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 his discussion with the panel on rental properties and homeownership. If some gigantic company owns 10,000 rentals, then Bruce for example would not know what to do with his because he would not know if the playing field was legit and if they are going to put 10,000 houses for sale. However, as a builder Bruce certainly would not carve up dirt waiting because that risk is out there that others could be his competitor at the drop of a hat. We should give investors a shot at taking the inventory down because it is manageable if we do not put it on the market.
Doug mentioned how he had come out of the venture capital industry, and a lot of folks in his industry put a lot of money into bad companies back in the late 90s. When there was a crash, they lost their money from bad investments. Therefore, the question is if Doug, for example, were to lend Bruce $100,000 and does not figure out what his ability to pay is and Bruce ends up stopping payments, then whose fault is it? The answer in this case is the lender. If you want to know how to fix things like this, from a market perspective the foreclosures should work through the system and let the banks take the loss. The issue in Washington is that the public has poured a lot of money into Fannie Mae and Freddie Mac, and a lot of those losses are going to rebound back onto taxpayers. You see the functions of the GSEs in terms of working other options other than the principle write-down piece, which will put those losses right back on taxpayers. Part of the reason that he hosted a meeting with some people at I Survived that night was to explore the investor option. They have a rule to have no more than ten loans per single investor. In the course of the bubble, the homeownership rate got well ahead of what was sustainable. There is not a broad based program to tear the properties down, and when Doug made a suggestion that it would be a good idea to tear them down, he was labeled within the company as “Dozer Duncan.”
Bruce said this actually happened in California with a brand new housing tract that The Norris Group made a bid on. Someone had sent Bruce an email with a YouTube video, and when Bruce saw the housing he thought they looked familiar. He asked Greg, and he told him those were the houses they had just made a bid on earlier. These were all brand new homes; the originals had all been torn down. Doug mentioned the evidence with the company’s portfolio from how they treated the properties, whether or not they were sold to owner occupants or to small investors and hedge funds was that the loss severity was greater. The loss severity on hedge funds is the greatest when you sell to owner occupants or small investors.
Sean talked about how you have 600,000 people right now who are 90 days or more delinquent, and there are another 200,000 who have a notice of default or are in the process of foreclosure. However, even though there are 800,000 in these groups, we have 2.4 million who are underwater. Between short sales and foreclosures, we’re cleaning up about 18,000 houses a month, so we’re looking at a span of five years if things stay at the same pace. It’s amazing that our pace of sales has stayed as high as it has, and it clearly would not have stayed this high without investors in California because repeat home-buying is gone.
Bruce next talked with a second group of representatives from the Mortgage Bankers Association, the National Association of Realtors, and the Appraisal Institute. The first, Debra Still, is President and Chief Executive Officer of Pulte Mortgage, a national lender headquartered in Inglewood, Colorado. She is the vice-chairman of the Mortgage Bankers Association, and she has been in the mortgage industry for 30 years. This year marks the first time Debra Still has been on the panel for I Survived Real Estate.
The next person was Sara Stephens. Sara is the 2011/2012 president of the Appraisal Institute, and she will become president on January 1, 2012. She serves on the organization’s board of directors and on its executive committee. Sara has been active in appraisal institutes up to regional and national levels for 20 years, and she is owner and principal of Richard A. Stephens and Associates, the oldest appraisal firm in Little Rock, Arkansas.
The next representative, Gary Thomas, is the first vice president of the National Association of Realtors. He is the second-generation real estate professional and owns Evergreen Realty in Villa Park. He has owned the business for over 30 years and has served the industry in countless roles. One of the things that struck Bruce was he has 16 grand kids.
Debra Still went first to say that her company is a national company, so they do business in 29 states, wholly on subsidiary of the homebuilder. She is very pleased to say that real estate is very stable and feels pretty flat, even with some of the dramatic headlines they have had in the last couple months. Their new orders and sign ups are very steady. In the third quarter they ran around a 22% cancellation ratio.
Sara Stephens said the market in Little Rock is doing well, and their public supply is officially in the office area. The retail properties are multi-family, while the residential market is stable in some parts of the city, more than other parts. It’s specifically in the Delta where they see declines and real problems.
Gary talked about how Orange County has faired pretty well for Southern California. It’s actually the best performing county in the Southern California area. They are holding their own and doing fairly well. He has not seen any challenges with loan reduction amounts, but he thinks we will sometime, especially along the coast where the average sale price is much higher and will therefore have an effect there. Bruce wondered what his down payment would look like if he was getting a down-payment loan and if he would be able to be self-employed. Gary said this would be very tough as it is harder to get a loan when you are self-employed. He would probably still be able to make a 20% down payment, but the loan would be harder to obtain.
Legislation passed the Dodd-Frank bill about a year ago, but it is almost to be figured out later what it needs. We’re arm-wrestling right now for the terms of what Dodd-Frank is even though it already passed a year ago. Bruce wondered what they did and if they had said what they wanted accomplished and were still trying to find a way to get there. Debra said the Dodd-Frank Act has about 250+ rules that need to be written, about 100 focused on mortgage lending. Now, the regulators are charged with actually writing the rules and the definition to meet the spirit of the law. There is a lot of facets to it, but one of them is a qualified residential mortgage. This could be a problem for our industry because if in fact they adopt the rule, it would mean to receive the better rate, you would have to have a 20% down payment. The problem with the thinking that you have to have skin in the game or it’s not a performing loan is because they’re not concentrating enough on the underwriting, which is what they really need to focus on rather than the down-payment. If somebody can afford the payment, it does not matter whether they have put 10% down or 20% down, or even 5% down. It’s really about whether or not they are a qualified buyer and if they can afford the property that they are buying. That went out the window in the past, so now it has to come back. There is a thought that that is getting back to basics, so Bruce wondered when the basics existed because it was not true in his first house purchase.
The risk retention rule is the rule that the definition of QRM comes up under, and the rule would say that someone who securitizes mortgages needs to retain 5% risk or reserve for the loans that they securitize. When the rule was originally published, there was no exemption other than FHA, USDA, and VA. One of the things the Mortgage Bankers Association lobbied very hard for was the notion of a carve-out for a qualified residential mortgage, and the definition of a QRM was left to the regulators to write. The regulators put out the first definition of a qualified residential mortgage that required the 20% down payment, a 28/36 jet ratio, and required no late payments within the previous 24 months. This is what the industry has been reacting to asking whether the regulators wrote a rule that was more conservative than the spirit of the law. Hundreds and hundreds of comments were filed, and whether it was mortgage bankers, realtors, homebuilders, or consumer groups, Debra believes everyone agrees that the rule went too far and we need to try again. The sound goal of it all was to encourage sound lending behaviors that reduce future default without harming responsible borrowers and lenders. This is where the rub is in that if it’s a 20% down purchase or 30%, it’s 30% equity for a refi. That is a big chunk of equity. The Mortgage Bankers research would suggest that if you look at the law, it provides for fully documented loans, no negative amortization, no exotic loan programs like IOs or payoffs in arms. Their research would suggest that the loan parameters inside the law were strong enough to prevent extraordinary default, and you don’t need the other underwriting restrictions that normal protocol for underwriting should prevail.
Risk retention sounds almost like a good thing because somebody who is creating a loan would have skin in the game, but there are unintentional consequences. If you think about the spirit of the regulation, it was to protect consumers; yet the regulation has gone so far that it is probably denying credit to well-qualified borrowers. Statistics would show that you can have the right risk balance without going as far as the 20% down or the debt-to-income ratios. MBA’s stats would show if you look at the 2009 Book of Business, which was a pretty conservative underwriting year, you see that still 70% of the consumers that received loans in 2009 would not qualify for a QRM loan. For a non-QRM loan, the difference in the interest rate would probably range from 100 basis points to 300 basis points. This would apply to a lender who would want to put capital reserves up and make a non-QRM loan. This is the concern as the Mortgage Bankers Association won’t have that kind of capital, so there would be too many of us that will not be making non-QRM loans. It would also eliminate a lot of buyers from the marketplace if your interest rate was 1 ½% higher. If it was necessary for safety, it would make sense, but if not then it would not make sense.
Another part of the bill is reps and warranties. This basically means that the person who has represented their mortgage as exactly what MBA would buy then has something go wrong with it; this person would be asked to re-buy it. If you look at one of the things those lenders are struggling with right now and the primary driver of some of the behavior that you see from lenders in terms of concerted underwriting guidelines is the notion of reps and warrants. When MBA sells a mortgage in the secondary market, they make reps and warrants to the investor as to certain parameters. They are always on the hook for borrower misrepresentation as well as on the hook for not following the investors’ underwriting guidelines. As investors have gotten more and more conservative and as loans have been put back to lenders, the lenders are starting to get more and more conservative in today’s environment because we are on the hook for reps and warrants. One of the parts of the law suggests that a third party do all of the reconfirming of verifications. This would probably get to the stated income loans that the industry was doing in the past. The fact that we did not have a third party with a verification of employment or depositor bank statements means it would address more a fully documented loan.
Sara went on to say that the appraisal business has not been left out of the Dodd-Frank Act. HVCC came first, and this did a fair amount of damage to the appraisal industry. Bruce wondered what changes happened with HVCC and if that has been replaced with what is intended with Dodd-Frank. Sara said one of the things that most real estate appraisers, especially those who are doing residential real estate, found was that the firewall was initially installed between the appraiser and the lender. Rather than communicating directly to the lender, the appraisers would be placed in a situation where they were directly communicating with the management system and management company. In many cases, their residential appraisers surveyed who worked with them extensively have lost 40-60% of their business. Whereas, when they had a direct relationship with the lender, they were suddenly thrust into the idea that they had to communicate with a management company. In many cases, rather than look for quality, expertise, education, things became quick and cheap. This is what so many of our people are facing now. We see people coming in from 250-400 miles away from markets where they probably had very little expertise. This has been a real problem for the Appraisal Institute, and it has changed the face of residential lending activity in a huge way.
Bruce said if he was an appraiser who had gone to sleep in 2007 and woke up in 2010, he would have been quite surprised at what had happened. You would have your income divided by multiples because you would have the assumption that you must be doing something crooked if you have a relationship, and you also now have to have a middle person taking half of your fee. This would be very frustrating, and the industry has unfortunately lost a lot of people who said they are not interested in this anymore. The statistics on renewal for our specific certification requirements has seen that in some states the renewal rate is as low as 30-40%. If you cannot continue to support your family doing what you are trained to do and what you have expertise to do, then you have to look for something else. This is what so many member of the Appraisal Institute have had to do. It is extremely difficult to re-train yourself to work in a lending environment where your expertise, education, and you qualifications really don’t mean that much to the person or persons that you are communicating with. This is unfortunate, especially for the consumer.
Bruce talked about how they had an interesting appraisal that happened the opposite way. Someone with no experience in a very unusual area where you received a lot of money for a certain located lot had a $1.3 million comp for the model-match house. They had the right location, but The Norris Group did not. They had a home for sale for about $700,000 for 90 days, which is not worth $1.3 million. When they went pending, the home was appraised for $1.3 million because it was a model-match house; someone had come in from out of the area who did not have a clue that it mattered there.
To find out more, tune in next week for I Survived Real Estate 2011, part 5. 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.
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