Bruce Norris is joined again this week by David Kittle. David is the senior director of industry relations for IMARC, a fraud investigation company located in Santa Ana. He manages IMARC’s Washington D.C. office. He is the past chairman of MBA’s political action committee MORPAC and former vice-chairman of MBA’s residential board of governors. He also served on MBA’s board of directors from 2004 through 2010. David is the past chairman of the Mortgage Bankers Association in Washington D.C, completing his term in October 2009.
Bruce and David talked off-air about some of the loans that should have been easy to get funded that have not been easy. Bruce mentioned how it seems there is a conveyor belt A and then everything else; and it seems you can get off of conveyor belt A very easily. If it is not meeting a very standard format, then it seems that your loan can go unfunded or unwanted for months. Bruce wondered what conveyor belt A is, what the desired product is, and how hard it is for the lender to want to spend time on it should it get out of that matrix. David said the answer to the last question is the fear in the marketplace of making a mistake. If you are not in a mid to high 700 credit score and a relatively low loan-to-value 80% or under, no dings on your credit, a very good stability record with some cash, and not self-employed, then you can have issues. Even somebody in that particular matrix can have issues. It has to be pristine; and these are all the rules coming out of Dodd-Frank and the CFPB that is driving fear and uncertainty to the lenders.
This means QRM is already in place even though it is not law because everyone is afraid that if they do something wrong, they will buy back the loan. Fannie Mae is still kicking back loans. David Kittle’s company does loan purchase rebuttals for their lenders as well, so when they get a loan kicked back it’s not good. David said he has seen cases where lenders are being asked to repurchase the loan on rules that were not even in place when the loan was made. This was highly unfair, but it is still happening.
Bruce said he was a part of a foreclosure task force in a city he lived in, and if there was a room he was on the farthest right-hand corner you could possibly be. A lot of the suggestions were how they could teach classes on helping people stay in their home longer. Bruce suggested teaching two classes. One would involve if a lender was not getting paid payments, it is perfectly within their right to foreclose on the asset. The other class would be about the person being foreclosed on getting a chance to buy again. What frustrates Bruce about this whole experience is he doesn’t think we have learned anything. We are not letting people fail, but rather we are teaching people that the government is always going to be there to bail them out in one form or another. This could be through an extension of unemployment benefits that go on for two years due to the government holding up job creation. It could also be from the government stepping in to help you with a loan modification. Somebody is paying for that, and nobody suffers the consequences of their own decisions anymore. We have continued to create false bottoms; and if we want to get values back up they have to hit a bottom.
We are probably very close and may be there now. The people were saying back in 2008 and 2009 that we were going to hit the bottom in 2009 or 2010, and it just didn’t happen because the government keeps stepping in to cushion people’s fall. A government solution to an economic problem never works. As was touched on in the first segment, they are so far in now that the stepping back gets more painful the longer they wait. It also becomes more difficult for them to do since they keep promising something, and they have to keep breaking their promises. People are not even being prosecuted today for doing strategic defaults. People can walk away from their house, go down the street and try another loan, and the fact that they walked away is not being held against them. It is an absolute mess out there in many areas.
One of the things that got us into the mortgage mess was we had stated income loans. Now that you people on the other side of that trying to get short sales and loan mods, you would also have stated hardship. David does not know what the percentage is today, but there is still a relatively high percentage of the stated income and loans that are still paying on time. The loan products were not bad products, but rather they were made to the wrong people. They all started taking advantage of them. David remembers one testimony he did on November 19, 2008 after he had become chairman. He made the testimony in front of Senator Dick Durbin, and one of the disagreements they had that day was about whether or not they should continue to make 100% loans to people. He told them there were still good 100% products out there, and Dick could not believe it. David said this was all on CSPAN and mentioned VA loans, which never left their charter. They underwrote the credit and collateral, and these loans are some of the best in the servicing portfolio. Under the right product, 100% loans made under the right underwriting guidelines and to the right people are very good loans.
Bruce thinks the part everyone is afraid of most in a qualified residential mortgage scenario is a mandatory 20% down payment. However, a down payment is not even necessary if it is underwritten properly. A lot of good people lost their jobs and good mortgage insurance companies closed because of the capital requirements that were being put on them. Lots of mortgage companies left even though you can still get a high LTV loan as much as 95%. With mortgage insurance, if your credit is good then you have good job stability. The programs are still available, they’re just a lot harder to get to now.
One of the things Bruce has learned by studying economics is unintended consequences. Bruce wondered what lessons lenders have learned in the last few years that will shape the loans of the future. David said unfortunately these loans are being shaped for us by regulation. David said through MBA they are trying to have as much say in the shaping of the regulations that shape the products as possible. They want FHA to be around, but FHA has loan capitalization problems as it exists. It is underwater, and they are raising the mortgage insurance premiums on future borrowers to pay for the fact that they let the brokers run over, get approved, and do all the subprime loans in 2009 and 2010. FHA, which has been a stalwart for over 80 years is in financial problems right now in spite of what they say.
When FHA looks at their loan portfolio on loans they did in 2011 and 2012, Bruce said he would be shocked if this was not the safest pile of loans they have ever written. David said as an industry they are making the best loans they have ever made in 15 years. When the meltdown started to occur, the subprime faucet was being turned off in 2008 and 2009. During this time, the brokers out there ran out and got FHA approved. The loans were still being made through people with very bad credit scores, and we are still paying for this today. If home values would continue to rise, part of that pain will go away. They are raising premiums on future borrowers, so people that are getting FHA loans now and into the future are going to be paying higher mortgage insurance premiums because of the decisions that were made in 2009 and 2010.
These fees used to disappear after a certain equity appeared, and Bruce wondered if this was not true anymore. David said on an FHA loan the monthly mortgage insurance was there through the life of the loan, and there was an upfront fee you could either pay or finance. Most people financed them, so there was actually two MIPs still in place. You can have more insurance on a conventional loan once you can prove you are in a 20% equity position and 80% LTV. You can ask for it to be removed, and in most cases it is.
One of the things that is very different in the California market that it is benefitting from very well is we are at a median price, and in Riverside we have an FHA loan limit around 500 whereas it would be 730 in higher end areas like Orange County. When we were at a 350 median price coming up in the 90s, the FHA loan limit was 160. Even in Bruce’s area it is three times the amount of ability to borrow from FHA than it ever was in prior years. Bruce wondered if there is any discussion about that changing since it used to be a percentage of what Fannie and Freddie were. Now, it is almost its equivalent. David said there is still a lot of discussion on this and MBA is fighting to keep those loan limits higher.
David’s personal opinion regarding the loan limits is that part of the problem is everybody went to refinance, even the higher loans, into FHA. This is not why FHA was established or why it was there. It was there to help load and meet moderate income first-time homebuyers. However, in order to help bail everybody out they raised loan limits, and people rushed to refinance through FHA. They had lower credit scores, so people with big loans and lower credit scores were allowed to go to FHA. When home values dropped, this was when the problem occurred.
There have been a lot of programs to help the underwater homeowner refi. Bruce wondered if the program was HARP and if we have another hybrid of this that is about to come out. At one of Bruce’s speaking engagements, somebody asked him about HARP #3. Bruce wondered about the ability for somebody to refinance something that will not appraise but for which they can get a loan anyway. David said this is true and that they are looking at doing a mortgage bailout through HAPR, HAMP, and a couple other acronyms. The Obama Administration and several of the senators on the Democratic side want to help people refinance their mortgage with another refi bailout plan. David said it is time for people, based on their decisions they made with the best information possible; to stand on their own two feet and either make it or fail. It is not the government’s responsibility to bail you out. Bruce remembered losing some money in stocks, and he did not have a person to call. David said this is just the way it should be and that it is a risk you take.
A lot of principal is being forgiven in California now. There are mailers going out to people telling them your credit line is being forgiven. Bruce said he knows this is part of the foreclosure settlement totaling about $25 billion. Bruce wanted to know if lenders were compensated for some percentage of the debt they are forgiven and if this is part of the process. David said he is not sure.
Bruce and David next discussed the topic of shadow inventory. This is one of the things people are most fearful of, and it has changed in what it means. Originally in 2008 and 2009 it really referred to properties the lenders had foreclosed on but had not put up for sale. It then grew to include the people who were delinquent and have not yet been foreclosed on. At some point it also started encompassing upside-down owners. Bruce wondered what David’s sense is from talking to lenders if they are looking at very hard times in the future as far as dealing with losses from the properties or if they think the worst is behind them. David said it is a combination of both. When you hear that home sales are up, you know that cash is king. People have started to step back into the market, and a lot of these purchases of single-family residences are people who are investing in them. They are not single-family owner-occupied homes; so people are buying them up and they will end up being sold again as they continue to bet on values to rise. Another option is they will be rented out to others. This is not a bad thing since they are at least coming off the market and being fixed up while property taxes are being paid. It’s good somebody is buying them, but there is still a surplus of housing out there in some geographic markets. It’s geographic across the nation.
If you are on the East Coast right now, such as North Carolina and Pennsylvania, you will see things are picking up as far as where you can buy a house. Employment is strong here. Texas is off the charts as far as employment and people in jobs. When you look at it, the states that are doing very well are the states with very low or no state income tax; they just have high real estate tax. When you drive around, you get to contribute every 1/10th of a mile. In the California market, what is happening is a little disconcerting for somebody who is really a free-market person. Wall Street has shown up in California with some serious money, so you have 6-10 hedge funds each armed with $500 million to $2 billion. They are buying virtually everything in sight that they can buy. This is basically a scenario similar to what happened two months ago where an REO agent gave The Norris Group a call about a listing he had that was reasonably priced in an as-is property. It got 94 offers in the first 24 hours; and the high offer was from one of the hedge funds with proof of cash of $194 million.
This is what is happening to almost every property. It does not even have to be underpriced; if it is just priced at market and offers are coming in from all-cash buyers as well as hedge funds with an MO where the interest is in any house between 1,000 and 4,000 square feet built after 1970. In this area, this represents a good 80% of the entire inventory you could possibly have for sale. The problem is if you are a private buyer with the need of a mortgage, the seller is often saying that is an iffy sale and they are just going to sell it to a cash buyer. This comes back to Dodd-Frank, CFPB, onerous regulations, and fear of the market place.
David said he has a very good friend who put her home on the market in Washington D.C. last week, and she had eight offers the first day. David remembered telling people this is where it had to be and people are coming in and bidding. She sold it for $70,000 more than what she paid for it. This is a hot market, and there is no recession in Washington D.C. Rather it is full employment. If you have the difference between a cash offer, maybe even at a little less price, as opposed to somebody who has to go get financing who has not been pre-approved, you are going to take the cash offer. Oddly enough, the cash offer is not for less than asking price in some areas. Where the aggression comes in regarding the price is that it is often for higher than you are asking and is multiple offers.
There was a transformation during 2012. The Norris Group buys and sells houses, and they usually have around 50 houses available at any one time. In January of 2000, they went from having a pretty normal market where they would put a statement into the MLS saying they would fix the house in a certain manner and get to fix it, put it on the market, and sell it within two months. By mid-year, they were getting offers to buy it as-is at the price, so they did not have to do the work. By the end of the year they were getting half a dozen offers that were aggressively pursuing the property as is and willing to pay, in some cities, 10% over any possibility of an appraisal reaching that number. They put in an addendum when they went into escrow under those circumstances that the appraisal would no longer determine the sale price. People that went into escrow being the winning bidder closed on that sale adding cash over and above the appraisal. This is what has been moving the market so aggressively since there is nothing for sale. Overall this is good news from the standpoint that this is taking up excess inventory and the people who are investing believe we have reached a bottom and the market is coming back. Overall this is good news unless you are the person trying to buy your first house.
As examples of properties not available in a marketplace, during 2009 Bruce pulled up properties in Moreno Valley for under $100,000. Since he could not accomplish this search, he had to lower the price to $90,000. He got about 480 properties available for under $90 grand. A couple days ago he did a search for under $150,000 in Moreno Valley and found twelve houses. If you go to a thirty days of inventory search, have twelve properties available, have 150 pending, and you have 150 closings in that thirty day period, you have tremendous demand now lighting on twelve houses or moving to the 150-200 category next.
David asked if MBA’s forecasts are true and rates go up from where they are today to 4 ½%, then what would this do to your particular market environment. Bruce said oddly enough, the last time this happened it adds impetus as long as people can actually qualify and get a loan. You now have a twin engine, both a price progression and a payment progression. Both of these adds aggression to the buyer. This happened back in the ‘70s when Bruce was the buyer patiently waiting for a deal. As he would go to see new housing tracts, it would go from 59-69, and interest rates went from 9-10. It really put the pressure on Bruce to make the decision since he was losing on two fronts instead of one. David has been through all the interest rate increases and decreases since the 70s, and he knows that as rates start to tick up buyers look at that and you realize you need to get off the fence and go buy a house. David looks at it as a motivator in many cases and markets.
What really ends up ending the cycle is when the lenders eventually say no more often than they say yes. Bruce heard a lot of people doing presentations saying interest rates are at the lowest in fifty years, so he did some research. He and Sean O’Toole went back to Washington D.C. to the Library of Congress and looked in the microfiche. They went back to the 1850s and began looking once a month on a Sunday for rates available for real estate. It is a fact that there is no one alive who has ever seen these interest rates. This is what is allowing for aggression of price to happen so quickly in some of these markets. There is not a big monthly cost for a $50 grand change in price. This is a manipulated market by the Federal Reserve. David said even though he is a free market kind of guy, we don’t have free markets. One of the things you have to realize is that unless policies change, we are going to have price progression that could get us right back where we were very quickly into a bubble situation where we will have losses again. We need to learn from our mistakes, let rates rise and let the market find its own level. They also need to reduce regulation and get out of people’s way. We are way overregulated right now and the pendant has swung way too far this time.
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