The Norris Group Blog

California Real Estate Headline Roundup

Posts Tagged ‘I Survived Real Estate 2011’

By Bruce Norris .

247-TNG Radio – Gary Thomas 10-14-11

Thursday, October 13th, 2011

Sean O'Toole


Gary Thomas

President Elect, National Association of Realtors

(Full Bio)

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On October 14th, 2011, The Norris Group returns with its award-winning event I Survived Real Estate. An expert lineup of industry specialists join 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 be possible without the generous help of the following platinum partners: Foreclosure Radar and Sean O’ Toole, Housing Wire, The San Diego Creative Real Estate Investors Association and President Bill Tan, Investors Workshops and 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 Wiles Web and Branding, MVT Productions, and White House Catering, who will provide the 3-course meal for this black tie event. Visit iSurvived2011.com for more details.

Bruce is joined this week by Gary Thomas. Gary is the current National Association of Realtors 2011 first vice-president. He is also owner of Evergreen Realty in Villa Park, and he has served the industry in many roles including being the president of the California Association of Realtors in 2001. Gary began his career in 1975 at a time when California real estate did something unusual from 1975-1980. It actually separated itself from the national price by doubling. Gary was right in the middle of all this in the prime location where it happened the strongest in Orange County. At this time, it was very easy business. Bruce remembered reading on a California Association historical website someone’s surprise that prices could accelerate at such a fast pace when interest rates were 13 ½%. What was interesting was not only were prices escalating, but the interest rates were going up as well. It was like you had a double whammy. If you did not make a decision, then you were not only going to pay more, but you were going to pay more per month. The one thing that did help during the time when the interest rates ballooned up to 18% was they had what was known in California as the Wellencamp Decision, where a buyer of an existing home could take over the loan without having to qualify or without getting permission from the lender. What they did was they put a second trust deed behind the first, so the effective rate was much lower than the 18% that you would have to get if you went out and got a brand new first trust deed.

At the time, 60% of transactions in California did not require a new loan in ’81-’83. If you did not have that in place, you would not have had a market, and it would have been disastrous. What is interesting about understanding the history of how we survive certain things because back in the ‘80s when we had the crazy interest rates, we did not have a price decline. We have the tools at hand, and one of the things we have is most of our loans are government-owned or controlled. They could probably think about the solutions of the past, and one of the things that can be done is to create a loan program where the due on sale clause has a moratorium or literally does not exist to where you could bring it forward into the future. You would end up having a much safer real estate market going forward, and you would also have the ability to have people have nothing down right now without a big risk. A lot of what is going on is finger-pointing and thinking everybody needs to have a giant down payment to be safe. This is never been true. It’s really about getting sound underwriting decisions and whether the people can afford to pay for the property at what they qualify for or not. A down payment does not really make that much difference. The problem is it seems like it should make a difference as it sounds like that could be a right decision. Shelia Bair said that when she said that when somebody puts 20% down, they are more committed to the property and it makes common sense until you look at a chart. If you look at a chart for foreclosures over a course of decades, you find out that there is virtually no difference between a 20% down loan payment and a VA nothing down loan. If you look at the VA loan program or the FHA loan program where FHA has very little down, both of those programs are working well. This is what is so frustrating to somebody on the outside not with a political axe to grind is you say, “Couldn’t we make some common sense decisions?”

We do not need to look at the years between 2002 and 2006 and say it is going to replicate in the future. All the decisions made at the time were probably the only time they will be made where a lender did not care if they got paid back because they got rid of the paper. Prior to that and for decades, somebody actually cared that they got paid back. Whatever programs were in place at the time in 2002-2006 worked. It’s like we are trying to solve 2002-2006 with these programs. This is not what we should be doing, especially in a time right now where people are struggling to get down payments because they are coming off of no gains on real estate. It’s also possible they have lost value in the stock market as well, so there is a combination of things that put investors and customers at a disadvantage by not having the kind of down payment that some within the administration or within government would think that they need to have. It’s understandable to have the desire to not create another group of foreclosures, but what they are probably going to do is create a generation that is going to be a renter. This is not as beneficial as people may think; if you look at statistics you see that people who own homes generally do much better both from a wealth standpoint as well as a way of living. Their children have better test scores, they do better in school, and they generally as less apt to have a criminal background. It’s much better within communities to have stable homeownership than it is to have a renter class.

There was a recent Time Magazine cover that said Rethinking Home Ownership by Owning a Home May No Longer Make Economic Sense. This drove both Bruce and Gary crazy. In the county where Gary is, prices are less damaged than they are in Riverside, which is down 60%. Interest rates are 4%. For somebody to say on the cover of a magazine that it does not make sense to tie up a fixed house payment at a sub-4% interest rate for the next thirty years is really an astonishing statement. What is going to happen is a few years from now people are going to look back and kick themselves for not having bought, even if they absolutely timed the bottom prices because of the interest rates. Once interest rates begin to rise, trying to time it to the bottom is going to erase that difference very quickly. You can go from 4-5%, which doesn’t sound like a big deal, but it is actually a 25% rise. This is a big discount in a price. In 1975, Gary would have seen an interest rate be at 8%, and by the time 1980 came it was doubled. These are bragging rights. If you have a 4% mortgage rate 5-10 years from now, there are going to be people looking at it and confused. It is going to feel like a good decision. When someone talks about on the cover of a magazine that something does not make economic sense, this is not really why most people own.
If Gary went home to a rental instead of a home that he owned, for one he would not feel like doing anything to the property because you just don’t have the pride of ownership and would have to ask for permission to do anything. This is what is special about America; we should not short change the feeling that comes from owning your own little square of the world. The first house Bruce bought really stands out for him because he was married, was 20 years old, and bought a house that had a lot of problems. However, on Saturday morning after closing on Friday, Bruce had the opportunity to mow his own grass on his own house. Gary had bought a brand new house with an FHA loan after he had been married for about three years. He had the same experience as Bruce, but because his house was brand new he got to build a patio and patio covers, put the yard in, and put in the sprinkler system. For this same reason this house is the one that stands out in his mind. There is more to having a home than the economic side of it.

Ron Phipps said we are at a turning point, not just because our livelihood is at stake but because home ownership is at stake. The privileges we have had, our parents had, and our grandparents had are being eroded. Our children face having those privileges denied to them as well. This is a pretty strong statement, but it seems everything is coming together to try and discourage homeownership or try make it much less accessible for most people. All the way from the QRM, where they are proposing that qualified residential mortgages, which would get the best rate, would have to have a 20% down payment. However, this does not make any sense, and people have been avidly going in to make sure this doesn’t happen. There has been a coalition for this, and the members involved are civil rights groups, consumer groups, lenders, and almost every kind of group. The civil rights groups are looking at it and thinking a whole class of people will be disenfranchised if you go down this road. The mortgage interest deduction keeps coming up under attack talking about whether they want to trim it or reduce it. You can go on and on with all the things that are going on to stop the 20% down from happening. The jumbo loan limits have just been reduced, which not only affects the absolute top of the loan limit, but it also affected almost every place in the country because it went from 115% of the price in a market area to 110%. It’s going to affect everybody across the board, and people do not realize this.

You take everything into consideration, and it is just one thing after another where it seems like people are trying to fix the ills of 2002-2006 in 2011 and 2012 when we don’t need it now. In Riverside, for example, it would be hard to find a PITI house payment that would be more than the rental equivalent. They probably have a prototype if they want to see what a nothing-down loan program would perform like, which would be the $8,000 rebate timeframe. This would be close to nothing down; somebody paid it down and received it back. They would most likely not have a serious foreclosure problem with the pile of loans. They would not have had a serious problem ever since the whole downturn started since the newer loans are all performing well. There are some loans also that were recast where the borrower went back in and tried to save it, but part of the problem is still when they purchased the loan and what they got into at the time. It looks like people are going to have to give up a lot of the goodies of real estate because there is going to be a commission of physical responsibility that is going to save $2.5-4 trillion from somewhere, and everyone is going to be asked to do their share. The question is whether the National Association of Realtors has really thought about having to give certain things up as well as what should be given up and what should not.

Everything that you change has an effect that multiplies. Take for example the mortgage interest deduction. One of the things that has been discussed is to take it away from vacation homes or second homes. This not only hurts the resale or sale of homes in vacation areas, but the ripple effect of what that does to the economy in those particular areas. This includes all the way from service sector jobs to anything you want to think of. If people are not buying in those areas, it affects everybody. It not only affects the person who owns it, but it also affects a lot of people. This is the unfortunate as they don’t think through the ramifications of doing anything fully. This would counter to producing jobs. An unintended consequence is a big topic. Sometimes Bruce just shakes his head when he sees decisions made where there could not have been anyone with a deep knowledge of the industry allowed to participate and have the decision emerge. For instance, the Dodd-Frank Bill and the QRM, Bruce got the sense they were handed a past bill with almost the mandate to make it happen. Typically what happens is when a bill is written or a regulation, the people who write it then send it out for comment. Typically comments are made on anything that affects the industry, homeownership, or property rights. Any interested groups will then right on it. Whether they take it into consideration or not when they mandate the regulation is really up to them. Groups such as Gary’s try to be engaged, but they cannot always affect the outcome the way they would like. This is very frustrating because the people who write the bill do it in a vacuum without consulting anybody with academic minds and without any real world experience, and they come out with something without thinking about the unintended consequences.

The Norris Group recently held an interview with the president of MERS, and the reason Bruce did it was because he was just in front of the Senate in Congress. Bruce read his deposit word for word with the yellow maker, so when he watched the Senators ask him questions; it was obvious no one had read it. It is frustrating when a bill is created without the input of an industry that could give input. For example, if the outcome they want is to have fewer foreclosures, then others could advise them the route to take to accomplish it instead of the route that they were choosing without input. Bruce thinks part of it is payback. We really went through a time where real estate was going gangbuster, and many were shaking their heads saying things could not continue the way they were. Therefore, part of what is going on is an overreaction to what was happening as well as misdirection. One of the things Bruce has been fortunate to go and talk to Fannie Mae, Freddie Mac, and FHA about is how to deal with the situation and getting rid of certain homes. One of the things that would be frustrating would be if they decided to bulk sell them to hedge funds since they were great participants in making things happen in the first place.

In 2005, neither Bruce nor Gary knew what a mortgage-backed security or a collateralized debt obligation. They had no idea how they were being funded and spread around until 2007 and 2008. It was really confusing how things were working. We had an industry definitely was benefiting by the new rules, but we did not realize the unintended consequences of what was going to happen. Unfortunately, this is what we are dealing with now.

One of the most important agendas for this coming year for the National Association of Realtors is trying to make sure we get back to a healthy housing market and get some reasonableness back into government and how they’re dealing with things. If we can do this, it would be a homerun. A lot of other pieces of the industry want this too. One of the questions Bruce asked the president of the Appraisal Institute was how he would have liked to go to sleep in 2006 and wake up in 2011 as an appraiser. Your job would be a lot different.

Gary Thomas will be on the panel for I Survived Real Estate 2011, taking place on October 14th. 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, 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, 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.

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.

246-TNG Radio – Sean O’Toole 10-8-11

Friday, October 7th, 2011

Sean O'Toole


Sean O’Toole

President of ForeclosureRadar

(Full Bio)

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On October 14th, 2011, The Norris Group returns with its award-winning event I Survived Real Estate. An expert lineup of industry specialists join 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 be possible without the generous help of the following platinum partners: Foreclosure Radar and Sean O’ Toole, Housing Wire, The San Diego Creative Real Estate Investors Association and President Bill Tan, Investors Workshops and 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 Wiles Web and Branding, MVT Productions, and White House Catering, who will provide the 3-course meal for this black tie event. Visit iSurvived2011.com for more details.

Bruce is joined this week by Sean O’Toole. Sean is the founder and CEO of ForeclosureRadar.com. Prior to launching ForeclosureRadar, Sean successfully purchased and flipped more than 150 residential and commercial foreclosures. Leveraging 15 years in the software industry, Sean used technology as a key competitive advantage to build his successful real estate investment track record. Prior to that, he was involved in software startup companies.

Back in the late 80s and early 90s, Sean ran a homes and land real estate magazine in the Hawaiian Islands. He spent time taking a break from his software career to run this magazine and to buy and sell his own houses, which played a part in his real estate business career prior to buying at trustee sales. He became attracted to trustee sales after the .com bubble when he was trying to figure out what to do with his life. They were trying to take public company he had started and raised money for about the time that the bubble imploded, bringing it to an end. He was trying to figure out what he was going to do next when he was thinking of starting another software company since this was really all he had ever done. He was introduced to a friend who was buying foreclosures, and he said he should give it a try and if Sean helped him write some software to run his business, then his friend would teach him the rest of the business. At first Sean did not think this was very interesting; but then his friend showed him the kind of money he was making, and he became a lot more interested. Sean started buying at the trustee sales in 2002, which was an interesting time to be involved in something like this. During the era from 2002-2006, Sean was often surprised on the high side. He bought a property, and if it was a hassle to fix and get people out, he was bonused money along the way for the time delays.

One of Sean’s most profitable deals was where he had a gentleman fight him on the eviction for a year through multiple bankruptcy declarations to the point where the judge said he could never file bankruptcy again for the rest of his life. It seemed like a real headache until he went to sell the property, and it had gone up nearly 50%. It’s a very different world today. You would not want to have delays; if you can get to the finish line, then you would want to get there.

When Sean first started in the trust deeds business, it was tough to access information about properties and liens. There was a decent little service up in Northern California that later changed their business model and didn’t have as good of information as Sean had first used from them. After they changed their business model and stopped collecting the data directly, he had to find out how to collect the data himself. He was pulling data from the assessor’s office and the recorder’s office. The biggest thing was you would show up at the sales from everything that had been in the paper, and you would have a list of about 20 properties. They would then call 100 properties because the other 80 had been postponing for some period of time. Unless you went back years and went through all the notices, you had no idea what was still coming up for sale or not. You would have to play catch-up, which would be an awful lot of homework. People don’t realize unless they are in the business that each property entails a full-blown title search, an appraisal, and you have to determine if the pursuit is worth your time. Fortunately, from 2002-2006, there was natural equity most of the time. You wouldn’t have been following a lot of trustee sales that did not have equity; whereas now it is completely different. Back then, term “drop-bid” was unheard of at the time. It was very rare that the banks discounted the bid from the amount owed on the property and was unnecessary. The nice part about having inflation was that their loan was probably below what it was worth and therefore attractive to trustee sale buyers even though the number of trustee sales was way down compared to now. The amount of properties that had equity had to be very high in percentage.

Since Sean’s father is a logic professor, to him he needs things to make sense for him to understand them. So one of the hardest times he had with trustee sales was none of the deals sold on the courthouse steps made any sense. They had equity, and the person could have sold the house. It should not have gone to sale; they should have taken care of their problems, paid their mortgage, or refinanced. This was when he had learned that there were some basic reasons for foreclosure which had happened even in the best of times which were called the 5 D’s: drugs, divorce, death, denial, and disease. These things were not fun to talk about and made the business not feel very great on that side, but back in that period of time these were the reasons properties were foreclosed on. We still have foreclosures for those reasons, but the vast majority of foreclosures happening today are due to negative equity. We have an additional category that is really raining a lot of properties into the system. Back then when you were checking up on sales, you were on the phone and trying to get information to see if it was going to be worth going to the sale.

Sean’s website has really changed the process for someone wanting to be a trustee sale buyer and made it simpler. The person who taught him the business would take a Polaroid of each house and then write down the postponement dates. He had a shoebox organized by date of all the properties that could come up for sale, and literally each time a property came up for sale he had to put a new date on it and put it in a new spot in the shoebox. Other people would keep spreadsheets, and you really had to have somebody down at the sales every day to track everything. One of the big goals for ForeclosureRadar was to get people out of the really tedious sale tracking business. This is one of the areas where they have been very successful. Sean’s website is much more accessible and understandable, and it has made the competition greater. There are definitely new people that can go from novice to acceptable much quicker these days. Sean and his team was definitely in the right place at the right time, but he thinks the transition still would have happened if they were there or if somebody else was there. They launched in May of 2007, and it was towards the end of 2008 that banks began dropping bids and people began making a lot of money. At the same time, they had a lot of contractors and commercial real estate folks who suddenly saw their business go away and needed to find something else. Trustee sales were the right thin at the right time for a lot of people, and Sean and his team benefited from being the best tool at that time. However, he still thinks the transition and the competition would have heated regardless of whether they had been there or not.

Sean’s customer base is dominated by investors and realtors. Just in Sean’s little hometown of Discovery Bay, there is about 85 properties listed for sale; but there is 200-300 in some stage of foreclosure at any give time. If you want to call yourself a market expert, it is pretty hard to do if you don’t have a clue about the all the properties in some stage of foreclosure. If you’re listing a property, and two days later a bank-owned listing pops up next door, there is no excuse for not having known about it ahead of time. At ForeclosureRadar, they can give you months of advanced notice that is potentially coming, so you can work with your customers to be ready for it. The volume of dollars in sales as far as trustee sales in California is in the billions. Typically, the third-party investors are buying 20%, about half a billion dollars worth of property, a month. ForeclosureRadar’s peak month was around $8 billion at original loan value, not at current market value. The $8 billion encompassed the properties that would go to third party and to REO, anything for when someone has lost their house to foreclosure. The two categories combined, REOs and third-party bidders, is a resolution.

In California, there are currently 95,000 properties scheduled for sale, which is down quite a bit. A year ago, there were 120,000 properties scheduled for sale. Out of that, between homes sold back to the bank and sold to third parties, about 14-15,000 sell in a month. Last month, about 24,000 were added. If you take the 95,000 with 24,000 new added, you have 15,000 taken away. This means about 15% or more of the properties are bought by people that are investors to fix and resell. This is one of the reasons they don’t use trustee sales when talking about market sales. When NAR or CAR talks about the number of homes sold per year, they’re not including what happens at the trustee sales. The vast majority of things purchased at trustee sales are resold. Almost all the investors at trustee sales flip the property, and then the banks largely relist the properties as REOs.

Investors are the ones who tend to get rid of properties quicker. Right now in California, it takes banks on average 237 days and 131 days for third-party investors. Investors are a lot better at disposing of properties than banks. Investors are pretty motivated in terms of the fact that it is their money on the line and not a shareholder or tax payer. They also know the local markets better, and they invest in and fix up homes. The people who are fixing up properties put in new paint and carpet, and they are getting them ready for a first-time buyer or a landlord to turn them into a rental. Therefore, they usually try to make them really nice. The banks, usually because of the servicing agreements, try to do a little more than clean out the properties. You will have a lot of properties that are trashed that end up going as REO sales that first-time buyers simply can’t afford to buy, fix, and clean up. You also have some that are so trashed that you cannot get loans on them. The banks not fixing the properties is a big part of it.

When they first started talking about shadow inventory at ForeclosureRadar, it was prior to September 2008 because at that point the banks were taking on huge inventories of REOs that were not listed. Shadow inventory is described as bank-owned homes that were not listed for sale. After September 2008 when they really slowed down the foreclosure sales, at the time when the government made some changes that really slowed down the foreclosure sales, the bank-owned inventory came down to the levels where it really should be. Several folks that had been talking about shadow inventory changed the definition to now include the folks that were now in foreclosure and not-yet-bank-owned. Later, it was changed again to also include delinquent properties and not yet in foreclosure. Depending on who gives the term these days, Sean has even seen some people expand it to those who have so much negative equity they will eventually be delinquent, lose their home, and pay inventory. Sean even had someone the recently tell him that you also have to include all the people who like to sell their home, but not at the current prices. Pretty much most of the country is shadow inventory. Nationally, there are about 4.2 million properties that are between the stages of 90 days late and the bank already owns them. Of the folks that are in foreclosure, you have 134 that are at the default stage plus 94 scheduled for sale. You also have another 100 that are currently bank-owned. NODs are usually filed at the 13-month mark, although this has gone up a lot. Traditionally it was at the 90-day mark, and now it is at 13 months, which is roughly 398 days. The other 300 days, between 90 and 398 days, included defaults and delinquencies. Delinquencies in California are usually around 9%, so that is 30 or more days late. If you take 9% of homeowners with a mortgage, that is another 650,000. All combined, you have close to 1 million.

There are some problems that are going to have to be resolved one way or the other, which will be discussed with the group on the panel at I Survived Real Estate on October 14. They will be discussing possible resolutions since there seem to be conflicting goals. One document says it wants the country to save between $2 and $4 trillion so we can pay our bills, and we have an industry that almost needs more support. It will be interesting to see how the discussion comes about.

The percentage of owners that are over encumbered in California is unknown right now, but a lot of the larger properties are more over encumbered. They have not yet seen the declines in the upper end. There have certainly been declines in the Bay Area and in Newport Beach, but they have not been as traumatic as the declines in San Bernardino, Riverside, Central Valley, and Sacramento. This would most likely be attributed to the bulk of the inventory that is for sale being a foreclosure property. The other reason could be it was a different loan type that did not have the biggest problem as early as its subprime. Also, wealth plays a part. Higher end neighborhoods tend to have more wealth. In addition, data shows that the banks are taking a lot longer to foreclose on higher end homes where the losses are bigger, so part of the reason we have seen less in that area is because the banks are trying to delay losses and remain solvent.

Sean O’Toole will be on the panel for I Survived Real Estate 2011, taking place on October 14th. 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, 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, 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.

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.

245-TNG Radio – Debra Still 10-1-11

Friday, September 30th, 2011

Debra Still

Debra Still

President and CEO of Pulte Mortgage and the Chairman-Elect of the Mortgage Bankers Association

(Full Bio)

streamitunesdownloadrss

On October 14th, 2011, The Norris Group returns with its award-winning event I Survived Real Estate. An expert lineup of industry specialists join 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 be possible without the generous help of the following platinum partners: Foreclosure Radar and Sean O’ Toole, Housing Wire, The San Diego Creative Real Estate Investors Association and President Bill Tan, Investors Workshops and 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 Wiles Web and Branding, MVT Productions, and White House Catering, who will provide the 3-course meal for this black tie event. Visit iSurvived2011.com for more details.

Bruce is joined this week by Debra Still. Debra is the Mortgage Bankers Association Vice-Chairman, and she is also President and Chief Executive Officer of Pulte Mortgage, a nationwide lender headquartered in Inglewood Colorado. The company employs 542 individuals throughout the United States, and since 1972 has helped more than 300,000 homebuyers finance new home purchases. Debra has been the Vice-Chairman for the Mortgage Bankers Association for a year now, and it has been a wonderful experience for her. She got involved with MBA about seven years ago when she moved into her current role as President and CEO of Pulte Mortgage. She really wanted to make sure that she had a strategic component to her leadership at Pulte. Having gotten involved with MBA, sat on a multitude of committees, being able to leverage the research and information, and being a part of the issues and debates in today’s environment is invaluable and gives her a chance to contribute back to an industry that she worked in for the last 35 years.

Debra has a conference coming up called the MBA’s Regulatory Compliance Conference. A piece of information about the conference stated, “While regulators write the rule book for the Mortgage Finance System of the Future, Congress will begin considering the future role of government in the secondary mortgage market. Put all that in front of a backdrop of continuing microeconomic challenges, and efforts to reexamine the tax code in 2011 will remain a time of intense uncertainty and rapid change for the mortgage business.” All of the people in the industry and part of MBA and Pulte are very aware that there is quite a bit of rulemaking going on right now. The laws were passed substantially. The Dodd-Frank Act is now over a year old, so the rulemaking has begun. Right at the moment, with interest rates as low as they are, most lenders are very busy helping borrowers refinance their loans. However, they were also very busy and very involved working with the legislators and regulators to make sure that we write the rules so they do not have unintended consequences for consumers or the liquidity of our industry. At the same time, however, it needs to provide governance for moving our industry forward in a better way.

As aforementioned, the Dodd-Frank Act already passed, but it is just now that the rules of that law are being made. It happened after the fact and is in progress right now. If you think about it, Dodd-Frank created an act that incorporated about 250 new rules. 100 of those rules are focused on mortgage lending. If you think about some of the laws that passed, such as the risk retention law or the ability to repay law, you see that now what happens is the regulators have to go write the rules and the guidelines on how to comply with the law. The rule writing is happening now. If we look at the Risk Retention Rule that specifies that securitizers hold a 5% risk retention for the assets they securitize, we see that we are crafting now and providing comments back to the regulators on several issues. This includes what the definition of a qualified residential mortgage is, how the risk retention would be treated between originators and securitizers, how long the risk would need to be held. These are all the details that the regulators are now charged to figure out, and the law specifies certain timeframes for those rules to be published.

In working with the rules and trying to deal with compliance with the new law, sometimes there are times to make suggestions to restructure the law and show that there were unintended consequences that we didn’t think about earlier. There might be opportunity if absolutely appropriate to go back and look at the legislation, but right now the assumption is that it is our job to work collaboratively with the regulators. Many of the rules are put out for comment, and there is typically 30-60 days to provide comment. The regulators are getting quite a few comments. The comment period for risk retention and the ability to repay have just expired in July and August, so now the regulators will take the industries’ comments, analyze them, and they will come out with a final ruling at some point in the future. It is certainly believed that the rules need to be crafted thoughtfully so that they do not have unintended consequences. There is some concern that some of the rules, particularly as it relates to the risk retention rule, might have gone a bit too far to the detriment providing financing to credit-worthy borrowers. We need to make sure we get the rules well-balanced and well thought out so that they accomplish their intended goal but don’t restrict credit to deserving borrowers.

It seemed the intended goal was to not let 2005 and 2006 ever happen again. However, in a way it seems like they are preventing 2011 from happening nearly as well as it could. Bruce buys and sells properties, and to get people approved now is a very tedious process. We would all agree that we do need rules and guidelines to make sure that we don’t have some of the problems that were created in the past. The rules have to be crafted very thoughtfully, and right now lenders are and have been very conservative based on some of the direction that we have gotten from the federal agencies, whether it is Fannie, Freddie, or FHA. We need to make sure that we have good balance in terms of credit risk parameters and due diligence to comply with all of the regulations that have always been in the industry. Debra believes our industry needs to accept that change, despite being inevitable, is necessary. We need to make sure we have the right balance. One of the things that Dodd-Frank did was it created a new regulator, the Consumer Financial Protection Bureau, and all the desperate consumer financial protection regulations will now be housed under the CSPB vs. different governing bodies that they would have been housed in prior. We have RESPA, PEELA, HOPA, HUNDA, HICRA, ACO, and the Safe Act, all consumer protection regulations now moving to the CFPB. The CFPB now will have full ownership of coordinating and regulating the rules for all the consumer financial protection regulations, which will help the industry have a more coordinated approach to consumer protections. They will therefore have some consistency and standardized forms, a clear coordinated effort, and eliminated redundancies and inconsistencies between the different regulatory bodies.

When talking about qualified residential mortgage, one of the requirements passed was a required 20% down payment to be qualified for the definition of a qualified residential mortgage. There is some debate as to whether the rulemaking went farther than the spirit of the Dodd-Frank Act intended. The rule provided for a 20% down payment, and it also provided for debt-to-income ratio criteria of 28 over 36. It also had thresholds for negative credit events; and it is possible that the people at MBA have put together their working groups and done their own research as FHFA has done research, they are all in agreement that the rule is too restrictive. It would deny credit to far too many credit worthy borrowers. FHFA would suggest that almost 70% of the existing business would not be eligible to meet the requirement of a QRM. If we were to look at the 2009 Book of Business, MBA’s position was that the criteria should be eliminated from the rule all together and sound underwriting practices should prevail. From an MBA perspective, they believe and it was their strong recommendation that the regulators should come out with another attempt at defining a qualified residential mortgage and the industry should get a second chance to comment, having incorporated all of MBA’s first run or responses.

If you put together a 30-year history, going from 1980-2000, have a foreclosure rate of an FHA loan, a VA no-down loan, and a Fannie Mae Loan, you would not be able to distinguish one from the other. They are so tightly compressed in performance. This is consistent with MBA’s analysis, which would show that if you were to leave in the rule some of the product parameters but take out of the rule the down payment requirements, ratio restrictions, and the credit restrictions, you would still very much manage a safe and secure credit worthy mortgage that the criteria the regulators put in didn’t have a significant impact on default rates.

The 2009 Book of Business is considerably tighter credit risk parameters than the five years prior. It’s a highly conservative book of business, and as it relates to the QRM rule, the GSEs would suggest that 70% of their purchases would not have met the standard. Even though 2009 was a much more conservative credit risk box, some of the parameters would be even considerably more restrictive than where the industry had naturally taken itself after the performance of the loans prior. There are not any statistics regarding how well 2009 is performing compared to a prior year’s, but certainly considerably better. Without the QRM, the ship has righted itself just by the industry doing what they did prior to 2002 and 2003. If you look at the Risk Retention rule, the law actually does prohibit risky mortgages, so the law provides for mortgages that would be fully documented. It also provides for mortgages that are fully amortizing, and it disallows mortgages such as some of the pay options ARMs and the negative amortization loans that were being offered. The law, by virtue of the loan programs that it provides for, has taken care of the vast majority of the risk. At the addition of these additional criteria, such as down payments or credit ratios, they are going above and beyond.

On top of the Federal Regulations, each state has an opportunity to put in their two cents and make things more difficult. The CFPB is very committed to working with the states and trying to align with the states, but in today’s environment, Debra’s company is an independent mortgage banker that does business in 29 states. The states have had varying variation in terms of how they treat fees, the forms that are required to be completed by the consumer, the disclosures, predatory lending laws, and treatment of appraisals. It’s critical if you are a state lender that you understand the state you are doing business in, what the laws are parameters are. MBA’s loans officers have to be licensed in the states and some of the licensing requirements are different state by state. There is a lot of variation on top of the Federal laws. Based on the way MBA does their business today, you must comply with both the state and federal laws. Most of the state laws would not negate a federal law; they would just put parameters and requirements on top of federal law. They must comply with federal first, and then they must make sure that they are complying with all the incremental state laws.

Most of the loans funded are in a way connected to the government, whether it is Fannie, Freddie, FHA, VA, or USDA. Somewhere in excess of 90% of the loans made in the U.S. are being insured by the Federal government. Right at the moment, the federal agencies are critically and vitally important to mortgage-lending liquidity in the U.S. Hopefully over time private capital will come back, and it is very important for us to understand what the future role of government will be. Private capital is waiting to find out what the government’s role will be in housing. In February of this year, the administration put out their white paper that launched the debate on how to restore stability to our secondary mortgage markets and what is the appropriate role for the federal government in housing. It also put forth the notion that we have to figure out what the future of the GSEs is as well as the administration’s commitment to affordable rental housing. The white paper provided some options all the way to a fully privatized market to a couple of variations on a much smaller role for government. The white paper started the debate and has left the final decision up to Congress. While there have been some bills that have been presented in Washington, much of the debate will probably happen after next year’s elections. The MBA was very proactive in putting forth its proposal for the future of government’s role in housing; Fannie and Freddie in particular. They put together a council called The Council to Insure Mortgage Liquidity. Their model would recommend a smaller role for government in housing than the 90% of the funding that we are in today. In an environment where you would have private companies that would issue securities backed by the full phase of the federal government, there would basically be a fee that would be paid by the private companies to receive the government backing.

The president of the Mortgage Bankers Association, David Stephens, went in front of Congress; and one of his suggestions was for investors to be a participant in solving some of the REO problems. It’s not possible to get financing right now, so it would be really nice if this were to become possible. As the government starts to look to find ways to help stimulate the current environment, the notion would be how they would help current homeowners possibly refinance into safer mortgages or lower interest rate mortgages. Some of the things that are being looked at are adjustments to the HARP program, but then also the government also put out an RFI or a request for information to look for new ideas for selling REOs and for the first time considering the possibility of having Fannie and Freddie enter into JV structures to accomplish that goal. You also have to acknowledge that Fannie and Freddie’s core mission is not property disposition, so how can we get the experts to help us move some of the inventory and looking at financing for what would likely be rental housing?

Debra Still will be on the panel for I Survived Real Estate 2011, taking place on October 14th. 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, 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, 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.

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.

243-TNG Radio – Doug Duncan 9-17-11

Friday, September 16th, 2011

Doug Duncan

Chief Economist for Fannie Mae

(Full Bio)

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On October 14th, 2011, The Norris Group returns with its award-winning event I Survived Real Estate. An expert lineup of industry specialists join 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 be possible without the generous help of the following platinum partners: Foreclosure Radar and Sean O’ Toole, Housing Wire, The San Diego Creative Real Estate Investors Association and President Bill Tan, Investors Workshops and 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 Wiles Web and Branding, MVT Productions, and White House Catering, who will provide the 3-course meal for this black tie event. Visit iSurvived2011.com for more details.

Bruce is joined this week by Doug Duncan. Doug is Fannie Mae’s vice president and chief economist. He’s responsible for managing Fannie Mae’s strategy division, economics, and mortgage market analysis groups in this leadership role. Doug provides all economic housing and mortgage market forecasts and analysis and serves as the company’s thought leader and spokesman on economic mortgage market issues. Prior to joining Fannie Mae, Doug was senior vice president and chief economist at Mortgage Bankers Association. Doug was recently named one of the country’s top four most accurate economists in 2010 by Wall Street Journal. He was also named one of Bloomberg’s Business Week’s 50 most powerful people in real estate.

It was back in 2005/2006 that it first occurred to Doug when he looked at the real estate market that things were going to unsustainable. In one of the first conversations he had back in late 2005/early 2006, he was talking with the commerce secretary in a business group, and he asked Doug what he thought about house-price bubbles. He told him he was in the Don Ho camp, Don Ho being the recording artist who recorded the song “Tiny Bubbles,” but it turned out the bubbles weren’t so tiny. However, there were some tiny bubbles, and one of the keys that he had an inkling of but didn’t really comprehend was after the end of the 2003 refinance boom when they had expected to see a downturn in employment in the industry. They had forecast about 85,000 layoffs as the Feds started to raise rates in January 2004 through February and March. At this time there were about 30,000 layoffs, which was right along their forecast path. It turned around, and employment started increasing even though total volumes were falling. They puzzled over this for a while, and it took about a year to figure out it was really the growth of the subprime business and this was going to provide support for price appreciation. They were a little slow to figure it out and saw the trigger did not completely comprehend it.

At the time it was not possible to understand the products that were being used, such as the mortgage backed securities and the CDOs. You would have really had to realize that at the moment you had lenders that did not actually care if they were loaning to people that could pay them back. As the discussion of CDOs and other derivatives came to the forefront, they tried to understand them. He recalled someone asking him to give an explanation of them in a public setting in a Q and A session, and he told them that he was reasonably good at math but he could not figure out how you could take the B tronches from ten different securities and put them together into one new security and then rate the top 80% AAA. Doug said at the time this was something he should have paired more concretely with the change in the employment structure, thought about the products, and done a better job of vetting it. It was clear that there were problems, and one thing they did was properly called “the peak of momentum in the market.” What they did not call was the degree of downturn and the breadth of impact it would have on the overall economy. In the October convention of MBA in 2005, they believed that in June of that year the peak of momentum had passed. This came from their observation in the condo market. In condos, a much lower proportion of people who own them live in them as their primary residence. The biggest transaction cost in real estate is actually moving out. This does not show up in financial metrics, but from the human perspective this is the biggest issue. If you don’t have to move out and you can sell it, the price is more sensitive to market movements.

In June of that year, for the first time in four years, the year-over-year price appreciation in condo existing sales was less than non-condo existing sales. They watched in July, and the same thing happened in August; so they concluded that was an early signal that momentum had peaked. The average house price continued to rise through 2006, but condos were falling. The sales peaked in new homes, which are always the second to go. This started to decline in October, and by January of 2006 they were also in decline in terms of the number of units. In about July of 2006, average house prices started to go as existing home sales started to fall. They did call the peak properly in terms of the momentum in the marketplace, they just did not get the degree of magnitude of disruption it was going to be or the degree to which house prices were going to decline, even though they knew they would. It was unprecedented, no one can fault somebody for not picking up that this was the Great Depression of real estate and is pretty much what we’re living through right now.

A survey was conducted back in 2003, the time when you would not have seen much change between this year and 2005 because people were using the products which ended up being destructive in some cases. The pace of appreciation had them frightened that they wouldn’t have gotten access to housing. They were using these different products which had payment characteristics that ultimately proved to be unsustainable in some cases and of course got caught in the downdraft of prices and other cases. It was because the price appreciation was so strong they thought they would not be able to get onto the wagon. In the 2003 survey, people said when asked about the safety of housing as an investment, they even ranked it over insured deposits, which is nonsensical. This could be a warning sign for someone in Doug’s business who is looking to the future when somebody perceives absolutely no risk when signing up for something so large. It should have been another early signal to put things into perspective. Things have changed a lot from 2003 to what the recent survey from August 2011 showed. Clearly they have changed for the worst in general across the whole survey. Even from 2010 we have had some significant movement in attitude, even seeing a dramatic shift in the last two months. If you summarize all the information from the surveys, the public is basically saying they like the economy’s direction less today than they liked it a year ago. More people have seen their expenses go up than their incomes. They don’t expect interest rates to go anywhere, but they expect house prices to actually decline. They expect rents to go up, and they wonder why anyone would think now is a good time for them to make the biggest financial commitment of their life. When you aggregate that on the most recent quarter when they recently asked how people felt about the stability of their job, 26% of employed people were worried about the stability of their job. If you add that to the 9% unemployment rate, you have 35% of all the employable people in the country that are worried about the stability of their job. This is not a good sign for demand for housing.

As Bruce mentioned earlier, when you had a mood that was euphoric that took us too far, you now have a mood that is almost depressed and probably doing exactly the same thing in the other direction. The percentage of people who say they would rent if they were to move in the next twelve months is rising. The percentage who says they would own has been falling. In particular, for anybody that is delinquent, their view of next-time ownership has degraded significantly. In this case, you are talking about one’s desire to own, but now you have to pair this with capability of qualifying. When someone says they are delinquent and might not want to own, they are not going to be able to own. There are a lot of firsts in this downturn, and this is one of them. California has several mixed areas, and Riverside County is one of the harder hit areas. 65% of all of the sales are either short sales or REOs; which means that when someone closes 1,000 sales, they are only producing 350 potential repurchasers. 65% of the inventory is going to go vacant and be bought by an investor or bought by somebody migrating to an area that has 15% unemployment. They would need to find 650 people per 1,000 houses, which is a unique problem. This is one of the reasons when Bruce was talking about investor financing it seemed obvious they were probably going to have to participate.

To find out the significant mood change in the market in the last two months, Doug asked several categories of questions. They asked about their attitude about the direction of the economy, their confidence and changes in the nature of their personal financial situation, interest rates, prices, and rent vs. own. The main question they asked was whether or not they liked the direction in which the economy was going. In the last two months, the percentage of people who feel it is going in the wrong direction has increased by 14 points. In the most recent survey, 78% of the people who took the poll said it was heading in the wrong direction. If you go back two months to the debate over the debt ceiling combined with the re-emergence turmoil in Europe, they concluded that consumers were watching with one eye the debate in Washington for clues as to whether there was going to be a serious addressing of the longer term fiscal health of the United States. They came away from the debate dissatisfied that it had really solved the problem. With the other eye, they were watching Europe with in mind that that was a potential future for us if we don’t get our fiscal health in order. This is an inference that they weren’t asked to articulate. However, when you look at the changes in their attitude about all the other things related to their personal situation and their housing choices, it seems to be a reasonable conclusion to draw what was aforementioned. There were not other significant events at the time that would have driven so big a change in attitude.

It seems like just the idea of buying a house has become more complicated just because people are being forced to consider some of the other factors involved. If one thinks they are just going to buy a house in California and see if they make enough money, it’s not that simple. They also have to not only think about if their job is going to be stable, but also factors like whether or not countries like Greece will pay their debt. It’s a lot to think about. Also, the size of both the deficit and the debt that we are accumulating make it more apparent to people that somehow it’s going to have to be paid for and that it is people and households that ultimately pay for that one way or another. You’re seeing a continued financial conservatism on the part of households as they attempt to get their household balance sheets back in order, reducing debt, and increasing savings. All of that is a demand-side problem for housing. What is hard to imagine is that there is hesitancy buying a property when the financing is something like 3. To become an investor, Bruce refinanced his house that was almost free and clear at 17 ½% fixed in 1981. Doug just bought a house in Florida, and on 15 year fixed money it was 3 ¾%. It’s an amazing thing, and people recognize that. When they ask them in the survey whether or not it is a good time to buy a house, a very high percentage say it is a very good time to buy a house. What they are not saying is it is a good time for them in particular to buy a house.

Bruce mentioned the front cover of Time Magazine and how it really bothers him because of its description. Its title is Rethinking Home Ownership: Why Owning a Home May No Longer Make Economic Sense. This drives Bruce crazy because he is thinking that going forward they are probably going to have some inflation. No one that owns a rental is going to let somebody tie up a fixed-rent for 30 years. If you get to borrow money at something that starts with a 3, you will have a real hard time convincing Bruce that it is a bad economic decision ten years later when your neighbor is renting for twice your house payment. This is one of the things that is a practical attribute of homeownership that gets lost and is one of the reasons that there is a difference between how households behave with their mortgage and what we teach in introductory finance classes in college. There is a practical attribute to the mortgage, which is as long as you make it through the first three or four years of that mortgage successfully, typically it is with a growing income. After a while your income grows away from that fixed obligation and becomes less and less significant; whereas to Bruce’s point as economic conditions’ rents change annually and don’t have the same attribute as the fixed lending. If you don’t own in the future, the housing bill will always take the majority of your income. If you are able to buy and lock in a fixed rate, it will become less and less a part of a percentage of your budget. You will have spendable money and will be able to absorb higher tax levels where it will still leave you with a lifestyle with which you are okay. The difference in the cash flow also allows you to diversify your investments and increase your overall financial strength through other diversification of ownerships.

The biggest hurdle to a normal housing market is employment. Going back to the survey, with 26% of the people saying they are worried about whether their job is stable and another 9% unemployed, this means 35% of the employable market is worried about their job. On that side of things, stability is really critical. Doug and Fannie Mae have tried to fix employment without having construction be a participant, but he said this slows things down. Typically, about 10% of new jobs are in the construction space in any expansion. When housing is not a contributor, then it is much slower. It would seem like we would have to resolve a backlog of homes that are below replacement cost before we get to somebody building a significant amount of homes. The pile of properties that would be called shadow inventory would still be a significant issue. It is both a current issue and will be a longer-term issue with regards to price appreciations. There are folks who would like to sell their house but know that they cannot get the market price that would make it make sense for them to sell unless they are under pressure. There are also folks who have had to sell; and with prices falling and lots of distressed sales, investors have appropriately stepped in to assist. Some of the investors will take a long-term buy and hold strategy for the investment value, both for the capital gain and also for the cash flow returns. Others will be helping make the market as it transitions to absorb the supply and will put them back on the market as price appreciation sets in. The implication of that is that price appreciation for sometime into the future would be slower than what folks have seen in the past. If you look at the instances where there was a significant regional price decline in Los Angeles in the late ‘80’s or even in New England in the Boston area. The pattern that you see with a precipitous decline is in a very long and slow recovery period, something along the order of a decade.

Right now we have the risk of a recession as a coin toss. The triggering event is usually a surprise when it occurs, but sometimes you can get it right. One of the things that could cause another leg down for housing would be a major bank failure in Europe, which could lead to a layman type of event in Europe. They are our biggest trading partner, so that would definitely be a hit to the U.S. economy, both in terms of trade and general economic activity. However, we also have significant interbank relationships in our financial system with them. This is the thing Doug and Fannie Mae are watching most closely today. If something was to happen and we were to go into another recession, there would be additional downward movement in prices. The degree would depend on the degree of the recession.

Doug Duncan will be on the panel for I Survived Real Estate 2011, taking place on October 14th. 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, 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, 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.

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.

242-TNG Radio – Eric Janszen 9-10-11

Friday, September 9th, 2011

Eric Janszen

Eric Janszen

Economic & Financial Analyst of iTulip, Inc.

(Full Bio)

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On October 14th, 2011, The Norris Group returns with its award-winning event I Survived Real Estate. An expert lineup of industry specialists join 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 be possible without the generous help of the following platinum partners: Foreclosure Radar and Sean O’ Toole, Housing Wire, The San Diego Creative Real Estate Investors Association and President Bill Tan, Investors Workshops and 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 Wiles Web and Branding, MVT Productions, and White House Catering, who will provide the 3-course meal for this black tie event. Visit iSurvived2011.com for more details.

Bruce is joined this week by Eric Janszen. Eric is a serial technology company CEO, economic and financial market analyst, author, and speaker with more than 28 years of executive experience in high-technology startup companies, venture capital, finance, and economics. Eric is the founder and President of iTulip Inc., a data-driven economic analysis firm. Started as a website, iTulip.com in 1998, Janszen is widely recognized for more than a decade of accurate forecasting of major economic and market trends. He has also written in 2010 a book that Bruce has enjoyed called The Postcatastrophe Economy.

Eric first came up with the name iTulip when he started the site back in 1998 when he was the managing director of a venture capital firm called Osborn Capital. They invested in 20 startup companies, mostly friends of his who he and his friend Jeff Osborn knew the industry. Out of the 20 companies, they had 7 liquidity events, including sales to Cisco, Nortel, Microsoft, and EMC. The purpose of iTulip was to publish the research he had been doing when he was running Osborn Capital. The research steered him in the direction of concluding that they were participating in a bubble. iTulip is a takeoff on the tulip mania that happened in the Netherlands in the 1630s. When Eric first came up with iTulip, it was tradition at the time to put an “I” or an “E” in front of everything and also come up with a .com version of everything. The interesting thing about the tulip mania was that it seemed reasonable for other people to participate in it at the time because there was no reference point for the price of these newly discovered plant bulbs. As a real estate investor you rely on comps, which are past decisions of other people.

Bruce remembers looking in one of the books at an actual transaction where a tulip bulb was exchanged for everything the man owned. This included 50 acres, a barn, cattle, and at the time it seemed like a reasonable transaction in terms of market value. Janszen says we can learn a lot from human nature from this period of time, especially when looking at bubbles which are very different from each other depending on the asset class. Commodity bubbles are very different from stock market and property bubbles. Therefore, the role of the retail participant is different in each case as well, although it does seem to be similar in a lot of ways. The tech bubble ran on a recycling of money from IPOs back into the venture capital industry back into more startups. This is typical of a late stage bubble in that they generate and start to run on their own fuel, their own money. They don’t need an outside source, but they are always launched by some kind of outside event that distorts the market. This was the case of the tulip bulb mania, which included the simultaneous discovery of the tulip bulbs and a bond that was floated by the government that produced a big surge in credit and the money supply. There is usually some distortion that occurs in a market combined with some kind of discovery that gets the ball rolling. In the case of the housing bubble, it was the introduction of a securitized debt and the and mis-rating and mis-pricing of it that fueled the beginnings of that bubble. This was reinforced by accommodative monetary policy and weak regulatory policy. The retail investor does not get in on the game until  prices have been going up for a while and a lot of positive memes start to develop,  propagated in the mainstream media, which reinforce the trend of rising prices.

Bruce says it’s easy to understand the attraction of participating in a bubble because it is exciting and it gives the regular guy hope to escape the daily grind. Everyone around him seems to be cashing big checks. In one example, Bruce had a relative invest in penny stocks back in late 1999, and everything he touched doubled. Bruce became curious and had a lot of real estate at the time, so he took $250,000, put it with Merrill Lynch, and in 40 days turned it into $800,000. He thought he was a pretty wise stock picker, so he began writing an outline for a penny stock course, which he didn’t have the chance to finish until his $800k turned into $100k. However, it was an exciting period, and he really learned a lot about the emotional cycle of investing. Real estate is his field, so he was able to get off of the bandwagon in time, but you can understand the emotion that goes on in it and where you are enjoying participating. If you don’t have a real exit, like with the stock market bubble. You understood the stock market was a bubble, so you can understand the attraction; but the damage path probably hurts more people than it helps. This is usually the conclusion of a bubble.

Eric says bubbles are manufactured. In the case of the tech bubble Eric participated in personally, Eric was watching a group of intelligent and thoughtful people come to believe in a set of fallacies. In one of their deals with a company called Arrowpoint, they received back a 220 time return on their investment. Eric knew there was something amiss because there was no rational pricing and the way that pricing typically maintains irrationality during a bubble is the desire for it to continue and the hope to get rich quick is hard for them to avoid. Eric, who he said himself tends to be more skeptical, was on the boards of several of these companies and knew something was wrong. He started to do his own research, and it became very clear to him not only that it was a bubble, but he also had a good sense of when it was going to end as well. In March of 2000, he published on his site iTulip.com that if they were still in tech stocks, now was their last chance to get out of it. They needed to be out by March or April at the latest. Osborn Capital sold all of its positions from sales and IPOs of portfolio companies in April, May, and June of 2000. They were able to capture the gains that they made in the previous period. He started watching the housing market go up, and he wrote his first piece about the housing bubble in August of 2000 where he said the early stages of the housing bubble would go on for 3 to 4 years. However, it has a very different dynamic than a stock market bubble for several reasons, one being that it is debt financed. There is going to be a lot of damage when it crashes, he warned, and the crash is going to be macro economically very damaging. The housing bubble collapse is going to be bad for the banking system and much worse for the economy than the stock market bubble was, he warned in 2006. Eric said that for the housing bubble to develop it had to have the cooperation of policy makers, which to Bruce seems kind of odd considering there is a history of bubbles not working out too well and the aftermath not being pleasant. You would think we would learn to make smarter decisions, but we didn’t.

If you go back and read some of the articles Eric wrote around the time when he met Sean O’Toole back in 2005, his warning was if they did not reign in the housing bubble and it went to its logical conclusion, then what is going to happen is we are going to have a massive financial and economic crisis. When he was working as an entrepreneur in residence for Trident Capital, a large venture capital firm in Connecticut, he told the committee there that the financial crisis will occur starting in 2007. He also had a theory that if the housing bubble ran to its logical conclusion, then we would have a very unconstructive conversation later on about how to prevent a recurrence. The political policy response to the collapse of a bubble is the collective punishment of the innocent. With the stock market bubble, it was Sarbanes-Oxley, which Eric calls the Accountants Full Employment Act. It probably won’t fix anything, but it will make people feel better. His warning about the housing bubble in 2006 was that after it pops is that there will be a massive populist movement to try to reign in the banks, reign in the lenders, and constrain the housing industry exactly to the point where the opposite should be done. So instead of having a countercyclical policy response, it will be a pro-cyclical policy response, and it will make the housing crash even worse. There is movement right now to make it very difficult to buy real estate in the future with big down payments exactly at the time the payments are less than rent. The stunning thing about it is the utter predictability about it, Eric said.

iTulip attempts to understand the underlying process of the political economy and the interaction between markets and policy within our political system. This way, we can see how markets will tend to respond later on and how to allocate capital. Here we are in this situation where the housing market is as bad as it has been in recent memory, and it is not recovering. Particularly, residential construction spending is back where it was in 1996.

Bruce agrees and says there is no way you are going to have construction pick up again. In California, Riverside County has been damaged by about 60-65%, which with the price of a home now built even in 2004-2005, is selling for half of replacement costs. The one thing Bruce had not really thought about when he looked at the foreclosure list growing was that it represented every time a property sold, for example, 1,000 homes selling in Riverside, 70% are either short sales or REO. This means 70% of the closings don’t reproduce a buyer, they produce a renter.

Our short run problem is we have a lot of inventory that is being presented, and a refusal to have financing for investors because they are viewed as speculators. You really have a challenge because you don’t have people migrating to Riverside when it has 15% unemployment. It does have to have some calmer heads prevail, and there do have to be some common sense decisions made. This is actually a problem because the thing that happens when you have a market event like the housing bubble class that causes major macro economic distortions and a big downturn in unemployment is that unemployment is the most politically difficult change in the economy for politicians to deal with. You are not going to get elected if you don’t help solve an unemployment problem. If you want to really understand what is going on in our political system right now, it’s all about long-term unemployment. If you look at the mean duration of unemployment today, it is even worse than it was when the recession started. It just keeps going up and represents a large and growing pool of very unhappy people who are looking for a quick fix, most of whom didn’t really think much about economic issues or about markets. Therefore, they are listening to different voices out there, and the voices they are going to tend to respond to the most are the populace voices that they have come down hard on the real estate industry and the banks. Instead, they need to level with the American people, tell them the mistake that was made, how they got here, and what viable paths out of it are. If we sit around trying to figure out who is to blame, we’re never going to get out of it and it is just going to keep getting worse.

Real estate was a big participant in what Eric referred to as the “fire economy,” which has been going on for about 30 years. Real estate insurance, financing, has all been part of what we were accustomed to. When Eric wrote his book back in 2008 and 2009, his thinking was after the crisis occurred it would be a forcing function for significant change in the structure of the economy. The crisis would would enable the next leader of the country and members of Congress to stand up tell the public that the structure of the economy is the problem and needs to be changed. They could have gotten the economy aimed in the right direction so that by 2011/2012 the economy would be growing 3-4% a year and jobs would start coming back. However, starting back in about 2010 it became apparent that none this was going to happen and the leadership was not even framing the problem correctly. Now we have wasted years and also a considerable amount of public credit in attempting to re-start the FIRE Economy that is not sustainable. Now we have fewer options and even less time.

To get an idea of how to make the change in the right direction, Eric has talked to a lot of people in interviews, among them former Senators Phil Gramm and Bill Bradley. The general consensus is that we have to have a crisis that is even worse than what we had in 2008/2009. In the words of one of the political figures Eric interviewed, “We need a crisis that gets everyone kneeling at the cross to come up with a solution.” Everyone has to be effected equally, and the political pain has to be more shared across more groups than it is today. This is why we cannot get a consensus even on what the problem is let alone how to fix it.

One of the things Bruce was most impressed with in Eric’s book was that he views America as having the legacy of treating everyone equally and giving everyone a fair shot. These are the roots we have to go back to of resurrecting that entrepreneurial spirit and be willing to put infrastructure in place that goes to the future instead of thinking we are going to resurrect what was working for the last 30 years. We have to start thinking about maybe what doesn’t even exist today but we know can exist. Instead of some ad hoc, road fixings, and other fiscal stimulus projects, we should have invested in bolder projects which were intended to make the U.S. more competitive. The higher level goal was not to create jobs in hope that we can muddle through the next few years until the next election, but rather the thinking was how to square the country to be competitive in ten years. The issues facing us will be very high energy costs, heavy global competition for the smartest people in the world, which we have traditionally won but over the last ten years have been starting to lose. We need to get the differentiators back, and if we had done this we would not be where we are today where public spending on construction has been steadily declining since the end of the recession. It should be growing, particularly if private spending on construction is continuing to decline. This just shows very bad planning and unclear thinking about what has to be done to get the economy going.

Our economy is dominated by the FIRE Economy but we need to be getting to the “TECI” economy where the focus is instead on production, specifically on transportation, energy, and communication infrastructure. In the meantime, we are going to be stuck in this transitional economy. Back when everyone was doing their forecasting around the time of the tech and housing bubbles, they were short the S&P in December 2007. All these forecasts and decisions were based on an understanding of the cycle of asset price inflations, crashes, and then re-flation via monetary and fiscal policy. Today, the challenge is that the economy is clearly weakening, but we don’t have the option of spending our way out of it. Our credit is not strong enough, and if we try to significantly expand the public debt to finance major public projects it is very likely that we will start to see interest rates go up and then we will go into a cycle that we see in countries like Greece and other places where you simply do not have enough economic growth to credibly finance the existing debt. Eric and iTulip made a huge bet on gold back in 2001, which has turned out to be doing quite well. This is actually unfortunate because with the rise in gold prices and the current trend in national governments becoming net buyers versus sellers of gold, happening since 2009, is a very bad omen. This is a trend that indicates the extent and severity of the failure of public policy and leadership. This applies not only to the U.S, but in other countries as well.

Problems in Europe have a chance to spill over and cause grief here in the United States. Eric just returned from a trip to Europe, and it is quite clear that there is a tremendous amount of anxiety over there about how they solve their debt problems politically. The reason the German people are so upset about Germany carrying the load is that everyone knows that the top 5-10% of wealth group in Greece doesn’t pay any taxes, so when the idea of austerity comes up, the rest of the population knows that they have been carrying the load anyway. Now, they are being asked to pay even more and receive even less. It’s like there is two separate worlds now: the people that have and the people that don’t. There is going to be some political and societal upheaval for that.

Eric Janszen will be on the panel for I Survived Real Estate 2011, taking place on October 14th. 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, 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, Realty 411 Magazine, Rick and LeaAnne Rossiter, Southwest Riverside County Board of Realtors, Starz Photography, uDirect IRA, Wilson Investment Properties, Tony Alvarez, and Westin South Coast Plaza. Visit isurvived2011.com for more details.

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.

The Norris Group Real Estate News Roundup 9/2/11

Friday, September 2nd, 2011

Sources:

Foreclosures Now Take 20 months

Mortgage rates hover around all-time lows

Home prices decline in 40 states

Employment Situation Summary

Working Together for Strong Communities

New GSE appraisal database to tighten scrutiny on mortgage lenders

Today’s News Synopsis:

In this week’s video, Aaron Norris gives the news of the week in the world of real estate and other big events. Realty Times reported again that mortgage rates are at their lowest on record.  Housing Wire reported that 17 banks that sold bad mortgage-backed securities to Fannie Mae and Freddie Mac are being sued by the Federal Housing Finance Agency.

In The News:

Housing WireU.S. sues 17 banks over MBS sold to Fannie, Freddie” (9-2-11)

“The Federal Housing Finance Agency sued 17 banks Friday, seeking damages from the sale of soured mortgage-backed securities to Fannie Mae and Freddie Mac.”

Inman - “10 metros with greatest 5-year gain in real estate values” (9-2-11)

“Online real estate valuation and search company Zillow has  calculated the 10 U.S.  metro areas that have experienced the largest gains in home values over the  past five years, based on the company’s home-value estimates and its Zillow Home Value Index, which is generated from those  value estimates.”

Bloomberg - “U.S. Employment Stagnated in August” (9-2-11)

“Employment in the U.S. unexpectedly stagnated in August, increasing pressure on Federal Reserve Chairman Ben S. Bernanke and President Barack Obama to spur an economy that’s barely growing two years into the recovery.”

Realty Times - “Making Home Affordable Program” (9-2-11)

“It made headlines when it emerged on the market in early 2009, but here’s a refresher on President Obama’s Making Home Affordable Program.  This program was designed to help up to 9 million families restructure or refinance their mortgages in an attempt to stave off foreclosure.”

DS News - “HUD Awards $10M to Housing Counseling Agencies” (9-2-11)

“HUD announced Friday that it will distribute more than $10 million to housing counseling agencies throughout the country.”

Housing Wire - “Hurricane Irene could cause home refinancing, purchasing issues” (9-2-11)

“Damage from Hurricane Irene could make it difficult for homeowners in the Northeast to close on pending home refinancing and mortgage purchase applications.

Los Angeles Times - “Long-term interest rates plunge on hopes for new Fed stimulus” (9-2-11)

“Long-term Treasury bond yields tumbled Friday as investors bet that the grim employment picture will force the Federal Reserve to launch a new bond-buying economic stimulus program.”

Realty Times - “Mortgage Rates Remain at or Near Historic Lows” (9-2-11)

“Freddie Mac (OTC: FMCC) today released the results of its Primary Mortgage Market Survey® (PMMS®), showing mortgage rates declining amid continued weak economic and housing data. While the 30-year fixed held steady, the 5-year ARM set a new all-time record low having fallen for the eighth consecutive week and now standing at 2.96 percent.”

O.C. Register - “Home prices up in 24 ZIPs! Yours?” (9-2-11)

“For the 22 business days ending August 16 – DataQuick’s freshest stats — the Orange County real estate market had homebuying patterns showing: 24 of O.C.’s 83 ZIP codes with gains in their respective median selling price. Overall, buyers’ prices were -2.8% vs. a year ago.”

Looking Back:

Servicers made over 120,000 proprietary loan modifications in July 2010, and 36,695 HAMP modifications. Pending home sales increased 5.2 percent in July 2010, according to the NAR. MBA reported 30+ day commercial delinquencies increased to 8.22 percent in the second quarter of 2010. Freddie Mac’s weekly survey showed mortgage rates dropped again to a rate of 4.32%.

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.

241-TNG Radio – Sara Stephens 9-3-11

Friday, September 2nd, 2011

Sara Stephens

Sara W. Stephens

President of the Appraisal Institute

(Full Bio)

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On October 14th, 2011, The Norris Group returns with its award-winning event I Survived Real Estate. An expert lineup of industry specialists join 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 be possible without the generous help of the following platinum partners: Foreclosure Radar and Sean O’ Toole, Housing Wire, The San Diego Creative Real Estate Investors Association and President Bill Tan, Investors Workshops and 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 Wiles Web and Branding, MVT Productions, and White House Catering, who will provide the 3-course meal for this black tie event. Visit iSurvived2011.com for more details.

Bruce is joined today by Sara W. Stephens. Sara is the 2011 President Elect of the Appraisal Institute. Fresh from testimony in front of Congress in July, Sara has been active at the Appraisal Institute in various capacities for 20 years. Sara graduated Magna Cum Laude from the University of Arkansas at Little Rock and has a Masters Degree from University of Arkansas at Fayetteville. She and her husband Richard own the oldest appraisal firm in Little Rock.

The Appraisal Institute is a professional association of more than 24,000 members. They provide the best and most comprehensive education, and their ethics and standards are a part of what has maintained them through the years. Their designations indicate quality and outstanding achievement on the part of those who have earned them. They are also a worldwide organization, located in about 60 countries in addition to the United States. They have members in China, Japan, Korea, Germany, and they are continuing to grow internationally as well as in the States. With several different countries, it is interesting the way people approach the idea of market value. They’re still looking at willing sellers and willing buyers, but in a lot of the countries they’re looking into working with and have contacts and relations with it’s a very different concept and therefore challenging for them to understand the nuances of each of the markets that they’re in. There are a lot of different property rights, and in some of the countries the state owns the ground and the individual owns only the improvement. But at the same time, it is very exciting to be able to expand their scope and membership past the United States boundaries.

If Bruce were an appraiser, in the last five years he would be very happy that there was an organization with access to Congress to talk about his industry and see if they could get some things not going their way to get back to normal. The Appraisal Institute is a voice for all appraisers, and while they represent their designated members and the quality they bring to the appraisers’ profession, their efforts are really for all people who are doing valuation work. Their voice is strong, and they have the only Washington D.C. office as well as lobbyists there who are working every single solitary day for appraisers and for the efforts that they need to continue to make their service to the public a continued part of the financial picture of the United States. The first time Legislation passed something that really affected the appraisal world was the HVCC and the Dodd-Frank Legislation, both of which they are still feeling the effects. The Dodd-Frank Legislation, especially, was an enormous effort and is beginning to be implemented this year. All appraisers are certainly looking at the different processes and trying to not only understand them but also understand how they impact their practice and their relationship with their clients and with the regulatory scene that they are certainly involved with them. The one thing that HVCC did was to reduce value pressure, which was very important. A lot of business at the time was refinancing, and the appraiser was asked quite often to reach for a number or there was a chance they wouldn’t get the appraisal. This was very common in a lot of situations, and the one thing HVCC did was it put a firewall between the appraiser and the person who was continually reaching for a specific number. Unfortunately, some of the good things about HVCC were overshadowed by some of the things that have become a real problem for appraisers, especially for residential folks who are finding themselves working not in concert with a particular lender or client with whom they may have developed a long-standing relationship. However, now the appraisal management companies and their interaction with appraisers are certainly different from the client/appraiser relationship that many knew in years past.

One of the things we really have to clarify is that long-standing relationships in most cases are earned because of expertise, not because of compliance with a number. You have a lot of appraisers that really deserve their status of being the first choice, and then all of a sudden they can’t be first. One of the things that has happened that the Appraisal Institute has seen more and more is that appraisers who have skills, training, professional development, and spend a lot of time with education and have concentrated in trying to be the best are now looking at valuation assignments for a much smaller fee than they had before and are often being passed over. They are often passed over because someone will agree to perform an appraisal for a cheaper fee and a quicker turn-around time. It has almost been like a rush to the bottom in some instances where timing and fee are the overriding concerns rather than professional expertise and looking for a person who really has the qualities that are needed to perform a valuation that is noteworthy.

With the invention of automated valuation models, one of the things The Norris Group always stressed in teaching people to be investors is nothing is as easy as pushing a button to determine a value. A lot of people think it’s a lot easier than it sounds and they have a real grasp on what something is worth because they can get some kind of results from pushing a button and getting a Zillow estimate. This is not really going to provide you an accurate number a certain percentage of the time. People seem to forget that an AVM is really a mathematical model that is combined with the database. The big issue with most of the AVMs is that they rely on public information, some of which might be incomplete or inaccurate. What is missing from the automatic valuation model is the personal touch, the on-the-ground person taking a look at the condition, the amenities, and all the features that contribute to value. This is where a trained professional appraiser, such as an SRA designated or an MIA designated appraiser from the Appraisal Institute makes all the difference. The automated value ignores the idea that all properties are not created equally and have the same size structure that makes it the same size lot, but that is where the differences begin. It is a quicker and better look at what you have rather than just size and a data sale.

In a recent example in Palm Springs, The Norris Group bought a custom home on a golf course, but there were definitely superior lot locations that they did not have. There was a comp for the same house, basically the same size and builder that was over $1 million and The Norris Group had their home for sale for $799,000 for 4 months before it went pending. One of the people that shouldn’t have been given the appraisal was given the appraisal assignment and came in at $1.2 million. They really did The Norris Group a favor because the buyer was thrilled to get a property that was $400 grand below what it was worth. However, it was not worth $1.2 million, and he did not have local expertise; he just had a comp he thought was a model match. The Appraisal Institute is seeing a lot of instances where the issue of geographic confidence is huge and with a lot of the instances with the rush-to the cheap and the fast, they are finding that appraisers are driving 400-500 miles to look at a market that they have no connection with whatsoever. They simply capture a comp, and that is it. Everybody will probably agree that there is no substitute for the competency that one has in a geographic area with which they are very familiar and with which the data is there for them to make the effort and the time to verify the data with a buyer, seller, or both. In this they will try to understand what happened in their transaction. You don’t get this when somebody is driving in 400-500 miles, takes a quick picture or two, picks up a comp or two, and then drives back to finish up the assignment. It is also hard for the person who is used to making a certain living to have part of their fee taken.

Most appraisal management companies are owned by large groups of people. Some of the financial institutions actually have their own appraisal management company, and the biggest problem with the appraisal management companies for their real estate appraisers is that they are asking their people to take a part of the fee, and then they’re taking a part of the fee themselves. The Appraisal Institute recently did some sampling on the idea of reasonable and customary fees, and this is one of the issues that the Dodd-Frank bill has presented. When a person acquires a loan, portfolio, or piece of property to be appraised, then they go to an appraiser and ask about doing an appraisal. However, one of the big problems and issues is that the appraiser is often forced to take much less than what their normal fee would be, and then the appraisal management company tacks on their fee. There is really no way that a consumer at this point knows how much of the fee that they pay for the appraisal goes to the management company or to the appraiser. For a HUD-1 form, that fee is lumped up in one number. There may be some instances where some of the management companies are forthcoming with the amount of fee to the appraiser and the amount of fee to the management company, but by and large this is not happening. Many of their appraisers have been forced to leave the business because they cannot support a family or a business when they are working for 50% or less of what they have been working for. This is a huge concern, and they all have invested a lot of time and effort into becoming educated and acquiring, in terms of the appraisal institute, a designation in keeping themselves current and becoming as professional and having the expertise they need to go to the market and to help consumers make the decisions they need to make on the loans and the properties that they are trying to buy. People have decided in some instances that they cannot continue to do that and be paid 50% of what they are usually paid. A lot of consumers see this when they go to close; they see a large fee for an appraisal, and they don’t really understand that part of that fee goes to the management company.

In Sara’s testimony, one of the things she said was that the appraisal institute would like to see just simply either a division of the fees or something to come forward through Congress that says the appraisal fee will be paid to the appraiser. Then the management company can pay or be paid the fee that they charged. There would be a different line item, and it would be more expensive for the consumer because this was what Dodd-Frank was supposed to take care of as opposed to HVCC. There was going to be fair compensation for appraisers that was customary before HVCC, but this did not happen. This is one of the things that she advocated for when she spoke to Congress. They must have a return-to and must compensate their people. There was not any doubt in Dodd-Frank that the Appraisal Institute was not looking to provide a reasonable and customary fee for their appraisers. Unfortunately, that fee was always considered the fee to the appraiser and not the fee to the management company and the appraiser. That was where there was a big difference.

In a market like California and in Riverside County, it was 80% REO sales at its worst. These were closings. You could not ignore these as comps, at least some of the time, because they were definitely going to set the bar. One of the things that investors have problems with is that appraisals now are not easy. You have a really fixed up house and you might have seven offers on the house, which to Bruce is stating market value, and then you have comps where 80% of them don’t have a kitchen. It takes a little work to figure out if your house that you had seven offers on is actually a valid sale. Without compensation, it would have a hard time to spend the time necessary to come up with the right number. This speaks even more to the fact that as time passes and we see more and more of a market that is up and down, having someone working with you and having a real estate appraisal performed by a competent, qualified person who is invested in education and put themselves in a position to keep up with the trends that are in the market, has geographic competency, will take the extra time to check the comps, and catch a comp that is missing something is absolutely going to be the most important thing that you could have as a buyer. As a lender, you know this is the most important decision to buy a home and own a property that most of us make. You should want the best and desire the very best person working for you and working on that. They would like to say that kind of person is a designated member of the Appraisal Institute who has the SRA or MAI designation or the SRPA. These letters really used to mean something, but from what Bruce has heard, when you own an appraisal management company, these are completely ignored.

The overriding feature for most of the people who are working for management companies is the fee and the timing. The idea is to get it done quickly and get it done cheap. For someone who is going to continue to be a professional, completing an assignment in a tiny turnaround time without the opportunity to extend that expertise to go look at the property, understand what is happening in the market, and view the comparables, it is not possible. A lot of people think appraisal management companies are necessary because they think they are a provision that the banks have to follow, but there are other ways to get around the idea of the firewall being built. It’s a misconception.

When Sara was in front of Congress, she definitely had the sense that they understood the subject matter and took the time to read her document. She was asked three questions, which were right in tune with what she had talked about to them. On the panel that spoke that day, there were sixteen people who were invited. It was such a large panel that they had to divide them into two parts. Sara really thought they were making an enormous effort to try to understand what is happening in the market and try to help the consumer not only to protect them, but to give them the opportunity to be dealt with as fairly and expeditiously as possible. There was an article just a couple days ago that talked about appraisals now coming in too low and that about 16% of transactions were falling out because the appraisal wasn’t coming up to the purchase price that was agreed upon between the buyer and seller. This is because one of the things happening now is a real misconception of what the role of the appraiser is. We are reporters of the market; we reflect what is happening in the market and we don’t set it. The assumption that a lot of buyers and sellers have is that an appraisal is somehow wrong if it doesn’t match the listing and the sale price. There is no reason to assume that the contract price is correct simply because it might be higher than the appraiser’s values. The Appraisal Institute is a disinterested third party, and we try to reflect what is in the market. The best reflection of that market is going to come from someone who has good training and good education. What they are asking Congress to do is to refrain from legislating the appraisal process and to take a look at exactly what these bills are mandating. This would be taking away their right to report the market, and this is what they are. It would take away their right to be a disinterested third party. What is really interesting about all this is Bruce buys and resells homes, so he can say it is definitely part of the market when he puts his up for sale. You cannot ignore the fact that it is going to compete with whatever you have and therefore is a valid part of the market.

Sara is a real optimist and is hopeful that there is some reasonable thought going into this process and that a reasonable decision will be made. There are people who are extremely interested in the consumer and in trying to make sure that the consumer is protected and that we have an opportunity to allow the services that protect our financial markets and to be the best that they can. Sara really got the impression from speaking in Congress that there is a possibility that a reasonable decision will be made. Bruce is very hopeful too because this would be a very big positive for the industry.

Sara Stephens will be on the panel for I Survived Real Estate 2011, taking place on October 14th. 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, 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, Realty 411 Magazine, Rick and LeaAnne Rossiter, Southwest Riverside County Board of Realtors, Starz Photography, uDirect IRA, Wilson Investment Properties, Tony Alvarez, and Westin South Coast Plaza. Visit isurvived2011.com for more details.

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