year-old appraisal you have filed away. It’s not what a similar-size home that sold across town. It’s what a buyer is willing to pay today.”

Housing Wire – “Freddie Mac’s seven facts about the foreclosure process” (1-4-11)

“Freddie owns or guarantees 12.4 million single-family mortgages, and roughly 500,000 are seriously delinquent, roughly 10% of all serious delinquencies in the industry. However, Freddie reported $13.5 billion in homes that were already repossessed through foreclosure, adding $6.8 billion in the third quarter.”

Housing Wire – “FOMC minutes show little motivation to change QE2, ZIRP” (1-4-11)

“At its Dec. 14 meeting, the FOMC chose to keep the federal funds target rate at next to nothing – 0% to 0.25% — as it has for two full years now, and maintained plans to reinvest principal payments from its securities holdings into about $75 billion of long-term Treasury securities each month through the end of the second quarter.”

Housing Wire - “BofA pact represents 44% of total Fannie repurchase claims” (1-4-11)

“Fannie Mae said the agreement reached with Bank of America regarding repurchase requests on mortgages sold to the GSE by Countrywide Financial Corp. addresses about 44% of the $7.7 billion in repurchase claims the company had outstanding with all of its seller servicers as of Sept. 30.”

Housing Wire – “Amherst finds mortgage market underestimates looming defaults” (1-3-11)

“Mortgage-backed securities analysts at the fixed income dealer took a look at $1.3 trillion in outstanding nonagency mortgages from a year ago to see how they’re doing as of November 2010. They found that the $485 billion of nonperforming loans, those more than 60 days delinquent, dropped to $414 billion through either modification or liquidation.”

Bloomberg - “U.S. Office Market Has First Gain in Occupied Space Since 2007, Reis Says” (1-4-11)

“Office buildings added 2.5 million square feet (232,000 square meters) of occupied space in the fourth quarter, compared with a loss of 14 million square feet a year earlier, Reis said in its report. It was the first rise in net absorption since the fourth quarter of 2007.”

Bloomberg - “Wall Street Banks Preparing $4 Billion of Commercial Mortgage-Bond Sales” (1-4-11)

“Deutsche Bank and UBS are teaming up to issue as much as $2.5 billion in commercial mortgage-backed securities linked to loans on office buildings, shopping malls and hotels in what would be the largest offering of its kind since the market froze in June 2008, according to a person familiar with the deal. JPMorgan plans to sell $1.5 billion in similar debt, a person familiar with that sale said.”

Inman - “Broker launches first-time-buyer education site” (1-4-11)

“A Portland, Ore.-based real estate broker has launched a national homebuyer education website. FearlessHomebuyer.com walks first-time homebuyers through the real estate transaction process, from deciding whether or not to buy, to obtaining financing, to estimating fix-up costs.”

Inman - “Jobless rates rise in 49% of U.S. metros” (1-4-11)

“Metropolitan areas in California continue to register the highest unemployment rates in the nation, according to the latest figures released today from the U.S. Bureau of Labor Statistics. Of the 13 metros with unemployment rates above 15 percent in November, 11 were in California.”

Looking Back:

One year ago, forty percent of national home sales were foreclosures or short sales. Economists and real estate experts were complaining that Obama’s $75 billion foreclosure prevention program had damaged the market. The CIRB reported that builder permits for single-family houses fell 3.5 percent. According to The Institute for Supply Management, most companies showed an increased rate of expansion in December 09.

For m ore information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 170 podcasts in our free investor radio archive.

Resources:
Foreclosure Freeze Chills Home Buying
Jobless claims continue bouncing around with 6.3% rise last week
Consumer confidence in Nov. hits 5-month high
Freddie Mac to suspend foreclosure evictions this holiday season
Fed made $9 trillion in emergency overnight loans
Fed data reveal wide scope of loan action during financial crisis
Fannie, Freddie Defend Foreclosures Amid Criticism

Today’s News Synopsis:

New Federal regulations on real estate appraisals have been released. FHA has chosen to leave the loan limit at $729,750 for 2011. Some builders are experiencing a 15 to 25 percent decrease in construction costs. The Bureau of Labor Statistics reports the unemployment rate increased to 9.8%.

In The News:

Wall Street Journal – “Deficit Plan Fails to Win Panel Support” (12-3-10)

“The president’s U.S. deficit commission received the backing of a majority of its 18-strong panel, but fell short of the 14 votes needed to possibly trigger congressional votes on its recommendations.”

Housing Wire – “Regulators set final guidance on appraisals” (12-3-10)

“Federal regulatory agencies released final guidance Thursday on how financial institutions will conduct real estate appraisals, the first nationwide update since 1994.”

Housing Wire – “Nonfarm payrolls add 39,000 jobs in November,unemployment rate up to 9.8%” (12-3-10)

“Nonfarm payroll employment rose slightly last month but considerably lower than most analysts were projecting adding just 39,000 jobs, and the unemployment level increased to 9.8%. The Labor Department’s Bureau of Labor Statistics said employment in most industries changed little during November although temporary workers and the health care sectors continue to see jobs gains while retailing shed another 28,0000 jobs during the month.”

Housing Wire – “FHA loan limit ceiling unchanged for 2011″ (12-3-10)

“The Federal Housing Administration released approved loan limits on mortgages it would insure in 2011, leaving the ceiling unchanged at $729,750. The Economic Stimulus Act of 2008 and the Housing and Economic Recovery Act of 2008 raised the FHA loan-limit ceiling to help stabilize a shaky housing market. The national floor remains unchanged as well at $271,050.”

Housing Wire – “Bair wants mortgages modified to mitigate losses before starting foreclosure” (12-3-10)

“Bair said servicing agreements need to give servicers the authority to attempt to mitigate losses in a timely manner and modify loans to address reasonably foreseeable defaults before putting the mortgage into the foreclosure process.”

Bloomberg - “Toll Brothers Deposits Rise 10% as Mortgage Rates Increase, Chairman Says” (12-3-10)

“Toll Brothers Inc., the largest U.S. luxury-home builder, saw deposits increase 10 percent compared with a year earlier in the past two weeks as mortgage rates began to rise, Chairman Robert Toll said.”

Orange County Register – “Builders benefit from cost savings” (12-3-10)

“Builders say construction costs are down 15 to 25 percent. That translates into an average cost of $100,000 to $140,000 for just the ‘sticks and bricks’ (without land) for a modest, 2,000-square-foot house.”

Realty Times – “Let it Shine, It’s Not Just Paint Color That Counts” (12-3-10)

“Many new tract homes are painted using a flat paint. While that may look nice at first, it can be very difficult to clean and instead of wiping off walls, you may find you have to touch them up with paint more frequently. Thankfully there are some other paint finishes that look great and are a bit more durable and easy to clean. The eggshell and low-sheen finishes put off a higher shine but they seem to last longer, stay cleaner, and are all around easier to maintain.”

Looking Back:

One year ago, Fannie Mae increased its minimum borrower credit score to 620. According to Lender Processing Services, loans were deteriorating 3 times faster than they are being approved. The average interest rate for 30-year, fixed rate mortgages declined to 4.7%

For more information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor event calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 200 podcasts in our free investor radio archive.

The MBA’s weekly survey shows mortgage applications increased 2.7% this week. SB1275, the foreclosure/modification bill, was rejected by congress in a 36-30 vote. Fannie Mae’s new rule regarding appraisal cutting takes effect today. Construction spending decreased 1 percent in July, according to the Commerce Department.

In The News:

Mortgage Bankers Association – “Mortgage Applications Increase as Rates Hit New Low in MBA Weekly Survey” (9-1-10)

“The Mortgage Bankers Association (MBA) today released its Weekly Mortgage Applications Survey for the week ending August 27, 2010.  The Market Composite Index, a measure of mortgage loan application volume, increased 2.7 percent on a seasonally adjusted basis from one week earlier.  On an unadjusted basis, the Index increased 2.3 percent compared with the previous week.”

Reuters - “Loan picture improves but troubles remain: FDIC” (9-1-10)

“The Federal Deposit Insurance Corp revealed some encouraging figures about the bank industry, saying the sector earned $21.6 billion during the quarter largely due to banks putting away less money to cover expected loan losses. During the first quarter, the industry earned $17.8 billion.”

San Francisco Chronicle – “Assembly rejects foreclosure/modification bill” (9-1-10)

“SB1275, which was rejected 36-30 late Monday, would have required lenders to provide homeowners with a fully considered loan modification decision prior to foreclosing. Unlike federal initiatives, it would have given homeowners the right to sue the lender if that process did not occur.”

Housing Wire – “Fannie’s appraisal cutting ban takes effect” (9-1-10)

“Fannie Mae’s new policy to reduce appraisal cutting takes effect today. If a lender is trying to sell the GSE a loan, they are now prohibited from changing the market value of a home on the request form. Fannie Mae said Tuesday if a loan servicer does not properly handle a troubled mortgage loan in a timely manner, it will demand compensation from the servicer for the mortgage.”

Housing Wire – “Fed buys $900 million of Treasury debt” (9-1-10)

“Dealers offered to sell the Fed $25.79 billion in debt. The three slices of debt purchased by the Fed include $131 million maturing Nov. 15, 2012; $345 million maturing Dec. 15, 2012; and $424 million maturing Jan. 31, 2013. At its meeting from earlier this month, the Federal Open Markets Committee directed the New York Fed to maintain the total face value of domestic securities held in the system open market account at about $2 trillion.”

Housing Wire – “DebtX July CRE loan value up to 79.4%” (9-1-10)

“The value of commercial loans priced by The Debt Exchange in July that collateralize commercial mortgage-backed securities rose to 79.4% of the original balance. DebtX said the value is up from 77.4% in June, marking the fourth-straight month of increases, and is higher than the 71.1% for the year-ago July. The values are based on loans priced by DebtX. In July, the company priced 57,801 CRE loans with an aggregate principle balance of $679.5 billion that collateralize 623 CMBS trusts.”

Bloomberg - “Construction Spending in U.S. Declined Twice as Much as Forecast in July” (9-1-10)

“The 1 percent drop brought spending to $805.2 billion, the lowest level in a decade, after a revised 0.8 percent drop in June that wiped out a previously estimated gain, Commerce Department figures showed today in Washington. Spending on federal government projects fell by the most in a year.”

Bloomberg - “Real Estate Premium Near Record to U.S. Bonds Signals Time to Buy Property” (9-1-10)

“Capitalization rates, a measure of real estate yields, averaged 7.22 percent in the second quarter, based on an index calculated by the National Council of Real Estate Investment Fiduciaries. That was 429 basis points, or 4.29 percentage points, higher than the yield on 10-year government bonds as of June 30, according to data compiled by Bloomberg. It’s about 475 basis points higher than Treasury yields as of yesterday.”

Looking Back:

One year ago, the NAR reported that pending home sales increased 3.2 percent in one month. The average price of homes bought with mortgages funded by Freddie Mac increased 1.7% during the 2nd quarter of 2009. A wildfire north of Los Angeles threatened more than 12,000 homes and forced the evacuation of more than 4,300 people.

Joseph Magdziarz

2011 President,
The Appraisal Institute

(Full Bio)

This week Bruce is joined by Joseph Magdziarz. He is the current Vice President of the Appraisal Institute and he will become the President Elect in 2010 and President in 2011. He has been associated with the Appraisal Institute for 38 years.

Bruce begins by asking if Joseph if he considers business nowadays to be usual or unusual. Joseph has seen similar conditions in the late 80s and early 90s, but for many people, this is a new experience.

Bruce asks Joseph to explain what is similar about our current market and the market of the late 80s. The declining prices of real estate but the cause of these declines is significantly different.

Something radically changed a few months ago in the appraisal business. The Home Valuation Code of Conduct (HVCC) agreement between the Attorney General Cuomo and Fannie Mae and Freddie Mac caused this change. A few years before the HVCC came out, Joseph was lobbying with Congress about the pressure being put on appraisers to make inflated home appraisals. People were happy with many appraisers, because they received high appraisals, but this problem put ethical appraisers out of business, because they would not cooperate with people who wanted their home values inflated. Some of the new people coming into the business may have given into the pressure to make bad appraisals because they did not have the established relationships with lenders that some of the well known appraisers had.

The goal number for an appraiser is market value. Bruce asks if that is still the goal that appraisers are shooting for. Joseph says that is what appraisers are trying to estimate but some of the values coming out are closer to distressed asset value rather than market value.

Bruce asks if something has changed in the appraising process or if the changes are coming in after the appraiser states a market value and someone attempts to correct them. The definition of market value has not changed since 1989. The methodology has not changed either. Joseph thinks that many appraisers have not experienced a distressed market such as the market we are currently in. The HVCC, and the lenders’ choice to move much of their business to appraisal management companies, have caused a lot of problems.

This is one of the first markets we have had in 10 years in which we have declining prices. It is legitimate to have a 90 day old comp that is worth less today than it was when you first got it. Bruce asks if the big problem is that we do not have enough fully repaired homes as comps in comparison to vacant REOs. Jospeh says it’s very localized. Joseph says this is a big problem in some parts of the country, but the real problem occurs when all the occurring sales are foreclosures and short sales.

The definition of market value is the meeting of the minds between a buyer and a seller, each equally motivated and knowledgeable, and without undue pressure. If you have a bank with many foreclosures, they are more motivated than a typical seller would be. They will often dispose of those assets at a lower price which makes none of those properties a valid comp. The motivation of the buyer and seller is important when evaluating market value.

TNG’s business is buying and fixing properties that need work. TNG typically puts $35,000 dollars into a repair job, and they typically end up with a property that is worth about $140,000. It is very hard to get $35 grand worth of credit. There seems to be a rule which only allows a ten percent credit limit for the kind of properties that TNG deals with. Bruce asks Joseph to explain this issue. Joseph explains that this issue relates back to a Fannie Mae/Freddie Mac guideline that says when you have an adjustment greater than 10 percent, you need to explain it. As the percent of adjustment increases, the sale becomes less comparable. There is no ten percent requirement. This is just a guideline, but unfortunately, some of the underwriters believe it to be a rule.

Bruce has had trouble with this guideline. For example, Bruce had 6 offers on a property being sold at 122,000, but then the appraisal came at 102,000, and then the review appraisal came in at 85,000. That is far from what 6 buyers thought the market value was. In the end, Bruce did not sell this property and he kept it as a rental home. If an appraiser is not able to honor the market decision of a buyer, then the market price in some areas will go down further for no good reason. Part of this problem goes back to the HVCC stating that there needs to be a firewall between people originating a loan and people doing appraisals. At this time, that firewall is the appraisal management company. One of the main complaints that Joseph is getting is that many appraisals are being done by appraisers who are not experienced enough in their geographic region.

Bruce asks how appraisers are assigned properties to appraise. Some companies broadcast assignments to everyone on their approved list, so the first person to sign up for the job gets it. The problem with the AMC is that they are not giving these jobs to experienced appraisers. The AMC is focused on getting these jobs done quickly rather than effectively. Better appraisers are missing out on jobs because they cost more. They are hiring people with not enough experience.

The Appraiser’s Institute company has 26,000 members. Each one of these members receives notifications saying that they need to have the proper experience necessary to get jobs done properly, otherwise the Appraisers Institute will take aggressive enforcement against any member who accepts a job that they are not qualified for. These members are also given information on how to turn in unqualified appraisers.

In July, the current president of the Appraisal Institute met with Congress to discuss this issue. He also reminded them a few years before that these problems were occurring, and they failed to act on those problems back then. These problems do not look like they will be dealt with until some time next year. A few bill are pending but nothing will be done until next year.

Bruce asks if the Appraisal Management Companies has to be run by someone with an appraisal background. This is a problem that the Appraisal Institute has been lobbying for as well. There are appraisers who have had their licenses revoked that are now supervising other appraisers. Joseph thinks it would be better if appraisers were required to be licensed within their state.

Bruce asks if communication is allowed between agents and appraisers who are working for Fannie or Freddie. Joseph says this is not forbidden. The loan officer is not allowed to communicate with the appraiser, but Realtors and management companies can communicate with appraisers. Appraisers have an obligation to verify information given to them about a sale. This is a misunderstood rule that Bruce has had difficulty with. Bruce has called appraisers who told him that he was not allowed to talk to them.

Bruce asks Joseph about what the fee was for an appraiser before HVCC and what that fee is now. This is one of the five biggest problems that the Appraisals Institute currently has. Not all appraisal management companies are the same. In Chicago, GAMCO uses Appraisal Institute members, and they give designated members 90 percent of the fee, and they give non designated members 80 percent of the fee. What Joseph has heard nowadays is that management companies are starting to take 50 to 60 percent of the fees. When that happens, the better appraisers refuse to work for those companies. That leaves the new appraisers with the ability to get into the business, and they may not be qualified. Joseph fears that these rules may cause some very knowledgeable people leaving the business. Another problem with management companies is that they require a 24 to 48 hour turn around time. This does not allow appraisers to get to know the market value of a specific market.

We now have the ability to use automated appraisals (AVM), but these automated appraisals are trumping appraisals made by actual appraisers. These automated appraisals are done on a statistical basis. The problem with these reports is that they do not use comparable sales. These automated appraisals essentially come up with a median value rather than a market value. These mechanical appraisers are not capable of looking next door to a certain property in order to obtain a better understanding of the value of the home being examined.

Joseph is can be seen September 11th at our I Survived Real Estate 2009 event.

Joseph C. Magdziarz, MAI, SRA is the 2009 vice president of the Appraisal Institute. He will become the president elect in 2010 and president of the Appraisal Institute in 2011.

Magdziarz has been an active member of the Appraisal Institute for 38 years. He has served in a variety of capacities at all levels of the organization.

At the regional level, Magdziarz has served two terms as Regional Vice Chair and two terms as Region III Chair. He has also been a regional representative for many years. On the national level, Magdziarz served two terms on the Appraisal Institute’s National Board of Directors. He has served as Chair of the Education Committee for five years and has also chaired the National Audit Committee, Instructor and Faculty Committees, and Education and Publications Committees. In addition, he has served on a number of project teams. Presently, he is serving on the ADAPT (MAI demonstration report alternative) project team and the International Education and Designation project team.

Magdziarz has been President of Appraisal Research, Inc. in Rockford, Illinois for 38 years. He resides in Rockford, Illinois with his wife Sandra of 41 years and his bulldog Bella.

Magdziarz is an approved Appraisal Institute instructor for 26 courses in the Appraisal Institute’s QE, AE, CE, and USPAP curriculums. He has also had international assignments in Naples, Italy; Istanbul, Turkey; Seoul, South Korea; and Beijing, Tianjin, and Shanghai, China.

For more information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 170 podcasts in our free investor radio archive.

Sources:
http://www.latimes.com/business/realestate/la-fi-foreclosures-20100715,0,5786857.story
http://www.boston.com/business/articles/2010/07/09/banks_fight_changes_to_accounting_rules/
http://www.aba.com/Industry+Issues/FASB_advocacy.htm
http://www.dsnews.com/articles/gses-face-lawsuit-over-resistance-to-going-greener-energy-loans-2010-07-15
http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2010/HUDNo.10-150
http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2010/HUDNo.10-145
http://www.dsnews.com/articles/senate-approves-landmark-financial-reform-legislation-2010-07-15
http://www.dsnews.com/articles/senate-approves-landmark-financial-reform-legislation-2010-07-15
http://www.reuters.com/article/idUSTRE66E4FP20100715

Today’s News Synopsis:

According to MDA DataQuick, 43,964 new and resale houses and condos were sold in California last month. The California Employment Development Department reports that unemployment levels remained stagnant in June while 400,000 people lost their unemployment benefits. The SEC is charging Goldman Sachs with a $550 million fee for misleading its investors. HR 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act, is expected to be signed. This bill will end the HVCC.

In The News:

DQNews - “California June Home Sales” (7-15-10)

“An estimated 43,964 new and resale houses and condos were sold statewide last month. That was up 7.3 percent from 40,965 in May, and down 0.5 percent from 44,167 for June 2009. California sales for the month of June have varied from a low of 35,202 in 2008 to a peak of 76,669 in 2004, while the average is 50,405. MDA DataQuick’s statistics go back to 1988.”

Los Angeles Times – “California job climate stagnant in June” (7-16-10)

“California’s jobs climate stagnated in June as part-time federal census workers lost their jobs and about 400,000 out-of-work people lost their unemployment benefits. Although the monthly, seasonably adjusted unemployment rate crept down a tenth of a percentage point to 12.3%, the economy lost 27,600 jobs, according to the California Employment Development Department. The state’s unemployment rate was 11.6% in June 2009. Nationally, it hit 9.5% last month.”

Sacramento Bee – “Home Front: Idea to reduce principal is gaining” (7-16-10)

“The financial system, federal government and California’s state government have favored loan modifications, and more recently, short sales. Both are chaotic. Neither has proved equal to the problem of negative equity. About 45 percent of Sacramento-area borrowers still owe more than their houses are worth. About 12 percent of Sacramento-area home loans are delinquent or headed toward foreclosure.”

San Francisco Chronicle – “Bill would shield homeowners’ credit ratings” (7-16-10)

“Struggling homeowners who get loan modifications to stave off foreclosure often discover that their credit score takes a big hit. A bill introduced on Thursday by U.S. Rep. Jackie Speier, D-Hillsborough, would shield homeowner credit ratings after a loan modification.”

Housing Wire – “Goldman to Pay $550m and Reform Subprime Mortgage Investment Activity” (7-15-10)

“The Securities and Exchange Commission (SEC) today announced that Goldman, Sachs & Co. (GS: 146.45 +0.85%) will pay the largest-ever penalty by a Wall Street firm.”

Housing Wire – “House Approves Flood Insurance Reform” (7-15-10)

“The US House of Representatives on Thursday approved a flood insurance reform bill that would reauthorize the National Flood Insurance Program (NFIP) for five years. The provision, which extends the program to Sept. 30, 2015, passed by a wide margin, 329 to 90, with support from both Democrats and Republicans.”

Housing Wire – “Home Asking Prices, Listing Inventory Up in Q210: Altos Research” (7-16-10)

“The June median listing sales price for single-family existing homes was $477,937 in June, down $146, about 0.03%, below the May 2010 median of $478,083 for homes in Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco, and Washington DC.”

Bloomberg - “Housing Bubble Leaves $4 Trillion Hangover: Chart of the Day” (7-16-10)

“The bursting of the U.S. housing bubble has left homeowners buried under about $4 trillion of excess mortgage debt, according to Dhaval Joshi, the chief strategist at RAB Capital. The CHART OF THE DAY compares the total amount of home loans outstanding with the value of residential real estate, as compiled by the Federal Reserve, for the past two decades. The latter is adjusted to reflect the average 40 percent debt-to- value ratio that prevailed from 1990 to 2005. Mortgage balances were $3.64 trillion higher than the adjusted figure as of March 31, as shown in the top panel. The actual ratio, which stood at 62 percent at the end of the first quarter, appears in the bottom panel.”

Inman - “Goodbye, Home Valuation Code of Conduct” (7-16-10)

“HR 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act, includes appraisal independence requirements and provides grant funding for state oversight and enforcement of those regulations. The bill creates a new Bureau of Consumer Financial Protection that’s charged — among many things — with drafting new interim final regulations that specifically define acts or practices that violate the bill’s appraisal independence requirements. The regulations are to be drafted within 90 days of the bill’s signing, superseding the Home Valuation Code of Conduct, rules adopted by Fannie Mae and Freddie Mac in May 2009.”

Looking Back:

One year ago, 44,167 new and resale houses and condos were sold statewide in June. The Commerce Department announced that housing starts increased by 3.6 percent. The government was considering a proposal to allow homeowners to stay in their home as renters after a foreclosure. Voit Real Estate Services reported that office vacancies increased to 16.3% from April to May 2009.