The Norris Group Blog

California Real Estate Headline Roundup

Posts Tagged ‘deed-in-lieu’

By Bruce Norris .

273-TNG Radio – Sean O’Toole 4-14-12

Friday, April 13th, 2012

Sean O'Toole


Sean O’Toole

President of ForeclosureRadar

(Full Bio)

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This week Bruce Norris is joined once again by Sean O’Toole, founder and CEO of ForeclosureRadar.com. Sean has been an experienced trustee sale investor, buying over 150 properties, both residential and commercial. He also has a very intensive tech background that he has brought to ForeclosureRadar.com.

In the last segment Sean and Bruce had just started touching on the term shadow inventory. Originally it meant the lenders had foreclosed on inventory and were sitting on it. Sean said he still thinks of it as how the bank originally coined it of being the bank-owned homes, and they were the first to say there was no more shadow inventory and those bank-owned homes the banks appeared to be sitting on in late 2008 are largely gone now. However, it has been pretty universally extended to also include those in the foreclosure process and still not bank-owned. It also even includes those who have not been making their payments. From there, he has even heard a few, which he does not agree with, extended to the people who are underwater or even to those who would want to sell their house today if prices at 2006 levels.

What most people will ask is if there is a ball-turning behind the scenes that could emerge and affect the pricing, which Bruce believes to be a valid concern. Bruce wondered if there was some inevitability about the process that they will eventually own it, or are they now really going to concentrate on every other way to dispose of it by selling several houses to someone who is going to keep them as rentals. He wondered what Sean’s take was on what percentage would be solved without the process of a trustee sale. Except for the word “solved,” Sean thinks we are going to see every possible effort to not go to trustee sales. We will probably see these REO rentals or even deed-in-lieu rentals where they tell the person to give them the deed to their house in exchange for renting it back to them. We will probably see every possible scene in the book to keep business going from foreclosure.

Unfortunately, it is an interesting thing where you have Occupy Wall Street and others all rallying against foreclosure. What they do not realize is they are helping the banks. Foreclosures hurt the banks; and foreclosures are the best thing ever, especially in California for the consumer. You get to completely walk away from the debt with a seven-year hit on your credit in most cases. It is a brilliantly pro-consumer thing, and it has been turned on its head by some activists to be anti-consumer. Sean thinks this is absolutely the trend; we have seen this trend since September of 2008 when Paulson announced TARP. Every government action, every program we have seen since then including robo-signing and the attorney general’s statement, have been specifically designed to provide cover to the banks to allow them to continue to trickle this out, manage their losses, and manage their balance sheets.

Bruce does not know if there is much that is new. For instance, with deed-in-lieu, this has been around for several years, and you could probably count them on not too many hands the ones that have actually been accomplished. Bruce thought originally this was probably a reasonable way to do it, but it has been received by the occupant with a yawn. Bruce wondered why this is the case. Sean said it was not only a problem with the occupant, but early on it was a problem with the lenders. When you have a deed in lieu, you take the risk for any junior debt. What most of the big banks are maybe now figuring out, which is just a suspicion on Sean’s part, is that if he were Bank of America and there was a first and a second, then he has sold off the first mortgage to some investor. He would hold the second mortgage himself as a portfolio loan. If he takes a deed in lieu, it certainly hurts the investor because it does not go through the foreclosure process and wipe out the second. However, it leaves the second mortgage holder in a much better position. So a deed-in-lieu with a rental and some sort of scheme that says someday the second mortgage may be worth something if we hold onto the property long enough and finding a way to make it all work on the books is pretty brilliant. Sean thinks we may see a renewed push there. We just saw Bank of America announce that they are going to start a deed-in-lieu to rental program, which they have previously resisted.

Bruce said he has a portfolio of loans at his business, and he uses the term that The Norris Group is the servicer. However, he said they would never think of doing something without the expressed permission of the person who is actually the owner of the loan. In some cases it seems the servicer has more power than the people who actually own the loan. This is why if you are an investor it is so important to carefully choose your servicer. This is a testament to why people choose Bruce and not others.

Bruce said his thoughts sometimes are, “So what, you’re a servicer. You can’t do a thing without calling the person who is the benny.” He said this thinking is naïve, but he is being honest. It sounds like somewhere in the contract they have been given an awful lot of authority to act on behalf of the benny. This is an interesting scenario where you are acting on someone else’s behalf for your interest. This is kind of a scary scenario. Sean said he has only dug into the attorney general’s settlement a little bit, but he has talked to others who have. One of the things that really surprised them and is leading now to some investor lawsuits is there are things in the settlement where the servicers have agreed to put the investors in a worse position than their own portfolio seconds. Part of the settlement agreement was to give seconds a bigger share in the names of helping homeowners. However, it sure seems like a bank bailout by any other name.

Up until recently, everyone has been against reducing principal. There have been a couple million loan mods, but really very few of them have dealt with principal reductions. All of a sudden, even that seems to be on the table as well. Sean thinks if they were really seriously talking about principal reductions, they would change the rules around market to model and the rules around allowing lenders to leave these things on their books for extended periods of time, which is basically back to the way things used to be. If they could not play games and they had to take losses, then they would probably realized principal balance reductions likely lead to lower losses. However, they lead to losses all the same.

There is a tough double-edged sword because for every loan that is currently delinquent, there are another three to four folks who are underwater. If you make that too easy, those other three to four who are underwater but still paying may want the same deal. Sean thinks this leads to a banking collapse similar to 2008 if not worse. Sean believes this is the queue reason DeMarco at FHFA has been pushing back against that. It is the start of a slippery slope. Sean thinks it is getting more press, but he does not know if we will see any more of them in reality.

Bruce said it reminds him of the $8,000 tax rebate because right before that there was a $7500 tax loan that was not a rebate. You have an interest-free loan; so if you have gotten the $7500 no-interest loan and a month later the program changed, instead of feeling grateful you are now feeling you got cheated. There are $2.2 million loan mods looking at this going, “Hey, we didn’t get any principal reduction.” The first two million problems are people who have already gotten the loan mods. Sean said he has always called that first set of loan mods the most exotic loans ever made. Here you are taking loans that already never should have made it in the first place, and a lot of them get converted into these ridiculously low 2% interest rates, interest only for five years or some other incredible terms. Some of the early loan mods especially have to be some of the most toxic loans on the planet, and they will probably start blowing up as we hit the five-year mark on those. This is probably one reason why the foreclosure problem is going to extend.

Sean said he used to talk about when the pay option ARMs or the five-one interest only were carefully tracked when these things were going to hit their reset dates. Everyone has forgotten about reset dates because they never panned out to matter as much as people thought. The things with reset dates were the ones the banks were most aggressive about fixing. However, they fixed them by tacking another five years onto an already bad deal in a lot of cases. Sean thinks this is still a ticking time bomb. Coming back to shadow inventory, there is no question there is a lot of distress. The only thing he tries to remind folks of is with the length of the foreclosure process, even if they got to work on it now and went through the foreclosure processes as fast as possible, by the time these things hit the market and they deal with the evictions, you are talking a minimum of a year. There is no sign of this at this point, so there is no possibility of a wave of foreclosures hurting the market in any way, shape, or form for at least twelve months. There is just not the inventory there that they could put back on the market that quickly.

The loan mods that were done in the first year are over 70% delinquent already. Their total percentage of current loan mods for the entire history is 49%. Half of these are late. So if this was a loan program, it would be hard to call that a success at 50% default. There should not have been any surprise here. You cannot take a toxic loan, make it more toxic, and think you have fixed it. This is one of the things people believe to be true and what Sean said to be true, but lenders will also loan to people in foreclosure much earlier than the 7-year time period mentioned. When somebody is in foreclosure, it is going to be on their credit history for seven years. However, this does not really prevent them from getting a loan for seven years. Sean said on the upside for the real estate market, the folks who were foreclosed on early in 2008 are getting to be four years into this. Some of those folks are probably tired of being renters by now, realize that interests are awfully low, or may be starting to reach a point where they can qualify to be homeowners again. Sean thinks this is actually a potential source of strength for the market in the next couple years.
Bruce interviewed FHA a couple years ago, and he asked her specifically how long it takes after a foreclosure bankruptcy before she would consider someone for a loan. Her answer was six months, which really surprised Bruce. He thought this is certainly not the street answer. Sometimes there are overlays on top of programs, but if that program actually does exist where FHA would actually say they will look at that as early as six months, then they really should think about not knocking off the overlays since it would probably be a safe loan at this point. If the government had not outlawed everybody but big banks making loans and getting a decent return on their money, then Sean said he personally would take any dollars that he had and loan to strategic defaulters. These are people who made financially smart decisions; and if he is comfortable with current asset values, he would make a loan to anybody with a pulse. Even if they did not perform, he could rent the property and get a better return than he would probably get on the interest rate on the loan. He could certainly find somebody else to take over the loan. Sean said anybody with a pulse would be given a loan when prices were ridiculously high. Now, the prices are at a point where you are taking no risk by making a loan to anyone with a pulse, so they won’t do it.

Bruce and Sean had the privilege of going back to Washington D.C. and sitting in front of what seemed to be pretty intelligent people. You just wonder how the decision process is flawed where the people sitting in front of them could have influence and make the same decisions Bruce and Sean had talked about. It seems like there are roadblocks to common sense. Sean said he came back from this trip more depressed than he had been in his adult life. Bruce said the only reason he came back a little bit better than that was because he always realized there would be room for private money. Unfortunately, they continue to make lending money privately as illegal as possible to help out their handful of friends at the banks. Fortunately, they have not done this for loans to investors, and hopefully this stays true. When you look at things as a business owner, one of the scariest things is you feel like things could change at the drop of a hat for all the wrong reasons. Everything that is real should have foreclosures going up, and the reality is 2012 is probably going to play out as Sean expected with a quantity getting into the marketplace with less inventory.

Sean said in February they saw fewer foreclosure sales than any month since September of 2007. The number of people underwater and in the foreclosure process is not dramatically different from when we were near our peak in foreclosure sales that was three times as many. Clearly the only difference between then and now is the policies around foreclosures. He would love to say these policies were helping people with principal balance, loan mods, and more short sales. However, this is not the reality.

Sean also tracks a couple other states besides California. Bruce said he does not know the rules of Nevada, but he had read something that it is almost outlawed to have a foreclosure. They are the negative equity capital of the country, so Bruce wondered what has changed here. Sean said it has not only changed here, but it appears those changes are coming to California. This is important to understand as Bruce’s business model could change pretty radically if this happens. The fundamental issue is the laws we have around mortgages or deeds of trust are what we really use. If Sean buys a house and receives a mortgage, he gives his ownership of the house in trust to a trustee. They have the power to sell the house if Sean does not make his mortgage payments. This is how the foreclosure process works in California and in Nevada. Within that, there are these loose terms in the law that say that there is a beneficiary for the deed of trust who one could assume was the lender or even the note holder. It is not that specifically spelled out in the law. Somebody who benefits from receiving the stream of payments is allowed to foreclose.

What they have done in Nevada is they have retroactively changed the law to say that you must prove that the beneficiary actually holds the underlying note and all of the paperwork such as assignments and transfers have to be shown up front before the foreclosure can occur. The whole point of the foreclosure process is if somebody tries to foreclose on you and you can prove that you have made your payments, you have the opportunity to come forth and stop the sale. If the trust deed does not agree with your proof, you can avail yourself with reports and get an injunction to stop the sale. There is plenty of time for this, but instead they have now switched that burden of proof from the homeowner to show that he has made his payments to the bank to show that they actually have the power under the deed of trust to collect in a way that was never previously specified. What this has done is it has brought a complete halt to foreclosures in Nevada. There are still some foreclosures, but they are all Homeowner Association liens, which are not subject to the laws or for loans that are outside of the timeframe. There is a timeframe to which the law applies. It has really brought a complete halt to the foreclosure process there, and if those laws pass in California then he would expect the same thing to happen here.

What is interesting about this entire scenario are the unintended consequences going forward for who is going to make a loan next in Nevada. The government is always going to be crazy enough to make a loan, even if they cannot collect since they have the taxpayer to fall back on. It was only a few months ago when Nevada had 3,000 homes being sold at foreclosure a month. That is 3,000 escrows, realtor commissions, cleanout crews, and homes getting cleaned up and put back on the market rather than sitting in foreclosure with an owner who is not going to continue to make repairs. The question is why they would continue to make repairs on something they know they are going to lose. Sean believes they are going to deal with pretty significant economic impacts a few months out in addition. They don’t need any further pain in their economy, and they are probably going to deal with significant blight as homeowners. Homeowners just stop bothering to take care of these properties.

Ronald Reagan had a good quote. He said, “The nine most dangerous words in the English language are ‘I’m from the government and I’m here to help.’” Bruce kind of wishes they would leave the industry partially alone at this point. But what Sean was talking about is kind of a scary scenario. It affects people’s lives that have had business models that they thought were going to work, and then all of a sudden they are dead in the water. The world has changed. When most of these laws were written around mortgage notes and foreclosures, these laws are not ten but eighty years old. These things have been around forever. The whole robo-signing situation drives Sean nuts because what they are saying is the person does not have personal knowledge. Sean does not rely on looking everything up. If he has his computer system where he has been tracking his invoices, accounts, and bills, he relies on this. He does not remember every bill he paid over the last year or every detail, so he needs his computer.

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.

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206-TNG Radio – Jon R. Daurio 12-25-10

Friday, December 24th, 2010

Jon Daurio

Chairman of Kondaur Capital


 

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This week Bruce is joined by Jon R. Duario. Jon is the chairman and chief exective officer of Kondaur Capital. He founded Park Place Capital in 2001, and sold it to Ameriquest Mortgage Company in 2002. After the sale, the name of the business changed to Sprint Funding Corp, and Jon remained as president through May 2006. He received his Juris doctorate and Masters from UFC, and his BA Cum Laude from Harvard. He is also a fifth degree black belt in Tae Kwon Do.

This week Bruce is joined once again by Jon Daurio.  Mr. Daurio is currently the chairman and chief executive officer of Kondaur Capital.  Previously, Mr. Daurio co-founded Parkplace Capital in 2001, sold that business to Ameriquest Mortgage Company in ’02.  After the sale the name of the business was changed to Sprint Funding Corp.  John remained with Sprint as president, general counsel through May of 06.  John founded Encore Capital Corp., a national wholesale residential mortgage banker.  Mr. Daurio received his juris doctorate and masters from USC and his bachelor of arts degree cum laude from Harvard, and somehow in his spare time managed to get a fifth degree black belt in Tae Kwon Do.

Note pools most frequently involve a competitive bid situation, but not always. When a large pool of loans, or any pool of loans for that matter, is being sold, the seller typically will sell those loans.  Most analogous to what I think people would understand to be a sealed bid, although it’s not literally in a sealed envelope or anything like that, so it is a competitive bid situation.  Many of our sellers that we’ve dealt with repeatedly though will sell or deal with us on a negotiated trade basis, meaning that they’ll deal directly with us, and I believe they do that because we have proven ourselves over the last 3 and a half years that we’ve been in business and buying these loans to be if not the most competitive bidder meaning we’re paying the highest prices for these loans, at least the most experienced and, I’ll use the term easiest, purchaser to deal with because the purchase of these loans is not an easy procedure, and there’s tons of laws and issues that have to be addressed when a loan is purchased and servicing is transferred.

Its hard to imagine the infrastructure you have to have to do diligence on for a pool of loans, especially if it’s all over the country. That’s one of the reasons Daurio’s company has almost 500 employees and growing.

The way the market works, which is the majority, on a competitive basis, a pool of loans is given with information about the loans, the address of the house, the credit history of the borrower, the terms of the existing loan, the payment history, especially since I focus on non-performing loans, when the last payment was made, where those payments were made and you get what’s called an indicative bid.  We at Kondaur as well as others give an indicative bid stating, “If all of the information that you’ve provided to us is true, this is what our price would be.  However, we need to conduct a due diligence review of the loans in order to A. verify that the data that you’ve given us is true, and B. determine what other types of compensating factors or issues that could change what we offer for loans.  I will note that Kondaur Capital Corporation is unique and has a reputation as being the nation’s only true loan level bidder, meaning when we receive a pool of loans; let’s say 1,000 loans, we give 1,000 individual loan prices and allow the seller to cherry pick us. Bruce was surprised to hear this.

Many of Daurio’s competitors are surprised when Daurio explains to them which loans he doesn’t like out of a pool of 1,000. For example, I might say, “Okay, well I like your prices on these 820 loans, but I don’t like it on this 180 loans.”  Many of our competitors in that situation will say, “Well wait a second, we’ve gotta re-price because we assumed we were going to purchase all the loans.”  And that’s in essence the difference.  It’s that we do a meticulous, an extensive review of each individual loan to the point that each individual price stands on its own.  So in answer to your question, ‘How long does that take?’  Typically that takes us between two and three weeks to complete.

This is not for the purpose of getting the indicative bid. The indicative bid is something that we do on a macro basis or a modeling basis that would give a price.  And then the final price takes us about two or three weeks.

The value of a loan I would say is what a ready, willing and able buyer would pay for that loan, and because I am a ready, willing and able buyer, my purchase price is an accurate depiction of what the value of that loan is.  And in turning the value of that loan, we spend a tremendous amount of efforts analyzing both what the expected sale price would be of the home securing the loan assuming that we’re going to take title to the house as part of the resolution effort which we do approximately 75% of the time.  The (indistinguishable) majority by paying for a deed in lieu of foreclosure as opposed to foreclosing on the loan, as well as an analysis of what is the current credit situation of the borrower, which we determine with very little information available to us because during that bidding process we’re not allowed to contact the borrower.  We have to rely on existing servicing and collection notes and the origination file that might or might not be available.

For every 100 loans purchases, Kondaur eventually owns the house as an REO about 75% of the time. For the other 25% of loan purchases, Kondaur is selling the loan on a one-by-one basis or refinancing it.  With the available FHA programs, Kondaur could successfully do a refinance of the loan about 4% of the time.  About 1% of the time the borrower’s actually able to come up with funds to give me a short payoff where Kondaur will forgive a fairly significant amount of the principle balance but they’ll be able to pay me.  Or Kondaur will modify the note either by principle forgiveness and/or payment reduction, but in that situation Kondaur won’t hold it; it’ll still sell the note or it’ll sell it as is.

Kondaur sells 100% of the REOs that it takes title on, even after we’ve taken property back.  As Jon said in the past segment, when Kondaur takes title to a house as REO it is very, very quick if there are people still in the house to go through any of the cash for keys process.  Or, if the occupant won’t cooperate, an eviction process, and then Kondaur rehabilitates the property to put it in turn-key condition, meaning that whoever buys the house doesn’t have to put any money into the house in order to live in it, and then sell it.  Typically, Kondaur has a REO off the books within about 3 months.

There are some opportunities for investors willing to come in and pay at a lesser price and close these things in a week.  This prevents Daurio from taking the 3 month journey. But again, we don’t take cash because we have a need for liquidity.  I’m very, very fortunate in this sense that my company is very well capitalized.  We have access to well over a billion dollars of capital.  But the reason why we do it is I am very pessimistic on a national basis and especially in the Inland Empire as to home prices in 2011 and 2012.  So if there is an expected, which I think in the Inland Empire could be as high as another 1% per month decrease in the value of the homes.  If I get cash today, it’s better than trying to get under contract in 3 months.  This is a side note:  we, with rare exception, will ever accept a purchase offer where the close of escrow is beyond 30 days.

FHA has about 555,000 people 90 days late or more, and they only have 50,000 current REOs.  Daurio is interested in getting pools of loans that are able to be purchased from the Department of Housing and Urban Development.  He is currently dealing with members of HUD.  He is trying to figure out how we might be able to buy and/or service their loans.

Another thing that makes Kondaur Capital somewhat unique in this market, especially relative to other people that are buying these loans, is I require only two representations and warranties on behalf of the seller: that they own the loan, and that they can sell it.  Meaning that if they breech either of those representations or warranties; they didn’t own the loan or they didn’t have the ability to sell it, I can mandate under contract that they have to buy it back.  Things like title, what leansare on the property, I take upon myself the responsibility for determining that, and the way we determine it is rarely by a full-blown title insurance policy, but there’s a product that many of the title companies make available called an ownership and encumbrance, or ONE report, and that’s what we rely on for trying to determine what leans exist against the property or what the situation is with who really owns the property and how title is held.

We never buy a loan that’s in the MERS system.   One of the things that we require before we close on the purchase of any loans is that the loans are out of MERS before we purchase them. From the day I started the company and built it we wanted it out of MERS.  I won’t say I anticipated these kinds of issues, but I always want to try to minimize the number of parties that are involved and the resolution of the loan.  One of the reasons why we do very few short sales is because typically in a short sale the borrower’s going to vacate the house by selling it, and we’d rather just pay them for a deed in lieu of foreclosure and then sell the house ourselves.

Daurio has noticed some attitude changes of the occupants in the 3 years that he has been doing this. This is because of the media making borrowers more aware that owners of loans, like myself, would be willing to pay them for a deed in lieu of foreclosure despite the fact that they haven’t made payments for months or even years.  We’ve seen some people that are more amiable to take that because they didn’t even know it was available.  Then we have some borrowers that because of the publicity of issues on litigation with respect to issues like modifications or MERS or the robo-signer issues or things like that they’re holding out.  I guess there’s actually a third thing, and the third thing is that people are just making economic decisions that unlike what we offer at Kondaur Capital Corporation to a borrower to vacate, the borrowers are making economic decisions saying, “Okay, you’re willing to give me X dollars, but I could stay in my house rent-free for X number of months,” and the two don’t equate.  So therefore it’s economically better for them to remain in their house rent-free than it is to accept what so many of my competitors offer which is simply a nominal amount of money.

There are many failed loan modifications within these pools. Potentially half of the loans I buy today are failed modifications. Bruce is very surprised by this. Bruce doesn’t understand why a lender would choose the pool method of selling as opposed to making it one at a time.  He would think they would net more by doing this. Daurio thinks it’s more ignorance or purposeful sticking your head in the sand to avoid the issue.  Let’s recall that there is a separation of the owner of the loan and the servicer of the loan.  Many servicers of these loans are the same servicers that were granted the right to service these loans when these were performing loans and therefore the amount of money that the servicers are being paid to service the loans is woefully inadequate for the servicer to properly staff both in terms of quantity and quality of people.  Quite frankly these servicers aren’t staffed to be able to service these loans on a one-by-one basis; and the owner of the loans, even if they get smart enough to realize that this is an issue, is unwilling to pay the servicers to adequately staff.  This is not that bad of a decision because so many of the relationships are adversarial in the sense that a servicer typically makes money on servicing fees and therefore liquidating the loan is not in their best interest.  But it may be for the owner of the loan.  That’s why at Kondaur, we’re an owner servicer.  We do third-party service for some, but those are the entities that understand and we actually make our self obligated to take the route that is the best for the owner of the loan and not necessarily for us.  Daurio tries to align those interests in the contracts he has with them.

This round of foreclosures and not receiving payments is probably creating a lot more overhead for the servicers than they were anticipating. At Kondaur Capital Corporation, when we service with third party service, in our servicing agreements we really retain a tremendous amount of flexibility and authority to do what we think is best.  In fact, I have not taken on third party servicing assignments where the owner of the loan wants to inject their opinion.  In other words, they want to put a limit on how much I could offer for a cash for keys or for a deed in lieu of foreclosure based on things like a percentage of what the loan is worth or a percentage of what the house is worth or a percentage of the unpaid principle balance, all things which I think are irrelevant in determining how much should be offered to a borrower for cash for keys.  What should be offered to a borrower for cash for keys should be the subject of two analyses.  One, if the borrower were to make an economic decision and continue to live rent-free, what is that value relative to what is being offered?  And then secondly, what is the benefit to getting the house quickly, especially when you are like I am where you think housing prices are still going to depreciate fairly significantly in the upcoming months and years.

Bruce just did some research on not just the pricing of California in terms of what homes are selling for, but the cost per month. Cal Poly Pomona does a report and has for several decades, and twice a year they reappraise the same address in many different cities in California.  I went back to 1990 level pricing and compared it to 2010, and I’ll just pick Lancaster/Palmdale.  The actual price is -11% for that 20 year period, dollar for dollar, not inflation adjusted.  Interest rates were 10.2% in 1990, and interest rates now are say 4 and a half.  So you have a 55% discount on the cost of a loan and you have income that’s increased.   So it’s interesting that the market is so unwilling to buy a product that’s virtually on sale at an all-time level monthly.

Daurio agrees, but there are other situations in which, for an owner of a loan such as himself, getting ownership of that house can be faster and better.  It’s not just because he expects housing prices to continue to deteriorate, but also because rent-free borrowers in the house are not expending money on maintenance, and so there is an increased amount of what we call deferred maintenance, which is a great cost.  Thirdly, when we take title to a house by paying a borrower for a deed in lieu of foreclosure, the borrowers are not vindictive as we have heard borrowers have been in other foreclosures where they rip out the piping or cabinetry or plumbing or things like that.  Most of Kondaur’s borrowers, nobody happy about the fact that they’ve lost their home, but they feel like they’re definitely treated better and better off than with their previous servicer.

Bruce feels that is a good point, because somebody can do an awful lot of damage in a bad mood in one day, no doubt about that. Daurio considers this sort of property damage to be criminal. Bruce has found it very hard for anyone to acknowledge that this might be true.  We buy at the trustees sales, and we have sometimes people very blatantly doing things that were detrimental to the property.   You can call the police; you can even go to the extent of a lawsuit and it would be very tough to justify the activity just because it doesn’t seem like you have too many people on your side.

Daurio believes there will be some different occurrences in 2011 from 2010. He see more loans going to default. Also, he see more loss severities, because he believes housing prices will depreciate more in 2011 than 2010.

Kondaur Capital Corporation will begin purchasing commercial loans. Daurio started a subsidiary company called Kondaur Commercial; and it is going to both third-party service and purchase initially small balance commercial loans. By small balance he means 5 million or less.

Kondaur Capital has purchased quite a number of land loans.  It’s just not as large a market as one to four family or small balance commercial. Bruce thinks this would probably entail holding it at this point.  Daurio disagrees saying, “No actually, again, it’s all of a function of so many things in real estate:  you make money on the buy.  We buy land loans when we think we have an exit strategy that is profitable.”

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.

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187-TNG Radio – Sean O’Toole 8-14-10

Friday, August 13th, 2010


Sean O’Toole

Founder, ForeclosureRadar

(Full Bio)

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September 17th, 2010, The Norris Group returns with its award winning event I Survived Real Estate 2010. The Norris Group has assembled an incredible line up of industry experts to discuss the state of REO from the inside. Topics will include regulatory intervention and aftermath, bulk buying, myths and facts, and opportunities emerging for real estate professionals. 100 percent of the proceeds support the Orange County affiliate of Susan G. Komen for the Cure. This event would not be possible without generous help from the following platinum partners: Foreclosure Radar and Sean O’Toole, the San Diego Creative Real Estate InvestorsAssociation and Bill Tan, Investors Workshops and Shawn Watkins and Angel Bronsgeest, Invest Club for Women and Iris Veneracion and Bobby Alexander, San Jose Real Estate Investors Association and Geraldine Barry, Claudia Buys Houses, Frye Wiles, MVT Productions, and White House Catering.

This week Bruce is joined by Sean O’Toole. Sean is the Founder and CEO of ForeclosureRadar.com. ForeclosureRadar is the only company that tracks every foreclosure in California, Arizona, Nevada, Washington and Oregon. It makes updates daily on all foreclosure auctions. Prior to ForeclosureRadar, Sean spent 15 years building and launching software companies. In 2002, Sean entered the foreclosure business, and bought and sold over 150 properties.

Bruce thinks everyone who is a trustee sale buyer should be a member of ForeclosureRadar. When Sean started Foreclosure Radar, there were only about 40 trustee sale buyers who bought the majority of the deals within the state, but now there are thousands. The invention of the lower bid has created activity. We wish they would drop their opening bids even lower.

5 to 10 billion dollars worth in properties go to the courthouse steps every month. 80 percent of those properties go back to the bank as REOs. The number of REOs have decreased 50 percent from July 2008. However, there are still a huge number of properties being taken back by banks. From a historical perspective, we still have an outrageously high number of REOs.

People tend to have this mentality that nothing bad can happen from here on out, because they don’t think the lenders will unload a bunch of inventory into the market. However, in 2007 and 2008, that is exactly what they did. Up until the end of 2008, regulations required you to file a notice of default after 60 to 90 days of delinquency. In September of 2008, Paulson changed the rules, and since then, they have changed the rules to mark to market. Lenders now have this mentality that discourages them from foreclosing so long as there is some hope of receiving payment at some point in the future.

People are wondering when all the shadow inventory is going to show up and ruin everyone’s day. Shadow inventory has a few different holding tanks. The banks are holding it and not releasing it. In 2008, there was growing evidence that banks had inventory that were not being listed. In 2009, banks started selling more foreclosures than they were taking back. In the mean time, we had delinquencies that were over 90 days delinquent and were not going into foreclosure. Some properties are as much as 180 days delinquent. We have 1 million homeowners in California that are not making payment, but only 200,000 in foreclosure, and only 15,000 to 20,000 being foreclosed on per month.

There is a report claiming that “once a person is behind, the odds of them making that payment current again without a loan modification is 1%”. Sean thinks that may be true historically, but right now, the situation is worse than that. In the past, people went delinquent because of job problems, but this time, they are going late because we had a massive credit bubble that doubled home prices fictitiously. We have now corrected those prices, but we have 4 trillion dollars in excess mortgage debt. People are realizing that they are never going to get that money back, and paying the interest doesn’t help them.

ForeclosureRadar noticed an increase in investor activity in 2009. Subscriptions increased slightly around that time. Right now, people are concerned that the economy and housing might double-dip. Bruce thinks that a double-dip will probably occur.

A lot of ForeclosureRadar’s growth has come from builders and commercial real estate brokers. The court house steps have become much more competitive because of these two groups. They can’t just stop working because their niche isn’t doing well.

From 2002 to 2006, good investors could get a 50 to 75 percent return on capital. In 2007, the market went away because the banks weren’t dropping the bids. In 2008 and 2009, Sean heard plenty of stories about investors getting an 80 percent return on capital. It got really good for a little while, but over the past six months, the market got a lot more competitive. There are plenty of risks with buying at auctions. Bruce believes that someone makes a mistake every day at the courthouse that alters their financial life for a while.

The government has decided that it is better to avoid taking a property back to the lender. ForeclosureRadar is tracking the lenders who are willing to work problems out. Investor short sales concern Sean, especially if the deal is being bought to be flipped. Some people are claiming you can make a lot of money by doing a short sale through a double escrow. Sean thinks people who do that are going to get themselves into trouble. Bruce interviewed the FBI on this subject, and the FBI described the people who do double escrows as perpetrators. There are short sale opportunities out there, but there is a lot of risk involved. It can be difficult to convince lenders that you have added a significant amount of value to a recent short sale.

Lenders understand that auctioned properties are being sold at a discount. On a short sale, lenders believe that a market sale is being made, and they will not like the idea of selling a short sale at $100,000 below market.

Deutsche Bank recently made a report on mortgage servicers and how long it takes to do a short sale. With prime mortgages, GMAC took six months on average, CitiGroup took 7.5 months, Wells Fargo took 8 months, and Countrywide took 13 months. There is a buyer attached to the end of these deals, and no one is going to wait 13 months.

People involved with HAFA brag about their ability to sell within six months, and Bruce thinks that is ridiculous. The problem is that people are not coming to terms with the losses they are going to take. The government also has a few policies that are affecting speed. If Bruce was attached to that business, he would be very frustrated.

Mortgage insurance companies know they will have a better income and have less of a loss with a short sale, but if they have that loss right now, then they’ve got a payout to make. If they do not approve a short sale, and force a property into foreclosure, they may not have to payout for 8 or 9 months.

Sean believes that companies are moving away from principal reductions. Freddie claimed that they are not going to do principal reductions, because they have been tasked with protecting tax payer funds and they cannot just give out principal. If GSEs, who hold a lot of the mortgage debt, start giving out principal reductions, then that comes directly at the cost of the taxpayers. Freddie has a deed-in-lieu lease back program with a lease option. If someone does a deed-in-lieu under this program, they have a two year waiting period before they get to buy a property, and Bruce has the feeling that the property they will buy is that same property they were previously in. That would cause less volatility in the market, because it would discourage buyers from moving around.

Sean recently did some research for American Banker Magazine on jumbo loans. Loans under $417,000 are the fastest to be foreclosed on. Mini jumbos, which range from $417,000 to $729,000, take 30 days longer to foreclose on, and it takes even longer to foreclose on big jumbos. If lenders are struggling to deal with reality anywhere, it is at the high end of the market. Lenders sometimes try to aggressively foreclose with the hope of scaring the borrower into paying, but when they don’t get scared, the borrowers will simply vacate and move, and then the foreclosure gets cancelled. When lenders do not foreclose because they do not want the house, they are usually cancelling foreclosure by the masses. These lenders are often working to get people into the HAFA program, so that they can get a short sale or deed-in-lieu. Sean thinks the HAFA program is just like HAMP last year. It is not meant to conclude a bunch of short sales, it is meant to put people through another six months of delay only to tell them that they do not qualify.

Sean O’Toole’s website is www.foreclosureradar.com

Sean will be on the I Survived Real Estate 2010 panel in September.

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.

Thank you for being a Gold Sponsor for I Survived Real Estate 2010: Delmae Properties, Elite Auctions, Entrust California, Inland Empire Investors Forum, Keystone CPA, Las Brisas Escrow, Leivas Financial Services, Mike Cantu, North San Diego Real Estate Investors Association, Northern California Real Estate Investors Association, Personal Real Estate Investor Magazine, Realty 411 Magazine, San Jose Real Estate Investor Association, Tony Alvarez, and Westin South Coast Plaza.

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173-TNG Radio – Leslie Appleton-Young 5-8-10

Friday, May 7th, 2010


Vice President of C.A.R.


(Full Bio)

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This week Bruce is joined by Chief Econ0mist for the California Association of Realtors, Leslie Appleton-Young.

The peak of the median home price in May 2007 was almost $600,000. Bruce believes there were indications that we were no longer in the peak in May 2007 despite the fact that median prices reached that level. Transactions slowed in the 4th quarter of 2005. In Sacramento, there was a lot of new construction, affordable housing, and subprime borrowing. In areas like Sacramento, homes were purchased in 2003 and 2004, but they began adjusting in 2006. These properties started faltering for a full year before they showed up in the data. Sales at the moderate and low end shrunk, but sales at the high end were doing fine, so the median home price became skewed. Prices went down in 2007 and 2008, but at the same time, sales were increasing by over 25 percent.

We have never experienced a price decline like this recent one. However, the San Fernando Valleys had a significant drop in 1990’s when there were fires, floods and riots. At that time, the median went from $225,000 to $165,000 in that area.

There are many owners who put down 20 percent on their home, but now owe more than their house is worth. There were people with good jobs and good mortgages, but got in trouble once prices decreased. In the future, we need to be more aware of cash-out refis. People who had equity would use it for vacations and toys rather than investment. We had such a long run –up in price that people began to think that real estate could not hurt them. They thought that pulling out equity now would be replaced by more equity later, and that was not true.

There are many people who are defaulting strategically presently, because they don’t want to pay for a property which won’t return to its previous value in many years. However, you have to weigh this benefit against the damage done to your credit. Strategic defaults are becoming more prevalent, and it is becoming more socially acceptable. It was once considered bad to choose to stop paying on a mortgage, but now people find it acceptable. Fannie Mae just came out with a statement which allows people to get financing within 2 years if you will give a deed-in-lieu of foreclosure. This new rules will come into affect July 1st. The new mortgage you get in 2 years will likely require 20 percent down.

Distressed sales have never been this high. ForeclosureRadar.com provides a tremendous educational opportunity for those interested in learning about the distressed sales market. In areas like Riverside, distressed sales represent nearly 80 percent of all sales. Short sales are also beginning to increase.

Distressed sales have been more common in the lower end of the market. However, now that the downturn has been going on for so long, foreclosures are becoming more common in the upper end of the market.

In Riverside County, there are approximately 3,000 homes with over 3,000 square feet which are pending for sale. Bruce doubts that we have buyers for all those homes, and the loan balance for many of those homes is probably over $1 million. Bruce thinks that we are going to have a price hit and glut of inventory in the upper end of the market.

Leslie thinks that first time buyers are in good shape with the stimulus package, but the trade-up buyers are having trouble. When you have a median price of $600,000 and the government programs are specifically designed to help people that owe less than the Fannie Mae maximum loan balance, then you are probably missing 35 percent of the market. People who owe $1 million dollars have no encouragement to buy again. Bruce thinks that having a home above 3,500 sq. feet will be less meaningful in appraisal values than ever before.

The spread in the jumbo loan market has come down to 1 percent. Many of these borrowers are putting down 30 to 40 percent down for jumbo loans. To get those loans, you need to have a large down payment and a strong FICO score. Many loans are being held in portfolio by the lender, because they want to have a cushion going forward.

People have different reasons for buying now than they did in 2006. People are not buying homes expecting to get rich off of their homes. They thought they could sell their homes once the interest adjusts or refinance, and when the adjustment time came, neither of those options were available. Now people realize that they are not going to get rich over night just because they own a house, and they are looking for a place to raise a family.

There is a strong disconnect in the mind of a person in congress between the word investor and speculator. In this market, the speculator has gone home, but investors are working to fix up houses and they are needed. Banks do not have the resources to rehab and get homes onto the market in a timely fashion.

Bruce will be a moderator on an interestingly panel coming up in June for Fannie Mae and Freddie Mac. These two companies are starting bulk divisions. Bruce wonders what size of bulk deals they are planning for, and whether or not there will be restrictions on detaining those properties. Bruce is not sure when Fannie and Freddie will finalize their decision on this subject. Bruce is also trying to get Sean O’toole from ForeclosureRadar.com to be a moderator as well. REO agents can benefit from listing homes ten at a time, rather than 1 at a time. There is a huge chunk of negative equity properties that need to get through the process, and anything that speeds that process up in a reasonable manner is a good thing.

There are many people in California who are showing tremendous character by paying for an upside down property. The best way to reward these people is to show them that there is hope for equity replacement in the near future.

60 percent of people are not buying homes, yet very few are renters. Leslie thinks many of these people are moving in with their parents and children. The housing downturn has affected very aspect of the economy, so people need to save.

There is a statistic showing that 200,000 homes are built every year. Builders are looking at this statistic and thinking they need to build more houses, but you have to be more realistic than that. The reason why builders aren’t building homes is because nobody is willing to buy. However, all these people that have moved in with their families to save money will someday want to move out. We are artificially skewing our building to the low side right now. There will be a day when builders will be behind the curve, and demand will accelerate far faster than the inventory.

Many jobs have been lost in the California construction industry, but these jobs are starting to return. Leslie thinks that this industry will make a comeback in a few years. We need to make jobs from new products and services. We usually expect construction to provide jobs at the end of a downturn, but that will probably not happen this time. Consumer confidence increased in March, but it is still only half of what it was one year ago. The opportunity for builders lies in creating multigenerational housing.

A report was just made on the demographics of California through 2050. The numbers show that we are very different from the other states, and that we will probably grow. Our growth will cause more demand for housing, but it will not happen over the next few years because of the problems we’ve had.

In Riverside, unemployment is close to 15 percent, but that probably translates to around 20 percent because many people have stopped looking for jobs. Riverside County used to be the leading county in California in regards to employment growth. People will always migrate to places with more jobs. California is currently losing people to other states with better employment. Uhaul recently came up with a report on moving destinations, and one of the top destinations was Sacramento. People are moving there because housing is more affordable and they have been able to find some sort of employment. It will take time to work through California’s negative equity position, but we will improve eventually.

Unemployment is usually an instigator of foreclosure, but this time unemployment has lagged from foreclosure yet is increasing the problem. There are areas that were not subprime focused that are being dragged into the overall problem because prices have gone down.

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The Norris Group Real Estate News Roundup 4/16/10

Saturday, April 17th, 2010

Today’s News Synopsis:

California unemployment increased to 12.6 percent last month. The SEC charged Goldman Sachs with fraud. According to the Commerce Department, Housing starts climbed to an annual rate of 626,000 last month. Fannie Mae is developing a new program to help families in foreclosure gain access to a new mortgage within 2 years.

In The News:

Sacramento Bee – “Jobs rebound, but California unemployment at 12.6 percent” (4-16-10)

“California’s unemployment inched up to 12.6 percent last month even though the state added 4,200 jobs, the federal government reported today. The numbers from the Employment Development Department are further evidence of the economy beginning to stir.”

Los Angeles Times – “Housing starts, permits rise as builders rebound” (4-16-10)

“Housing starts climbed to an annual rate of 626,000 last month, up 1.6 percent from February’s revised 616,000 pace, which was higher than initially estimated, Commerce Department figures showed Friday. Building permits, a sign of future construction, climbed to the highest level since October 2008.”

Wall Street Journal – “Mortgage Rates Reverse Course and Fall” (4-16-10)

“The 30-year fixed-rate mortgage averaged 5.07% for the week ended April 15, down from 5.21% last week. A year ago, the mortgage averaged 4.82%. The 15-year fixed-rate mortgage averaged 4.40%, down from 4.52% last week and 4.48% a year ago.”

Housing Wire – “Fannie Mae Director Outlines Program to Turn Homeowners into Renters” (4-16-10)

“Miguel Gutierrez said the goal of Fannie Mae is to minimize family displacement for borrowers that participate in a deed-in-lieu of foreclosure program, launched early in November 2009, while managing it in a way so as to not put any undue pressure on Fannie’s ever-growing rental portfolio. The homeowner-turned-renter is required to pay fair market rent to stay in their home for up to 12 months. The renter must have enough income to sustain a 31% income-to-rent ratio and rental payments are not subsidized by Fannie Mae, but could include renters eligible for Section 8 payments.”

Housing Wire – “Fannie Shortens Wait for Some Distressed Borrowers to Get New Loans” (4-16-10)

“Fannie Mae (FNM: 1.24 -4.62%) announced it is reducing the wait time for some borrowers between when they complete a short sale or deed-in-lieu of foreclosure transaction and when they can obtain a new mortgage. Previously, a borrower was required to wait four years before getting a new mortgage, or two years if their home sold in a short sale. Under the new guidelines, a borrower that previously completed a deed-in-lieu of foreclosure transaction can get a new mortgage in two years, provided the borrower has a 20% down payment.”

Housing Wire – “SEC Charges Goldman Sachs with Fraud Over Subprime RMBS CDO” (4-16-10)

“The Securities and Exchange Commission (SEC) today charged Goldman Sachs (GS: 160.70 -12.79%) and one of its vice presidents for allegedly defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages, demanding a jury trial for the allegations to be heard.”

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