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The Norris Group Real Estate News Roundup 2/6/12

Monday, February 6th, 2012

Today’s News Synopsis:

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

In The News:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Hard Money Loan Closed

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

California Real Estate Investor Events:

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

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

For more information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 170 podcasts in our free investor radio archive.

Tags: Bank of America Plaza, Barney Frank, BentleyForbes, bruce norris, Capital Economics, fannie mae, FDIC, FHFA, Financial Services Committee, First American Improving Markets Index, foreclosure, freddie mac, mortgage bankers association, National Association of Home Builders, reo, the norris group, U.S. Commerce Department
Posted in News | No Comments »

263-TNG Radio – Mike Novak-Smith and Ted Boeker 2-04-12

Friday, February 3rd, 2012

Mike Novak-Smith

REO agent

RE/Max

(Full Bio)

Ted Boeker

Owner and Broker

RE/Max

(Full Bio)

This week Bruce Norris is joined by Mike Novak-Smith and Ted Boeker. Mike Novak-Smith is not only one of the largest REO agents in the Inland Empire, but the nation. Mike is in the top 1% of all real estate agents nationwide and is experienced in REO, short sales, bankruptcies, asset management, and negotiating. Mike specializes in REOs in Riverside, Moreno Valley, San Bernardino, Perris, Rialto, Colton, and Corona. Ted Boeker is the owner of the company that Mike is at and has brokered for RE/Max Results in Moreno Valley. Having started the company in 1989, Ted has vast experience in real estate and has been able to train and lead 35 of Southern California’s highest producing real estate brokers and agents to close deals quickly and efficiently for a variety of clients in commercial, residential, multifamily, and office real estate. Nationwide Home Loans Inc. and RE/Max Results escrow division are associated companies. Before that, Ted practiced law.

Ted opened a business in 1989, which was a peak year. Things changed radically after this, and Bruce wondered if this was something that as a part of his business model he saw changing very quickly or if it surprised him. Ted said he would love to say he foresaw a lot of things, but he really did not see much coming. He had come out of commercial real estate, which died after the 1986 Tax Reform Act; and he said there was nothing in commercial to do so he should look at residential. It looked attractive at the time, but he never dreamed they would see the ups and downs that they have. Ted said it was probably good to start when he did because it did steal him through some of the early tough times. The flexibility of a business model all of a sudden became absolute. You could not do farming and be surviving in the ‘90s, and you could not do it after 2006 either.

Bruce went to a meeting at Ted’s company where he talked, and remembered prior to the meeting when they were talking about volume of sales. They were talking about the number of closings that Mike had and the other people who were ahead. Bruce also envisioned a meeting he was not at in 2006 where everybody is doing pretty well, and he wondered how you tell somebody that is doing well that their model is about to radically change and they have to do it before it actually happens. Ted said it is not easy as real estate agents are a wide variety of people, some well educated and others not so much. The biggest example is 3 years ago Ted started harping on short sales, being able to hopefully foresee what was coming. However, agents two years ago said Ted was crazy and they were not going to do what he was talking about. Ted said today about 40% of his sales are short sales. The agents who refused it are probably gone, and the ones who embraced it are doing relatively well to the marketplace. There are not a lot of easy commission checks anywhere.

Mike has been involved in the REO listing side for 21 years. The first REO ever listed was in January 1991. He worked at a Century 21 Office where they could not give away the REO. It basically paid 5% commission instead of 6%. He made a referral, but he was number 9 one the list; so when they finally got to him he knew the economy was declining. The Persian Gulf War had started, and things were tough. He thought if he could do the deal at 2% he could still make the house and car payments and could eat another month. This was why he carried out the deal. Anybody that declined the deal at the time is no longer in the business. Prior to doing the REOs, Mike’s business model was to show up at a Century 21 office and try to live off the floor time and advertise, which he did well. People would just walk in and say they wanted to buy or sell a house and you wrote up the deal. It was easy. Mike also started in 1989 at the very peak year and then quickly transitioned into unknown territory. The 90s was not replicated and it was not the normal downturn. In the ‘80s we had the radical interest rate change, but we did not have a price decline because we were able to borrow the cheap financing and move it forward to other buyers. In the 90s we took a 5% gradual decline every year for a while, and this was news to everyone who owned California real estate.

Bruce wondered how the 2006-2011 downturns differed from what Ted experienced in the 90s as a business owner. Ted said he did not remember the 90s as well because they never really got up to speed. It took them ten years to get up to a critical mass of agents and holding on through the tough times. The early 2000s were good, and then the falloff was a real shock. When they saw the change in 2008, it was the big change for them. In 2008 and 2009 they had a lot of REOs, and then nothing for two years. This is the biggest challenge he has ever had. They have really been able to tighten up and cut out expenses, but that is the key.

As far as the cycles went, Mike said in the 90s he could predict better what was going to happen. He could see the start and the end game. Now it just seems like it is never going to end. It was easier back then to predict your business than compared to now. You get a lot of curve balls today that you did not get then. As far as quantity of listings in this current cycle, Mike said the peak year for him and for everybody in general was 2008. We did not have the government intrusion that we had in the last 3 years, and this is a big frustration.

Bruce wondered what the following years as far as percentages went after 2008 if that year was a 100% year. Mike said in 2008 it went down about 20% for him and 60% in ’10. In ’11, it picked up a little bit but still went down about 50%. Bruce also wondered if anybody on the lender side is saying to either Mike or Ted that they will not be releasing so many or if they are always telling them to step up. What he heard for a long time was to maintain the staff and not cut anybody back, and this was kind of a mistake. He carried too much overhead through a lot of 2010, and he finally decided he was going to have to cut it back. He is okay with not making any money sometimes, but he hates having to feed it. Now he has the right amount of staff, and if they pay attention and operate well, they can make money. When you talk to asset management, the general opinion of people is they do not want to sit there and say they are not going to have a job. They believe it is going to pick up and they are going to have REOs to sell so they will have a job. He believes this is what a lot of it comes down to overall, and he does not believe anybody can predict what is going to happen. They are probably not at the policy decision level. With someone in Mike’s position, one of the nation’s largest, he would probably feel that he has access to somebody inside actually telling him the real scoop. However, this does not happen. Mike said he does know some people way up the food chain from various REO organizations, and even they cannot tell you what is going to happen.

Mike’s REO business peaked in 2008 when we had about a 3.4% delinquency rate, and we went up to 11.2%. Mike’s peak of foreclosures resulted from a 3.2% delinquency, and then we tripled. The amount of REOs he probably should have been handling should have been some gigantic percentage above the peak and its decline. The shadow inventory term is real, but it is not where people think it is. Mike’s opinion of what shadow inventory is the process that is not being finished. There are a lot of defaults going on, but the timeframe between when somebody misses the first payment to the time they foreclose is probably in many cases 18 months to 2 years. He asks a lot of people how long since they made their payment and this is the answer he usually gets. He rarely gets anybody less than a year; but he thinks the whole process has just slowed down, and this is your shadow inventory. It is not like the banks are sitting on millions of houses they own; they just don’t finish the foreclosure. Bruce wondered if there is a valid reason why they don’t do this, and Mike said part of the reason is if they just foreclosed every which way they could, they would not have the capability to handle the property. He hears of agents telling him they are in a really bad situation and don’t even want to foreclose because they do not want the house back. They don’t want to be responsible for the code liens and the taxes.

Bruce said what is interesting to him is somebody always tells him that the lenders are too smart in regards to carrying out foreclosures, but in 2008 they did exactly what they should not have done. They foreclosed on properties aggressively, and we ended up with something like 17 months of inventory and a price decline of about 3 or 4% a month. Once you are there on that low level of price and everybody is upside down; it is much easier to make a decision to walk when you have negative 50% equity. When the civil Code 1169 came into effect in California, you could be fined $1,000 a day if you are the lender owning the property or a trustee sale buyer owning a property. They have someone come out and visit your place, and you have a week or two to fix whatever they are going to see.

When Mike resells REOs, Bruce wondered if there was a big problem with liens that had been placed on the property. Mike said they have a lot of problems with liens. He has a full-time employee whose job is dealing with liens, code violations, and HOA problems. Part of the problem with a lot of the banks is they do not have the internal staff anymore to handle these problems. It used to be they had attorneys on staff that would fix a lot of the code violations and a lot of the liens, and now a lot of that is not done. We do not figure it out until we start marketing the property and they come up. He said he fronts a lot of money to pay code violations and liens because typically the agents expect you to pay them and then be reimbursed. They are on it full-time, checking properties every day as he does not want any code violations and does not want to front the money for it. It is a lot bigger problem than it once was.

Bruce wondered what percentages of his listings were occupied by somebody at the end of the foreclosure process, which Mike said was about 75%. The attitude of the person behind the door is usually bewilderment as they wonder how something like this could happen, and most of these people are tenants of the former borrower. They did not know they were about to be asked to go.

On the topic of Cash for Keys, once this type of thing happens it becomes a street lore and urban legend. You can go ahead and ask for cash for keys, plus with some of the clients they are told how much cash for keys is going to be. A large problem Mike has is a lot of clients are very generous with cash for keys and some are not. Many of them ask why they only receive $1500 when their friend received $8,000. Bruce said if the Learning Annex was still in business, he could be almost certain there was a class held at night. The Cash for Keys is a big deal, but the offers vary a lot, and this can cause some problems. Bruce wondered if it has to do with the size of the loan or just the motivation of the lender, to which Mike said it is the latter. The more well known you are today as a lender, the more you want to pay.

Bruce wondered how big of a problem MERS robo-signing presented to California lenders. Mike said he has not seen much of it where it was a problem. He does believe with a lot of their deals a lot of the loans are in pools and portfolios, and sometimes they get slowed down because someone is going to check the whole portfolio, whether most of the loans are in Chicago or Florida. Sometimes this will slow them down. Something that was originally going to close, for example, in January will not close until March. However, the bigger issue is they are in a mix of properties.

On the myth of bulk sales and bulk REO listings, Bruce said he has only fallen victim to this one time as he went around an looked at 100 houses in two days to get his piece of the dream. However, there have been people who spent a year and ruined themselves by following something that seemed imminent that they were going to cash in on 100 houses. Mike does deal with a lot of REOs, and Bruce wondered if he has dealt with successful bulk deals in California only. He said Fannie Mae and several others do pool sales and advertise for it, but it is usually beyond the capability of the small investors. It does happen, but where he gets the calls is from some person who wants to buy ten houses in bulk, and the problem with that is with many of the lenders there are ten different investors on the deals. It is not the same real seller when you get down to the bottom line. Bruce wondered if he feels there are sufficient properties going that route that it affects the volume that they see, but Mike said this was not the case.

Another topic is bulk note sales, where you have big companies buy thousands of loans at a shot. Bruce wondered if this is significant in its impact in the REO listings. Mike said he is not sure he has seen them, even if it is possible they are going on. You do not see them in California has much as you see them in other places. In Orange County, there is a company in Irvine that buys very large pools, but the majority of the loans are not in California yet. Even if the purchaser received 60% off of the face, it would be hard to say that there would be a lot of room.

Bruce was a moderator of a panel on bulk buying that HousingWire.com had a couple years ago. He was very fascinated with the concept and thought it could really happen to somebody. Of the three, one of the companies that was on the panel was capable of buying 1,000 homes in a very short notice was Williams and Williams Auction Company. Bruce knew Tommy Williams personally, so he talked to him, the person he thought would really know. Having auctioneers all over the country, their infrastructure is such that they literally could get a 1,000 property listing within two or three days, legitimately see every one of them, and come to a number. They had not bought a property in a year, so they had the capacity, but there was not any inventory that was going that route in that kind of volume. Bruce just heard of another scenario yesterday about a bulk sale from one particular lender, so it is such a great theory. However, Ted said somebody actually has to go out and look at the properties to make sure they are even there. Ted said they have had REOs they have gone out to look at that are not even there and had burned down about a year earlier.

It seems one of the things RE/Max would really have a grasp on is how much infrastructure there is as far as capacity to move inventory already in place. They do not have to invent a thing. Bruce wondered how many more listings they could have, if they could have a multiple of 300-400% alone. This is replicated everywhere. Someone could drop a lot of properties into the United States REOs, and it would get absorbed by current staff. Another option is trained staff is added, and this would make more sense more than selling thousands of homes to a hedge fund. There were couple of things in a report Bruce read, and one of the things was doing a big bulk deal. A couple days later he saw a headline for a $650 million pool by one of the well known big companies that they were going to buy REOs and retain them as rentals. This sounds significant until you look at the numbers of how much debt there is in excess. You basically have a $3 trillion problem when you start throwing $50 million at it and see how it is such an insignificant thing. In short of saying they are going to forgive everybody, whoever owes more than their house is worth, we are probably in for a long haul. There is really no end in sight and no end game. Neither is there a change in the aggression of lenders saying they should cut to the chase and take all the REOs back. If a lot of the houses were sold to hedge funds, they would be a lot more aggressive because they would not care about their name being drug through the mud. They do not have a public name or a retail presence, and this is most likely part of the reason why things are slow in some cases.

One of the suggestions in the white report was getting a deed in lieu of foreclosure and giving the people right to buy the property back some years later. Bruce wondered what their thoughts were on the same owner returning as owner at a later time. However, Ted said this is silly. Once a person has given up on the property as we have seen and stopped making payments a year or two earlier, when you go to that person see them start making payments again, that person just laughs at the agents in charge. Bruce does not know how you rationalize this with the person next door making payments on the same loan. You start asking yourself if you can get the deal too. Mike and Ted said one of their clients offered the ability for the occupants to lease the property for a year. Mike and Ted said they have started a few of these, but they have yet to see anybody finish before they failed and ended up being evicted. For them, not paying is a good deal and they want it to continue.

Bruce read another news article where they were talking to a family that had not made a payment in a couple years, and it was a very positive experience for them as far as what it did for them financially. If you think about it, they have an expectation that this is okay, and there is an expectation that it is almost sad when it ends. Of the people who have not made a payment in two years, the ones who have saved all the payments is 0%. There is a statistic that 4,100,000 people that are 90 days late or beyond, including REOs, there is only a 1% chance that they will willingly write a check to make it current. 99% of the pile is going to go the route of a lowered opening bid at a trustee sale, a short sale, or an REO.

In RE/Max’s business model, the short sales have really aggressively gained momentum. Bruce wondered if they are ahead of REOs as far as closings. However, Ted and Mike believe they are even. Last year, roughly, they had about 20% normal sales and about evenly divided between short sales and REOs. Bruce has looked at charts for years, and he said he has not come up with a real meaning with what was just said regarding REOs and short sales until recently. When you close 100 sales, only 20 buyers emerge. This really hit Bruce that in the Inland Empire 80% of the closings are either going to be vacant or bought by someone new migrating here or someone in credit damage or investor for cash. This is not a lot of people. Unfortunately, it is many of the people who walked from their homes three years ago and now have repaired their credit and are able to buy again. There are very few of those, but it is shocking in today’s world that the person who did the wrong thing three years ago seems to be saving the system. Had we foreclosed on somebody instead of waiting, the people who are behind by 2 ½ years have not had one day of new credit.

Tune in next week as Bruce continues his interview with Mike Novak-Smith and Ted Boeker. For more information on RE/Max, visit www.remax-results-ca.com/.

Tags: asset management, bruce norris, bulk note sales, bulk sales, cash for keys, code liens, delinquency, foreclosure, HOA, MERS, Mike Novake Smith, Norris Group real esate raidio show, RE/Max Results, reo, robo-signing, shadow inventory, short sales, Tax Reform Act, Ted Boeker, Tommy Williams
Posted in News, Radio | No Comments »

262-TNGRadio – Robert Kleinhenz 1-28-12

Friday, January 27th, 2012

Robert Kleinhenz

Chief Economist for LAEDC

(Full Bio)

This week Bruce Norris is joined once again by Robert Kleinhenz. Robert is the Chief Economist of the Kyser Center for Economic Research, which conducts research on regional, state, and national economies. Dr. Kleinhenz has a Bachelor’s Degree from the University of Michigan, a Masters and Doctorate from USC, all in economics. Prior to joining LAEDC, he served as Deputy Chief Economist at the California Association of Realtors and taught economics for over 15 years, most recently at California State University Fullerton.

Bruce said he recently poked around at a refi and quoted a rate that he could barely understand. He said it was something like 3 7/8 for a 30-year mortgage. Bruce said going back 30 years when he became an investor and had refinanced his house at the time to get the money; it was perfect timing back in 1981 when he paid 17 ½ % fixed. Robert said there may have been a couple recessions in between, but what a difference two decades makes. Bruce wonders if when you are 22 and just starting out if you are thinking that it is in any way normal where you are only accustomed to seeing numbers that start with a 5 or a 4, and he wonders how different the future will be with the particular rate going forward. In this case you are comparing what happened back in the early 1980s to the interest rate situation today.

Robert said if he were to place a bet on what was likely to be more normal in the foreseeable future, he would look at the interest rate climate of today and not of the early 1980s. Back in that time we had high rates of inflation, and we had an economy that was in transition and stagnating in several sectors for several reasons. The main thing was we had a lot of inflation, partly driven by high oil prices. This in turn led to high interest rates and at the time the Paul Volcker of the Federal Reserve Bank of New York led efforts to bring the reign of inflation down. One of the ways it did that was by increasing rates by making it very difficult to borrow. This was a much different climate, and hopefully economists have learned a little bit about keeping inflation in check. Hopefully policymakers have listened to the economists who talk about it, and we are most likely going to stay in an environment over the next few years that either has low or moderate inflation and not double-digit inflation.

Bruce read a quote saying, “Experience is something that lets you recognize a mistake when you make it again.” What is interesting about not being concerned about the people that are in charge of policies is their opinion of how benign the housing problem was going to be. This bothered Bruce; and Robert reiterated saying policymakers are humans like us and sometimes don’t get the information right and sometimes still make poor judgments. We definitely have to be concerned about the fact that mistakes are made on the policy side just as mistakes were made on the business side of things. This gave rise to the situation we face today.

Bruce wondered if Robert was concerned about deflation if not inflation. He said it is not that he is not concerned about inflation, but he does not expect to see high levels of inflation over the foreseeable future, and that is predicated on policymakers and their ability to make the right decisions. It hinges on the ability of the Congress to come up with a credible plan to take care of these federal deficits over the long term. Somebody has to be interested in a bond that the risk-level seems appropriate with the return. What is interesting is the one-year T-Bill in Greece is paying 402% as of yesterday, which would probably give you an idea that you should not invest in it as you are not going to get your principle back.

The likelihood that the United States would find itself in the same position that Greece finds itself in is very low, so we should not be too alarmed. There is a very real possibility that we may face a debt situation, but there are several moving parts here. Fortunately, the ace in the hole that we have here in the United States is the fact that the U.S. dollar is the reserve currency, and our Treasuries tend to be the flight to safety for so many investors around the globe when things go awry elsewhere. Bruce did not know how profound an effect this would have because this is exactly what happened when you talk about a ten-year T-Bill. Most of us would have anticipated seeing something under 4% was pretty astonishing, and then it was under 2%. If someone has not already refinanced their house, you definitely need to be sitting up and taking a look at rates today because those rates are fundamentally driven by what is happening with the yield on the ten-year treasury, which nobody would have expected would fall below 3 or 4%, and here it has consistently been under 2% for quite some time. All of this is courtesy of something that is really outside of our borders. Part of this also stems from the Fed’s commitment to maintain low rates over the foreseeable future through the middle of 2013. There was this policy move and effort to insure that long rates stay low partly to help the housing market and to get investors to pay attention to the stock market where it would theoretically be better returns. There are a number of angles behind the Fed’s move, but this has served to also keep rates down.

To insure that something like what was aforementioned is in the Fed’s control, they would have a limited ability to do it. If the market moves in a big way, they may not be able to buck that trend. However, it does accomplish that end by buying or selling securities in such a way as to maintain rates at the levels that they are targeting at this time. We have a 0-fit fund rate and a mortgage rate under 4%. If we were to have an issue where the Euro zone went into a tough recession, Bruce wondered if there would be a domino effect here that could possibly kick us into a another recession. Robert said the cards we are looking at in 2012 include the situation happening in Europe. If their economy is weakened or there is some concern that we have already seen of economies tipping into recession; then that could jeopardize the situation here in the United States. We’re out of the recession and growing and now in the expansionary phase coming out of the recession, so that could tamper the growth or lead to a stall out in the economy here in the United States. This is economic linkage between the European economies and the U.S. economy.

The other linkage is the financial linkage. If the sovereign debt problem in Europe, not just in Greece but also Italy and possibly France, give rise to problems with banks not unlike what we had a few years ago at the height of the financial crisis, then that could stymie activity in the financial world once again. As a result of that, it could have a feedback effect on the real economy and either slow the growth pattern of the U.S. economy or tip it into recession. You have two things coming out of Europe that have the potential to either slow down or derail our current expansion. When the United States had defaults on the mortgages, mortgage-backed securities, and the CDOs, it had quite a direct effect on the people that invested in the banks.

Bruce wondered if the United States has as much of the investment there in Europe, or is it mostly contained inside of their own banking system. Robert answered that it was incestuous in a way in that there are flows capital that go across international boundaries through commercial banks; so if there is a problem that shows up over there, it may also show up on the balance sheets of banks over here. It is through this particular conduit or channel that we would see problems occur. Robert said he would be very surprised if we have something as calamitous as what we saw in 2008. To look at this situation in the financial sector, we have to recognize that so many financial decisions rest on some confidence of what is going to be occurring in the future. If you lack confidence in the future or just don’t know, then you are unlikely to make a decision or make a decision to do nothing. The problem with financial crises that we went through in 2008 is that they have long-lasting effects and wreak havoc on consumer and business confidence. They then leave businesses and households to sit on their hands until they get a sense that the coast is clear. That is one of the reasons this recession was so deep and continues to keep going as long as it has been. There is a real concern about the outlook, and it is reflected in consumer confidence and business confidence that has just not really shown marked improvement over the last couple years.

Bruce wondered if there is real concern about the oil world and if there is fear about aggressive actions such as the closing of the straight. Robert said if we take a step back to 2011 for a moment and think about all of the wild cards that played out in 2011, there are a lot and a number are still playable in 2012. There was earlier discussion on the European debt situation, which is a wild card that has been played several times over the past few years. The Greek debt crisis seems to be the one that is played most frequently. If you take a look at the Arab Spring, that gave rise to disruptions in the flow of oil and gave rise to higher oil prices. There is always the chance that something in the world of energy that triggers an increase in the price of energy, oil or otherwise, there is always the chance that this could slow down economic activity if not derail a growing economy. The other wild card that we have to contend with in 2012 that we also dealt with in 2011 was political. This year the big political wild card is what will happen in November with the election. It does appear as though we are going to continue to be stepping carefully through 2012, hoping that these wild cards do not wreak too much havoc on the economy. If they do, then they have an adverse impact on confidence. If there is an adverse impact on confidence, then the growth we anticipated is just not going to materialize.

In the employment sector, Bruce wondered how important construction is to the improvement of the unemployment. Robert said it is an important segment of the economy but is essentially flat on its back right now in California and elsewhere around the country. If you look at residential activity in the state of California, permits for example, they are just a fraction of what they were in years past. They have been at this very low level for just a fraction of any long-run numbers for the last few years, but it makes sense. If so many foreclosed or distressed properties are available for sale at a fraction of the cost of new construction, it is going to be sometime until after the backlog of distressed properties gets substantially moved before we see construction pick up in a noticeable way. There is a broad market for housing where distressed property values are probably way down on other properties. Things are also the same way with commercial construction. There are a lot of high vacancy rates for office buildings these days; less so for retail and certainly much less so for industrial. Industrial in Southern California is actually outperforming markets around the country. It has less than a 5% vacancy factor, so it is very much a mixed bag. However, construction is going to be recovering slowly, so meanwhile we should take a step back.

In a general sense, the labor market seems to be at a turning point where in order to produce more in 2012, it seems very likely that employers are actually going to have to add people, not just ask their existing labor force to work longer hours. There should be a general upturn in employment in 2012 compared to 2011. It is just a question of how much of an upturn there will be. We need somewhere around 300,000 jobs added per month across the nation in order to bring the unemployment down in a noticeable way in a reasonable amount of time.

The most recent report, the one for December, showed that we added 200,000 jobs, which was a great number based on the recent history. It is just not a high enough level of growth to bring the unemployment rate down. At 200,000 jobs per month, it could take 4 or 5 years for us to get back to a 6% unemployment rate nationally. At 300,000 jobs per month, it would only take a little less than two years, which is a huge difference. At the present time, we should be banking on the 200,000 jobs per month, barring any of these wild cards being played. If that happens for a few months time, then we might actually see the economy gain some ground.

The sector that is in the driver’s seat here is the consumer sector. Consumers are weighed down by uncertainty about their jobs and their economic outlook. The fact that are assets are not worth what they had been worth and the fact that they may have some credit constraints, access to credit may not be what it had been, especially with respect to buying homes. All those things are constraining growth and consumer spending, and that is really the main thing that we need to look for in terms of the driver behind the overall economy. If consumer spending picks up, then we are going to see job gains pick up as well.

In looking at a chart for mortgage equity withdrawal in 2002-2006, it was responsible for a lot of GDP growth. This driver has certainly been diminished if not eliminated from most people’s possibilities. As we go forward, it is certainly going to be the case that the American consumer is still going to have a place for the use of credit. They may not have access to the same amount of credit that was available when they were able to use their home equity in order to finance so many things. This is not a bad thing because it does seem to have created problems, especially problems that have spilled back into the housing sector. We do not want to go back this way, but we do expect to see that some loosening of credit access on the part of consumers would probable enable the consumer sector to get a little bit more steam and give a little bit more push to the overall economy.

Another issue is shadow inventory. Bruce wondered what Robert’s thoughts on what shadow inventory contains are. The definition of shadow inventory has changed over the last couple years, so Bruce wondered what Robert feels is the shadow inventory and what the best resolution for it is. Robert said it is useful for us to get a sense of how long we are going to be dealing with large numbers of distressed properties. If we use that as the definition and ask what things going to be like two years out, then the shadow inventory is the inventory that is on the books, such as MLS inventory for existing homes plus unsold new homes, and the unsold inventory for existing homes in the state of California, which is about 5 months inventory. Five months inventory is enough to actually sustain increases in prices and not decreases in prices because the average is about seven months, so we are at seven months if we are under five. By then we would go through the foreclosure pipeline, and the thing we would pick up would be the number of REO properties that are held by banks in inventory. This is equal to about another 2 ½ months of inventory. Now you are getting over seven months when you take the five mentioned earlier and add 2 ½ months, then there properties that are scheduled for auction and also another 2 ½ months inventory. However, the timeline for that is a much longer timeline.

For the REO properties, the point in time they go into inventory might be about 6 months or so before they are prepped and sold. The relevant shadow inventory number to use for current market conditions and understand what is happening in the current market is probably MLS based inventory plus new homes plus REOs in inventory. If we are asking the question about how long this is going to be with us, then we are going to go further up the foreclosure pipeline and pick up the properties that are in a pre-foreclosure state, such as an NOD or delinquent property. If this is the case, then you are looking at another 2 ½ months inventory. This is simply by taking the number of properties that are in pre-foreclosure state, which is roughly 100,000, and looking at that relative to total annual sales. You also have to look at the timeline. An NOD that is filed in January of 2012 is probably about 18 months away from going into the REO inventory. These numbers are roughly 100,000 in REO inventory and roughly 100,000 NODs plus delinquencies at the present time for the state of California. The timeframe is not anywhere close to normal as the statutory timeframe is about 6 months. Because of different kinds of policies and other factors, this timeline has been stretched out; and a number of lender and servicers have encountered a number of problems along the way.

The bottom line is as we are going further up the ladder and actually including more and more things in this notion of shadow inventory, we also have to figure out how long it is going to take to push all the properties through the foreclosure pipeline and out through the new home market. Therefore, we are looking all the way into 2014 before things get any closer to normal levels of distressed properties. The housing market is going to feel like it has recovered before that period of time, but we are going to have substantial numbers of distressed properties working through the housing market over the next three years. In Riverside, 62% of the sales are either short sales or foreclosures, which means when you sell 1,000 homes, only 380 buyers emerge. Everyone else is credit damage. This is going to take a while to heal.

If you want to learn more about Robert’s company, the Kaiser Foundation, go to LAEDC at www.laedc.org. Here, you can find out about the annual forecast event that will be happening this February 15th in downtown Los Angeles. This is a ticketed event.

Tags: bruce norris, chief economist, deflation, Euro zone, Federal Reserve Bank of New York, gdp, Greece, inflation, Kyser Center, LAEDC, MLS based inventory, mortgage-backed securities, mortgages, NOD, norris group, Paul Volcker, reo, Robert Kleinhenz, shadow inventory, T-Bill
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The Norris Group Real Estate News Roundup 1/19/12

Thursday, January 19th, 2012

Today’s News Synopsis:

Freddie Mac announced 30-year fixed mortgage rates decreased to 3.88, setting a new record low. Housing starts over 4% decreased last month according to the Commerce Department. The Lender Processing Services also reported that teh loan-delinquency rate also decreased 7.7% from a year ago, and the rate is now at 8.15%.

In The News:

Los Angeles Times - “California home sales rise in December; median price falls again” (1-18-12)

“Home sales in the Golden State rose slightly in December, boosted by a pickup in the Bay Area and investor activity in Southern California. But with foreclosures and other low-cost homes dominating the market, the median home price for the state ticked down.”

DS News – “Firms Launch $450M Program to Convert REOs Into Rentals” (1-18-12)

“Government officials are in the process of reviewing 4,000-plus recommendations for turning repossessed homes into rental properties in order to trim the REO inventory held by federal housing agencies.”

Housing Wire – “30-year, fixed-rate mortgage hits new low” (1-19-12)

“The 30-year, fixed-rate mortgage fell to 3.88% this past week, hitting a new low and marking its seventh consecutive week below 4%, Freddie Mac said Thursday.”

San Francisco Chronicle - “BofA Swings to Quarterlly Profit as Lender Builds Capital” (1-19-12)

“Bank of America Corp., the second- largest U.S. lender, swung to a fourth-quarter profit as the company sold assets and built capital faster than expected.”

Inman - “Spy some real estate savings: spyRealty” (1-19-12)

“A new discount-brokerage firm, spyRealty, has launched in New York and Massachusetts, offering homebuyers a 2 percent refund off of the purchase price of a home.”

Housing Wire – “Fitch: Principal reductions meaningfully reduce mortgage delinquencies” (1-19-12)

“Principal reductions on mortgage loans meaningfully reduce delinquencies and foreclosures, much more than current proposals, according to Fitch Ratings.”

Bloomberg - “U.S. Housing Starts Drop 4.1%” (1-19-12)

“Builders began work on fewer houses than forecast in December, capping the worst year on record for single-family home construction and signaling recovery in the industry will take time.”

FINS – “BofA Plans More Job Cuts Under ‘New BAC’” (1-19-12)

“Bank of America plans to continue cutting jobs after reporting in its year-end earnings statement that employment fell by 5,874 in the fourth quarter and 3,836 over the year in 2011.”

CNN Money - “CPI: Inflation remains in check” (1-19-12)

“Inflation overall held steady last month, as declining gas prices balanced out higher prices for other items. The government’s key measure of inflation, the Consumer Price Index, showed prices were virtually unchanged from November to December. It marked the second month in a row CPI has barely moved.”

Housing Wire – “U.S. loan delinquency rate down 7.7% from last year” (1-19-12)

“The delinquency rate on U.S. mortgages monitored by Lender Processing Services (LPS: 15.00 +3.52%) fell 7.7% year-over-year in December as the delinquency rate hit 8.15%.”

Mortgage Bankers Association - “CampusMBA Extends Partnership with Insurance Advisors to Offer New Live Online Workshops for Commercial/Multifamily Professionals” (1-19-12)

“CampusMBA, the award-winning education division of the Mortgage Bankers Association (MBA), today announced it has extended its partnership with Stamford, Connecticut-based Insurance Advisors LLC. Under the agreement CampusMBA, in conjunction with Insurance Advisors, will continue to offer live online workshops addressing a variety of insurance issues for commercial/multifamily real estate loans.”

Hard Money Loan Closed

Riverside, California hard money loan closed by The Norris Group private lending. Real estate investor received loan for $105,000 on a 3 bedroom, 2 bathroom home appraised for $168,000.

California Real Estate Investor Events:

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

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

Looking Back:

The Commerce Department reported housing starts decreased in December 2010. However, Fannie Mae expected housing starts to triple by 2013, and the nation’s largest home builders announced plans to increase activity by 10%. RealtyTrac claimed foreclosure starts in California decreased 33% in 2010.

Tags: Advanced Investing Skills and Strategies 2.5, Bank of America, bruce norris, CampusMBA, Commerce Department, Consumer Price Index, fitch ratings, freddie mac, Lender Processing Services, reo, San Francisco, Shawn Watkins, southern california, spyRealty, the norris group
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260-TNGRadio – Craig Hill 1-14-12

Friday, January 13th, 2012

Craig Hill

Hard Money Lender for The Norris Group

(Full Bio)

This week Bruce is joined once again by Craig Hill of The Norris Group. Craig has worked with The Norris Group since the company opened in 1995. Craig has worked with the real estate investors, helping them access money for their deals and trust deed investors who want to get a very safe yield on their money. Prior to working with The Norris Group, Craig was in the hard money loan business for years prior to that; and the expertise he brought with him has proved him valuable to the success of the company.

Today’s radio show focuses on the borrower side of loans. Craig deals with calls all the time and goes through the terms of the loan, and there will be some callers who are connected to the advertisements of 4% and are completely shocked when Craig tells them it will be 12.5%. They do not understand this side of the world at all. However, Craig said these calls usually come from people who have never done it before, so usually whenever Craig gets into a situation like this he tries to ask them how they funded the last deal they did. You really have to establish that this is a different world, and if somebody has been a property buyer for a long period of time, they have a better understanding. Sometimes if you get that person who feels they can do it, it might be best for them to pursue a loan at their bank under a non-owner occupied program. Craig tells them they might be able to get it if they have perfect credit and other things. There are a lot of different ways to handle it, but Craig said The Norris Group usually deals with investors who do this for a living and have an understanding of what the costs are going to be.

The real education is to go ahead and try whatever you think is easier or less expensive because the lending world is really not working very well right now. Bruce worked with a major bank where the manager told him the frustration they have right now where they cannot fund owner-occupied loans inside of 75 days. In the investor world, if you do not have speed, you don’t find deals. They have to be able to close their loans quickly, and they have to rely on the fact that the deal will close. People are always asking how they can save money, so they either try to list the house themselves or find their own money source. People even hold seminars about how people can find their own money, but it is really not that easy. It is not that easy to get trusted with money. You always have to ask yourself whether it is really cheaper or not because there is always something attached to it, including a no answer when you thought you already had a yes. The Norris Group gets a lot of these kinds of calls where someone calls at the last minute and only has three or four days or less and they need to close it. Someone had told them something didn’t perform. It is so competitive out there now, so you have one loan that does not perform then you can forget about doing business with your agent again or anybody that agent knows. You have to see that this was really the cost of not getting a loan as it exceeded far the cost of getting one. It is not easy to watch over the years people going through a process of trust. As a person, to start from scratch is just not a reliable source.

Bruce came through the hard money business first as a borrower of considerable amount of money on a regular basis. He really did not consider the cost as onerous at all; he just needed access to it. With reliability comes the ability to grow. It’s the same way with The Norris Group business as a whole and just like how it is with an investor. If an investor has either his own money, such as a limited amount like $200, they really are working under constraints. Once they have access to somebody who might have, for example $1 million, they can start and tailor their business knowing they have access to $1 million. There is a cost to this, but you also have to look at the benefits of this. The benefits are you can up your marketing and do many more types of projects. It’s like being a construction lender without having a lender. A construction worker has to have some leverage, or he is only going to build ten homes. This has been the same way with The Norris Group; the borrower side has always grown along with the money side because the money side is there and the borrowers need the funds. This is what a hard money lender is.

When Bruce and Craig met, their meeting came about because Bruce was seeing more opportunities than he could personally handle. He had a fair amount of cash and a credit line, and all these were active on free and clear things. He had a chance to go to HUD auctions that were tossing out $.50 deals a half a dozen times per auction. He also had the chance to buy a track of homes at the same number. He looked around and saw how he could not take advantage of it, and this was the start of their meeting. When Bruce and Craig met, this was not the typical loan for a hard money loan business. It almost did not exist, and this was in about 1992 or 1993 when for hard money lenders the rule of thumb was a house was worth what you paid for it. If one next door sold for $100 that was fixed up, then you bought one that was exactly a model-match right next door for $50 or less, then you could borrow $30 or $40 on that one. At the same time, The Norris Group could lend somebody who had never made a payment $60 grand on the other one. When Bruce first came to Craig, he had to fight very hard to get the first few deals through because it was not done that way. Now, in a lot of ways hard money is synonymous with that exact function for investors. Back then, however, it did not even exist.

Bruce said he remembered for one of the properties he bought at a HUD auction that was appraised, they had not discussed what he had paid for it. He asked for it to go ahead and be appraised and would be able to borrow X-amount of percentage on the value. When Craig told Bruce the value, he asked Craig if it bothered him that he would be giving him money back more than he paid. The first thing Bruce thought of was they had a really unique opportunity there and Craig was probably dealing with his type of the world for the first time, and Bruce had access to a lot of dough for the first time. Bruce told Craig he could rest assured and made six payments on the first loans, and all of a sudden it dawned on the owner of the company that they had never had anybody do that prior, so they either understood that Bruce understood it or he was capable more than their other clients had been. This was an important transition for the hard money loan industry because it followed with Craig hoping there were more people like Bruce. Craig spent three or more years until he had all the other loan officers ask him when he thought it was going to be done. Some of them never transitioned into doing that and Craig strictly transitioned into doing only that because he got used to the facts from Bruce and others thinking the process was very efficient. They knew how to make the most happen with the least effort.

Bruce has always been surprised because he remembered thinking when 1995-97 passed and it was the end of the REO world, they were really thinking from where all the deals were going to come from, and they did. The private party purchasing and construction started, and all of a sudden The Norris Group was even busier. Craig said this has been the one important thing that there has always been a niche for good borrowers and private money. If good people are out there doing something and making a profit at it, whether it be buying off private parties or lots when the time is right, there is always an opportunity and a surprise that no matter what the real estate market is like, there is always a space for hard money loans. Bruce is so convinced about this now that he has had the chance to go back and rub shoulders with the people who make decisions in the normal world and see how they view investors. He came back with a self-assurance knowing there will always exist a need for a private loan business because we just make decisions that are common sense, yet the infrastructure prevents this. For example, The Norris Group is not afraid of a home that does not have a kitchen because they have dealt with 1,000 of them and have not been damaged by any of them because they know a kitchen can reemerge for a certain amount of money. In the loan process, they retain the money that would cause a kitchen to show up if the borrower stopped paying. You start putting the pieces of the safety together and think you can make the loan, but it does take private money to fund it quickly and accurately. Bruce does not think we are ever going to have a lot of competition from the other side.

Craig is amazed how much conventional lending will not do. There are so many hoops to go through, and the borrowers The Norris Group is loaning to have wealth and credit. They have everything where you think you can walk in and get any amount of loans you want, and they can’t even get loan #1. Craig received a call from a borrower not too long ago who owned about 4 houses free and clear for about $120-$140,000 each. This is his money he put into them, but the bank will not work with this because they consider it cash out. Craig wondered if he would be a stronger borrower if he leveraged at 100%. Here is somebody with perfect credit with four free and clear houses and the bank will not work with him because they see this as cash out. It does not make sense to him. Somehow this puts him in less of a safe position that he owes, for example, $200 grand at 50% and has $200 grand of liquidity to make sure it gets paid. This is a decision-maker you’re competing with and you think you will be okay. With The Norris Group on the other hand, their response is how quickly they can get their appraiser out there.

Some people are disappointed that there are more hoops than they thought. They attend a seminar and get told that hard money only looks at one thing, and then they go elsewhere like The Norris Group and see that this is not the case. They were not really told what was really going on. Because of the nature of loans and more recent history, Craig said one thing that is very difficult for people to understand is if you are brand new, it is very hard to delicate the whole process and think you are going to have a good result. You don’t even know how to protect yourself. This is the most frustrating thing Craig sees from some of the national seminars because it is almost like they are a part of a group and are dealing with a mentor, while The Norris Group takes a look at the deals and sees they are not deals. The number one thing The Norris Group wants is to make sure people have a deal, or they are going to talk them out of it. Bruce said this is an important thing for people to know that there are companies that are built that way and companies that are not. It has to go through some filters. If The Norris Group is going to make a loan on it, then there is probably a very high success rate for the investor.

There are several filters. For one, you might look at the sheer numbers and say it is not a deal, and then you have an appraiser who goes out with a lot of experience in investing and says that the numbers make sense but it is really a dangerous property for specific reasons. The filter The Norris Group has for people who borrow money from them is second to none. Bruce trusted himself and said he would actually have cause himself if he had found a deal. If someone like Rick Solis had gone out there and told him he really needed to take a second look, then he would. You really cannot put a value on this type of filter, and sometimes The Norris Group will get calls from people who are thinking of buying all cash, and Craig tells them to call him when they have their numbers. If they have something in escrow that they are thinking of doing, then they need to take a quick look at it because it is very easy to see where somebody can make a mistake.

For people who don’t have experience, they really don’t realize how expensive the journey will be, so there are surprises and repairs. All these things start taking away, whether it is a percentage here or there, and all of a sudden a deal at, for example, $.82 on the dollar that seems like it is going to make you a lot of money actually costs you a lot of money. If you get over 75% of what the house is worth in repairs and the purchase price, you are really starting to deal with a very thin margin. Craig will back out everything and start at 100%. He will ask them if they are going to sell it themselves or if they are going to have a commission, because now more people are paying incentives such as 2 or 3% of the closing cost. If you have something and then you have the cost of the loan, pretty soon they can see that what something is costing and being sold for is not leaving anything in the middle. You are going on a 6 month journey, and this is where the experience comes in. You are going to hire a construction crew you have never dealt with, and the odds of this not working out are higher than dealing with one you have dealt with twenty times. Everything that potentially goes wrong in the business is especially likely to occur to the first-time person. For that individual, having a deal is critical. The first step is the person needs to have a deal.

The second most frustrating thing for people is they really are told that they don’t need to have any money or need only a very little money. We are looking at things in terms of the borrower needs to have survivability and a successful outcome. Years ago Craig had a client who had a house and made payments like clockwork, then all of a sudden he stopped making payments. He called in and said he had a specific amount allocated for that, and Craig said it was quite a surprise. This was years ago; so more and more The Norris Group has had the philosophy that the really liquid cash is very important because it gives them survivability to only to protect The Norris Group and their investor, but it really protects their down payment and what they put into the property. It gives them the ability to get out of a situation instead of lose a situation. It is also really a benefit for them to make a monthly payment.

Craig has always been asked if the payments can be included in the loan, and he learned years ago from making an unwise transaction with his baseball cards that once the money was long gone he made payments on it every month. Every time he wrote the check it was a lesson to not do it again. In the same way, if you are making a payment on a property you realize that it is costing you money. Just because you might have payments for six months, you cannot just sit around and wait. You have to take action since the problem is not going to solve itself. The payments are either not a high priority or the borrower has a tendency to not think about making payments. The Norris Group used to do seconds for people so they would not have as much in, although this is something they do not do anymore. They realized that not everyone is disciplined. The Norris Group not only looks at the deals, but they also try to help people be disciplined so they have successful outcomes. You cannot try to do three if your limit really should be one. Stick with the one because you are really going to have a successful result on that one. One of Bruce’s favorite statements Craig has made is, “Lost another loan; made another client for life.” In this case, the client was told the truth they actually needed to hear to see that they now have confidence that they have a backup system they can trust and will not get hurt by their loan officer.

There is almost as many people out there who would thank The Norris Group for not doing deals, talking them out of a deal, or explaining how it works. It is very satisfying because what Craig tells people when he is talking to them is he can tell by their voice when they are a little disappointed, but he tells them he can deal with that. Being a little disappointed right now with Craig telling you no or what is the real deal is much better than the client having a deal three weeks from now where they are going to lose the deposit or having a deal nine months from now where you lost $20 grand. This is going to be a lot more disappointing. The philosophy at The Norris Group is to deal with it as it comes, and people are usually very appreciative of the fact that TNG tries to give them good advice.

Bruce mentioned the home shows and how one of the things he noticed was how frustrating they were because some of the reality was missing. On the show, you are shown a property in the beginning that needs a lot of repair. It’s a perfect opportunity for two investors, but then you come back four months later and they look like they want to get a divorce. Then, the realtor comes back in and tells them what they left out. Going from A to B is an expensive process, and it just shows there are deals that do not fit the level of experience of certain buyers. Craig always tells them when they get their first deal; he tells them they did not find the deal, it found them. There were several people who passed on that deal who were experienced investors, and the newer people need to stick with what they know and what is the simplest process. You have to leave the other things for the other people, and conversely in their group of clients they have a lot of clients who are experienced. They have one right now out in Orange County who is buying a property for $220,000 and are putting about $125 grand into it. This is a very experienced investor, but it is also a niche because not a lot of people are going to be able to accomplish what he is going to accomplish. You have two sides of the scale; one that can tackle these kinds of things, and the newer group that needs to stay away from this. Most often these are the deals that the new people find that other people had passed on originally.

Be sure to visit our website, www.thenorrisgroup.com, for more information on trust deed investing and our loan programs.

Tags: 12.5% loan, appraisal, bruce norris, Craig Hill, hard money loan, HUD, loan officer, norris group, owner-occupied loans, real estate investor, realtor, reo, Rick Solis, riverside
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256-TNGRadio – Carolina Reid 12-17-11

Friday, December 16th, 2011

Carolina Reid

Senior Researcher at the Center for Responsible Lending

(Full Bio)

This week Bruce is joined once again by Carolina Reid. Carolina joined the Center for Responsible Lending in August 2011 as a senior researcher working out of the Center’s California office. Before coming to CRL, Carolina served as the research manager for the Community Development Department for the Federal Reserve Bank of San Francisco. At the Fed, she published a substantial number of journal articles, working papers, and policy reports on the Community Reinvestment Act, the Foreclosure Crisis, Access to Credit, the role of anti-predatory lending laws. She also helped build the capacity of local stakeholders, including banks, nonprofits, and local governments, to undertake community development activities, especially in the area of affordable housing.

In their last interview, Bruce and Carolina had just broached on the subject of the need for a down payment. Shelia Bair stated as she was leaving office, “If people put down 20%, it makes perfect sense that they are going to have a better payment history.” Based on that assumption, we’re going down the road of Dodd-Frank and making it mandatory for a 20% down payment before we’re able to receive the best rate loan. Bruce believes the timing of this is disastrous. Shelia agreed, and she also does not think that 20% down payment is necessary in order to ensure that borrowers stay in their homes and receive responsible loan products. Carolina said they have a history of providing no down payment or very low down payment loans with very high success rates. The questions are how you underwrite these loans, what kind of product features do these loans have, and if you have really considered the borrower’s ability to repay the loan over the long term. There is evidence from city programs and state affordable housing programs and other programs like the Community Advantage Program, which has run out of self-help and is affiliated with CRL and a CRA motivated lending program and has very low foreclosure rates. We have also seen the aforementioned in an FHA loan, although historically FHA foreclosure rates have been slightly higher than the market overall. Over this most recent time period, they have actually performed quite well compared to the Alt-A and the negative amortization as well as the other risky loan products that were originated during the subprime boom.

Bruce believed they were probably not a big participant in the years that Carolina covered. In California they would have been non-existent, but they are certainly going to have their fair share of 2009 foreclosures. The deal is not so much the down payment as much as the negative equity, which has not really been discussed. The majority of the country’s problems are really located in areas that had ridiculous prices rises and then ridiculous price declines. Bruce wondered if the negative equity was really the driving force to most of the foreclosures. Carolina was uncertain and said there is some debate among economists about what actually caused the foreclosure crisis. Once prices start to decline, it becomes really hard to come up with an alternative of exiting your home if you are having payment difficulties other than foreclosure, whether it is because you cannot resell or do not have enough equity. However, it is a big part of the problem now and is certainly hurting homeowners, particularly homeowners who have lost their jobs or otherwise financially struggling due to the recession. It is one thing to have a negative equity position; but if you’re attached to the real estate industry then the odds of you making the same money that you were making in 2006 is very unlikely. If you are in the lending business and are paid a point-to-loan, you are now making a loan at half of the price and a lot less transaction. Even if you are employed, you are not as fully employed as you once were. Carolina said she believes families are really struggling right now because the after effects of the recession have gone on so long and unemployment still remains so high that even people who had considerable savings have burned through that. This has made it increasingly difficult for them to make their mortgage payments. Bruce said there is also acceptability right now to not making your payment that is definitely taking hold.

When The Norris Group buys foreclosure property, they have seen that the average length of people have been in the property for two years or more and have therefore been making payments for a couple years. There is a study that says if your circle of people starts performing strategic foreclosures, then there is pressure. You may be sitting next to your cousin, who is on vacation on a cruise ship, and he may be thinking, “The only reason this is possible for me to take this vacation is I stopped making that payment.” You begin feeling the urge to join the party. Carolina is not sure of the extent to which this may be a real problem across the state. In the many interviews she has done she has found that borrowers are really committed to making their mortgage payments, and they feel a real obligation to that with a real sense of self-worth about being able to make that payment and that commitment. Carolina said she wishes we had a way to empirically tease out which of the stories is the strongest, but there are probably just as many borrowers who are actually desperately trying to make their payments. Bruce believes if it was a lot more, you would have a gigantic foreclosure percentage. Bruce said he is dealing with the most foreclosures ever, but we are still not talking 10%. There are a lot of people upside-down making payments on things they know is over encumbered because it is the way they have been taught to be built.

One example of a group is there was an owner of a head shrunk fund in New York who owned a home in a real nice area in Orange County on a cul-de-sac. There were twelve houses, and he was the only one making his payment in the whole cul-de-sac. They actually had meetings every month with the eleven other people to discuss how it was going. This was considered a neighborhood strategic default, which Bruce had never heard of prior. Bruce also wondered about NSP funds. We have this foreclosure crisis, and the County of Riverside has their share of funds. The Norris Group met with the city and tried to figure out a way to work with them, but they could not really come up with something. Therefore, Bruce wondered how successful the NSP fund program has been and whether it was a wise expenditure of money. Carolina believed it was and that it was not a very big expenditure of money in terms of the housing market. We have to remember that it was a program that was developed in a period of crisis, so therefore there were a lot of mistakes made both in terms of initial program design and program implementation. Several municipalities and other areas that received NSP funds really struggled with the capacity to deploy those funds; but in other places they really have worked in the way they were intended and really helped to support non-profits and city governments in both purchasing distressed properties and returning them to productive use and affordable homeownership programs. Carolina believes there are a lot of examples of really innovating approaches to NSP implementation that maybe are not at the scale we would like them to be at but are certainly making a difference at the local level.

Bruce wondered why it is felt that the private investor would not be able to take on the inventory and provide a completely perfect house for these types of programs. It is not that the end buyer is getting a big discount, but he is getting a fixed-up home in a neighborhood area that has some challenges. In some places, they really are working to use NSP funds to turn them into permanently affordable homes through community land trusts. There is a very innovative program out of Boston Community Capital that tries to keep the distressed borrower in their home using NSP funds, but the best NSP funds usually go beyond this. There are a lot of investors out there who are not necessarily as responsible as others are. The idea behind NSP is trying to keep some of the wealth and some of the equity that exists in the home within community hands rather than in investor hands. Carolina does not see this as competition with other investors, but rather a very nice way to promote affordable housing within locally hard-hit areas. One of the challenges for NSP funds is they do have to compete with investors, and they did not end up with as many properties as they thought. This is one example of where you do not know when you are in the middle of a crisis, and people thought there would be plenty of properties that they would have been able to quickly acquire them. However, this turned out to not be true.

The delinquencies in California tripled in about a twelve month period, and foreclosures declined during the time period when delinquencies went from 3.4% to 11%, and foreclosures went from 1 ½% to .8%. Lenders stopped foreclosing. Carolina said they had problems with inventory even as early as 2009, but during that specific timeframe in 2008 they stopped. The reason they stopped in 2008 was when The Norris Group was buying REOs at the time, the lenders were receiving about $.18 on the dollar on their loan amount because there was so much inventory that the price was hammered to death. They stopped foreclosing on the inventory for a combination of reasons, such as they were capable of being fined by the city and prices were sinking because they had 16 months of inventory that was now down to 5 or 6. However, it is not churning in the background, and this is part of what Carolina’s report is saying that we are not finished with any of this.

One of the discrepancies that is a little scary is that we have already foreclosed on 2.3 million and have a little over 3 million to come, and in addition there was a wildcard statement that there was another report saying there was probably 10 million more to come. Bruce wondered where they obtained this figure, and Carolina said a lot of it was in the difference of measurement. The bigger figure, which was the 10 million, included the borrowers who were current but were significantly underwater. The estimate, therefore, was for borrowers who may still become delinquent, which CRL does not include. The estimate also included estimates of short sales, which CRL also does not assess in their reports. However, short sales are definitely gaining momentum in our world, so as far as the investor world they see that there is a shift. If you look at the California Association of Realtors’ figures, the short sales have already passed the number of REO sales in the counties of Orange and L.A. Riverside and San Bernardino are gaining momentum and you also have a fair amount of properties that will not necessarily go to the NSP stage because they are lowering the opening bids at the trustee sales to move the properties before they become an REO. Therefore, they are preventing as many REOs as they can, and there are also bulk deals where they are selling the notes in bulk to where people then have a chance to get a workout done because the new owner of the note owes a lot less than the face value of the note. In the $600,000 example Bruce used before, they might go buy the note for $350,000, and they would be in a great position to sit down with the owner to make a deal.

One thing that is a little aggravating is we never make a differentiation on the person that is upside down on how they got to that point. It’s the idea that one size fits all. So one person is upside down, but you had refinanced your way there and had pulled out $300,000. Or, in another example, someone’s application may have not been true. There is never a mention that when we are talking about a loan modification program we look at some of those categories and say we should not do it. Carolina agreed saying people got underwater under a multiple different ways, and the more careful studies do look at this. One of the things we are plagued by in this research is the lack of data that really helps us to combine all the different factors that went into both the loan origination decision and the outcome, particularly where borrowers are now given changes in house prices.

Bruce wondered what the next few years will be like for housing, and if when Carolina looks at the information if she is looking at it on a national basis or California specific. Carolina answered saying she is looking at national data, and she thinks the policy choices that we make now stand to make a real difference in what happens, how many people are affected, what neighborhoods are affected, and how long this downturn is really going to last. We do not need to throw up our hands at this point, but instead we need to continue thinking creatively about solutions. We also need to really understand that there are things we know we can fix, such as servicer behavior as well as aligning servicers and improving their servicing practices. We also need to get creative on the policy front in terms of reducing foreclosures and delinquencies as well as stabilizing housing markets.

Bruce wondered what ramifications happen, because it seems inevitable that we are going to have a decline of homeownership as we resolve this next pile of properties. He wondered what societal benefits has there really been having the biggest percentage of people ever owning their own home and what this has meant to cities and neighborhoods in the way of stability. Carolina answered that she has never been one who has been for getting the U.S. homeownership rate as high as possible, and she is not sure this is the goal for which we should be striving. Instead, we need to minimize homeownership gaps between different groups and making sure that where there are barriers to homeownership we should be able to overcome with prudent public policy. We should hope to overcome these because it remains true that owning a home is the best source of wealth for all families but particularly for low income and minority families. This is true partly because it is a savings mechanism and also because it is such a nicely leveraged asset. As Bruce said before, we know how to do this well. During the 1980s and 1990s, we really did help to increase homeownership rates among those groups of people and close the homeownership gap in a way that was responsible and actually promoted stability for both neighborhoods and families. Therefore, we should not lose sight of this goal.

Bruce believes homeownership is very important to our country. He was married at 17, so he was on the other side of the equation at that point. He remembered when he and Marsha bought their home after saving for two years, which at the time was only $750 a month; Bruce had the grant deed recorded in his name when he did not have a dime of equity. However, on the Saturday that followed he was able to mow his own grass, and he could tell you it felt like he was a man. It was then engrained in him that part of being an American is you are able to call the shots within your own yard. Bruce would really not like there to be policies that dictate big down payments and are so restrictive that you eliminate a lot of people from that privilege. It really does not make much sense. The pull of homeownership is strong among all different groups. People really do want to become homeowners to a large degree, and Carolina believes the evidence is very strong that when done responsibly it is good for wealth building, for communities, and families, particularly children in terms of later life outcomes. Therefore, when done right it really can be a very great way of expanding access to opportunity.

Bruce Norris and Sean O’Toole had the opportunity to go to Washington to talk to Fannie Mae and FHA about some of the solutions that they talked about at I Survived Real Estate at the Nixon Library. One of the things they talked about was the nothing down loan program and its ability to maybe move to another owner without formal qualification. That idea came from the early 80s when Bruce became an investor. To become a full-time investor, Bruce refinanced his house at 17 ½% fixed. He almost owned it free and clear. However, about 60% of real estate transactions in California between 1981 and 1983 were accomplished by not needing a new loan. They were allowed to take over the existing loans in a term called “Subject To.” You literally did not fill out paperwork from the lender and get approved. All you had to do was make sure the loan payment was current and you sent it one sheet of paper that says to take one person’s name off and put on another name.

If in the next two years we could have a program where you had nothing down, qualified people getting a VA loan and who could make the payment, and also made the loan transferrable to another owner someday; then that would be a very big benefit. The reason is because this low interest environment that we are enjoying right now will not always be there, but it is a huge savings. For the people who can get in now, especially the beginning group or the people who have not had a bigger share of ownership, to receive a 4% mortgage rate is bragging rights for 30 years. The housing cost would also be so low compared to their neighbor over time that they have a lot of spendable money. This would be a very big difference in their life, so hopefully we will not become so restrictive with our policies that we eliminate the chance to own homes for a good percentage of our people.

It is important to realize that owning a home is still an earned privilege. Sometimes we cross over to where it has become a right, and this is something that shows with people who are not making their payments. They have the mindset that they really deserve their house anyway, even if they cannot make the payments. These kinds of people are not in the communities that Carolina has been working in, but she can imagine if you ran into these people it would be frustrating. They do not realize that the bill is being passed onto others.

Carolina has been working for the Center for Responsible Lending for only a few months, but for the upcoming year they will be doing some more research on qualified residential mortgage, both working with definitions and trying to show that a 20% down payment is not necessarily in everybody’s best interest. They also hope to look a little bit at neighborhoods, neighborhood stabilization, and see what is happening in different places, particularly hard-hit areas in California.

Tags: Boston Community Capital, California Association of Realtors, Carolina Reid, Center for Responsible Lending, Community Advantage Program, Community Development Department, CRA, CRL, delinquencies, Dodd-Frank, fannie mae, Federal Reserve Bank of San Francisco, FHA, foreclosure, loan modification program, NSP funds, Orange County, reo, riverside, san bernardino, Sean O’Toole, Shelia Bair, VA loan
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The Norris Group Real Estate News Roundup 12/02/11

Friday, December 2nd, 2011

Sources:

Young workers getting hired again
Jobless claims edge up to 402,000
Case-Shiller Puts Home Prices 3.9% Below Last Year
Pending Sales of Existing U.S. Hoems Exceed Forecasts With 10.4% Increase
NAR expects some commercial real estate growth next year
Construction Spending in U.S. Rose for Third Consecutive Month in October
30-Year Mortgage Rates Increase to 4%
Average time to foreclose sets new record of 631 days
Citigroup’s $285 million SEC settlement rejected
Central banks join forces to ease debt crisis
PMI Insurance

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. In a big news story, unemployment decreased to 8.6%, the lowest it has been since March 2009. The number of homes in foreclosure also set a record at over 2 million. In Massachusetts, Ally Financial has stopped buying home loans after the biggest mortgage lenders in the state were accused of conducting illegal foreclosure practices.

In The News:

Housing Wire – “REO investors squeezing out owner-occupants” (12-02-11)

“Owner-occupancy rates of real estate owned sales are plummeting as investors who recognize their economic value are taking advantage of bulk transactions, a trend that nonprofits and trade groups are closely monitoring.“

Bloomberg - “Ally Financial Halts Mortgage Purchases in Massachusetts After State Sues” (12-02-11)

“Ally Financial Inc.’s GMAC Mortgage unit stopped buying home loans in Massachusetts after the state accused the five biggest mortgage lenders of conducting illegal foreclosures.”

Inman - “Record number of homes in foreclosure” (12-02-11)

“The foreclosure pipeline has never been more crammed, with lenders attempting to push 2.2 million homes through the process as of the end of October, according to a monthly report issued today by Lender Processing Services Inc.”

DS News – “OCC Investigates Foreclosures of 5,000 Military Members” (12-02-11)

“The Office of the Comptroller of the Currency (OCC) launched an investigation into the possible wrongful foreclosures of about 5,000 military members by 10 of the nation’s largest banks.”

Los Angeles Times - “Jobless rate falls to 8.6%, sending mixed message on economy” (12-02-11)

“The U.S. jobless rate fell sharply last month to its lowest level since March 2009 as employers stepped up their hiring in the latest sign of a steadily improving economy.”

Housing Wire – “California real estate execs arrested in alleged foreclosure scam” (12-02-11)

“Authorities arrested three top officers at Stockton, Calif., real estate company who allegedly took in steep fees without performing loan modifications.”

San Francisco Chronicle - “Property managers busy as rental market surges” (12-02-11)

“Just as the U.S. housing boom gave birth to such home buyer websites as Zillow and Redfin, services for rental properties are thriving following a surge in foreclosures and stiffening of mortgage standards. Membership in the National Association of Residential Property Managers has almost doubled in five years to a record 3,400 members, according to the trade group.”

Realtor Magazine - “Mortgage Rates Continue to Hover at Record Lows” (12-02-11)

“Averages on fixed-mortgage rates continued to hover near historic lows for the week, while adjustable-rate mortgages inched down slightly to reach new record lows, Freddie Mac reports in its weekly mortgage market survey.”

Looking Back:

The NAR reported pending home sales increased 10.4% in October 2010. According to RealtyTrac, foreclosure sales decreased 25% in the 3rd quarter of 2010. Statistics from the Labor Department showed jobless claims rose 6.3% the previous week. Greg Lippmann of LibreMax Capital predicted national home prices would drop another 10%.

Tags: Aaron Norris, Ally Financial, Angelina Mireles, bruce norris, Department of Housing and Urban Development, fannie mae, foreclosure, freddie mac, Julissa Garcia, Legacy Home Loans and Real Estate, Lender Processing Services, Magdalena Salas, mortgage rates, National Association of Residential Property Managers, New Vista Asset Management, Office of the Comptroller of the Currency, Redfin, reo, the norris group, zillow
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253-TNG Radio – I Survived Real Estate 2011 part 6 11-24-11

Wednesday, November 23rd, 2011

I Survived Real Estate 2011

(Full Bio)

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 asked the panel if they see anything in Dodd-Frank or the changes in qualified mortgages that threaten a 30-year mortgage for some of the stratuses of loans. Debra said she does not really see anything in the QM or the QRM that would specifically attack the 30-year mortgage. For the most part this has been a product that housing in America has depended on. Debra does not worry about the 30-year mortgage going away as a result of the regulation. Bruce also wondered if there was any discussion on where Fannie and Freddie will end up. In response, Debra said our fragile housing market right now is delaying the government’s desire to shrink the footprint in housing. The white paper at the beginning of this year would launch the debate for the future of the government’s role in housing, the future of the GSEs, and how to rebuild the nation’s secondary mortgage markets. Debra does not believe the debate is really going to get going until most likely after the elections. The future of the GSEs is uncertain. There are a couple bills that have been introduced that would suggest all the way from completely privatizing what would now be Fannie and Freddie to maybe private companies with a government wrap for the securities that are issued. However, she reiterated to say debate would probably not start until the end of next year.

Sean O’Toole, Doug Duncan, and Eric Janszen returned to continue the discussion with Sara, Gary, and Debra. The first thing Bruce talked about with all six panelists was a recent Moody’s report he read that talked about the qualified residential mortgage in place, and it talked about FHA only being about 10% of the market. This really surprised Bruce because in California, even on the low side first-time buyers were 30% on the low side and 50% on the high side in the market right now. He wondered how FHA could only be 10% unless it was really being restricted. He wondered what would be the restriction that would prevent it from being a normal percentage as this would be the loan to which you would think those kinds of people would go. Debra said if you look at what the government is willing to do to get FHA from a 30% market share down to a target of 10-15%. They have already raised the mortgage insurance premiums, so an FHA loan is slightly more expensive than it was. We have just seen the stimulus loan limits expire, so that is another nudge toward a smaller market share. There has been talk about possibly looking at a median income restriction somewhere in our future. We will most likely not see anything like this anytime soon, but we will most likely see small moves to get the market share down from about 30%. Doug Duncan said part of the discussion will be getting the private market more involved. If you go back to some of the history of the FHA loans, the underlying theory for FHA was that there was part of their credit spectrum that would not get served by the private market. This was because the returns most likely did not reach private market returns, and therefore there were external benefits encouraging home-ownership by providing a subsidy through the FHA program to get credit to the households. In return for that, there was also a ceiling on the size of loans that was available in the market. We may see some discussion on this come up again, but Doug said it will all be done in context of what is done with Fannie Mae and Freddie Mac.

Bruce wondered what would happen if we lowered the loan balance. For instance, in California we had a median price of $600,000, and we now have a median price of under 3. Even though we reduced the loan limit, it has to serve more households with a new loan limit than it served with the big loan limit because there are a lot fewer expensive homes at least when it comes to going forward. At the same time, you might have a problem with refis. Bruce wondered if we are supposed to have government program that is over twice the median price of an area. Doug said if you looked in their book of business between the previous limit and the conforming limit to where it dropped; it was less than 5% of the book. The problem is it is regionally targeted, so you will see California, New Jersey, Maryland, Washington, and all your high-class markets hit more than the national. Debra said from modeling their business she could see the impact is very small, although you really have to question anything right now that would be negative to housing and if this is what we really want to be doing.

Sean O’Toole discussed how one of the things he has always found interesting about the federal programs is that it’s at the county level. One of the biggest drops we had in California was in Monterrey County where you have Watsonville, which is close to Carmel, Pebble Beach, and Monterrey. You have two completely different markets, even though they are 15 miles apart, so Monterrey and Carmel are going to take a $200,000 hit on the conforming loan limit; whereas in other areas such as San Jose and Contra Costa County that are not as desirable, they are not going to take as hard a hit. It does not make any sense, and it happens in any place where this kind of decision is made. This would not be a factor in Santa Ana, for example, but it would be a factor in Newport Beach. It goes back to applying a broad-based national policy to anything that overrides the local conditions and requires some of the expertise that was being talked about in the appraisal space and a whole host of other things that relate to real estate. Doug said for a long period his company looked at the national home price, and then they talked to their friends and neighbors about how all real estate is local.

Bruce mentioned a document that talks about saving $2-$4 trillion off of the budget going forward, and real estate would be an actual target for trying to get some of our chips. Bruce wondered if we have ever thought about what might be okay to take of if we cannot have anything. Bruce said he had a questionnaire, and one half of the people said it was not okay to take anything, but Bruce wondered if it will not happen one way or the other. For example, if an interest rate went down to $500,000, Bruce wondered if this would be that impactful to our market. Gary Thomas answered that the National Association of Realtors does believe it would be impactful. They do not think this should be touched at all because of the unintended consequences. One of the proposals is to take the interest rate down on second homes in resort markets. However, you have to ask what this will do to the resort market and what it will do to the communities where you cannot resell properties. The unintended consequences are it affects the grocery stores, the pharmacists, and everybody. It does not only affect the person who owns the property and cannot deduct it anymore.

Eric Janszen agreed with Bruce in that it is most likely a real target since it is a government subsidy, and subsidies in both of the ideological camps are obvious targets for cuts. It is always the other person’s subsidy that is the bad one. If it did happen, Eric was not sure if it would have as big an impact as everyone thinks it would. The real big problem we have right now is incomes and employment. We are not really going to fix the housing problem. All of these are marginal issues and marginal solutions until we start having job growth. Riverside County is 15% unemployed, and usually we really count on construction. However, we have a price per square foot on some inventory that is half of the construction cost. It is almost like the dominoes have to fall backwards before they can fall forward. We have to get rid of a lot of what we would consider shadow inventory. We first have to know what shadow inventory is and what to do about it. Until you end up with that disseminated into the marketplace to where no one fears it coming out later below replacement cost, you won’t be able to go forward. Sean O’Toole jokingly said the newest version of shadow inventory moves to help provide cover to whoever got it wrong the first time.

In 2008 when the subject of shadow inventory first came up you had foreclosures just on a tear, banks taking back lots of property, and we were not seeing the property back on the market. It occurred to them that the banks were really holding a lot of property that was not making it through the market. This is what Sean O’Toole originally talked about with shadow inventory and had a lot of statistics on it. A lot of people talking about the foreclosure way and other issues needed to change this over time, and it has grown to then include everyone in foreclosure and everyone who is delinquent. It also includes negative equity, and Sean said he has heard people say it also includes all those who would like to sell at the prices that are in 2006 but now cannot. This has been nicknamed the “delusional inventory.” However, if you start talking with people about it, you will see that there is a lot of “delusional inventory” and a lot of property that should be and would be on the market if people were not still holding out some hope that there is going to be some fix in Washington. This is as big a problem as anything else.

Bruce noted in some markets you have 3,000 square foot houses that cost a lot to build being bought for $140,000. There might be a pile of them, so the shadow inventory is not only what the lender owns, but what is being refused to be foreclosed on. Bruce said this is where he would go with shadow inventory. It’s a ball of two-year late people that for some reason are not being forced to the finish line. Whether credit for this goes to MERS or robo-signing, long before this became a front-line issue it looked like lenders made a decision to not foreclose on specific things. The question is what the reasoning is for waiting so long. The last time we had this problem was in the 90s, and lenders began to wait. People were getting close to a year behind, and then the FDIC came in and said this was not okay. Bruce remembered the chart and remembered how there were foreclosures declining in California back in ’95, yet delinquencies were increasing. There was a rule passed that said when you were 100 days late you had to file an NOD. This came basically from instruction. This time, however, it seemed not only was there nothing in the instructions, but it seemed like people were getting free passes and being told, “Whenever you want to or don’t want to, it is okay.” Eric said the thing that changed was there was just not a large enough pool of credit worthy buyers by the new definition of credit worthy. Bruce would say if you want to sell it to investors, you would have all that you can give to the market. However, Bruce does not believe that there is a fear of there not being enough cash because with everything that is bought at trustee sales a month, there is a lot of money spent.

Debra does not get the sense that lenders are purposely delaying foreclosure by design as much as working through the process, meeting regulations, meeting investor requirements, state requirements, and other requirements unless there are REOs that have not come back out on the market. She does not get the sense that lenders are purposely delaying the foreclosure process by the same token that lenders are going overboard right now to make sure they are doing the responsible loss mitigation activities that they need to do to help keep borrowers in their homes, structure short sales, or whatever the appropriate process is one buyer at a time. It’s possible they are also trying to figure out who owns the loan.

Sean mentioned how we had more than double the foreclosures that we have today in 2008. The idea and the notion that the lenders need more time to figure things out is ridiculous. They have had plenty of time to figure it out, and we are four years into this thing. This is not really the problem. Doug touched on earlier the notion that Fannie and Freddie don’t really want to talk about principle balance reductions. They are worried about foreclosures because ultimately these losses flow through to the taxpayer. The taxpayer is not in much of a position to take them right now, and neither are the banks. If you start looking at just the seconds that a bank has where maybe the first are held by Fannie and Freddie, but they have a portfolio of seconds that are on their portfolio that exceed the equity of the institution. When you really start clearing things through, you have a much different problem than simply processing the paperwork. You are talking about banking and government solvency.

Doug said it is a grand social experiment of the question, “Would the welfare of the economy and the populace be better served by a rapid and deep clearing of inventory, which would bring into question the solvency of the significant part of the financial system; or do you obtain a better result through a variety of policies to make a slow move to bring prices back into equilibrium?” Sean said the latter would be great, except now it is extend and pretend because you have to confess and say you have more losses than you can afford to bear. You have to tell the American people that this is really the situation and we’re going to on purpose drag this out so we have an orderly disillusion, like back in Grease, rather than a disorderly one. We cannot continue to extend and pretend and not have a conversation about how bad it really is. We created $4 trillion of excess debt; and we have worked through half a trillion of it. So far we have $3 ½ trillion to go, but we cannot afford it today. Therefore, we have to have a solution.

One of the things Bruce noticed was back in 2008, we really had a lot of price damage and when he was buying houses for $.18 on what the lender was owed. That was really the number because there were so many inventories. At that time our default was about 3.4%, and our foreclosures were 1.2%. About 9 months later, our defaults were 11%; and our foreclosures were .08%. They had just stopped foreclosing, and you had tripled the default. One of the disservices this does is there are gentlemen in the audience at the time of ’08 who had 800 REO listings. They had a business plan around that volume and were never told that the listings were going to turn into 200. One of the things that would have been helpful would have been to tell an industry that they will simply not do it at that pace anymore and could have had a better business plan. This was one thing that would have been frustrating for mortgage people and appraisers as well. This is all business that is turning in a red ball behind us that is not producing a fee, a commission, or a rental.

Bruce wondered if the losses that are in a second position behind the firsts that are a 200% loan-to-value are being booked at zero value or face-note value. Sean mentioned that back in 2008 when Paulson announced TARP, everyone thought it was about loans to banks. However, if you go back and read his statement, it was really about how we should not force banks to sell specific properties into a distressed market at certain distressed prices. This sounded good on paper except that the issue was not a distressed price but rather a reversion of the mean and the price at which things were supposed to be. The losses were real, and we need to figure out how we recognize them and deal with them. Four years later, we have not even started having honest discussion about recognizing and then dealing with them. Bruce wondered what would happen if we were to say, “Let’s foreclose on the red ball.” Do you absorb $4 trillion and survive? Sean reiterated saying Doug may have been right and that we need to think about a different social experiment. At the end of the day, what we need is a clear housing policy because what most people realize that extend and pretend is not working, and that is one of the reasons we are not seeing home sales take off in Riverside where it is now an incredible bargain. It is hard to take risks when you don’t know the rules of the game.

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.

To find out more, tune in next week for I Survived Real Estate 2011, part 7. 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.

Tags: bruce norris, Debra Still, delinquencies, Dodd-Frank, Doug Duncan, Eric Janszen, fannie mae, FHA, freddie mac, Gary Thomas, Henry Paulson, i survived real estate, Moody’s, National Associaton of Realtors, norris group, QRM, reo, Sara Stephens, SEAN OTOOLE, shadow inventory, Susan G. Komen, TARP
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252-TNG Radio – I Survived Real Estate 2011 part 5 11-19-11

Friday, November 18th, 2011

I Survived Real Estate 2011

(Full Bio)

Bruce continued his discussion with the panel on an interesting appraisal they had. Someone with no experience in a very unusual area where you received a lot of money for a certain located lot had a $1.3 million comp for the model-match house. They had the right location, but The Norris Group did not. They had a home for sale for about $700,000 for 90 days, which is not worth $1.3 million. When they went pending, the home was appraised for $1.3 million because it was a model-match house; someone had come in from out of the area who did not have a clue that it mattered there. This did, however, help lock in the sale.

Bruce wondered what the intent is on the mortgage side. He asked what the function of the appraisal management company was and if they are really supposed to just make sure that appraisal independence is accomplished. Sara confirmed saying this is the main function, and it was intended to be the main function to begin with. Unfortunately, it has become a clearing house for fees lower. The management company is going to make the money, and Sara said what her company finds is that when many consumers close a loan are confronted with an amount for an appraisal that includes not only the appraiser’s fee but also the management company fee. Sometimes the management company fee is more than what the appraiser is actually making on the particular sale. Sara related to Bruce on a personal instance where she had a friend who called and asked her if about $300 the usual in customary fee for a residential appraisal. Sara said this sounded a little high an asked her to call the appraiser. When she called the appraiser, she found out that a good part of the fee that she was going to be paying for the appraisal was actually going to the management company and not to the appraiser.

To earn their cut, the management company usually engages the appraiser and is responsible for the documentation securing the appraisal, getting the appraisal back to the file, and getting it to the lender. They act as the middle man. Bruce jokingly said they basically take an email and forward it. They do not necessarily have to have expertise as appraisers, however. In a lot of states like Arkansas and most likely in California, they have certain requirements for AMCs. The Appraisal Institute has been very active in trying to monitor the appraisal management companies and try to obtain some kind of regulation process, some bonding or some kind of law that supports the appraiser in the event that there is some kind of argument with regard to fee and process. In some states they are not regulated at all, and in other states they are closely regulated. This actually brings up a confusing situation. Bruce wondered if the Appraisal Institute has national and state regulations that overlap or contradict, which Sara confirmed.

Debra Still began talking about how her company works in 29 states and files 29 states worth of appraisal regulations, fees, forms, disclosures, and predatory lending. The variation is pretty stunning. The Dodd-Frank Act had tried to solve the reasonable customary fee, and Bruce wondered if this has changed in practice where the appraiser is now getting paid what they used to. However, Sara said this is not the case as there is still a big issue in this area. When Sara testified before the Congressional Subcommittee in July, this was one of the things that she continued to talk about with the subcommittee. The idea of reasonable and customary and the intent of Dodd-Frank was never to include the AMC fee into the reasonable and customary estimation. The Appraisal Institute has done a lot of research, a lot of study, and they have looked at VA schedules and others to try to help these AMCs and try to help the Congressional Subcommittee to take a look at what a reasonable and customary fee might be to an appraiser. They would like to see the HUD-1 form simply separate the fees. The appraisal fee needs to be on one line and one transparent number, and the appraisal management fee should be on another. An appraiser needs to be paid for the time, the education, the professionalism that they have and that they bring to the experience. The AMC should also be compensated for the work that it is doing. There are pretty severe fines for not paying reasonable fees. In the Legislation, it gets into the millions, and it is uncertain if any of these fines have been levied.

One thing that existed at one time and it is good that it does not anymore is undue pressure. However, Bruce gets the feeling it actually does exist but on the back end. He feels like there are buyers who are willing to say about a house that it is the one they want at the price they want it, but somewhere along the line there is pressure to get it at a lower price. He doesn’t know if it is the review appraisal process, an automated system, or it is an underwriter who says it should be lowered. He really doesn’t know, but he does know that as a seller he is confused sometimes why it comes back less. It’s not reasonable. People look out for their own best interests. For example, a seller checks out the market and goes pending, to Bruce this is a comp. If it disagrees with all the other comps severely, then this might be a problem. When The Norris Group fixes up houses, they might spend $30,000, but they do not automatically think about if they will receive $50,000 back for it. There are, however, times where a buyer looks at this and says they would not be able to do it for $30,000, and a $20 grand price difference at 4% interest is so minimal per month that the answer is they will take the $30,000 over the $50,000, especially when you have 70% comps against REOs and short sales. This is a problem. The real question is how they are viewed. One does not show up and say a property is a comp but it does not have a kitchen. You can’t get the truth with the push of a button.

Sara said all this points out the need for local market expertise, for people who are trained professionals, people who are trained to go to the market and interview the buyer and seller, to investigate the comparables, and make sure they are comparables. Secondly, Sara believes that a lot of appraisers, as they begin to turn in their appraisal reports, face a lot of undue pressure, for example, added comparables, extra questions, and more scrutiny placed on their valuation and their judgment. Bruce wondered if for some reason the pressure is there or a review appraiser disagrees that they could lose business because they came in at a higher number than the review appraiser. Sara said this is something that might happen on some instances, but it really falls to the appraiser to defend himself over and over again. If the information is there and the valuation has been done to the best of the appraiser’s ability, then you need to just get to the point in time where you have to say, “This is it; this is all I can do.” Sara said often times when this situation confronts the people at the company, they will say, “Could we pick you up? Could we drive those comps and take a look at them?” A lot of times you are talking to somebody who is sitting at a desk who never looks at the property and never goes to the particular comparable. He never inspects the interior and doesn’t have any information. It is a communication problem sometimes because as an appraiser and as a person who is writing the report, the communication skill needs to be there to convey extraordinary measures you may or may not have taken to include the sale and why. It is a difficult environment, and it is very difficult sometimes to meet the requirements that are piled on, that are additional, and seem perfect in terms of the final valuation result.

Debra Still said you do have underwriting guidelines and some investor overlays that are now causing some of this challenge where you might have an investor that requires that two comps be outside the community. Outside the community possibly means a foreclosure. This is one of the homebuilders’ top 4 issues. As we see some of these sub-markets beginning to heal and prices starting to stabilize, we have to think about how do we move forward and recognize that in a declining area we might have a very stable sub-market. How do we recognize that some investors want four comps or six comps or justify the time valuation? It becomes very complex when you combine both the appraiser’s work and the underwriter’s work on top of it.

Bruce gave an example of something that really changed their business model. They bought a property in Moreno Valley for $52,000, without a kitchen and other necessities, and they fixed it for around $25,000. They put it up for sale and went pending for $123,000, and they had seven offers within two days. This is a pretty good statement of market value. The appraisal came in at $100,000, and the review came in at $80,000. Consequently, they kept it as a rental at $1100, and they rented it in one day. The statement basically by the appraisal said that given $100,000 at 5%, the rental payment was worth twice as much as the value when you consider what it was worth in mortgage payment. What it prevented was them fixing the next 50 properties in Moreno Valley because what it told them was due to the changes that HVCC brought in, the appraiser was incapable of coming to that decision because no one would allow him to do it. This is a challenge for the industry right now, especially in the areas that have the overwhelming vacant REO as the comp. One of the reasons they concentrate in a specific area is because they provide their own evidence that a decision has been made before, which is what you are in a way stuck with as an appraiser. You have evidence that somebody made a decision.

Sara said one of the other things the aforementioned points out is a relationship with the purchaser and with the person who is going to be working with the mortgage as well as conversation and dialogue on the front end certainly might help to solve some of the problems. The Appraisal Institute is beginning to look at how they can develop some relationships in sub-markets that would allow them to try to take a look at what they have in the market in which they are working. The technique, theory, and ideas going forward are pretty new, and therefore they may have a lot of risk in them for a lot of lenders. It goes back to educating both the lender, the appraiser purchaser, and the investor in what is going on in the market and how they can handle some of the consequences of the downturn that we have seen.

Debra Still said this is one of the things that is difficult with HVCC. The spirit of the HVCC was right on target, not doing anything to exert undue influence on an appraiser. On the other hand, it is now law; and having those good, constructive conversations are very delicate. You have to be very careful and very thoughtful, and there is a protocol to have an appropriate dialogue with an appraiser as you are trying to get to the right place. It is using coercion when it really just needs to have better information.

In order for a company to not require an appraisal management company to act as the middle man and go directly to the independent appraiser, they would have to be a reasonably large lender. Debra Still’s company has a national subdivision processing department, so everything that has to do with properties is done by a department that is outside of the origination, the processing, the underwriting, and the closing. As long as you can set up an arms length environment, you don’t have to use an AMC. Most companies, however, would use that as their way to ensure arms length and to stay within the law. Sara said this is a big factor with a lot of lenders right now as they do not want to cross the line.

There is definitely a sense that there is some rotation system that is necessary where no matter what the experience level or knowledge of an area, it is just a specific person’s turn to obtain an appraisal. Debra Still’s company does a 1 in 5 rotation in each sub-market and probably has about 300 appraisers nationally that they use. It is very important not to use one person solely for a community. There needs to be team partners. All of the appraiser’s business would be dependent upon the company giving, so they have to do at least a 1 in 5 rotation. This is how they have set up their due diligence. They will review the appraisals, review for error, review any quality control audits, and they would make sure they have qualified individuals on their appraiser panel. Sara believes in this type of environment you would have more control over the quality of the appraiser. This is one of the things she does not find happening with a lot of the AMCs. They will gravitate toward cheap and quick and possibly overlook the qualifications that the appraiser has such as market expertise, which Sara says is extremely important. What really matters is the person who is willing to travel, to finish the appraisal, and turn it in completed. A quick turn-around time might be a day to a day and a half. There is no way that if you are not familiar with the market you can simply march in, collect the comparables, talk with the buyers and the sellers, get a sense of what is going on in the market, make the inspection, get a feel for what the property contributes, what are its overall attributes in relationship to the others that are on the market or the other sales that have occurred, go back to make the appraisal, and then write and convey it in a quick amount of time. It just cannot be done. Bruce said it is hard to want to do this if you are getting paid half of the appraisal fee. It may not even be feasible to spend as much time because you just cannot possibly do it. You might as well just go to Multi-list and get a couple of comps and move on.

When asked about broker-price opinions, Sara said one of the things about this is in some instances it might be a good vehicle, but for mortgage-lending purposes and for decisions a lender has to make; by in large the opinions are unregulated. An appraisal that is put forth and signed by a state-certified appraiser, which is what the Appraisal Institute does, has some education. They are unbiased and a third party out there taking a look at the property. They really don’t have anything more in the game than just to report and analyze the market. Sara believes sometimes in the terms of broker-price opinion you have a disinterested person. They are an advocate for the property owner and for another entity. They are certainly not regulated like the appraiser is in terms of adherence to certain educational requirements. There are so many things that are missing. The broker-price opinion might have its place in some part of the real estate picture, but certainly not in terms of making a decision to buy or sell. It’s a different approach; it’s a different mindset, and it should be for a different use.

Bruce speculated that when there is an REO created, there is a series of things that happen including a couple of BPOs and an appraisal. It’s uncertain which is weighed heavier, but there is evidence that everybody is getting a turn in saying what the value is.

To find out more, tune in next week for I Survived Real Estate 2011, part 6. 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

Tags: AMC, Appraisal Institute, appraisal management company, appraisals, bpo, broker-price opinions, bruce norris, Congressional Subcommittee, Debra Still, Dodd-Frank Act, Gary Thomas, HVCC, i survived real estate, mortgage, mortgage bankers association, norris group, QM, QRM, reo, Sara Stephens, Susan G. Komen
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The Norris Group Real Estate News Roundup 11/4/11

Friday, November 4th, 2011

Sources:

Freddie Mac Seeks $6 Billion From U.S. Treasury as Quarterly Loss Widens
Weekly jobless claims drop below 400,000
Homeownership Near 13-Year Low as Mortgage Rules Crimp Sales
Mortgage Applications Increase in Latest MBA Weekly Survey
Foreclosure reviews of largest servicers begin
Pending Home Sales Decline
Construction spending and manufacturing–slightly
US files $834 million lawsuit against Allied Home Mortgage
Real Estate Outlook: Changes to HARP
CoreLogic expects HARP 2.0 to help hardest-hit housing markets
Home prices heading for triple-dip

Today’s News Synopsis:

This week’s video is a slideshow of the news of the week in the world of real estate and other big events. The San Francisco Chronicle reported the number of impoverished neighborhoods increased 33% in the last ten years, with the suburb areas being hit harder than the cities. According to Bloomberg, in October the jobless rate decreased after employers hired less workers than was originally predicted.

In The News:

DS News – “Hudson & Marshall to Auction Over 100 HUD REOs This Saturday” (11-04-11)

“Hudson & Marshall has once again been selected to partner with HUD to auction over 100 foreclosed homes located in Nevada and Arizona. The auction will take place this Saturday, November 5th at the JW Marriott in Las Vegas.“

Bloomberg – “U.S. Jobs Gains Show ‘Frustratingly Slow’ Growth” (11-04-11)

“The U.S. jobless rate unexpectedly fell in October while employers added fewer workers than forecast, illustrating the “frustratingly slow” progress cited by Federal Reserve Chairman Ben S. Bernanke this week.”

Realty Times - “30-Year Fixed-Rate Mortgage Averages 4.00 Percent” (11-04-11)

“Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing average mortgage rates declining sharply as investors rushed to U.S. Treasury bonds amid concerns over the European debt market. The 30-year fixed at 4.00 percent marks the second lowest reading since it hit a record 3.94 percent in the October 6, 2011 PMMS, the lowest in history.”

Housing Wire – “First-time defaults in private-label MBS edge up in October” (11-04-11)

“First-time defaults on private mortgages edged up to a rate of 0.89% in October, a slight increase from this segment’s default rate of 0.86% in September, a new report from Amherst Securities Group said Friday.”

Wall Street Journal – “How Appraisals Are Derailing Home Sales” (11-04-11)

“In the past, appraisals rarely disrupted a home sale. But realtors and housing experts say new requirements and a difficult housing market are doing just that. Year-to-date through September, one third of realtors have said appraisals resulted in buyers and sellers delaying or cancelling contracts or renegotiating to a lower sales price, according to the National Association of Realtors.”

San Francisco Chronicle – “Neighborhood poverty surges in past decade, up 33%” (11-04-11)

“The number of Americans living in neighborhoods beset by extreme poverty surged in the past decade, erasing the progress of the 1990s, with the poorest areas growing more than twice as fast in suburbs as in cities.”

DS News – “Home Price Growth Has Dissipated With the Summer Heat: Clear Capital” (11-04-11)

“Temperatures are falling, and so are home prices in most local markets. Clear Capital says it’s expecting another long winter as the housing industry tries to cope with the downward forces of weak demand, record-low consumer confidence, and distressed inventory.”

Housing Wire – “BofA to raise up to $3 billion in stock issuance, reduce debt” (11-04-11)

“Bank of America (BAC: 6.49 -6.08%) intends to explore the issuance of common stock and senior notes in exchange for shares of preferred stock.”

Looking Back:

The MBA reported 3rd quarter commercial and multifamily mortgage loan originations increased 15% from the 2nd quarter of 2010. Jobless claims rose 4.5% the previous week. JPMorgan’s CEO claimed recent affidavit problems affected approximately 127,000 mortgage loans. Bruce Mosler of Cushman & Wakefield Inc. believed commercial real estate rents would rise in 2011.

Tags: Amherst Securities Group, appraisals, Bank of America, Ben S. Bernanke, Clear Capital, Federal Reserve, fixed-rate mortgage, freddie mac, home sales, HUD, Hudson Marshall, national association of realtors, Primary Mortgage Market Survey, reo, U.S. Treasury, unemployment rate
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