The Norris Group Blog

I Survived Real Estate 2009 Fundraiser for the Orange County Affiliate for Susan G. Komen for the Cure (Full Bio)

This week The Norris Group Real Estate Radio Show and Podcast presents Part 7 of I Survived Real Estate 2009.

California has a 9.7 percent default rate, and its home values have dropped by 50 percent. Bruce thinks that shows a lot of character, and that there are still plenty of people honoring their contracts.

SOMEONE believes that if they had purchased a home that turned out to be a terrible deal, he would be furious with his banker and the appraiser. The buyer on our system has always been on an island by himself. The Realtor does not have a fiduciary responsibility to the buyer unless they are contractually working with the buyer, the lender has underwriting standards but is not responsible for the buyer to make the payments, and the guys at Bear Stearns apparently did not have any fiduciary responsibility either. SOMEONE’s realtor told him that if you don’t have someone to write a mortgage for you, then use this person. That has worked very well with our system, because everyone played by the rules, but within the last five years, all the rules seem to have flown out the window.

Bruce asks David why 60 to 70 percent of loan modifications fail, and if principal reductions should be part of loan modifications. The lender does have a fiduciary responsibility, because they have buy-back agreements. There are many loans coming back from Fannie and Freddie, and they are asking the lenders to take them. The lenders do have responsibility, but the broker does not. There is recourse for the buyer in situations in which the buyer has committed fraud, and 80 percent of the loans going into foreclosure, in California, have fraud committed on them. That means that loan officers, Realtors, appraisers knew what they were doing. Even many borrowers are knowledgeable of the fraud that is occurring. David gives an example of a gardener who was told that if he stated an income of 15,000 dollars a month and falsely claimed to own a nursery, rather than his true income of 1,500, that when the value of his property went up the person helping him get the loan would split the money made on the deal.

Bruce recently talked to the president of a company in California who just bought a pool of mortgages for 335 million, and their face value was 25 cents or less on the dollar. He was in the subprime business, and he is probably responsible for creating the same paper that he is now buying and making a fortune on. David thinks that is shameful. David thinks that Barney Frank is one of the most intelligent people in Congress, but his policies are wrong. A year ago, 8 out of 10 of those subprime loans were still being paid on time, but now that number is 7 out of 10. It was not the products that were bad, but the subprime product was given to the wrong people. 50 percent of the 30 percent who have failing subprime loans will not lose their homes. That means that 85 percent of the people who got a subprime loan will not lose their house, but the media pushes it the other way.

David thinks that some loan modifications should include principal reductions, but not all. People in David’s industry once manually underwrote loans, and people had to qualify. That is what we are doing today, and we are making the best loans that we’ve made in 15 years.

People are asking lenders and servicers to use tools in a way that they were never designed to be used. Loan modification, forbearance, and workout programs were meant to be used on a case by case basis, but now we are trying to use these programs as mass market products. Now people are looking Obama to wave a magic wand over all the problems that are occurring. Short sales were supposed to be a rare occurrence for when someone has fallen on bad financial times at the same time as their house lost value. Now we are wondering why we cannot ask a single loan officer to do 100 short sales per day, and that is how many files they are getting. The tools we were using to fix this problem were not meant for the volume of activity we are seeing. Tommy believes that auctioneers can help fix that problem, but they have to sell at the proper value. Most people who have invested in the stock market have an equity that is off by 30 percent. Yet stock investors don’t think that the government should come up with some sort of modification or a cramdown for those sorts of mistakes. Tommy believes that people should know that real estate does not always go up. We have sold the concept that when you buy a home it will go up in price, and people have speculated on that concept, which is what caused all the problems we are currently seeing.

Bruce asks Pat if the reason for buying homes has changed. Pat says that it depends on where you live. All real estate is local. In the crazy market areas, some people began to look at real estate as an investment. In places like Michigan, home prices were not sky rocketing, so people simply viewed homes as a place to live in. Pat agrees with Tommy’s perspective on how this real estate problem came about. Realtors have contributed to this problem by telling people that they can easily flip properties.

Christopher Thornberg believes that  NAR hires economists to go out and produce ridiculous research, so that it can be used to support prices. The NAR never stood up in 2005 or 2006 and told everyone that there was a housing bubble. Pat believes that the NAR had very valid research. Thornberg debated economists from CAR and NAR who were telling him that there was no bubble. He frustratingly tells Pat that people should not view the NAR as an innocent victim on the sideline that was hit blind sighted by crazy people in California. Pat disagrees with Thornberg’s statement. She believes that the NAR’s economists did research in a credible way.

Tommy Williams moved to Oklahoma in 1985 immediately after he had experienced radical real estate devaluations in Western Illinois. He sold a farm at auction that brought 3,500 dollars an acre, but before he moved to Oklahoma, he resold the same farm for 1,200 dollars per acre. He met a lady who was trying to sell her house and he told her that her house would not sell for what she owed on it. She told Tommy that she had never heard of such a thing as a house that sold for a lower value than what it was bought for, and that she was going to tell congress that there should be a law forbidding homes to be sold for a decreased value. Christopher Thornberg jokingly asks if the woman trying to sell her house was Nancy Pelosi.

The 8,000 dollar tax credit was good for the industry. Bruce asks Pat if we would get the same result on a program involving a qualified buyer with no down payment. Pat is not sure if that kind of program would work. The NAR has seen a lot of qualified buyers sitting on the fence, because the media is saying that prices are going down. The buyers were unsure that they will be making a good investment. Now that the 8,000 dollar tax credit has come in, many of those fence sitters have chosen to enter the market. These new buyers are looking at low interest rates, choice in the market place, and affordability, but now there is less choice because the market is improving. Bruce asks Pat if we need to induce these buyers with a check. Pat would have said no six months ago. It bothers her to think that we need to pay off people to enter the market.

There is a proposal being supported by 16 senators to increase the tax credit to 15,000 dollars for next year. The current 8,000 dollar tax credit started at 15,000 dollars, but it was then taken down to 7,500 dollars, and then it was increased to 8,000 dollars. MBA is supporting an open 15,000 dollar tax credit. That includes owner occupied and second homes. Every time someone buys a house, they spend an average of 7,500 dollars. That money goes into places like Home Depot, Lowes, Porter Paint, and furniture companies. MBA’s economist estimates that if the 15,000 dollar tax credit was approved today, then an additional 400,000 purchases would take place over the next year. 7,500 multiplied by 400,000 is a lot of money. David Kittle would argue that when these people begin to buy these homes that they would most likely be buying a foreclosure. The government is going to have to spend money to bail out that market anyway, so David thinks this is a better option. Christopher Thornberg believes that this proposal is ridiculous, because you cannot expect the government to continuously subsidize everything. Chris thinks that this kind of spinning can cause the market to get into a “death spiral.”

The video of the live event is not being aired online HERE.

You can visit isurvived2009.com to learn more about our sponsors and speakers.

Here are the speakers involved in the event:

I Survived Real Estate 2009 Sponsors

A huge thank you to all of our sponsors who made this event possible.

Platinum Sponsors

Gold Sponsors
Tony Alvarez – The REO Mentor		Mike Cantu
		Awesome Limousines
	National Association of Real Estate Investors

I Survived Real Estate 2009 Fundraiser for the Orange County Affiliate for Susan G. Komen for the Cure (Full Bio)

This week The Norris Group Real Estate Radio Show and Podcast presents Part 6 of I Survived Real Estate 2009.

Bruce begins by discussing the declining housing inventory. A declining inventory typically means that the market is doing well, because you have multiple offers being placed on homes. We currently have the highest affordability rates in the history of California. The volume of sales has gone up to normal, but we have high unemployment.

Delinquencies have exploded. From July 08 to July 09, we have gone from 5.3 percent to 9.7 percent delinquencies. The inventory of REOs has gone down, because banks have not taken back as many as they should. Some people have not made payments in 14 months. Trustee sales have also declined during this same time period. We had 28,795 trustee sales in July 08 and then we progressed to the 9.7 percent delinquency rate. We are currently 306,000 trustee sales short of where we should be. That averages 25,000 homes going out per month in the future. We have not peaked at delinquencies, and according to reports, we will soon be at 13 percent delinquencies. At 13 percent, we will be releasing 70,000 homes per month. Bruce does not believe that we can have a positive market if these statistics are true.

FHA is going to have a large number of defaults next year. They once had a 203K loan for investors in which investors could buy a property and include the repair bill in the loan. A lot of people would use this kind of loan and they would buy up to 7 homes and use them as rentals. Bruce thinks this would help clear up a lot of inventory.

Bruce thinks that Fannie and Freddie programs should be expanded so that qualified buyers can get unlimited loans. We are currently stuck at 10, and many investors are capped out because they exchanged their homes out of California and moved their investments to another state. Those investors cannot sell their property and come back to California.

We are currently giving away homes for 8,000 dollars. That money is coming from tax payers. Bruce thinks that we should just let people take these homes for no down payment. We will have people walk away, but the next buyer will be able to easily take it. Under this kind of proposed program, it would not matter if the buyer qualified or not because this loan can be continually passed down. These houses could go to investors with a 5 percent interest rate. This program would not have foreclosure, because the problems would be solved by the next buyer. The people who have recently foreclosed on their homes will not be able to qualify for homes, which may keep them out of the market for the next few years. We could just reintroduce these people as buyers if they did not have to qualify. This is not a program that we have never seen before. We are trying to solve this problem by selling the next house to the owner occupant who was shoved into home buying by the nonsense financing of 05 and 06.

We are already doing zero down deals. When Bruce sells a property, he usually pays part of the closing cost. The person getting 3.5 percent down on a 100 grand purchase is getting an 8,000 dollar check; that is better than nothing down. If you just had nothing down and these people qualified, we would get rid of a lot of homes.

Bruce and many other investors believe that we need to get rid of the FHA 90 day flip rule. When an investor fixes a property, which may only take 3 to 4 weeks, and they sell it within 90 days, the investor is believed to be guilty of fraud.  The lender has to pay the cost for this, because the investor will subtract the amount that he or she must pay the lender for the property. We need to start looking at investors as people who can help this problem. At some point, we must either choose to not foreclose, or we must pay catch-up in a painful market.

Bruce asks Christopher Thornberg if he expects the dollar to lose value, and how the value of the dollar impacts interest rates. As the trade deficit gets wider, the dollar goes up. Now the trade deficit is going to close, so the dollar will get weaker. There is very little doubt that the dollar will weaken. Interest rates are undoubtedly going to go up. The federal reserve has increased the money substantially and that money is going to cause inflation. The Federal Reserve is either going to let inflation happen, which will raise interest rates, or they will fight inflation by selling the long range securities they bought, which will also raise interest rates. One way or another, interest rates are going to go up. In the shorter run, it will be faster to allow inflation to occur, because that would bail out the asset markets. In 1982, the mortgage rate was 18 percent, because of the fear of inflation.

Bruce thinks that we can absorb a higher interest rate and still have a good real estate market, because the combination with the cheap price could absorb a double digit interest rate, just like in the 70s. Thornberg says that a 1 percent increase in the mortgage rate means a 10 percent decline in prices. Bruce disagrees with this, because between 1974 and 1980 we had a tripling in real estate prices and interest rates doubled. Thornberg tells Bruce that he is talking about the real mortgage rate, which is the mortgage rate minus the rate of inflation.

Bruce asks Thornberg what the statement “Unemployment is a lagging indicator” means. Thornberg says that means that “the labor markets are the last to go into the toilet and the last to dry off.” Bruce asks if that means “when labor improves, every other category of real estate should have already started to improve”. Thornberg says that residential real estate leads commercial. Now, we keep waiting to hear about the collapse in the commercial market, but we are not seeing this at all. Thornberg says that this sort of lead and lag mentality can be exaggerated.

This is why Bruce brought this up, because in the last cycle, employment improved in California from 1994-96 but we did not have a price increase until 1997. If we do not have price increases, builders will not build anything. Bruce asks if you can have an improved labor market if builders do not have any work to do. Thornberg says that these two factors do kind of work together. The prices started to go up after the labor increases from 1994-96. Thornberg reminds Bruce that in the early 90’s we lost zero space, defense, and migration. In that market, the real estate was hampered by the excess supply. Thornberg takes issue with the idea that we should subsidize the building of new homes, because he believes that we have too many homes. Thornberg believes it would be a bad idea to subsidize the construction of homes when there is already too much inventory. Bruce says that some builders have been fixing existing inventory, and Thornberg believes that is all the builders can really do.

Robert Toll made 700 million dollars between 2000 and 2007 because he was selling too many houses at too high of a price, and now he wants tax payers to bail him out.

Bruce Norris asks Rick Sharga if people foreclosed for different reasons in 2008 versus 2009. Rick says that the reasons are not as different as the press would lead you to believe. The media has jumped ahead to the next wave of foreclosures. We are looking at a 3 wave foreclosure tsunami. The first wave began in the first quarter of 2006, because of the subprime meltdown and ARMs. The MBA numbers suggest that 33 percent of the new foreclosures are unemployment. That means that 2/3 of the foreclosure activity is not employment related.

What we are really seeing is increasing levels of foreclosure activity from the first wave, which is being made worse from the second wave. The second wave is about to pick up steam. If unemployment peaks around the first quarter of next year, we will see the foreclosures related to that peak around the 3rd or 4th quarter next year. That will be just in time for them to be augmented by the next wave. This next wave will be caused by the option ARMs. Many loans are going to reset, and people will owe more on their reset loans than their original loans.

Strategic defaults are going to be a problem. In the past American culture, people honored their contracts and chose to make their payments. Now people are realizing that the house they bought is worth half of what they owe, and they are wondering if it is in their family’s best interest to keep paying. If someone is only 10 percent upside-down on a loan then they will probably stick with the loan, but if they are upside-down by 50 percent then they will probably default.

Thornberg asks people if their credit or their equity will hear quicker. Thornberg says that most of these people will have their credit heal faster. Sharga responded to Thornberg with a story about a Coldwell Bankerk agent that was fired. This agent counseled her customers to default on their current loan after qualifying and buying a second house. Bruce feels that there is still a lot of character being shown in California; a state with a 9.7 default rate that has had a 50 percent value drop.

The video of the live event is not being aired online HERE.

You can visit isurvived2009.com to learn more about our sponsors and speakers.

Here are the speakers involved in the event:

I Survived Real Estate 2009 Sponsors

A huge thank you to all of our sponsors who made this event possible.

Platinum Sponsors

Gold Sponsors
Tony Alvarez – The REO Mentor		Mike Cantu
		Awesome Limousines
	National Association of Real Estate Investors

I Survived Real Estate 2009 Fundraiser for the Orange County Affiliate for Susan G. Komen for the Cure (Full Bio)

This week The Norris Group Real Estate Radio Show and Podcast presents Part 5 of I Survived Real Estate 2009.

The next speaker for I Survived Real Estate 2009 was Joseph Magdziarz. He is the 2009 Vice President of the Appraisal Institute, and will become president of the Appraisal Institute in 2011. He has been an active member of the Appraisal Institute for 38 years.

The Appraisal Institute is the largest professional appraisal group in the world with 26,000 members. Last year, the Appraisal Institute had 3,900 new members.

The market conditions today are difficult to figure out. When there are complex issues going on, we need to have experts dealing with them, but we are not getting experts to deal with these issues. The reason why this is happening is because the appraisal management companies want reports within a few hours and they pay very little. The best appraisers are starting to leave the industry because of this.

The HVCC expires in July of next year, and people are not happy with it. Moratoriums are not going to help anything. We need long term solutions.

There are 10 large appraisal management companies in the country. Those companies are advertising jobs to people who can do appraisal jobs quickly and cheaply, so people are taking these jobs in areas that they are not familiar with. This is harming consumers, and it harms everyone in the industry. The government is trying to pass a bill which will regulate management companies, so that they work on a state by state basis, and the appraisal management companies do not like that. If this bill passes, perhaps appraisal management companies will start looking for people of quality to do these jobs. Right now, consumers are paying more from lower quality work, and that is wrong. Perhaps if we present this problem as something that is hurting consumers then we can get this problem fixed, because nobody cares about appraisers, Realtors, and mortgage bankers.

One of the problems with current appraisal standards is that appraisers are using distressed sales as comparable sales. Distressed sales do not meet the definition of market value. If you were to use them, you would have to make significant upward adjustments.

People who are not a member of the Appraisal Institute are 7 to 20 times more likely to have complaints filed against them. Joseph hopes to make appraisals more competent by increasing education. Joseph asks that if anyone has an appraiser who is doing work outside of their comfort zone then they need to file a report with the Appraisal Institute. Anyone who does work outside of there are of competency needs to be reported.

Joseph supports the original HVCC because appraisers need to have pressure taken off of them, so that they can make accurate appraisals. Before, some appraisers were pressured to inflate appraisals.

A lot of the Appraisal Institute’s members had relationships with lenders, and they could talk to the lenders when they had problems. They were not being influenced to do unethical things. Right now appraisers have to register with the state, but they do not need a license. Appraisal fraud is beginning to increase again.

People are being discouraged from filing complaints against appraisers. Mortgage lenders do not want to get involved, but they need to. They need to file complaints with the state, because appraisers must have licenses, and file with the Appraisal Institute if the appraiser is a member.

Appraisers were not reporting listing histories or concessions in the past and that can cause over valuing. Also, not knowing those things can cause under valuing issues. If you do not talk with sellers about what caused them to sell, you can come up with a bad appraisal.

Under HVCC, lenders are responsible for paying the appraiser. Brokers are getting bad appraisers because they are not allowed to pick their appraiser. You should have the right to ask for a competent appraiser. If you are not given a competent appraiser, report the appraiser, report the bank, and report the appraisal management company. Ask your appraiser how long they have been in business and if they belong to a professional group. Fannie and Freddie agree that you should look for appraisers that belong to professional associations, because those appraisers have people observing their activity. Professional associations have more strict ethics than the state requirements.

If you have trouble understanding what a comparable sale is, think like this: “If I can’t buy this property that I’m looking at, what other property would I buy first?” That mentality will give you a good idea as to what a comparable sale is. This requires a competent person who can account for repairs that have been done on a house in a neighborhood full of foreclosures. If a repaired house is being compared to a neighborhood full of foreclosures then an upward adjustment must be made on the appraisal. Joseph thinks that many of the problems that we currently have can be blamed on congress, and their lack of enforcement.

The next speaker on I Survived Real Estate 2009 was David Kittle. David began his mortgage banking career in 1978, and is currently vice president of Vision Mortgage Capital. He has served as a past chairman of MBA’s political action committee, board of governors, and he has served on the board of directors since 2004. David Kittle’s mother-in-law is a 21 year breast cancer survivor.

David Kittle has been privileged to represent 3,000 member companies, and over 400,000 individuals that are members of MBA. During the last year and a half, David has spoken in front of congress 14 years. David’s favorite testimony was on November 19, 2008. Senator Whitehouse came out first and screamed at people saying, “Why can’t you modify these loans?” One of the other people there claimed that David was responsible for the entire collapse of the world economy. Last time the bankruptcy laws were changed was 1978. When David got in the business, he could get you an investment loan or a second home loan under the same terms as an owner occupant loan. People at this testimony called David a scrooge, because people were getting kicked out of their homes. David was taught not to talk back to a senator, but he fired back. He said, “Excuse me, Senator. I haven’t drawn a paycheck in 14 months. I’ve layed off 90 percent of my staff, because I can’t afford them. Don’t tell me I don’t know what these people are feeling. I was smart enough to put money away, I protected my credit scores, and I’m making my payments on time.” The senator that was accusing him sat back in his chair and apologized. 95 percent of David’s members are individual business owners who take risk every day. Senators could care less about David’s industry. They care about getting reelected.

MBA has a mortgage action alliance that is free for anyone who wants to make a difference in the mortgage industry. It is free and you do not have to be a member of the MBA. Got to MBA.org, give them your name, email address, and the names of your family. MBA will write your letter to congress, and they will send it to you, so that you may personally send it to congress. If you do not like the letter then you can edit it. A senator may not pay attention to 100 phone calls, but they will pay attention to 15,000 emails. Your opinion does matter.

People sometimes ask mortgage bankers, “Why can’t you modify more loans?” Mortgage bankers cannot modify loans, because borrowers will not call back. When people do ask for modification, they are already 90 days down the road. When bankers modify the loan, they have to retake the loan application, they have to verify assets, and they have to make sure that their borrowers have jobs. Then they have to run a title. The longer those go out, the more taxes are placed against their property.

David predicts that next year there will be a larger wave of foreclosures. All the brokers got FHA approved, and all the loans that were subprime are being placed under FHA. The government is going to have to bail out FHA next. David thinks that the net worth requirements should be higher, and education and licensing requirements need to be higher.

The video of the live event is not being aired online HERE.

You can visit isurvived2009.com to learn more about our sponsors and speakers.

Here are the speakers involved in the event:

I Survived Real Estate 2009 Sponsors

A huge thank you to all of our sponsors who made this event possible.

Platinum Sponsors

Gold Sponsors
Tony Alvarez – The REO Mentor		Mike Cantu
		Awesome Limousines
	National Association of Real Estate Investors