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California Real Estate Headline Roundup

Posts Tagged ‘LTV’

By Bruce Norris .

Vice President and Chief Economist of CAR Leslie Appleton-Young Joins Bruce Norris on the Real Estate Radio Show #281

Friday, June 8th, 2012

Leslie Appleton-Young

Vice President of C.A.R.

(Full Bio)


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This week Bruce Norris joined once again by Leslie Appleton-Young. Leslie is vice-president and chief economist for the California Association of Realtors, a statewide trade organization with over 150,000 members dedicated to advancement of professionalism in real estate. Leslie directs the activities of the association’s member information group. She oversees the analysis of the housing market and brokerage industry trends, member communication, and membership development activities. She also is closely involved in the association’s strategic planning efforts and is a well-known speaker in California.

One of the things Bruce has noticed that has been on the increase is the percentage of equity sellers. This is probably a very significant development because in a way that is an acknowledgement that they are not going to see 2006 prices any way soon. It is an embracing reality and also recognizing that whatever they are going to do next in real estate is a good time to do it. If you are selling today and trading up, you are going to be fine. If you are trading down and possibly dealing with some other investment property, there are a lot of things you can do to get the advantage of the positives in this market, even though you are selling at a price that a few years ago you would have been somewhat disappointed in. When you are buying in the same market, you might ask yourself what the big deal is. People have a lot of emotional attachment as was noted in last week’s radio segment. You have almost 30% of the mortgages in California underwater, so people are in distress and many stuck right now.

Bruce wondered how different the reasons are for people buying in 2012 than in 2006. Leslie said you have more first-time buyers, and you have a little bit more of the trade-up situation going on because those equity sellers have finally realized this is not such a bad time and are going to jump on it. If you look back in 2006 and 2007, it was really a market dominated by REO purchasers and larger and smaller investors. It was more of a situation where certain prices were so low they were going to buy as many as they could and do their business model that way. When you look at the market today, it is much more balanced. It depends on the area. If you look at the sales that closed escrow in April, 58% were equity sales, about 22+% were REO, and about 19.4% were short sales. Therefore, you have a little bit of a balance between short and REO; it is a little bit more on the REO side while the rest are equity sales. When we first started to come out of the bottom, the REO market was well over 50% in many areas and likely close to that statewide as well. We certainly have over the past several years whittled down on at least the available inventory of REOs to the extent that now you have a two month supply, even less in some areas, of REO inventory.

One of the things mentioned in the first segment was shadow inventory. FHA has approximately 41,000 REOs right now, but they have over 700,000 people that are 90 days late. Fannie and Freddie have similar stories, and the loan mods have similar percentages. Bruce wondered what will happen with this inventory, if they are just going to really dole it out over time or take it to the sidelines as rentals. Leslie said they will most likely keep doing what they have been doing, which is to dole it out over time since this is the only thing that really makes sense for them in terms of managing their balance sheet and recognizing the losses on those assets. What is interesting is that it seems like almost every year, not including the last year or two; people would have a date set. They would ask questions like if they heard that on September 15 all of the banks are going to dump all of the foreclosed properties in one day. This never happened, and it will not happen. However, we still cannot say that this problem will not be with us for quite some time, possible 4-5 years in some areas. There is no magic bullet here; it is really one property or loan at a time. The impact of various programs will ebb and flow, but it takes time for the lenders to work through each and every one of these, and it is going to define our market for a while. Every year the market seems to be a little bit different, and certainly this market with fairly robust sales for six months in a row is showing that people are able to be more responsive today to the advantages of the market.

Bruce wondered what percentage of these sales investors are buying. Leslie said the investor sales in California are probably over 20%. In some areas they are significantly higher. All cash purchases have been about 25%. NAR had a number that was in excess of 30% a couple months ago. There are non-investors who are paying all cash for homes, but it is a very significant part of the market. About 80% of them are investing to rent, and possibly the other 20 are reselling, flipping, fixing them up, and selling them. However, this will vary by market.

What is interesting is we have had a big recession, and if you look at household formation, it really didn’t happen. We are way behind on household formation, and at some point the echo boom generation is going to play catch-up. You will see an article from time to time talking about the coming housing boom. When you look at the lifestyle choices that the generation has had to make given how lackluster the job opportunities have been and the doubling and tripling of families, at some point they are going to have the income and the job market is going to be conducive for them to break through or break free and enter the housing market. New construction was just hit very hard and has started to come up the last couple years, but it is still well below the 200,000+ units we need a year to house everybody. Things will be changing, but as long as the economy is as challenged as it is with the euro zone and Japan and India slowing, there are a lot of global trends that will impact our economy and our financial environment.

Things are either a lot more confusing than Bruce ever acknowledged, or it is more confusing than it ever has been. Leslie said she believes it is the latter and recognition of the impact of all these forces outside of our control is more heightened than ever. Mark Zhandi came out with an article that said the GDP is really dependent on the end result of Greece. Some people when hearing this might think that Greece is the size of Rhode Island, so how would it have that big of an impact. It is a little frustrating for Bruce as a local investor in Riverside that he has to pay attention to a lot of things outside of real estate and outside of our country. The financial community is a global community, and everyone is a player. Everyone is exposed to Greek debt and the Euro Zone. With all of that the financial crisis was a real wakeup call that it is not just about me in my little area, but you are directly impacted by what goes on overseas. It really is overwhelming.

Mark Zhandi also said we sometimes have the tendency to create today’s policy to solve yesterday’s crisis. Leslie said she heard him speak in D.C. a couple weeks ago, and he was right on target with comments like this. We are dealing with Dodd-Frank and qualified residential mortgage as if that is going to really be a game changer, and it is not. A lot of requirements for that loan is not necessary. Leslie said it will be a game changer in a very negative direction. One of the things Leslie said she has been concerned about is in order for a mortgage to qualify, the loan needs to have 20% down. You look at the last ten years of what the GSEs have purchased, and less than 15% would have qualified as a QRM under this definition. It is very restrictive, and the data shows that the difference the delinquencies and foreclosures for 10%, 15%, and 20% down are not that different. To focus on 20% is really going to be a burden for a lot of first-time home buyers.

There are a lot of policy implications tied up into what was most likely a real attempt to not let that happen again. However, the pendulum always swings too far in either direction. The timing of this is really not the best, and we don’t need to have the most restrictive lending policy when we have the affordability that is at all-time highs. When you can actually buy something and reduce your cost as opposed to rent, you would think that would be good idea to be more aggressive as a lender than less. There are so many people who, if they could, would just a straight refi that would take them down from 7% to 4%. They would then be able to stay in their home, so Leslie does not understand why this would not be a doable thing. There is really no difference since you are already in the position of 140% LTV, so you might as well be at a 140% LTV with a loan that somebody is going to make a payment on that you can afford. We saw in the San Fernando Valley in the ‘90s that people stayed in their communities even when they were underwater. It is not a completely rational profit utility maximizing decision when people look at their home in their community.

Bruce asked Leslie if she thinks Fannie and Freddie will not exist in ten years. This was the impression the GSEs gave Bruce and Sean O’Toole when they spoke in front of them in D.C. Leslie thinks this message has been sent loud and clear. If you looked at the white paper that the FHFA came out with earlier, you would see that this year they essentially said as much. However, the question is if it is a new entity or a combined entity, and what does it do if it is backstops. There are a lot of unanswered questions that have just not been fleshed out yet, and it is going to take a couple of years for them to do that. However, there is enough possibility of major change in which we all need to be involved. If you look at the mortgage market today, you see that last year well over 90% of the loans originated in United States for home were Fannie Mae, Freddie Mac, or FHA. That is just the way the market is, so the first-pass argument is that whatever you are going to do, don’t do it now. We have an industry and economy that is trying to get back on its feet. Looking longer term, Leslie did not think there was any doubt that there are changes that should, could, and will be made. The point is to do it in a reasoned fashion so that you avoid as much as you can, both pitfalls and distress, that is going to take the economy back where we don’t want it to go.

Bruce thinks one of the things that is going to happen in 2013 is we are going to have to get serious about generating some revenue and increasing taxes. Bruce wondered if Leslie fears that real estate would be one of the obvious targets for some of the policy changes. Leslie said she had the opportunity to go back with her leadership team a couple months ago, walk the halls, and go in and talk to the California Congressional Delegation. Without a doubt there is support for the mortgage interest deduction and a general feeling that this is not a time to mess with housing since it needs to get back on its feet. If and when a major effort at tax reform begins, likely after the election, everything is going to need to be on the table. Leslie said they were told this a couple of times by people who were very sympathetic. The thought was if we take the mortgage interest off, then somebody else is going to their thing off while another is going to take their thing off until pretty soon nothing is going to be on the table. Being realistic about it, everything is going to be on the table, and we will just have to see how things go.

The majority of the California Congressional Delegation has signed on to a resolution that has been passed around for the last two years supporting the mortgage interest deduction as it currently exists. However, if you recall what happened in 1986, you had a midnight deadline for a 3,000 page bill, and there is a timeline where people sign on and you see the mortgage interest deduction get capped at $1 million. It is hard to updo an affordable housing argument against that kind of cap, but it does also leave open the door for further reductions down the line. Leslie said they will be watching this and participating in these discussions with great interest.

When it comes to topics such as Proposition 13, Leslie said she cannot imagine a time that this will be looked at in a realistic fashion to change. It is too much a part of the landscape, and the lore. The public support for Prop 13 is quite strong, and we have a budget in Sacramento that does not hold together for this year or for the foreseeable future. There are commitments made in terms of pensions and medical support that are going to require an increase in taxes, higher revenue, or a reduction in those benefits. It is not going to be for the faint of heart to watch that process going forward because everybody has something to protect. The bottom line is we are going to have to keep cutting back until we can afford what we are doing. Fiscal responsibility is extremely important.

One thing the real estate boom did was provide a lot of revenue that did not exist prior. It looks like we figured out that more revenue does not necessarily solve the problems. We now have a dearth of revenue, but if we are trying to get new revenue sources then this is not really the solution. We really have to go to where the cuts are, which is happening. You are seeing cuts, and you will continue to see more and more cuts. There is a structural issue with respect to the commitments the state has made and what it is legally required to do since it cannot file for bankruptcy. The local municipalities can though, which is what makes Chapter 9 bankruptcy an interesting study. We have seen this in Vallejo and a few other cities. Michael Lewis released a book titled Boomerang in which the last chapter is actually about San Jose and what they are facing with expenditures that were related to an economy that disappeared and that promises that were made to public sector employees are now the bulk of their budget. Hopefully some lessons have been learned, but we are going to have to find our way out of it. This will most likely come with a mixture of cuts and revenue, but it is going to have to be primarily cuts. This is why Bruce believes real estate will not leave the table unscathed. Hopefully they will leave some things that are important. We had quite a price decline, so possibly a reduction in the amount of interest as far as up to a certain dollar amount would not be the end of the world at this point.

Another interesting topic is mortgage settlement for the California market. Bruce wondered which would be likely to occur: $12 billion for write-downs or short sales. Are people looking at reductions with this $12 billion? Leslie said she does not really know since she has not been following this that closely over the last month or two. She has not really seen much in the press about what they are doing. The initial reaction was it was great, but in California it really is a drop in the bucket. She has not read anything that has been an update on where it is all going. Bruce said he thinks he knows where it is earmarked to go, but Leslie said it is probably too early in the game and the process to have really seen an outcome yet. On the city of Riverside’s foreclosure task force, it is anticipating knowing what kinds of funds are going to be available and for what purpose. As of now, they really don’t know. Leslie said it is hard to get even a little cynical after the last five years when you hear about a new program that is going to do one thing, but only ends up doing a tiny part of it. This is not very successful.

Bruce wondered what percentage of the market now is first-time home buyers. He knew it got down to about 37%, although Leslie said it is at about 40%. She said they were going to have their annual market survey in the field next month, and this is really the data that she looks at the most and has the longest time trend on. They recently just completed a homebuyer survey, and about 47% of the people in that example were first-time buyers. Therefore, this is probably the general ballpark. If we had more inventory, it would probably be higher.

Bruce also wondered how the membership is holding up and what the mood is like. Leslie said membership peaked in 2006 at 211,000 realtors this year. She said they are going to come in at about 158,000, which is awfully good considering what has gone on in the market and the percentage of the business done by a smaller subset of agents. All that being said, they really are very busy, very engaged, and they are encouraged by the market fundamentals. This is to say after 4-5 years, there is definitely a new mood of positivity.

To find out more about Leslie’s business and any updates, go to www.car.org.

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.

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269-TNGRadio – Matthew Scire 3-17-12

Friday, March 16th, 2012

Matthew Scire

Matthew Scire

Director, Financial Markets and Community Investment
U.S. Government Accountability Office

(Full Bio)

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This week Bruce Norris is joined by Matthew Scire. Matthew is the director of financial markets and community investment for the U.S. Government Accountability Office (GAO). This radio segment will focus on a report “Vacant Properties: Growing Number Increase Communities’ Costs and Challenges.”

The GAO is an agency of the Congress that does studies mostly at the request of chairmen and ranking members. They are made up of about 3,000 people and have offices all across the country. They look wherever there is Federal dollars, and their goal is to improve the way government works. The controller general is appointed for a fifteen year term, which gives them a great deal of independence from the parties and from the different parts of the government.

Bruce wondered what prompted the particular study about real estate investors. Matthew said the real interest was trying to better understand the extent to which vacant properties was a problem across the country. There was also some great interest in trying to figure out whether or not changing some of the decision rules when looking at potential modifications could somehow reduce the incidents of vacancies. This was what really got them to first take a look into it. The report focused principally on the question of what is going on in the area of vacant properties.

Bruce wondered how Matthew defined what an investor was in the report. Matthew said he really didn’t define it. What they are really looking at is the extent to which there are these vacant properties. They do some assessment looking at the strategies that localities are using to identify the extent to which properties are vacant and what they are doing to manage them. They do get from them a little bit about what they are doing to try to make sure the properties were maintained. Part of this is what role the servicers play and what role investors play in making sure the properties are maintained, specifically in today’s context.

The report does come out with some negative conclusions talking about investors and defined an investor that owned more than one home as a multiple-property owner. Bruce was not sure it defined to his satisfaction the difference between an investor and a speculator. In the report, it talked about there being different stratas of investors. There was intent to maybe buy and hold or buy and flip. There was also some differentiation in how the results panned out for those different types of investors. Matthew said what Bruce was looking at is the definition of something that is owned as principle residence versus something that is not. You might be looking at investors there in terms of the property as opposed to the tendency for the GAO to use investors in their reports in terms of who holds the note. What they were looking at here was what sort of requirement they may place upon servicers to maintain the underlying property.

In the report, it talked about the buy and flip person. The different investor would be a buy-and-hold. In that part of the report, they were talking about different strategies that localities are using for ultimately disposing of properties. Some of the communities talked to them about concerns they had and getting access to properties that have completed the foreclosure process. They were having difficulties competing with investors. In this sense, they are using the term investors to mean those that are buying properties without the intent of living in them.

Bruce said he was under the impression the report dealt with people who were buying properties and not occupying them, and this was a concern that they had certainly done more of it than was first thought. One of the things the report brings out is that the investor participation level during the boom years was different than what was once thought. Matthew said he had not addressed this; but he had talked about some concerns that localities had expressed in trying to get properties to homeowners and that they thought they might be more likely to maintain the property. He addressed more the process of once the property has gone through the foreclosure process rather than the level of investment for REO. He is talking about properties that have already been taken back and are problems for cities. Bruce said he would imagine that some of the programs he tries to deal with regarding loan modifications are trying to prevent the vacancy from happening in the first place. Their goal is to keep loans at affordable levels so people can stay in their homes.

Matthew said what this report really does is it is first trying to draw dimensions around the problem. For example, their big headline was that the number of vacant properties had increased by 2010 to 51% nationally. Not including seasonal and migrant properties, there are currently 10 million homes. We normally have quite a few, and it actually surprised Bruce when he looked into it. It’s normal to have millions and millions of vacant homes, but it is not normal to have18 or 10 million that are not seasonal. You just want to look at the rate of vacant properties, which had gone up from 6% to 8% between 2000 and 2010. This one-third gross in the vacancy rate is a big increase.

Bruce wondered if there was a normal level where we could say, “If we could only get back to this number, the new would probably be okay.” Matthew said he does not know what the norm would be as they are looking at two points in time. In 2000, they were not concerned about vacancies, so possibly this was a normal time. It seems that during this downturn the lenders have been more accommodative than ever as far as offering program after program. Bruce wondered what Matthew’s feeling was about the success that the programs have had in attempting to keep the owner in the property. Matthew said it has been mixed, so there is certainly more loan modification than has been the case in the past and this is both through HAMP and proprietary modifications. But it could also be that the demand for it is greater than it has ever been. There are still quite a few homeowners who are at risk of foreclosure today, eve with all the different activities that servicers have gauged in and investors have paid into in terms of the modification of loans.

Bruce said he would imagine one of the factors is this is probably the first time where you have some states where a negative equity is the prominent problem. This is a huge factor and is what marks this as a unique period. You never had the same proportion of homeowners of mortgagers who were underwater. The depth at which they underwater is pretty deep, so what makes this unique is that it is national. You have had this in local markets and regionally with certain economic downturns, but you have not seen this on a national scale. This is the all-time problem for real estate.

One of the things the loan modification programs hasn’t done is they have not reduced principal. Bruce wondered if this is something that will probably not occur or if it is being considered. Matthew said they are beginning to do it under the HAMP program, and there is a small amount of principle forgiveness that had been done, though not a lot. The settlement today anticipates that these particular servicers and investors would be doing more principle forgiveness going forward.

Bruce wondered if any of these programs are designed to be for the non-owner occupant borrower who has the problem of being upside down. Matthew reiterated by saying one of HAMP’s recent announcements was that it was going to open up to non-owner occupants. The various HAMP loan modification programs would now be open for investors. This could be for multiple loans simultaneously, although he was not certain about this. Part of this came out of a recent announcement, so he does not know if all the details have been made public. There will be some kind of details and specific guidelines coming out if not already, though.

One major change Bruce noticed he thought would be very helpful was to not have any appraisal necessary to accomplish the refi if somebody is current. He believes this to be a wise decision. Matthew said it would certainly help a lot more homeowners be able to refinance their mortgages as the lender is already in the position of whatever negative equity position there is, so they might as well be there at 4% than 6%. There were some changes made to this, which Matthew said he was not sure it did away with the appraiser or whether it moved to an AVM as opposed to an appraiser. So there was some attempt to get up to what the value of the property was, just not through an appraisal. Bruce said he did not think this was the determining factor for the refi. We did have one program where it went to 125% loan-to-value, but there is no maximum LTV with the revision. The only reason you would have an appraisal would be to see what your starting point was.

What is interesting about the problem is when you are talking about vacancy, you are talking about foreclosure; and it is really skewed toward half a dozen states. We have a national problem in that the size of it is definitely a national scale, but you have a lot of states looking around probably saying, “Well, that didn’t happen here.” Matthew said he does not know if there are states, but there are certainly states where it is much worse. The report points to the ones you might expect, such as California, Nevada, and Florida, which have horrible vacancy rates that have increased dramatically over the ten-year period that we looked at. There are a few exceptions like North Dakota where the economy is a little bit different, and therefore they don’t have near the same vacancy rates. He just looked at a map for the report, and there was an increase in the number of vacancies in every state, but it was the least in North Dakota, New Mexico, and West Virginia.

California has its share, and one of the things that the legislature of the state did was it had created a fine system where once the property was foreclosed on, the lenders had to maintain it in a certain fashion or would be subject to fines. This has definitely caused some issues, especially when the servicers and the lenders in 2008 and 2009 were busy. They were foreclosing pretty briskly and could not get to the entire inventory. The cities were fining them, and Bruce was uncertain whether everybody had enough staff to do what was necessary. You can go too far sometimes, and there are examples where localities have decided not to go through the penalty route for fear that it made them marketing the property later that much more difficult to do.

Bruce did know of an incident where this was the ratio of the loan to value at this point. There was probably a $300,000 loan on a property in an area of San Bernardino that was worth about $80 grand. The fines on the property were $100,000; so if you were the lender attempting to sell this you would have closing costs and would have to write another check on top of that to clear off the fine. They finally said to the city that it was all theirs. They also said they were not going to get it by deed, but they were going to have to get it by tax default for five years. It was then planned to let the grass be six feet high. This is the kind of thing you’re really talking about as it really is a better situation if everybody cooperates and realizes they are dealing with a very unusually large situation. Maybe by cooperating we can get to where we both want to go.

One of the things that had to surprise the lenders was the size of the losses they are taking. When we’re talking about keeping people in their homes and getting even deed on lieu of foreclosure, Bruce wondered if there could be an offer back to that owner to be able to buy the property that they had lost years prior. However, Matthew did not think this was the case except outside the settlement, it does provide some compensation for those who may have lost the property through a flawed foreclosure process.

Bruce wondered what the biggest concerns are when an area has a large amount of vacancies. Matthew side there are a lot of negatives. It reduces properties in the area generally, which can have an effect on your taxable base and make your tax assessments go down. At the same time, you might have an actual increase in demand for fire and police. These are some of the negative consequences of abandoned properties, and it’s exactly at a time when a city does not need any of those things. These cities are spending tremendous sums of money. A great example is in the city of Detroit, it has 40,000 properties that it owns and is maintaining; and it pays $25 each time to cut the lawn. Every couple of weeks while the grass is growing, the city is paying $1 million to cut lawns. This is an incredible drain. On top of that, over a two-year period the city of Detroit is spending $20 million for demolishing properties all while your tax base is declining. It is putting incredible demands on the city in a scale that we have really not seen since the Great Depression.

One of the things that will come out of this will probably be some change in policies to where we will not get here again. He wondered if the GAO had an opinion on the type of legislation regarding qualified residential mortgage. The GAO has done some work on QRM, although Matthew said he does not know much on this subject. Obviously, there is still a bit that is up in the air in terms of QRM and QM.

Regarding the vacant property problem, the dimensions are incredible with a 51% increase in vacancies over a ten-year period. That puts a lot of demand on cities, on servicers, and on households. Bruce wondered what percentage of these are actually in foreclosure. Matthew said this was something he could not do. However, they did get some information, for example, out of the city of Chicago, where they did some field work to see which of the 18 properties could be identified as being in the foreclosure process. It turned out to be 13,000, so it was a very big percentage. However, there will always be some level of vacancies. These numbers come from Census data, which they have been collecting for a very long time, so you cannot compare over-time the change in the vacancy rate. If you take away the seasonal and migrant workers, there will always be properties that individuals may own and are simply not using. They could be between transactions, whether leasing or buying; so there is only some level of vacancy. What we are seeing here is a tremendous increase over this ten year period.

Bruce felt Matthew did have a fair amount of investor participation and markets. At the time there was certainly some thought that the prices were escalating so fast that he just assumed it not be occupied. Then, perhaps, when the price changed it never got occupied. In the bubble years, there were quite a few vacancies that were simply investors buying a property with the idea of selling it later. It seemed like a good idea at the time; and if you got out before the bubble burst it was a great idea. This was the problem as it did have its moment where it made all the sense in the world, and then it took it back.

In a market like Nevada, you have overbuilding and vacancies as a consequence of this. In places like Cleveland, you have loss of population. This may be driving more of the vacancies, but certainly foreclosures or both. You have complete industries and changes in these areas aforementioned, and you have complete overbuilding in some of the areas that were booming. Some of it is more solvable than other areas, but unfortunately bulldozing very old houses that no longer make economic sense to fix is not a bad idea. Equities are doing this, and some of them getting money to the state might just be using some of the money for that purpose. There were also neighborhood stabilization funds that could be used for demolition. In certain markets this would make sense.

To read more on the report, go to http://www.gao.gov/products/GAO-12-34

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.

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254-TNGRadio – I Survived Real Estate 2011 part 7 12-03-11

Friday, December 2nd, 2011

I Survived Real Estate 2011

I Survived Real Estate 2011


(Full Bio)

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On October 14, 2011, The Norris Group returned with its award-winning event I Survived Real Estate. An expert line-up of industry specialists joined Bruce Norris to discuss current industry regulation, head-scratching legislation, and the opportunities emerging for savvy real estate professionals. 100% of the proceeds support the Orange County Affiliate of Susan G. Komen for the Cure. This event would not have been possible without the generous help of the following platinum partners: ForeclosureRadar and Sean O’Toole, Housing Wire, the San Diego Creative Real Estate Investors Association and President Bill Tan, Investors Workshops with President Shawn Watkins and Angel Bronsgeest, Invest Club for Women and Iris Veneracion and Bobbie Alexander, San Jose Real Estate Investors Association and Geraldine Berry, Real Wealth Networks, Frye Wyles, MVT Productions, and White House Catering. The event video can be found on isurvived2011.com.

Bruce continued the discussion on risk-taking. Debra said you have a lot of uncertainty in the lending community right now waiting for regulation and waiting to understand the government’s role. Doug said he had been surveying 1,000 people a month for 16 months and publishes the report on his website, so he asks what their expectation is on interest rates and prices. In the most recent quarter, Fannie Mae also asked them what they thought about stability when it came to unemployment. 26% of the people who were employed were worried about not being able to stay employed. 9% of the people in the workforce are already unemployed, so you have over one-third of the workforce that is concerned about the base ability to pay anything. When you look at their expectation that interest rates are going to be essentially flat for the next two years, they expect house prices to fall during that time period. They are essentially asking, “Why would you tell us that right now is a good time to go out and borrow $200,000 and buy a house?” There is a lot of discussion about the HARP Program and why people are not considering this.

If you think about the practical aspect of what the household faces, you have to consider that they are asked to bring $4-$6,000 to the table. If they are worried about being unemployed in 6 months, they are essentially saying, “If the payback is $200 a month in savings, and it is a couple years before I receive the money back, what if in 6 months I don’t have a job?” So if you say you understand it, it makes sense, and you now need to roll it into the principle; it doesn’t sound like a good deal because you are asking me to take on extra leverage. So to the customer, at the end of the day there is a question of stable employment that is equally big to the supply of properties they have to work off still. That is as much a macroeconomic issue to Debra Still’s point about the uncertainty as it is about housing because the engine for job growth is small business. When small businesses are surveyed, the number one reason they say they are not hiring people is lack of sales. The number two reason is uncertainty about the tax and regulatory environment. Until macro-policy makers get back to focusing on what makes a good investment market for businesses to go into and hire people, we will most likely have a concentric circle between housing and the aforementioned problem. This means we need to reduce regulation and stop making every tax code have to be renewed every two years. We need to make some permanent decisions on whether you are going to advantage or disadvantage investment so that entrepreneurs have a clear view on whether they will be able to retain the capital gains that they make by investing in their business. These kinds of things have to be put in place to give it a strong investment environment, which will then lead to employment.

Eric Janzen reinforced Doug’s point by saying we have a general problem with under-investment in our economy. This means there is not enough capital going into investment versus consumption. The result of that is we are not planting seed corn in the housing market. This is also true in venture capital as is the case with a precipitous drop-off in early-stage companies, which are the companies that provide most of the jobs and all the growth as well as the exports and all the good things that come with it. It really comes down to what Doug said that we have to make investment decisions very clear and stop disadvantaging investment. Bruce wondered what the likelihood was of this happening in the next year. Eric said this was not a good year for these types of decisions, so the safest bet you can make is to assume nothing is going to happen in the next year. Doug said you would not get a better return on a bet than you would on investing.

Bruce asked what was standing in the way of letting investors participate more fully in taking the inventory down. At times in the past we had a 203k loan program that was available as well as more generous loans available to investors, but this ended in about 1995. Debra Still said the Mortgage Bankers Association supports relooking at the 203k program with some incremental safeguards versus the prior program. She said they would support clearing a lot of the inventory. Bruce said this would take care of one level, but there were people at I Survived Real Estate who would not want to go through the journey of that loan but would buy something as a rental; keep it for a long time, and do it in good size quantity. He wondered if there was any discussion on a deed restriction. Debra said one of the recommendations on the RFI that the MBI made was a 3-5 year whole provision. One of the things we have to consider is moving the extra inventory and look at investors to make it happen.

Bruce wondered about how the person who purchases, for example, 20 houses would fix them up and keep them. A company that buys 1,000 will probably try to make them livable, but this is not as helpful as making it nice. This is why the nothing-down program intrigues Bruce. Right now you have a chance to get people in at a very safe payment that is fixed. Later on when we have to pay more taxes, which we will, we will have room in our budget because that payment will seem like a car payment. However, if you don’t let people in, their rent payment is always going to approximate market. We are not going to give somebody a 30-year fixed rent rate. If you had people buying something at no-down at 4%, eventually you would have price support and would get rid of the inventory. Sean said if we could sell every house tomorrow at full-market value, it would crash the system. Doug reiterated saying the big picture problem is that at the end of the day someone will not be paid. It is just like the Greece situation. The political system is good at doling out benefits, but it is poor at doling out costs. A lot of what is happening is instead of the broad-based principle write-downs, which is something that could fix a lot of problems, we have adverse selection and an unfair distribution of results based on decisions made in households. Things are costly politically in addition to financially. There are some discussions of things which are small costs.

For example, some ideas have been floated about tax forgiveness for investors who would get a 3-year abatement of taxes on the rents that they receive if they were to invest in a property today. What this does is raise the rate of return to them, which in turn raises the bid price which they could be willing to put into the market and reduce losses to the institution which holds the loan. There is still a loss, but it is incremental and not as visible. It is actually moving some of the inventory. Therefore, you will most likely see a lot of program proposals and capital gains release. Debra said some of the recommendations are Fannie and Freddie looking at investor properties and making small incremental improvements to the HARP Program, which would include investors owning more than the limit of ten properties. This would also allow for higher LTVs or other loans after 2009. Principle write-downs are very challenging for mortgage lenders. You have to ask whether the tax payer is going to pay, the bank will pay, or will the investor pay. As Doug said, somebody is going to pay the bill.

Bruce wondered about the idea of refinancing owner-occupant or investor over encumbered mortgage. He wondered why we cannot simply refinance them at the current rate, whatever the LTV is. You have the loan anyway, so why can’t you just make it make sense so that people will be able to write out the loan. He wondered what the point was of having a 6% mortgage that is not getting paid when you could have a 3.5% mortgage that would. Debra said this is certainly one of the things on the list to discuss. One of the things we also need to consider is if you think about the capacity of the industry and the fact that the large depositories have a good portion of the properties, it would take the whole industry to participate to help move this big “elephant” through the system. Most lenders who do not already own the mortgage are going to want rep and warrant relief. The question is why a lender who does not already own a loan on an underwater property would make a deal unless they had some kind of rep and warrant relief. This is a big deal for part of the discussion.

Bruce also wondered about the idea of principle-only payments to get people back to an even level. Debra said if the loan is in a security, then the servicer has to advance principle and interest to the investor. The principle-only is still going to create a negative gap for whoever the servicer is because they are advancing to the investor principle and interest each month. Bruce wondered if the investor can make a new agreement, say he is going to lose a lot of money if the money does not get paid. Doug said he does not think there is anything that prevents two private parties who have a contract from reworking the contract. Sean wondered if it could trigger some CDO risk. You have to talk about the derivative risk and potentially magnifying losses. This was a problem years ago, and people have still not tried to go in and figure out how big the derivative risk is and where it lies. Debra said you have to wonder what you would do with mortgage liquidity if investors have to take the principle write-downs. The question is who is going to invest in mortgage-backed securities in the future, and what do you do to the future liquidity of the industry with some of the dramatic actions. Eric said if you look at the market data, the market has been continuing to decline. It spiked from about $300 billion to $1.2 billion, but the latest numbers show it’s back down to about $400 billion. You can exactly identify the point at which the market started to fall in the financial crisis. That market is probably not coming back for a long time until there is market clearing. There is also a hidden additional cost in forcing homeowners to pay mortgages against inflated home prices, which is that there is a string of payments that is going uneconomically to a home price that really should not have existed in the first place. Personal consumption expenditures are getting absorbed for a non-productive, non-economic purpose.

Bruce asked each one of the panelists if we get together a year from now, what is the one thing they would like to have accomplished for their industry. Debra said she would like for all mortgage lenders to work collaboratively with each other. If you think about the industry, there are large depositories, small community banks, and independent mortgage bankers. They need to work collaboratively with one voice, decide on a way forward, and not be fighting each other. In addition, they need to work collaboratively with regulators and the policy makers to make sure that we don’t overcorrect and make sure the regulators understand the unintended consequences of the massive amount of regulation. They should also make sure they end up in the right place one year from now with the whole regulatory environment.

Doug Duncan agreed with Debra and said a great deal of it is overkill based on evidence that the market is simply adjusting back to what is a sustainable homeownership rate. Underwriting standards have moved back to more traditional levels. If the homeownership rate is going to be lower, then by definition the investor and rental share has to be higher. This is why there is finally a turn to focus on ways that this can be advantaged.

From the appraisal side, Sara Stephens believes one of the most important things going forward and what she would like to see happen coming into 2012 is a real effort on the part of lenders and the people who regulate the appraisal business to take a look at the difference between an appraiser and a qualified appraiser. The difference is huge. She also wants the lenders and regulators to take a look at the expertise and the education that one has as compared to a person who is just simply earning a fee. Working with the appraisal institute and other professional organizations would certainly be important. The Appraisal Institute would like to work with the lending community, the brokers, and everyone who is involved in the mortgage lending process to make an effort to use the most qualified people who can give the most reliable conclusions.

Sean O’Toole said he would like to change the national discussion on what a home is worth. The sales comparable approach to appraisal versus income or cost basis is ridiculous. It certainly was not the cause of the problem, but it didn’t help keep the problem from getting out of control. We also have a poor understanding nationally of what a home or a piece of residential real estate is really worth. Bruce said if you think about the appraisal process, when Bruce was purchasing in Grand Junction Colorado in 1985, there was no taker in sight. The only comp was his comp. If you had three of these, this was the appraisal number. In Moreno Valley, 2-bedroom houses that were going for $300 had company, and the appraiser had all the evidence that this was the right decision. This is what Sean was talking about reconsidering the definition of market value to have some other factor that doesn’t let things get out of control, whether up or down. This would give us to have stability that in turn would allow lending to be a lot saner and change the whole game.

Gary Thomas said he would like to see clarity from the members of his organization on what they’re doing. Are we still going to have mortgage interest deductions? We need to consider all the things that are really holding everybody back because they really do not know what the future is. Buyers don’t know whether you’re going to still be able to write off the interest on a loan. They don’t know whether they are going to have to put 20% down, 10%, 0r 5%. There are so many unknowns out there that everybody feels like they are in quicksand. Having some stability from a regulatory standpoint would go a long ways towards making things better for the industry.

Eric Janszen said within the context of the American political system, the aftermath of bubbles is always predictable. It is the collective punishment of the innocent. We had Sarbanes Oxley after the dot come crash, which is the Accounts Full Employment Act. This time we have overregulation across the board. It needs to be counter cyclical, so at this point we need to as quickly as possible regain a clear, consistent, and unencumbered relationship between buyer and seller.

Bruce Norris ended by saying he wishes that everyone that we elected in any position of public office would set aside whether they are Democrat or Republican and become American for one year so we can get a lot of things resolved.

This is the final segment for I Survived Real Estate. Thank you to everyone who attended and have tuned in to our radio broadcast. The Norris Group would like to thank their gold sponsors for the event: Adrenaline Athletics, Coldwell Banker Pioneer Real Estate, Conaway and Conaway, Delmae Properties, Elite Auctions, Inland Empire Investors Forum, Inland Valley Association of Realtors, Keller Williams of Corona, Keystone CPA, Kucan & Clark Partners, LLC, Las Brisas Escrow, Leivas Associates, Mike Cantu, Northern California Real Estate Investors Association, Northern San Diego Real Estate Investors Association, Pacific Sunrise Mortgage, Personal Real Estate Magazine, Raven Paul and Company, Realty 411 Magazine, Rick and LeaAnne Rossiter, Southwest Riverside County Board of Realtors, Starz Photography, uDirect IRA, Wilson Investment Properties, Tony Alvarez, Tri-Emerald Financial Group, and Westin South Coast Plaza. Visit isurvived2011.com for more details.

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.

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The Norris Group Real Estate News Roundup 8/10/10

Tuesday, August 10th, 2010

Today’s News Synopsis:

The new FHA short refinancing program will provide additional refinancing options to underwater homeowners starting Sept. 7. According to Integrated Asset Services, nationwide home prices increased 1.1% in the second quarter. Zillow reports California’s current rate on 30-year mortgages is 4.34%. CoreLogic estimates that short sales in Arizona, California, Florida and Texas will cost lenders $310m in unnecessary losses in 2010.

In The News:

Sign on San Diego - “Q&A: Pulte Homes exec on the San Diego housing market” (8-10-10)

“Q:Why is your company looking to build in the San Diego market? A: We are trying to be very strategic in our land acquisitions because there is a limited availability of finished lots. We see the economy starting to recover here with companies beginning to invest, especially in the high-tech and biotech markets. Engineers are relocating here. It tells us the demand is there.”

Housing Wire – “FDIC Launches Unit to Liquidate Banks under Dodd-Frank” (8-10-10)

“The CFI will review bank holding companies (BHCs) with more than $100bn of assets as well as non-bank financial companies designated as systemically important by the new Financial Stability Oversight Council. The CFI unit will also carry out the FDIC’s new authority to implement orderly liquidations of failed BHCs and non-bank financial firms.”

Housing Wire – “Home Prices Nationwide Increase 1.1%: IAS360″ (8-10-10)

“Integrated Asset Services, LLC (IAS), a Denver-based collateral valuation and default management service firm, released its latest IAS360 House Price Index (HPI) Tuesday reporting that collectively, nationwide home prices increased 1.1% from the first quarter of 2010 to the second. This is down 0.9% from the same period last year and down 16.7% from the survey’s all-time HPI high in Q407.”

Housing Wire – “FHA Short Refinancing Program Likely to Have Low Impact on Housing: KBW” (8-10-10)

“As HousingWire reported last week, the new program will provide additional refinancing options to underwater homeowners starting Sept. 7. To be eligible for the new loan, the homeowner must be underwater but still current on the mortgage. A credit score of 500 or better is required, and once refinanced and insured by the FHA. The new refinanced loan must have a loan-to-value ratio of no more than 97.75%. The borrower’s existing first-lien holder must agree to write at least 10% of the unpaid principal balance, and it must bring the borrower’s combined loan-to-value ratio (LTV) on that first mortgage to no more than 115%. The existing refinanced loan cannot be an FHA-insured one.”

Housing Wire – “Zillow: Weekly Rate on 30-Year Fixed Rate Mortgage Averages 4.3%” (8-10-10)

“The 30-year fixed-mortgage rate (FRM) slightly increased week-to-week nationally to an average of 4.3%, according to the Zillow Mortgage Marketplace weekly update. This is up 0.02% from the record low set last week. Regionally 30-year rates are varying, but the majority of states saw an escalation. California’s current rate is 4.34%, up from 4.33% last week, as is New Jersey’s at 4.28%, up from 4.27%.”

Housing Wire – “DebtX June CRE Loan Value Up to 77.4%” (8-10-10)

“The value of commercial real estate (CRE) loans that collateralize commercial mortgage-backed securities (CMBS) priced by DebtX rose to 77.4% at the end of June from 76.6% in May, the loan-sale adviser said in a press release Tuesday.”

Housing Wire – “Short Sales Cost Lenders $310m More Than Necessary, CoreLogic Study Finds” (8-10-10)

“The study projects that more than half of short sales happen in Arizona, California, Florida and Texas and will cost lenders an estimated $310m in unnecessary losses during all of 2010. These losses average $41,500 per short sale. Potential fraud, such as flipping or offer misrepresentation, likely happens in one in every 53 short sale transactions. CoreLogic examined a representative data sample of single family residence (SFR) short sale transactions from the past two years, representing 98% of real estate transactions and 85% of mortgage financing details, the firm said.”

Housing Wire – “Risk of House Price Decline Slightly Shrinks in PMI Index” (8-10-10)

“The Q310 market risk index, which uses Q110 data, dropped to 51.9 from 53.8. The score indicates the probability (from zero to 100) that the price of homes will on average be lower after two years. And while the risk of declines is less, economic analysts say house prices will likely continue to drop.”

Bloomberg - “`Buy and Bail’ Homeowners Get Past Loan Restrictions” (8-10-10)

“Real estate professionals call it ‘buy and bail,’ acquiring a new house before the buyer’s credit rating is ruined by walking away from the old one because it’s ‘underwater,’ or worth less than the mortgage. It’s an attempt to escape payments on a home whose value may never recover while securing a new property, often at a lower price with a more affordable loan. The practice, which constitutes fraud if borrowers lie on loan applications, is continuing even after Fannie Mae and Freddie Mac, the biggest U.S. mortgage-finance companies, beefed up standards to prevent it, according to brokers such as Collier and Meg Burns, senior associate director for congressional affairs and communications at the Federal Housing Finance Agency.”

Bloomberg - “Investors Doubt Mortgage-Bond Revival Until 2012, Moody’s Analysts Say” (8-10-10)

“Investors doubt the market for home- loan securities without government backing will revive until 2012, according to Moody’s Investors Service. About 74 percent of attendees surveyed for a June conference by the New York-based rating company responded that issuance, which essentially halted in 2007, will make a substantial ‘comeback’ no sooner than 2012, Moody’s analysts Navneet Agarwal and Brian Harris wrote in an Aug. 6 report.”

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.

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The Norris Group Real Estate News Roundup 4/5/10

Monday, April 5th, 2010

Today’s News Synopsis:

Pending home sales increased by 8.2 percent from January to February. A new rule will require all new lender applicants for FHA programs to possess a minimum net worth of $1 million. According to LPS, the average loan in foreclosure is 401 days delinquent.  A proposed bill, House Resolution 4935, will prohibit mortgage servicers from holding another mortgage on a property that also secures the serviced mortgage.

In The News:

NAR - “Pending Home Sales Show Healthy Gain, Hint at Spring Surge” (4-5-10)

“The Pending Home Sales Index,* a forward-looking indicator based on contracts signed in February, rose 8.2 percent to 97.6 from a downwardly revised 90.2 in January, and remains 17.3 percent above February 2009 when it was 83.2. The data reflects contracts and not closings, which usually occur with a lag time of one or two months.”

Housing Wire – “HUD Foreclosure Prevention Funds Taking Longer to Reach Housing Markets” (4-5-10)

“State and local governments drew up plans to spend 37.9% of the $3.92bn granted through the Neighborhood Stabilization Program first-round of awards (NSP1), according to data from the US Department of Housing and Development (HUD), sparking assessment of some programs struggling to get the funds in action.”

Housing Wire – “Freddie to Allow Mezzanine Debt on Multifamily Mortgage Refinancings” (4-5-10)

“In an attempt to bridge the gap in capital needed to refinance debt on overleveraged multifamily properties, Freddie Mac (FRE: 1.30 +3.17%) announced it will accept mezzanine debt on the qualifying senior multifamily mortgages it purchases. Under the terms of the new plan, Freddie Mac seller/servicers of multifamily loans will originate a first lien mortgage with a loan to value (LTV) of up to 75%, then work with the mezzanine lender to provide additional leverage, up to another 15% for their borrower, allowing the property owner to borrow up to 90% of a property’s value. The program requires the property owner hold a 10% cash equity position in the property.”

Housing Wire – “FHA Raises Mortgage Lender Capital, Liability Requirements” (4-5-10)

“The final rule, to be published in the next few days, will require all new lender applicants for FHA programs to possess a minimum net worth of $1m, four times the $250,000 required since 1993. FHA said in a statement today the final rule will also strengthen lender approval criteria, and make lenders liable for the oversight of mortgage brokers.”

Housing Wire - “For Consumers, Time to Shop (Until the Mortgage Drops)” (4-5-10)

“In fact, as I’ve shown in previous columns, most Americans behind on their mortgage have gone more than a year without making any payments. The average age of a loan in foreclosure is now 410 days delinquent, after all, according to LPS; and that’s just the average. Many delinquent borrowers are able to stay in their homes for even longer than that.”

Housing Wire – “House Bill Would Bar Mortgage Servicers from Holding Additional Mortgages” (4-5-10)

“House Resolution (HR) 4953, the Mortgage Servicing Conflict of Interest Elimination Act, would prohibit mortgage servicers from holding another mortgage on a property that also secures the serviced mortgage, Miller and Ellison said in a joint statement last week.”

Bloomberg - “Small Commercial Mortgages Present ‘Under-the-Radar’ Threat” (4-5-10)

“Loans of under $10 million account for $167.8 billion of the $651 billion commercial mortgage-backed securities market, analysts Gail G. Lee and Serif Ustun wrote in an April 2 report. About 5.95 percent of those loans are now at least 60 days behind on payment, the analysts said. The problems in this area are likely to increase and may not be getting adequate attention as loan servicers focus on high-profile properties.”

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