According to the latest report from the U.S. Commerce Department, sales of pending existing homes increased while at the same time sales of new homes decreased all in the month of December.  According to Housing Wire, commercial and multifamily loan origination increased 13% in the fourth quarter of 2011.  NAHB reported the number of housing markets showing improvement has increased to 100.

In The News:

Bloomberg – “Foreclosure Deal Deadline Arrives” (2-5-12)

“U.S. states that balked at liability releases in a proposed $25 billion nationwide settlement over bank foreclosure practices must decide today whether its mortgage relief and reforms are worth legal claims they’ll lose.”

Housing Wire – “Multifamily mortgage originations jump 13%” (2-6-12)

“Originations of commercial and multifamily loans grew 13% year-over-year in the fourth quarter of 2011, while still declining 7% from the third quarter, an industry trade group said Monday.”

Realty Times – “Real Estate Outlook: New Home Sales and Prices Decline” (2-6-12)

“Pending existing-home sales may be up across the nation, but new home sales fell for the first the first time in three months in December. These latest figures come from the U.S. Commerce Department.”

Bloomberg – “Bernanke: Fed will protect U.S. economy from Europe” (2-6-12)

“The U.S. foreclosure crisis has risen to new heights.  Atlanta’s 55-story Bank of America Plaza, the tallest tower in the Southeast, is set to be sold at an open outcry auction on the steps of the Fulton County Courthouse tomorrow after landlord BentleyForbes missed mortgage payments.”

Mortgage Bankers Association – “MBA Forecasts $230 Billion of Commercial/Multifamily Mortgage Originations in 2012; $2.4 Trillion of Commercial/Multifamily Mortgage Debt Outstanding” (2-6-12)

“In its inaugural forecast of the commercial/multifamily real estate finance markets, the Mortgage Bankers Association (MBA) projects originations of commercial and multifamily mortgages will hit $230 billion in 2012, an increase of 17 percent from 2011 volumes, and continue to rise to $290 billion in 2015.”

NAHB – “List of Improving Housing Markets Expands to Nearly 100″ (2-6-12)

“The list of housing markets showing measurable improvement expanded by 29 metros in February to include a total of 98 entries on the National Association of Home Builders/First American Improving Markets Index (IMI), released today. Thirty-six states are now represented by at least one market on the list.”

Los Angeles Times – “Lawmakers push Fannie, Freddie to write-down mortgage principle” (2-6-12)

“Rep. Barney Frank and two other House Financial Services Committee Democrats on Monday pressed Edward DeMarco, the regulator of seized housing finance giants Fannie Mae and Freddie Mac, to write-down the principal on mortgages of underwater homes.”

Housing Wire – “Capital Economics: REO to rental program possibly ‘best housing fix so far’” (2-6-12)

“In a statement released Monday, Capital Economics called the REO to rental program possibly the “best housing fix so far,” calling it “possibly more significant” than President Obama’s refinancing proposals announced late last month.”

Los Angeles Times – “Consumer Confidential: Mortgage deal, Redbox service, Clint rules” (2-6-12)

“Today’s the day for state attorneys general to decide whether they want a piece of a multibillion-dollar mortgage settlement with the nation’s largest banks.”

Inman – “Texas regulator issues cease and desist order against flat-fee FSBO site” (2-6-12)

“A Texas real estate regulator is investigating a flat-fee, for-sale-by-owner site for alleged unlicensed brokerage activities in the state and has issued a cease and desist order against the company.”

Hard Money Loan Closed

San Bernardino, California hard money loan closed by The Norris Group private lending. Real estate investor received loan for $150,000 on a 3 bedroom, 2 bathroom home appraised for $250,000.

California Real Estate Investor Events:

The Norris Group will be holding their monthly REO Boot Camp, February 14, 2012.

The Norris Group posted a new event. Bruce Norris of The Norris Group will be at the 2012 Kick Off Brunch on February 18, 2012.

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.

MERS recently won a case in an appeals court allowing them to foreclose on properties and assign a deed of security to to properties that are already undergoing the securitization process.  In a big story in the news, California saw a decrease in foreclosure notices with the improving housing market and changes in loan policies.  With the settlement between the top five banks and the state attorneys about to be completed, more servicers are hoping to join in on the settlement.

In The News:

NAHB - “GAO Study Finds Appraisal Process Inadequately Monitored” (1-23-12)

“Zeroing in on yet another deficiency of a faulty appraisal process that is hurting home values, hampering a housing recovery and often killing sales of homes coming in below the contract sales price, the Government Accountability Office (GAO) earlier this month reported that the Appraisal Subcommittee, which oversees the appraiser regulatory programs established by the states, needs to improve its monitoring procedures.”

DS News – “First Three Bank Failures of 2012 to Cost FDIC $244M” (1-23-12)

“Three community-based lenders went under over the weekend in Georgia, Florida, and Pennsylvania, marking the first bank failures of 2012. Altogether, the three closings are expected to cost the FDIC an estimated $243.8 million.”

Housing Wire - “Regions reports 4Q loss of $548 milion” (1-24-12)

“Regions Financial Corp. (RF: 5.105 +3.76%) reported a fourth-quarter loss of $548 million, or 48 cents a share, largely driven by a $731 million non-cash goodwill impairment charge.”

Bloomberg - “Fitch Will Release Mortgage Models as Ranieri Lender Complains of Impact” (1-24-12)

“Fitch Ratings is planning to share its grading model for U.S. home-loan bonds with issuers and investors as industry pioneer Lewis Ranieri’s lender complains that credit-ranking firms are hindering the market’s recovery.”

Realty Times – “Accidental Property Managers May Pose Problems for Brokerages” (1-24-12)

“The phenomenon of “accidental landlords” has been with us for a while.  Last month’s Wall Street Journal article (Dec. 12, 2011) on the topic didn’t uncover anything new.  Time Magazine had written about it as early as 2009.  In both cases, “accidental landlord” referred primarily to homeowners who had become landlords as a result of (i) either a need to move or a need for cash flow, and (ii) an inability to sell in this continuing depressed real estate market.”

Housing Wire – “Appeals court upholds MERS right to assign, foreclose on a mortgage” (1-24-12)

“Mortgage Electronic Registration Systems Inc. has the right to assign a security deed and foreclose on a property that becomes part of the securitization process, the U.S. Court of Appeals for the 11th Judicial Circuit held in a new opinion.”

CNN Money - “Meet the new Federal Reserve members” (1-24-12)

“It’s a new year. And that means a new, and probably less divided, Fed.  The Federal Reserve is playing its annual game of musical chairs, rotating voting members on its policymaking committee.”

Wall Street Journal - “New Spat Over Upper East Side Rent” (1-24-12)

“A real-estate developer is seeking to demolish one of the city’s oldest, privately developed low-income housing complexes, saying the Upper East Side apartments can each only fetch rent of $600 a month in their current state.”

Bloomberg – “California Home Foreclosure Notices Decline 12% as Lenders Change Policies” (1-24-12)

“Foreclosure notices in California, the state with the highest number of distressed mortgages, fell in the fourth quarter as the housing market improved and loan servicers changed their policies, DataQuick said.”

DS News - “Additional Servicers May Join in AG Settlement” (1-24-12)

“The settlement negotiations between the state attorneys general and the top five servicers have dragged on for more than a year now throughout frequent reports that a settlement is ‘close’ .  Working out a deal that banks feel is fair and that attorneys general feel serves their states’ residents has been challenging at best.”

Hard Money Loan Closed

Los Angeles, California hard money loan closed by The Norris Group private lending. Real estate investor received loan for $100,000 on a 4 bedroom, 3 bathroom home appraised for $225,000.

California Real Estate Investor Events:

Bruce Norris of The Norris Group will be at the Investors Workshops and will be interviewing Shawn Watkins on January 25, 2012.

Bruce Norris of The Norris Group will be at the Advanced Investing Skills and Strategies 2.5 on February 4, 2012.

Looking Back:

The CBIA reported total building permits issued during 2010 increased 23% from 2009. Statistics from Trulia showed that owning a home was cheaper than renting one in 72% of the largest cities in the United States. Commercial property values rose 0.6% in November 2010, according to Moody’s.

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.

In a big news story, the sale of new homes in the U.S. increased 1.3% for the month of October.  The number of problem banks on the FDIC list is continuing to decrease for the second straight quarter.  According to Housing Wire, the New York Federal Reserve reported a decline in mortgage debt in the third quarter.

In The News:

Realty Times - “Real Estate Outlook: Existing-Home Sales Improve” (11-28-11)

“Amidst turmoil in the stock market and continued crisis in both our own and European debts, the latest figures from the National Association of Realtors show that existing-home sales improved slightly in October.”

Housing Wire - “Mortgage debt falls in third quarter, NY Fed says” (11-28-11)

“Consumer indebtedness dropped by 0.6% in the third quarter as mortgage balances and credit card limits continued to decline, according to a report by the New York Federal Reserve.”

Wall Street Journal – “Stronger Lure for Prospective Home Buyers” (11-28-11)

“Home prices and mortgage rates have fallen so far that the monthly cost of owning a home is more affordable than at any point in the past 15 years and is less expensive than renting in a growing number of cities.”

CNN Money - “Citigroup’s $285 million SEC settlement rejected” (11-28-11)

“A judge rejected a proposed $285 million mortgage securities fraud settlement between Citigroup and the Securities and Exchange Commission on Monday, saying the deal was ‘neither fair, nor reasonable, nor adequate, nor in the public interest’.”

San Francisco Chronicle - “Sales of new homes up in October, but prices fall” (11-28-11)

“Americans bought slightly more new homes in October, a hopeful sign for the  troubled housing market. But the median sales price fell to its lowest level of  the year, and the overall sales pace is trailing last year’s — the worst in half  a century.”

Housing Wire – “NAR expects some commercial real estate growth next year” (11-28-11)

“The commercial real estate segment could experience some growth in 2012, the National Association of Realtors said Monday.  Still, the association and market analysts remain cautiously optimistic with the
economic crisis in Europe, as well as political wrangling and a bleak jobs picture remaining a top concern domestically.”

DS News - “FDIC’s ‘Problem Bank List’ Contracts for Second Consecutive Quarter” (11-28-11)

“Bad real estate loans from the boom years of the last decade have forced 412 FDIC-insured lenders to shutter their operations since 2008.  No institution’s balance sheet has been fully insulated from the downturn in the real estate markets, but data released by the FDIC suggests those lenders who’ve survived thus far are now finding their way out of the storm.”

DS News - “RealtyTrac Secures Capital Investmenr from Renovo Capital” (11-28-11)

“RealtyTrac said Monday that it has obtained “a substantial capital investment” from Renovo Capital LLC through the private equity firm’s Renwood Opportunities Fund. ”

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.

Bloomberg reported spending on construction increased in August the most it has been in two years.  Foreclosures are also increasing again, accoring to the Realty Times.  Despite this, a new study was released by CoreLogic showing that there are still positive numbers for equity in the country, showing that more homeowners are doing well than it may seem.

In The News:

Bloomberg - “Strategic Mortgage Delinquencies as High as 27%” (10-3-11)

“The number of borrowers choosing to fall behind on payments on U.S. home loans packaged into bonds without government backing has held steady over the past year, meaning the “strategic delinquencies” account for a larger share of new late payments, according to JPMorgan Chase & Co. (JPM) .”

Housing Wire - “Jumbo mortgages to remain steady after conforming loan limit drop” (10-3-11)

“The elevated conforming loan limit on mortgages guaranteed or insured by the government expired Saturday, but the only issuer of private-label jumbo securities since the crash said the largest banks will still move forward.”

DS News - “Moody’s: Refinancing Is Key to Housing Market Recovery” (10-3-11)

“If all of Fannie Mae’s and Freddie Mac’s borrowers paying interest rates that are higher than the median rate were to refinance at 4 percent, the savings would total $63 billion.”

Realty Times - “Real Estate Outlook: Foreclosures Rise Again” (10-3-11)

“Housing has remained in its state of flux this week, with mixed news from across the sector.  The National Association of Realtors latest existing-home sales report shows that sales rose in August by 7.7 percent”

San Francisco Chronicle - “Gross Says Recession Risk Overtaking New Normal Forecast” (10-3-11)

“Bill Gross, the manager of the world’s biggest bond fund, said the global  economy risks lapsing into recession with the pace of growth falling below the  “new normal” level the firm has predicted since 2009.”

DS News - “Closing of Texas Bank Pushes Year’s Failures to 74″ (10-3-11)

“The Texas Department of Banking and the FDIC seized control of First International Bank in Plano, Texas, over the weekend.”

Housing Wire - “CoreLogic launching new borrower credit report” (10-3-11)

“CoreLogic (CLGX: 10.38 -2.72%) is launching a new credit score service it claims will give lenders a much stronger sense of a borrower’s outstanding debts.”

Realtor Magazine - “Appraisals Blamed for More Deals Falling Through” (10-3-11)

“Appraisers are increasingly taking the heat for more transactions being canceled or delayed after more appraisals reportedly are coming through that don’t meet the contract price.”

Los Angeles Times - “Most homeowners still faring well, with positive equity” (10-3-11)

“A new study, conducted by mortgage and real estate data firm CoreLogic for this column, found that there are substantial reserves of positive equity across the country. CoreLogic maintains the largest database on home loans — 42 million
active accounts, more than 80% of all existing mortgages — with information supplied regularly by lenders and servicers.”

Bloomberg - “Construction Spending in U.S. Unexpectedly Rose in August on Local Outlays” (10-3-11)

“Construction spending in the U.S. unexpectedly rebounded in August, propelled by the biggest jump in state and local government outlays in more than two years.”

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 170 podcasts in our free investor radio archive.

The Wall Street Journal reported that more foreclosed homes will be featured on reality television shows.  In other news, the Reality Times reported that the sale of existing homes fell last month, the Northeast being the lowest.  According to Housing Wire, some of the big banks showed improvement in the second quarter with increased loans and bigger pre-provision earnings. 

In The News:

DS News - “Home Prices May Not Have Hit Bottom Yet: Survey” (7-25-11)

“Home prices, which have been sputtering along for much of the year, are likely to dip further by the end of 2011, according to the results of a nationwide industry survey of real estate agents.”

Inman – “Real estate exec jailed on drug trafficking charge” (7-25-11)

“Robert Lord Morris, president-elect of the Realtors Association of Lake and Sumter Counties in central Florida, is in jail after claiming a package filled with crystal methamphetamine worth an estimated $30,000 hidden inside a bag of Meow Mix cat food, the Orlando Sentinel reported Thursday.”

Bloomberg - “JPMorgan Cuts Commercial -Mortgage Bound Forecast as Volatility Hurts Profit” (7-25-11)

“JPMorgan Chase & Co. (JPM) cut its 2011 forecast for sales of bonds tied to commercial mortgages by as much as $15 billion as volatile prices curb profitability for Wall Street banks, impeding a recovery in the property market.”

Housing Wire - “Lack of financing may derail growing housing investments” (7-25-11)

“Investors are a driving force in the housing market, but their enthusiasm is constrained by limited financing options with more investors forced to pay cash for their homes as debt-driven financing remains restricted.”

Realty Times – “Real Estate Outlook: Existing-Home Sales” (7-25-11)

“Existing-home sales fell in June amidst contract cancellations, according to the National Association of Realtors.”

The Wall Street Journal - “TV Home Shows Flip Scripts” (7-25-11)

“Where are the hundreds of thousands of foreclosed homes in the U.S. ending up? On reality television.  This summer and fall, several TV networks are unveiling reality shows about buying foreclosed houses as a way to reinvent the popular “house flipping” formula, which proliferated in cable programming alongside the real-estate boom.”

Housing Wire - “Banks’ second-quarter earnings show some loan growth” (7-25-11)

“Second-quarter earnings from the nation’s big banks show the firms experiencing modest loan growth and higher pre-provision earnings during the period, FBR Capital Markets said in a new report.”

DS News – “Regulators Shut Down Florida and Colorado Lenders” (7-25-11)

“Regulators closed the doors on three lending institutions over the weekend – two in Florida and one in Colorado. This latest round of closings brings the number of names on the FDIC’s failed-bank list to 58 for the year.”

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.

Andrew Waite

Founder and Publisher, Personal Real Estate Investor Magazine

(Full Bio)

This week Bruce is joined once again by Andrew Waite. Andrew is the founder and publisher of Personal Real Estate Investor Magazine. He has authored a total of nine magazines, is a recognized expert, and is extensively published in sales and marketing automated processes, sports marketing, and sponsorship.

One of the things Bruce does as an investor is figure out where to put his money. He read one of Andrew’s reports word for word when it came out two years ago titled The Invaluable Investor, and he wondered what Andrew found in the report that might surprise people. Andrew’s main concern with the magazine is when they chose the word investor as part of the title; they missed the majority of Americans that were investing in real estate because there is a vast class of Americans out there that own real estate other than their own occupied property. They’re generating income, managing effectively and responsibly, and improving neighborhoods, but the last thing they define themselves as is real estate investors. The word investor implies professionalism, a structure, an operational sophistication, and it really isn’t that way when you think about it. If you are inheriting a family home, if you have a relocation that goes bad or you have a slow sale and you decide to get into the rental as a bridge strategy that ends up working out since you have not lost your assets, all of a sudden you have a really big market. Andrew said the problem with all the titling was the fact they chose the word investor. It’s not. It’s average Americans with some holding in real estate other than their owner-occupied home. They typically buy a multi-family house, and they also buy and hold it, the greater percentage of them tending to hold it. Flipping is a very sophisticated business because you have to worry about financing, timing, managing contractors, the buy and sell side, the marketing. You have to have a margin that isn’t necessary for cash flow.

When you look at a lot of real estate data, no matter the economy, the relativity remains the same. One of the interesting things that occurred with Community reinvestment, Fannie and Freddie, and all of the secondary market that was pushing liquidity into the market was they moved the homeownership percentage up to 69%. If you look worldwide over major English-speaking cultures and at the homeownership of quantity or relativity, it’s constantly 64-65%. It’s this way in every market, whether the interest rates are good or bad; the American dream or middle class dream in every country is to own their own home, which settles at about 64-65%. What Andrew and his business partners had done was they pushed the market into an area where it was beginning to defy personal and national economic trends. As soon as the market dried up on subprime and all of the artificially low loans, you found that those with budgets were pushed out of the market and later dropped back. Right now we’re running at about 67%, and we’re going to see a little more contraction, which is going to end up at about 65%. In Bruce’s opinion, it might end up less than this only because we have about 8% of the people that are still occupant owners not making a payment. When you look at the numbers on a relativity point of view to the actual market as a whole, if 3-4% of the investors solved their problem, you look at what this percentage represents in terms of the 123 million houses out there. The pendulum will probably over correct on the downside, but then it will float back to a 64-65% number. We’re talking about human behavior here, not about economics. To Bruce, this is the missing link between when people collect data.

As an investor, Bruce always has to look at what’s next. On occasion, The Norris Group has written reports, and they created a “moodometer” that actually charts the history of the mood of the buyer. It doesn’t only track the mood of the buyer, but like a Case-Shiller case, your propensity to take risk, or herd behavior. You also get this in lenders, not only the buyer. The buyer wants it, and the lender says, for example, they can lend them 125% LTV, and loan programs facilitate the exuberance. You then get to an interesting place that you didn’t really want to go. Now the opposite is happening. You have a skewing way below the line where they’re saying no to loans that make perfect sense. The Norris Group just made 13 loans to a gentleman that is a well known investor in Southern California who owns about 44 houses free and clear and can’t borrow a dime. However, he has ten loans, so he had to borrow 13 loans from The Norris Group at 9.9% interest. It’s ridiculous that people would think this was a dangerous loan, but this is where we’re at. The very interesting thing is when you see this behavior based on what is the need of the financial institution and their quarterly reporting or the reserve rules of the summary promulgated by the comptroller of currency, you find they overreact. One of the most interesting things that Andrew saw that nobody else seemed to see because it was an FDIC change made in 2007 based what happened with the RTC from 1987-1990. At that time, they had decided to accelerate mark to market all of the assets that a bank had that were nonperforming. Everybody had to take a 100% loss then and there, which destroyed many banking institutions. This allowed no provision for the fact that when these properties were liquidated, they had value. The delta was really the loss and not the 100% loan. They changed the law in 2007, but they went the other way. They allowed for the bank to keep the properties on their books, but in an Enron style offshore entity that was really part of the bank but not part of the bank. As a result, it made people hold onto assets in the shadow inventory, which when you watch the numbers and listen to Sean O’Toole at ForeclosureRadar, Sean will tell you that the banks have bought enough time to be able to liquidate enough. This way there is never going to be a huge thud as everything arrives on the market overnight because at least someone was smart enough in terms of liquidating the assets but not doing it in a precipitous manner. We have learned, but now we have a whole new set of lessons we have to learn again. We did forget back in 2006-2007 when inventory was dumped in California and properties were being bought consistently when inventory was at its worst. If for example, there was 18 months of inventory available in the MLS, it was being bought at $0.19 on the dollar from what the lender was owed. They presented the inventory as they got it, and that is what happened to the market. It dove like a rock. After that they pulled out the quantity of inventory, so the MLS then had about 4 ½ months of inventory. In Bruce’s opinion the inventory level is very phony. It could be a lot higher, so as an investor Bruce looks at this and sees that they are in an extended period of time where the lenders are going to present their inventory at a very measured pace. It will then be a contender for people to sell again for quite some time.

Bruce sees that there is going to be a real bend toward increasing down payments for owner occupants. One of the statements that was made by Shelia Bair was that when somebody makes a down payment of 20% they have more stake in the game and will perform a lot better. We have collected the data for this over a long period of time, and the payment history for somebody who puts 0% down VA, 3% FHA, and 20% of Fannie Mae or Freddie Mac, the difference in foreclosure rate is ¼%. They’re going to dictate all these policies based off a false assumption. With that model, they have retired sales, and its classic overregulation. Since Andrew is in the advertising business, he really understands what a control piece is. A control piece for the audience is you have a mailer or an advertisement you know gets a certain result. You don’t change the control piece but one thing at a time, and then you know if it would improve or not improve the results. It’s like doing diagnostics on a broken computer. You start with one assumption, and then when that assumption is not proved, you keep that assumption stable and then move to the next one. We have a 30-year history, a control piece of how not to have a national decline in price, and we are forgetting that all the way from 80-2000 we had a perfect record. We had some ups and downs that were minor, and the loan programs that created it are not getting the blame. What is getting blamed is the down payment, and it is absolutely ridiculous. This is dangerous because the timing of it couldn’t be worse. In California, we have a market in Riverside that is 71%, either short sale or REO, and what that means is when you have 1,000 sales you’re really creating only 290 buyers. All of the other people are credit damaged to the extent that they are not a buyer. You start multiplying this across the state of California, and it is a pretty big percentage. CAR did a study showing that when a seller re-buys something, they are usually re-buying something 33% of the time. When we have 500,000 sales in California, we’re producing 165,000 repurchasers and having to find 335,000 new buyers, which is impossible. To come from a new buyer list, it’s going to have to be investors, and that’s why numerically you’re going to have to deal with the fact that investors better buy these vacant homes and fix them. This is where Bruce hopes we end up as an industry, with an industry that has enough influence. The people will start looking at what The Norris Group does in a different light and see that they actually bring something to the party. The I Survived events are a class of industry event and industry interest where you’re combing the interest of both parties and let them all understand they have common goals and now speak as a voice. Andrew ran an investor provider leadership summit and brought several little companies from all over the country and put them in the same room. They were astounded at each other in that they all used common accounting standards. Those who didn’t were a problem because they weren’t comparing apples and oranges. They all realized that they needed to have standards and that they could stand up and say they were a housekeeping seal of approval style business, and all of a sudden even though they competed they realized that they were a singular voice for responsible investment and reaching a class of buyers that was the ordinary American looking for a better return than what was offered through traded assets. And this is the goal of I Survived Real Estate, to have leaders from different industries that have their own special interests think about how if they were to sit in front of Congress, then they will also think about how there is an investor base that can assist in the solution to the problem. But, if they all had the same mindset in how to solve the problem, then they would probably have a lot more power collectively than they would individually.

It is average Americans who have sound belief in their country and how business and real estate work. It’s not an unusual or exotic asset, but it is something everybody understands pretty well. Investors or average Americans investing in investment grade rentals are not slum lords because if they let their property go and the neighborhood is affected, their investment declines in value. If these people are responsible or irresponsible as other people try to paint them to be, they’re missing the whole story because these people are really proud of their properties. The better the properties are, the more easily they rent, and the better rent they accumulate. It was the market that pulled Andrew’s magazine through, not him and his business partners saying smart things. In 2005-2006, the group that called themselves investors was probably a lot of speculators that are no longer here. There are more true investors in 2011 than there were in back in 2005-2006. When you run a magazine, the fear is you run a weddings magazine. In those cases, a bride subscribes to your magazine, and 6 months later she’s married. If she is subscribing to your magazine a year from now or go back to her and ask her if she wants to re-subscribe, typically you will find a very low number. Andrew found the same thing with real estate investors because he would go to several real estate investment clubs, and the clubs would find something they wanted to get married to/invest in, thought they could make some money, and would sign up for an association. Their expectations were high. However, after a year when you go back to re-subscribe to a “bride’s” magazine, you get two classes of buyers for the second year of subscription. There were a lot of people being drawn into the industry that weren’t coming in with reasonable expectations, a type of “millionaire by midday,” but soon they were all gone because they spent all their money on books and tapes. The class of persons that promoted “edutainment” was very bad for the industry and it created a lot of vestibule object that you’re seeing from the legislators. They remember seeing “Billy Tan” and his blondes on a boat in San Diego on midnight television. Almost everybody was a real estate investor in 05-06. Bruce lost three people who cut his hair during that stretch of time because they all became real estate agents. This is when Bruce knew he better sell his things, and he sold 100 houses in that time stretch. One of the things about investors and looking into the future is that it’s good to have a way to make non-emotional decisions. Charlie Dow was the inventor of the Dow Theory, and he contributed to a book in the late 1800s. He said, “You could always tell where you are in an investment cycle by taking the mood of the crowd that’s investing it.” He said if you want to get wealthy, sell to the (eager) and buy from the fearful. This is the marketplace we’re in right now where real estate has created such a fear around it that there are opportunities where any time you would look at each other and see something is wrong and too good to be true, there’s not an enormous amount of participation. Andrew’s magazine is really an outlet for this on a national basis since a lot of markets are local and it helps to have specific knowledge (of the market).

There are four parts to the magazine: Process, Principles, People, and properties. The process and principles are pretty universal. It’s the people and properties that differ on a regional basis because if you are investing in the northeast you tend to be dealing with a lot more older stock custom houses. When you’re dealing in the Sunbelt or in the newer states, there is a lot more production housing. As a result, that is a far easier market for investors to operate in because there is far more predictability in it. Andrew sees a lot of activity in the “smile” of the southern states, starting in the Carolinas and going up into Northern California. It’s weather, economic strength, right to work, and a whole lot of things that make the markets much more attractive for real estate investors than the northeast, Midwest, or the far northwest. For California, what we have is a double whammy of you getting emotionally damaged by real estate after losing money plus high unemployment and not attracting migration. In California it is a perfect storm. Andrew moved to California in the ‘70’s when he lived at Berkeley, and just after watching and plotting the path of progressive strategies, he has seen that the people who leave the state are the productive people.

If you want to find out more about Andrew’s upcoming event in September, the Investor Provider Leadership Summit, go to www.personalrealestateinvestormag.com. You can also find Andrew’s magazine here or download it onto your iPad.

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.

John Burns President, John Burns Real Estate Consulting (Full Bio)

This week Bruce is joined by John Burns.  John is president of John Burns Real Estate Consulting Inc, which helps real estate industry executives by analyzing and summarizing the information they need to make decisions with more confidence.  Mr. Burns is on retainer with a number of companies, both in the housing industry and Wall Street to monitor housing conditions and help them refine their strategies in an ever-changing environment.

Since John last spoke with Bruce, he has expanded his consulting services to new groups of people.  His two largest clients back in 2006 were John Laing Homes and Centex Homes, which no longer exist.  His company monitors the housing cycle and does a lot of research; so when he saw the downturn coming, he pulled out his rolodex from the early 90’s and asked himself who they worked for during the last downturn.  He thought he would end up doing a lot of work for the banks, which he has gotten a fair amount of work from even though it wasn’t what he thought it would be.  A whole new world of distressed investors has come in, and they have been Mr. Burns’ primary clientele.  As a consultant, when you mention something negative to a client, especially something like a downturn, how well it is received by the clientele is really in the way you say it.  If you say “Now is the time to take some chips off the table,” or time to sell some land, generally people would agree with this.  The publicly traded companies don’t want to hear this because by nature of their ownership they’re being forced to grow.  However, at least most of John’s clients had been through a downturn earlier.  During the time period of the downturn, John Laing Homes ran quarterly meetings called “Preparing for the Downturn,” and they were able to get out of the downturn, but they were definitely thinking about and prepared for it.  After the market corrected in 2007, somebody from Dubai came in and offered them a large sum of money for their company, which they sold.  The company the person from Dubai bought is now gone.  With Centex Homes, the CEO who had been there 40 years and seen a lot of cycles said he was dropping prices in February 2006.  From that time on, he was saying things were always worse than you think they are and always last longer.  He made a lot of smart maneuvers and ended up selling his company to Poulty and received a 38% premium on his stock.

As a consultant, when someone asks John Burns’ opinion and he tells them what he thinks will happen based on the data, there are times he has to make sure he says his opinion in an acceptable language.  His goal as a consultant is to get them to act, so you have to know your clients.  No one forecasted the economy was going to be as bad as it is now.  You would have really had to understand how financing was done.  So in early ’07 John talked to John Paulson and another man from Front Point, and they explained things such as CDOs and mortgage backed securities to him.  John still thought they were making some smart bets.  When you really realize what was going on at the time, it’s shocking that we got to the point where lending was so carefree that we really didn’t care who ended up with what.  This is how you ended up having the price go up so much because the lending rules really just didn’t apply as we might have assumed they still did.  Still to this day, there is no good data on underwriting.  You don’t know averages or even stratification on debt-to-income ratios, loan-to-value ratios, and people’s net worth.   John was asking people questions about these terms back in ’05 and ’06, and they had no idea.  The data was probably not collected.  At this point, it may have not mattered because they were inventing whatever was necessary to get a yes answer.  Nowadays, you won’t find data such as FICO scores or debt to income ratios published.   You can feel the impact when you try to sell a house, but it’s really all random.  On a one-to-one basis, you pick up the anecdotes, but if you had some data collection that showed the number of people who were not putting down any payment and had no means of paying it while home prices were flat, somebody would have raised a red flag.

We were very generous with financing in 2005 and 2006 when prices were ten times our median income.  Now the prices have been demolished.  The mood now is to take goods away from real estate.  This has happened every time in the past, and it is happening again.  John Burns and his team just had a meeting last week where they invited all of their clients into a room, held to about 60 people, and debated various issues.  The two people who knew the most about what was happening in D.C. said that Washington D.C. was not interested in helping housing at all and, if anything, to solve the budget issues they wanted to penalize housing and the banking industry.  They felt like they gave them a handout, which they did, and now it’s time to take some of it back.  The people in D.C. don’t realize prices could take a big tumble because 90% of the mortgages in this country are still supported by the government.  If we’re trying to sell a home today it’s going to be financed though some kind of government arm.  John Burns was at a conference a couple weeks ago where the CEOs of both Fannie Mae and Freddie Mac spoke, and it was very clear to John that they were all about saving their charter right now.  The way they intend to do this is only to be extremely conservative and to show that they are making money now, which they are doing.   The CEO of Freddie Mac said that their average FICO score in the first quarter was 758.  In addition, the payment that is emerging is much different in the ratio of people’s income than it has ever been.  They’re only supporting great loans now.  It’s interesting that the sentiment starts dictating policy, and politics sometimes really get in the way of what would be a very common sense decision.  Fannie, for example, has been around for about 80 years, and for 4 years they made some egregious mistakes.  The management who made those mistakes is gone, so why are we going to “blow up” these organizations that worked for 75 years.  So overall, there are statements being made that seem perfectly logical, but if you were to see a chart you would see that charts defy what you thought was logically true.

One of the charts Bruce has is a historical foreclosure rate for Fannie, Freddie, FHA, and VA.  Shelia Bair suggests that if you require a 20% minimum down payment, with the rationale of somebody putting down 20%, they’re going to make that payment for sure.  If you look at the historic foreclosure rate on all the different loan types from VA nothing down to 20%, they’re all within a quarter of a percentage over four decades.  This is a very important chart because they’re going the other way.  They’re going to say that they will have a 20% down program, but people aren’t netting $200 grand from the sale of their houses anymore.  Cars are showing a net of 35%.  If you want a $150 grand median price, you have to make the rule that 20% is necessary.  What’s really disturbing is when they make policies on erroneous data.  Usually, the different factors are compared to earnings and price, but right now we have the lowest interest rates ever.  Therefore, if you have historical numbers on comparing earnings to payment, they show how significantly inexpensive this process is if lenders are aggressively financing.  We are most likely headed toward a slow 60% ownership, possibly less than that.  John Burns forecast is about 62.5%.  He thought the forecast should go lower, but his guys convinced him that the positive demographics and affordability would not make it go lower.

There are a lot of people that will be going from ownership to non-ownership.  If the policies start going along with that trend, then you start making down payments bigger, qualifying harder, and reducing loan amounts.  Orange County is probably one area that will be affected quite a bit if you start having Fannie and Freddie go from the 7’s to the 6’s and someday to the 4’s.  You are looking at a very different financing world.  All of the homes would become jumbo mortgages, so it would be about 50 basis points higher.  Usually, it is possible to have the money readily available, thus making it possible to take the volume that’s going to be necessary.  John has a number of clients that run huge bond portfolios, and the appetite for a decent pool of loans that pays a 5-6% interest rate is pretty strong.

If John was managing Fannie, Freddie, and HUD, for example, and he looked at how much REO and non-performing loans he controls, the last thing he would want to do is drive down home prices because that is where it would hurt him the most.  Therefore, the more distressed sales we have in the market, the more likely home prices are going to decline.  In his example, John pitched to the three organizations and didn’t get to the highest level when he did, but would tell them to create a restructure where you put REO homes into a pool that you rent out for five years.  You offer a deal to the current occupant, for example, charge them $900 a month for rent, and if they can’t pay it you rent it to somebody else.  This is no different than what a lot of Bruce’s investor clients are doing.  The only difference is Bruce’s clients are on an individual basis and therefore it’s harder to manage; but if you give somebody 300 properties in an MSA, they can be pretty efficient in it.  The model the FDIC uses is they take an ownership interest and they sell the property to somebody who manages it rather than the government managing it and the managing person gets paid for it.  Their upside is limited because the FDIC would participate in any kind of upside.  This was Bruce’s suggestion when he met with Fannie that they would sell to investors with a partnership arrangement where they shared in the upside.  They had just done this with their multi-family portfolio with a company called Related.  Bruce is not sure he would want the government as his partner because he wouldn’t be sure who would be making the decisions at the time he says it’s time to sell, and the government might disagree and think it’s not the best time to sell.  If you look at the FDIC, there were different partners who formed their own divisions.  Lennar formed a division called Rialto; Toll and Oaktree formed a group called Gibraltar.  There is also a contract that guarantees that they are going to make a small return, and if they perform they will do quite well as will the government.  Unfortunately, the reaction to John’s suggestion was ridiculous bureaucracy.  People were asking if the house needed to be fixed up and if they needed to hire a union.  People feel like the government is their landlord while they write the check to the U.S. government.  You hear things like this, and you just think that we’re not going to get anywhere.  This would be very frustrating, especially since John is surrounded by very smart people in his clientele, and he therefore would know a lot about the market and how to solve the problems if people would just listen.  It’s like the political process gets in the way of practical methods.  If you’re Fannie and Freddie, you’re very political right now because it’s the politicians who determine whether or not your organization is going to get blown up or saved.  You don’t want to do anything to rock the boat.  When they gave away the $8,000 tax rebate, in an area like the Inland Empire that was not only equivalent to nothing down, it was equivalent to cash back.  It was saying that you’re buying an $80,000 property and getting $8 grand, and your down payment for that would probably be $3 grand.  It would seem the loan portfolio then would have performed quite well because the payment that emerged was quite reasonable.  The CEO of Freddie said that their 09-2010 loan vintages had performed very well.

In 1981 and ’82, interest rates were crazy, along the lines of 17-18%.  60% of California sales did not require a new loan.  What they did require was that you had access to financing that already existed.  The 70’s before that had inexpensive interest rates, so they were allowed to buy and sell houses with the financing in place.  Bruce’s suggestion therefore is that they create a loan for only 3 years, and you sell the properties with qualifying.  Somebody has to qualify, such as by FHA standard or VA standard, but they don’t need a down payment.  This expands the demographics under 30 a tremendous amount, so you would get a lot of young adults to own a house.  The criterion with that loan program is that if you fail to make the payment, the ownership can get transferred to a new owner without them having to qualify except for when it closes escrow.  Then it has to be current.  If skin in the game is important, we need to make it come from the second person. On just this program, if you go to a trustee sale where everyone failed to make the payment, the opening bid at the trustee sale would not be the principle, but only the back payment.  Therefore, instead of having sales for hundreds of thousands of dollars, they would be ten thousand or twenty thousand dollars.  This would finance new buyers, give financing availability to people who already lost homes that had become non-owners, and it would finance investors who went to trustee sales and took over existing loans subject to closing.  They would pay the back payment and take over the existing loan.

Back in 2004, E-trade came up with a portable mortgage, which essentially let people take their mortgage with them when they moved, similar to taking their credit card debt with them when they moved.  This was called assumable debt.  Interest rates were low at the time, so who wouldn’t want to take on a 5% loan that they could then take with them when interest rates increased.  Securities in the securities market traded about 50 basis points higher because they traded it as premium over 30-year treasuries rather than 10-year treasuries, which would not be repaid quickly.  What E-trade found was that consumers didn’t want the extra 50 basis points.  It was huge news, on the front page of the Wall Street Journal, and hardly anyone took advantage of it.  It was likely a very different environment at the time.  Right now, if you give somebody a chance to go from a $1500 rent to a PITI payment of $1100 with nothing down, there isn’t much risk.  All of the mortgages at the end of the day get pushed off into some security, so the required interest rate on the mortgages would probably be 50 basis points higher than a traditional mortgage and would find a great deal of acceptance.  One of the niches that investors use right now is they’re not afraid of a lender calling a loan due that is current.  Bruce can’t imagine getting a call from a lender saying that he has reached the due-on-sale clause, so they’re going to foreclose on a current loan.  Therefore, you wrap it and you sell a property to somebody for 7 or 8% that doesn’t have a chance to own.  This kind of market does exist.  Rather than trying to figure out how to move another few million homes reasonably, they should instead go to owner occupants.  Our country should remain thinking that owning and occupying a home is a priority as opposed to protecting lenders or protecting politically what is appropriate.

There is a big chance of policy changes taking place in the future that will start taking away some of the deductions or other things that we take for granted in real estate.  Ken Mueller, a lobbyist/policy analyst who John Burns has spoken to a lot and believes to be the most right, believes there is a 75% chance that the mortgage interest deduction is going to get dropped to $500,000.  This will be tied into the debt reduction plan that is due August 2^nd, which is coming up pretty soon.  You’re also going to see all the government guarantees at best get more expensive or, at worst, go away or become available on fewer loans.

You can find out more about John Burns and John Burns Real Estate Consulting at www.realestateconsulting.com.  At this site you can find a wealth of information and blogs that discuss things pertinent in our market.

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.

Mike Shedlock

Registered Investment Adviser Representative, Sitka Pacific Capital Management

(Full Bio)

This week Bruce is joined by Mike Shedlock.  Mike is a registered investment advisor representative for Sitka Pacific Capital Management, and he also has a fantastic blog site called Mish’s Global Economic Trend Analysis.  In his blog he talks about oil interest rates, housing, the IMF, Europe, gold and silver, and anything going on in the market.

Even though times are a little tough right now to be an investment advisor, Mike’s work is going very well as he says that they have a neutral market and a cautious stance.  Their mission at Sitka Pacific is to avoid the next decline.  They had a positive year in 2008, even though hardly anyone else did.  Even without being net short they had a positive year.  They don’t bet on the market going down, but rather they try to go to the sidelines, find some things they like better than others, and have huge cash positions.  This is where they’re at today.  For the last year the stock market has gone up, and they have more or less been on the sidelines.  NASMP was up 12-15%, while they were only up 6%.  They don’t really like the risk award setup, as they believe that the odds are good that another recession is coming.  They think the recovery is not real and is only based off of fiscal stimulus both from Congress and monetary stimulus by quantitative easing from the Fed that’s not sustainable.  Both are coming to an end, and the Republican Congress does not want to have anything to do with larger deficit.  Therefore, the fiscal stimulus is going to end unless things get extremely nasty.  Global growth is slowing everywhere.  In Europe, Australia, China, and the U.S. people need to be extremely cautious in terms of what they expect out of the stock markets.

Most of Sitka’s clients are in a capital preservation mode, as is Sitka themselves.  The few that aren’t have left, but in the downturn they actually added to their client database significantly because Sitka missed the downturn but no one else did.  They are starting to see a lot of things come together all at once.  Commodities are back into a bubble; housing still has a further ways to go down, and they have already seen housing programs established.  These include Cash for Clunkers and the various stimulus packages in housing.  As soon as the tax credits for housing ended, housing prices went back down.  To work with this, Sitka delayed things for a year expecting that home prices are going to fall to where they’re going to get anyway.  Prices are going to fall until price meets genuine demand, not artificial demand coming from Congress.  The very best thing that Congress can do for the housing market is to do nothing.  They need to let prices fall, let foreclosures happen, and let prices get to where there is genuine demand.  It’s then we can find a bottom.  The more Congress tries to delay this, the longer and further off the bottom is going to be.

According to Mike, “Things don’t get where they’re going in a straight line.”  This has a lot to do with intervention, which doesn’t change the ultimate direction but rather the timeframe in which something happens.  This is why being an investment advisor is very difficult with unknown intervention.  There are a certain set of people, for example momentum traders, who expect someone to catch every move in the market, both up and down.  This is not something Sitka can do and most likely cannot be done at all, but this does not stop people from trying to do it or wanting to do it.  The population tends to chase whatever the latest and greatest thing is right before it’s ready to plunge.  This happened with housing in 2005, and it happened with the NASDAQ in 2000.  Some people who were hesitant about NASDAQ all the way up from 1996 to 1999 decided right in 2000 that they were wrong and that the productivity miracle from the internet was real and they should get in before it was too late.  Too many people think this is what makes the top.  They think this is what made the top in 2005 in the housing market.  People believed that home prices only had one way to go.  Everyone had bought in.  Even people who couldn’t afford a house bought one anyway.  There was no one left to buy.  The pool of greater fools finally ran out.  This is one thing you have to be weary of as an investor.  The mood of a market can definitely be opposite of the future direction.  Things change very quickly.  In the aforementioned situations, it changed on a dime.  When it happened with housing in 2005, people were camping out and entering lotteries for the right to buy a condo.  This is how crazy things were.

Another topic is deleveraging, which is inherently deflationary.  Deleveraging means to pay down debt, so by definition deleveraging is deflationary.  At the same time, it also depends on your definition of deflation and inflation.  To Mike, deflation is a decrease in money supply and credit from mark to market, so according to this definition deleveraging has to be deflationary.  However, if someone looks at things in terms of prices and they ignore home prices, for example, seeing the price of crude oil and thinking there’s nothing deflationary about it at all, then they’re not seeing the whole picture.  Crude is rising because of peak oil, because of massive monetary stimulus in China, and also because of some quantitative easing by the Fed.  It’s only the last that’s inflationary.  What’s really funny is people complain about the price of a hamburger going up from $3 to $4 and look at the inflation, but they’re failing to look at what’s more important: the price of a condo falling from $200,000 to $35,000, or a hamburger going from $3 to $4.  It’s irrelevant compared to the drop in home prices.  Paying down debt is one part of deleveraging, but defaulting is also a huge part of it in real estate.  This is really where the deleveraging is happening because the lenders are not getting paid the amount they have on the books.  This is where Mike’s mark to market play comes in when he defines deflation as a decrease in money supply and credit mark to market.  For the last year, the banks have gotten away with keeping absurd valuations on the value of their assets on the books.  As long as the asset values on the books were rising, the junk bond market was going up and various things were happening that were inflationary.  Mike doesn’t think the market is going to let the banks get away with it forever.  The National Accounting Board, the Fed, and the FDIC have interfered with and delayed regulations 2 and 3 times now for the last three years on mark to market rules and valuing things on the books.  They have kept things on the books at inflated values.  As long as they were able to get away with it, we’re probably going to see another big credit scare where banks are going to have to mark some of the debt they’re holding on their books back to market.  The value is going to plunge; the ability of banks to lend as a result of that will plunge.  This is why banks are not lending right now.  Banks are capital constraint and capital impaired, and there is few worthy credit borrowers that want to borrow.  This is the deflationary backdrop; and we also have a deleveraging deflationary backdrop.  In a sense, it’s really about attitudes.  It’s the willingness and ability of banks to lend and willingness and ability of consumers and businesses to borrow.

There has not been willingness for businesses to borrow.  If businesses were expanding, we would see it in the job market and in loans increasing. Instead, what we are seeing is the value of the debts going up on the balance sheets of banks.  However, banks are not really lending and the market has temporarily suspended mark to market sanity.  Instead, we have a mark to nonsense prices that have inflated the value of the stock market.  For now, Mike believes that asset prices are going to plunge, commodity prices are going to sink, and housing prices have a further ways to decline.  Everything, including stock prices and junk bond markets, is back in a bubble.

One thing that’s also happening is consumers are becoming willing participants in deleveraging intentionally.  They have access to credit then look around and don’t want it anymore.  A lot of this has to do with people trying to refinance their homes at a lower rate.  They have to bring money to the table to get that lower rate because banks require a 20% down payment.  If they’re 35% in the hole and banks want 20% down, then they have to bring in 15%.  We’re actually seeing cash-in refinancing now rather than cash-out refinancing in homes.  This is another part of the deleveraging process that is voluntary.  People are doing it so that they can receive a lower interest rate on their house.  One of the statistics happening now in Riverside they have never had before due to never having encumbered owners is 71% of the transactions are either short-sales or lender-owned properties.  This means that 71% of the sales do not reproduce a buyer in the marketplace.  Out of 1,000 sales, we have lost 710 buyers for a period of time, buy you still have 1,000 houses to move.  This is the big challenge for California in that you have a lot of houses that should be on the market that probably can’t be placed on the market because there is not really an owner-occupant buyer.  No one’s willing to give financing to investors.  For example, Fannie Mae is not doing it, and banks are not doing it.  In some extreme cases, someone wanted to put down 60% or 80% down, and they could not get the financing as it was just not available.  It’s possible some small local bank might give financing, but the big banks are not interested.  This should tell you how capital constrained they are and how stuffed to the gills they are with mortgage debt that they actually want to get rid of but don’t know how.  We also have some new rules that say the banks have to take 5% of the mortgage and keep that at risk on their balance sheets so they can’t securitize all of it.  Banks don’t want any part of this either, so we have had an attitude change on the part of buyers and on the part of the lenders.  Lenders don’t want to lend, and people are waiting for cheaper prices because they think they’re going down.  It’s the confluence of these two attitudes and willingness and ability of banks to lend and willingness and ability of businesses and consumers to borrow.  If you were a business, you would have no reason to expand in this kind of environment.  Any business who wants to expand here should be turned away as a poor credit risk because they don’t know what they’re doing.

One thing that needs to happen is we need to get rid of Fannie Mae and Freddie Mac.  In the short-term, real estate will be affected by the cost of obtaining a mortgage being raised above a specific amount.  The amount that Fannie Mae would be willing to finance is going to go down.  Anyone who wants to buy a home above that amount is now in a jumbo loan instead of in a regular loan, and a jumbo loan has a higher interest rate assuming they can obtain it at all.  Withdrawing Fannie and Freddie from the marketplace will result in downward pressure on real estate prices, which is actually a good thing.  The sooner the prices get to where they’re going, the better off we are.  If this means that 30-year mortgages completely vanish, this is a tremendous thing.  People should not be buying houses unless they have an expectation that they can pay it off in ten years.  Obviously not many people have been able to do this and not at the prices that homes were at in the market.  Fifteen years is a more reasonable timeframe.  Instead, at the peak of the insanity, we were going into 40-year mortgages, others 50 and 100.  If you need a 100 year mortgage to make something affordable, then it’s not affordable.  Mike also feels the same way about 30-year mortgages.  There should not be any reason for there to be mortgages longer than 15 years.  If someone wants a 30-year mortgage, maybe they need to pay a lot more because there is a lot more risk.  With 30-year mortgages, people are not paying the principle back fast enough, so in any downturn that comes there is going to be less equity and more likelihood for someone to walk away from it.  Someone who had to pay the house back sale over 12 years, not counting those who bought right at the tip of the bubble, would have some equity built up.  In fact, over the course of ten years they would have had their house paid off.

In regards to accessing the equity for business purposes, Mike would tell people not to do it.  People thought there was free money available.  They thought since the home prices went up they should take the money out and invest in the stock market.  Very influential people actually advised others and wrote books telling people to take money out of their houses and invest in foreign equities because they only go up.  It’s all part of when you leverage in this way the risk goes up.  With the price destruction we have had in California, at some point the price of houses will be so far below replacement costs that there is no way to pencil in new construction.  We will probably have a double-dip in some of the inventory types because of the lack of buyers and the quantity of inventory.    Mike wrote a post three years ago titled “Structurally high unemployment for a decade,” which talked about how eventually when we get to the lowest possible price level, the job market probably will not return.  We will have consistently high unemployment for a long time.  At the height of the housing boom, we were creating about 250,000 jobs a month.  At the height of the commercial real estate boom, which lagged and kept the economy going due to the subdivisions and strip malls being built, they were only averaging about 190,000 jobs a month.  Unfortunately, the commercial real estate is not coming back as we’re not going to have another boom or another housing build out like we did originally.  It takes 125,000 jobs a month to keep up with birth rate and immigration, so even if we did keep up with it, we’re going to have an unemployment rate at 8% all the way up until 2014.  The unemployment rate right now would be 12% except for all the people who dropped out of the work force.  They dropped out a faster rate than was thought, hence why unemployment is not making new highs right now.  It’s at 9.1% right now and 10.1% at its high.  We have added hardly any jobs since then, so now oddly we are heading into another recession with no telling where it’s going to go.  We may not even lose that many more jobs.  Housing is already trailing towards the bottom, so there’s not much to lose if we head back into another recession.  However, you can still expect to see the unemployment rate shoot back to 10%.

To hear more from Mike Shedlock, you can visit his website at globaleconomicanalysis.blogspot.com.  For a quick search, type Mish in Google.

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.

According to the Census Bureau, home sales rose 7.3% in April. NAR expects the national economy to add 1.5 million and 2 million jobs annually both this year and in 2012. Borrowers who default on mortgages are less likely to develop long-term poor credit in comparison to those who default on credit cards and auto loans. Ginnie Mae guaranteed over $26.4 billion in mbs during April.

In The News:

Orange County Register – “Census: Texas top site for Calif. movers” (5-24-11)

“Overall, California in 2009 — by Census math — lost 546,589 residents in 2009 to other states. On the flip side, Census found 460,161 new Californians from other states. Thus, by our calculations, California suffered a net loss of 86,428 folks to other states in 2009.”

San Francisco Chronicle – “Troubled banks made up about 12 pct of total in Q1″ (5-24-11)

“The number of banks at risk of failing made up nearly 12 percent of all federally insured banks in the first three months of 2011, the highest level in 18 years.”

CNN - “New-home sales up for 2nd straight month” (5-24-11)

“The Census Bureau reported an annual sales rate of 323,000 new homes last month. That was up 7.3% from a revised rate of 301,000 in March. Economists had forecast a sales rate of 300,000, according to consensus estimates from Briefing.com.”

NAR - “Commercial Real Estate Markets Stabilizing, Demand Growing” (5-24-11)

“Job growth creates demand for commercial space, and the economy should be adding between 1.5 million and 2 million jobs annually both this year and in 2012, with the unemployment rate falling to 8.0 percent by the end of next year”

Housing Wire - “Mortgage defaults do not predict poor credit behavior: TransUnion” (5-24-11)

“Troubled borrowers who default on their mortgages are less likely to develop long-term poor credit behavior, when compared to those who default on other kinds of loans, according to a new study from TransUnion. Consumers who default on other bills and lines of credit, such as credit cards and auto loans, are more likely to miss payments in the future.”

Housing Wire – “Bank earnings rose again in 1Q, FDIC problem list highest since 1993″ (5-24-11)

“The FDIC said banks it insures earned $29 billion in the first three months of 2011, up 66.5% from $17.4 billion a year earlier and at the highest level since the second quarter of 2007.”

Housing Wire – “Ginnie Mae MBS issuance tops $26 billion in April” (5-24-11)

“Ginnie Mae guaranteed more than $26.4 billion in mortgage-backed securities in April. That’s up from $24.1 billion in guarantees for March and similar to the February numbers of $26.2 billion.”

Looking Back:

One year ago, existing home sales increased 7.6 percent to a seasonally adjusted annual rate of 5.77 million units in April. The CIRB reports permits were pulled for 3,314 total housing units in April. Statistics from CAR show California home sales decreased 8.1 percent in April. The Federal Reserve doesn’t intend to sell any of its assets until after it begins raising interest rates.

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.

Ray McLaine President of the Commercial REO Brokers Association (Full Bio)

This week Bruce is joined again by Ray McLaine. Ray is the founder and president of the Commercial REO Brokers Association. Ray began his career in commercial real estate 30 years ago. He has developed apartment complexes, condo projects and a mini warehouse.

Commercial real estate tends to follow the residential market. In 2006, many speculators invested in commercial real estate as prices began to rise. Many residential investors began migrating into the multifamily market.

During the commercial boom, one of the leading asset management companies was offering loans up to 95% of a property’s value. Many of these loans operated under stated income, which allowed many people to easily qualify for loans. Most of these loans are now coming back.

A mortgage backed security develops when real estate loans are sold to a bank. The bank then groups those loans into $100 million pools. The interest from those pools is then collected and sold. Commercial mortgage backed securities (CMBS) are the same thing as mortgage backed securities (MBS), except CMBS is for commercial loans.

Insurance companies are typically more conservative when loaning. During the boom, the insurance companies wanted 20 to 30% down, they only wanted properties from prime locations, and they wanted a debt to service ratio of about 125%.

One thing that the CMBS market did, which the banks did not also do, was they lowered the debt to service ratio to 100%. In some cases, loan pools were created to help people carry loans with a bad debt to service ratio until a later, more preferable time. Unfortunately for the people who did that, the preferable time period never came around. The market collapsed and their loans went into default.

Most banks offered 25% financing for non-owner occupant properties, but some of the community banks went up to 80%, and the CMBS market went up to 85%.

Today, the CMBS market is coming back. 2007 was the peak for the commercial market. The MBS industry grew to $260 billion in 2007. If you add 20% to that, you will have the total transaction value of the MBS industry at that time. In 2007, CMBS accounted for 80% of the loans in the MBS business. In 2008, after the bubble popped, about $100 billion in transactions were dropped. In 2009, the market had almost completely stopped. There were only $2.9 billion in CMBS mortgages in 2009. There was an 80 to 95% drop in transaction volume in 2009 from the major companies in the business. Most of the little companies just went out of business.

This year, it has been projected that CMBS sales will increase from $12 billion to $50 billion. The market is coming back on a steep curve.

You cannot sell trashy properties in the CMBS market today. Most mortgages in the CMBS market are similar to the subprime loans in the residential market. Most of the CMBS loans are adjustable for 10 years.

Bruce Norris recently bought a commercial property for $317,000, which was worth $1 million in 2006. During the peak, you could have taken on a loan for $950,000 for that property.

If a borrower is in need of a loan modification, a special servicer is assigned to the borrower to determine what is in the borrower’s best interest.

At the end of 2009, when it was obvious that the CMBS market was crashing, many people defaulted. The banks were in big trouble when this occurred, so they asked the regulators at the FDIC for help. At that time, the FDIC had a regulation requiring banks to make a report of all loans that are over 60 days delinquent. During the crash, the FDIC changed that regulation, so that banks were allowed to not report delinquent loans for 6 months. Also, if the seriously delinquent loans were fixed during the six month period, then they were rewarded by not having to report the delinquency at all. At first, the banks were not allowed to give extensions to upside-down loans, but the banks did it anyway. When the regulators started checking on the banks, they discovered the banks had been making these extensions against the will of the FDIC, but the regulators did not feel there was a good solution to the problem, so the allowed the banks to continue extending upside-down loans.

Ray’s website is CREOBA.com

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.