On October 14, 2011, The Norris Group returned with its award-winning event I Survived Real Estate. An expert line-up of industry specialists joined Bruce Norris to discuss current industry regulation, head-scratching legislation, and the opportunities emerging for savvy real estate professionals. 100% of the proceeds support the Orange County Affiliate of Susan G. Komen for the Cure. This event would not have been possible without the generous help of the following platinum partners: ForeclosureRadar and Sean O’Toole, Housing Wire, the San Diego Creative Real Estate Investors Association and President Bill Tan, Investors Workshops with President Shawn Watkins and Angel Bronsgeest, Invest Club for Women and Iris Veneracion and Bobbie Alexander, San Jose Real Estate Investors Association and Geraldine Berry, Real Wealth Networks, Frye Wyles, MVT Productions, and White House Catering. The event video can be found on isurvived2011.com.
Bruce continued the discussion on risk-taking. Debra said you have a lot of uncertainty in the lending community right now waiting for regulation and waiting to understand the government’s role. Doug said he had been surveying 1,000 people a month for 16 months and publishes the report on his website, so he asks what their expectation is on interest rates and prices. In the most recent quarter, Fannie Mae also asked them what they thought about stability when it came to unemployment. 26% of the people who were employed were worried about not being able to stay employed. 9% of the people in the workforce are already unemployed, so you have over one-third of the workforce that is concerned about the base ability to pay anything. When you look at their expectation that interest rates are going to be essentially flat for the next two years, they expect house prices to fall during that time period. They are essentially asking, “Why would you tell us that right now is a good time to go out and borrow $200,000 and buy a house?” There is a lot of discussion about the HARP Program and why people are not considering this.
If you think about the practical aspect of what the household faces, you have to consider that they are asked to bring $4-$6,000 to the table. If they are worried about being unemployed in 6 months, they are essentially saying, “If the payback is $200 a month in savings, and it is a couple years before I receive the money back, what if in 6 months I don’t have a job?” So if you say you understand it, it makes sense, and you now need to roll it into the principle; it doesn’t sound like a good deal because you are asking me to take on extra leverage. So to the customer, at the end of the day there is a question of stable employment that is equally big to the supply of properties they have to work off still. That is as much a macroeconomic issue to Debra Still’s point about the uncertainty as it is about housing because the engine for job growth is small business. When small businesses are surveyed, the number one reason they say they are not hiring people is lack of sales. The number two reason is uncertainty about the tax and regulatory environment. Until macro-policy makers get back to focusing on what makes a good investment market for businesses to go into and hire people, we will most likely have a concentric circle between housing and the aforementioned problem. This means we need to reduce regulation and stop making every tax code have to be renewed every two years. We need to make some permanent decisions on whether you are going to advantage or disadvantage investment so that entrepreneurs have a clear view on whether they will be able to retain the capital gains that they make by investing in their business. These kinds of things have to be put in place to give it a strong investment environment, which will then lead to employment.
Eric Janzen reinforced Doug’s point by saying we have a general problem with under-investment in our economy. This means there is not enough capital going into investment versus consumption. The result of that is we are not planting seed corn in the housing market. This is also true in venture capital as is the case with a precipitous drop-off in early-stage companies, which are the companies that provide most of the jobs and all the growth as well as the exports and all the good things that come with it. It really comes down to what Doug said that we have to make investment decisions very clear and stop disadvantaging investment. Bruce wondered what the likelihood was of this happening in the next year. Eric said this was not a good year for these types of decisions, so the safest bet you can make is to assume nothing is going to happen in the next year. Doug said you would not get a better return on a bet than you would on investing.
Bruce asked what was standing in the way of letting investors participate more fully in taking the inventory down. At times in the past we had a 203k loan program that was available as well as more generous loans available to investors, but this ended in about 1995. Debra Still said the Mortgage Bankers Association supports relooking at the 203k program with some incremental safeguards versus the prior program. She said they would support clearing a lot of the inventory. Bruce said this would take care of one level, but there were people at I Survived Real Estate who would not want to go through the journey of that loan but would buy something as a rental; keep it for a long time, and do it in good size quantity. He wondered if there was any discussion on a deed restriction. Debra said one of the recommendations on the RFI that the MBI made was a 3-5 year whole provision. One of the things we have to consider is moving the extra inventory and look at investors to make it happen.
Bruce wondered about how the person who purchases, for example, 20 houses would fix them up and keep them. A company that buys 1,000 will probably try to make them livable, but this is not as helpful as making it nice. This is why the nothing-down program intrigues Bruce. Right now you have a chance to get people in at a very safe payment that is fixed. Later on when we have to pay more taxes, which we will, we will have room in our budget because that payment will seem like a car payment. However, if you don’t let people in, their rent payment is always going to approximate market. We are not going to give somebody a 30-year fixed rent rate. If you had people buying something at no-down at 4%, eventually you would have price support and would get rid of the inventory. Sean said if we could sell every house tomorrow at full-market value, it would crash the system. Doug reiterated saying the big picture problem is that at the end of the day someone will not be paid. It is just like the Greece situation. The political system is good at doling out benefits, but it is poor at doling out costs. A lot of what is happening is instead of the broad-based principle write-downs, which is something that could fix a lot of problems, we have adverse selection and an unfair distribution of results based on decisions made in households. Things are costly politically in addition to financially. There are some discussions of things which are small costs.
For example, some ideas have been floated about tax forgiveness for investors who would get a 3-year abatement of taxes on the rents that they receive if they were to invest in a property today. What this does is raise the rate of return to them, which in turn raises the bid price which they could be willing to put into the market and reduce losses to the institution which holds the loan. There is still a loss, but it is incremental and not as visible. It is actually moving some of the inventory. Therefore, you will most likely see a lot of program proposals and capital gains release. Debra said some of the recommendations are Fannie and Freddie looking at investor properties and making small incremental improvements to the HARP Program, which would include investors owning more than the limit of ten properties. This would also allow for higher LTVs or other loans after 2009. Principle write-downs are very challenging for mortgage lenders. You have to ask whether the tax payer is going to pay, the bank will pay, or will the investor pay. As Doug said, somebody is going to pay the bill.
Bruce wondered about the idea of refinancing owner-occupant or investor over encumbered mortgage. He wondered why we cannot simply refinance them at the current rate, whatever the LTV is. You have the loan anyway, so why can’t you just make it make sense so that people will be able to write out the loan. He wondered what the point was of having a 6% mortgage that is not getting paid when you could have a 3.5% mortgage that would. Debra said this is certainly one of the things on the list to discuss. One of the things we also need to consider is if you think about the capacity of the industry and the fact that the large depositories have a good portion of the properties, it would take the whole industry to participate to help move this big “elephant” through the system. Most lenders who do not already own the mortgage are going to want rep and warrant relief. The question is why a lender who does not already own a loan on an underwater property would make a deal unless they had some kind of rep and warrant relief. This is a big deal for part of the discussion.
Bruce also wondered about the idea of principle-only payments to get people back to an even level. Debra said if the loan is in a security, then the servicer has to advance principle and interest to the investor. The principle-only is still going to create a negative gap for whoever the servicer is because they are advancing to the investor principle and interest each month. Bruce wondered if the investor can make a new agreement, say he is going to lose a lot of money if the money does not get paid. Doug said he does not think there is anything that prevents two private parties who have a contract from reworking the contract. Sean wondered if it could trigger some CDO risk. You have to talk about the derivative risk and potentially magnifying losses. This was a problem years ago, and people have still not tried to go in and figure out how big the derivative risk is and where it lies. Debra said you have to wonder what you would do with mortgage liquidity if investors have to take the principle write-downs. The question is who is going to invest in mortgage-backed securities in the future, and what do you do to the future liquidity of the industry with some of the dramatic actions. Eric said if you look at the market data, the market has been continuing to decline. It spiked from about $300 billion to $1.2 billion, but the latest numbers show it’s back down to about $400 billion. You can exactly identify the point at which the market started to fall in the financial crisis. That market is probably not coming back for a long time until there is market clearing. There is also a hidden additional cost in forcing homeowners to pay mortgages against inflated home prices, which is that there is a string of payments that is going uneconomically to a home price that really should not have existed in the first place. Personal consumption expenditures are getting absorbed for a non-productive, non-economic purpose.
Bruce asked each one of the panelists if we get together a year from now, what is the one thing they would like to have accomplished for their industry. Debra said she would like for all mortgage lenders to work collaboratively with each other. If you think about the industry, there are large depositories, small community banks, and independent mortgage bankers. They need to work collaboratively with one voice, decide on a way forward, and not be fighting each other. In addition, they need to work collaboratively with regulators and the policy makers to make sure that we don’t overcorrect and make sure the regulators understand the unintended consequences of the massive amount of regulation. They should also make sure they end up in the right place one year from now with the whole regulatory environment.
Doug Duncan agreed with Debra and said a great deal of it is overkill based on evidence that the market is simply adjusting back to what is a sustainable homeownership rate. Underwriting standards have moved back to more traditional levels. If the homeownership rate is going to be lower, then by definition the investor and rental share has to be higher. This is why there is finally a turn to focus on ways that this can be advantaged.
From the appraisal side, Sara Stephens believes one of the most important things going forward and what she would like to see happen coming into 2012 is a real effort on the part of lenders and the people who regulate the appraisal business to take a look at the difference between an appraiser and a qualified appraiser. The difference is huge. She also wants the lenders and regulators to take a look at the expertise and the education that one has as compared to a person who is just simply earning a fee. Working with the appraisal institute and other professional organizations would certainly be important. The Appraisal Institute would like to work with the lending community, the brokers, and everyone who is involved in the mortgage lending process to make an effort to use the most qualified people who can give the most reliable conclusions.
Sean O’Toole said he would like to change the national discussion on what a home is worth. The sales comparable approach to appraisal versus income or cost basis is ridiculous. It certainly was not the cause of the problem, but it didn’t help keep the problem from getting out of control. We also have a poor understanding nationally of what a home or a piece of residential real estate is really worth. Bruce said if you think about the appraisal process, when Bruce was purchasing in Grand Junction Colorado in 1985, there was no taker in sight. The only comp was his comp. If you had three of these, this was the appraisal number. In Moreno Valley, 2-bedroom houses that were going for $300 had company, and the appraiser had all the evidence that this was the right decision. This is what Sean was talking about reconsidering the definition of market value to have some other factor that doesn’t let things get out of control, whether up or down. This would give us to have stability that in turn would allow lending to be a lot saner and change the whole game.
Gary Thomas said he would like to see clarity from the members of his organization on what they’re doing. Are we still going to have mortgage interest deductions? We need to consider all the things that are really holding everybody back because they really do not know what the future is. Buyers don’t know whether you’re going to still be able to write off the interest on a loan. They don’t know whether they are going to have to put 20% down, 10%, 0r 5%. There are so many unknowns out there that everybody feels like they are in quicksand. Having some stability from a regulatory standpoint would go a long ways towards making things better for the industry.
Eric Janszen said within the context of the American political system, the aftermath of bubbles is always predictable. It is the collective punishment of the innocent. We had Sarbanes Oxley after the dot come crash, which is the Accounts Full Employment Act. This time we have overregulation across the board. It needs to be counter cyclical, so at this point we need to as quickly as possible regain a clear, consistent, and unencumbered relationship between buyer and seller.
Bruce Norris ended by saying he wishes that everyone that we elected in any position of public office would set aside whether they are Democrat or Republican and become American for one year so we can get a lot of things resolved.
This is the final segment for I Survived Real Estate. Thank you to everyone who attended and have tuned in to our radio broadcast. The Norris Group would like to thank their gold sponsors for the event: Adrenaline Athletics, Coldwell Banker Pioneer Real Estate, Conaway and Conaway, Delmae Properties, Elite Auctions, Inland Empire Investors Forum, Inland Valley Association of Realtors, Keller Williams of Corona, Keystone CPA, Kucan & Clark Partners, LLC, Las Brisas Escrow, Leivas Associates, Mike Cantu, Northern California Real Estate Investors Association, Northern San Diego Real Estate Investors Association, Pacific Sunrise Mortgage, Personal Real Estate Magazine, Raven Paul and Company, Realty 411 Magazine, Rick and LeaAnne Rossiter, Southwest Riverside County Board of Realtors, Starz Photography, uDirect IRA, Wilson Investment Properties, Tony Alvarez, Tri-Emerald Financial Group, and Westin South Coast Plaza. Visit isurvived2011.com for more details.
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