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

Friday, February 3rd, 2012

Mike Novak-Smith

Mike Novak-Smith

REO agent

RE/Max

(Full Bio)

Ted-Boeker

Ted Boeker

Owner and Broker

RE/Max

(Full Bio)

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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/.

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

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262-TNGRadio – Robert Kleinhenz 1-28-12

Friday, January 27th, 2012

Robert-Kleinhenz

Robert Kleinhenz

Chief Economist for LAEDC


(Full Bio)

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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.

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

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253-TNG Radio – I Survived Real Estate 2011 part 6 11-24-11

Wednesday, November 23rd, 2011

I Survived Real Estate 2011

I Survived Real Estate 2011


(Full Bio)

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

Bruce 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.

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

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246-TNG Radio – Sean O’Toole 10-8-11

Friday, October 7th, 2011

Sean O'Toole

Sean O’Toole

President of ForeclosureRadar

(Full Bio)

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On October 14th, 2011, The Norris Group returns with its award-winning event I Survived Real Estate. An expert lineup of industry specialists join Bruce Norris to discuss current industry regulation, head-scratching legislation, and the opportunities emerging for savvy real estate professionals. 100% of the proceeds support the Orange County Affiliate of Susan G. Komen for the Cure. This event would not be possible without the generous help of the following platinum partners: Foreclosure Radar and Sean O’ Toole, Housing Wire, The San Diego Creative Real Estate Investors Association and President Bill Tan, Investors Workshops and President Shawn Watkins and Angel Bronsgeest, Invest Club for Women and Iris Veneracion and Bobbie Alexander, San Jose Real Estate Investors Association and Geraldine Berry, Real Wealth Networks, Frye Wiles Web and Branding, MVT Productions, and White House Catering, who will provide the 3-course meal for this black tie event. Visit iSurvived2011.com for more details.

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

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

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

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

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

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

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

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

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

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

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

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

Sean O’Toole will be on the panel for I Survived Real Estate 2011, taking place on October 14th. The Norris Group would like to thank their gold sponsors for the event: Adrenaline Athletics, Coldwell Banker Pioneer Real Estate, Conaway and Conaway, Delmae Properties, Elite Auctions, Inland Empire Investors Forum, Keller Williams of Corona, Keystone CPA, Kucan & Clark Partners, LLC, Las Brisas Escrow, Leivas Associates, Mike Cantu, Northern California Real Estate Investors Association, Northern San Diego Real Estate Investors Association, Pacific Sunrise Mortgage, Personal Real Estate Magazine, Realty 411 Magazine, Rick and LeaAnne Rossiter, Southwest Riverside County Board of Realtors, Starz Photography, uDirect IRA, Wilson Investment Properties, Tony Alvarez, Tri-Emerald Financial Group, and Westin South Coast Plaza. Visit isurvived2011.com for more details.

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

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The Norris Group Real Estate News Roundup 10/4/11

Tuesday, October 4th, 2011

Today’s News Synopsis:

Inman News reported a 20% increase in foreclosure starts on a month-by-month basis from July to August.  CoreLogic released a new report forecasting that mortgage frauds will decrease 40% in the coming year.  In other news, the National Association of Realtors reported a 1.2% decrease in pending home sales for the month of August.

In The News:

Bloomberg – “BofA’s Countrywide May Face Fraud Claim After Housing Audit” (10-4-11)

“Bank of America Corp. (BAC), the biggest U.S. lender by assets, should face fraud claims after the firm’s Countrywide unit submitted incorrect data on borrowers for government-insured loans, a federal watchdog said.”

DS News – “Credit Union Coalition Develops Foreclosure Intervention Toolkit” (10-4-11)

“The New York-based National Federation of Community Development Credit Unions has completed a new “Credit Union Foreclosure Intervention Toolkit” to help credit unions combat the foreclosure crisis in their communities.”

Housing Wire – “FHA and the Short Refi left behind” (10-4-11)

“The $8 billion Federal Housing Administration Short Refi program, launched last September to refinance underwater mortgages helped 301 borrowers in 11 months, according to Department of Housing and Urban Development data analyzed by HousingWire.”

Realty Times – “Pending Home Sales Decline “ (10-4-11)

“The latest National Association of REALTORS found that sales dropped 1.2 percent in August.  Lawrence Yun, NAR chief economist, said the decline reflects an uneven market.”

Inman - “Foreclosure starts leap in August” (10-4-11)

“Foreclosure starts jumped 20 percent from July to August, with first-time foreclosure starts hitting a 2011 high, data aggregator Lending Processing Services Inc. reportss.”

O.C. Register - “Mortgage fraud down 40% this year” (10-4-11)

“Santa Ana-based data firm CoreLogic estimated that the total value of U.S. mortgages tainted by fraud will drop 40% this year to $7.4 billion.  That compares $12 billion worth of fraudulent loans issued in 2010, the firm reported.  The decrease is due mainly to a decline in the overall number of home loans being issued”

San Francisco Chronicle - “Mortgage REITs Tumble to Worst Two-Day Loss Since December 2008″ (10-4-11)

“Real estate investment trusts that buy U.S. mortgage debt tumbled to the steepest losses since December 2008, on concern that their main source of financing will be roiled by European bank woes.”

CNN Money – “Fannie Mae ignored foreclosure abuses” (10-4-11)

“Fannie Mae (FNMA, Fortune 500), the government-controlled mortgage giant, ignored indications that attorneys it hired to handle defaults were abusing the foreclosure process, according to a report from the inspector general for the Federal Housing Finance Agency (FHFA), the agency that oversees Fannie.”

USA Today – “Shadow inventory keeps home prices depressed” (10-4-11)

“Stagnant home prices have become part of the new normal nationwide, and one of the big reasons is the nation’s giant shadow inventory — the hundreds of thousands of homes like those on McGregor’s route that are either in foreclosure or repossessed by banks, but not yet on the market.”

Housing Wire - “Consumer advocates urge Fed to reject Capital One-ING merger” (10-4-11)

“Consumer advocates Tuesday focused their criticism of the proposed Capital One Financial Corp. (COF: 38.80 +2.78%) acquisition of ING Direct USA (ING: 6.80 +5.43%) on what they described as Capital One’s predatory lending practices and inadequate commitment to reinvest in local communities.”

Looking Back:

GMAC Mortgage, JPMorgan Chase and Bank of America were reconsidering past evictions due to poor foreclosure processing procedures. According to the NAR, pending home sales rose 4.3% in August 2010. CAR expected 2010 home sales to be 10% lower than the total number of sales in 2009. 10.2% of all mortgages in the nation’s top-100 most populated areas were over 90 days delinquent.

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 event calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 170 podcasts in our free investor radio archive.

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233-TNG Radio – John Burns 7-09-11

Friday, July 8th, 2011

 

John-Burns

John Burns

President, John Burns Real Estate Consulting


(Full Bio)

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This week Bruce is joined once again by John Burns. John is president of John Burns Real Estate Consulting Inc, which helps real estate industry executives by analyzing and summarizing the information they need to make decisions with more confidence. Mr. Burns is on retainer with a number of companies, both in the housing industry and Wall Street to monitor housing conditions and help them refine their strategies in an ever-changing environment.

In today’s topic, Bruce started by asking what the common theme has been for a builder to survive between 2007 and now. In response, John states that first, regarding the privately held ones, the ones that were managing their balance sheets very carefully, trying to not become too overextended in debt, diversified into other businesses, and sold land at the top of the market were the ones who made it through. Some of the public builders, even after the market corrected, carried out some large bulk land sales, some being almost $.34 on the dollar while others were $.16 on the dollar. Not only did this get them some cash in the bank, but they were able to recognize some tax losses and get back millions of dollars that they had paid the IRS in prior years. The other thing that happened to the public builders was that the debt markets were wide open the last couple of years, so they have gone out to the debt markets and stuck out their debt maturities until 2016 or later. They have not had to make principle payments. So the two things previously mentioned have really helped them significantly.

As Bruce says, from a lender’s perspective this is a straight note. In 2016, they have a lot of bonds due, and at the time that they come due they either have to write another check or obtain another bond. They don’t have one big bond due in 2016; they have little chunks due in various years, which was really smart. However, at some point you will have to either refinance or pay off the debt. Most likely nothing spectacular will happen before 2016, but the bondholders who buy that are managing Bruce’s and John’s retirement funds, and right now a 10-year treasury is 3% while a lot of the debt trade is anywhere from 6-11%. Therefore, there is an appetite for the high-yield portion of the funds where they will take some risk. If things get really bad, they may have to refinance from an 8% interest rate into a 10 or 11% rate, but the person who owns 8% rate still gets paid off that way. The real risk is if the bondholder can’t refinance because someone thinks the bonds are not going to make it.

If you’re a public builder, the biggest advantage is the access to the capital markets. If you’re a private builder, you don’t have this kind of access, and all the debt is non-recourse. The public builder CEOs sleep better than private builders because they don’t have recourse debt. The ones with the best balance sheets have bought quite a bit of land, some of it with a really long-term perspective because none of them are worried about any cash crunch. Most of the builders have been buying enough land to assure that they have good revenue in 2012 and 2013. Much of the land they own is in tough areas where they can’t make money, so they’re trying to buy land in better locations. They will come back to the tougher land some day in the future when it makes sense again, usually in about 6-8 years. In the meantime, the twelve largest publicly trade builders are sitting on $13 billion in cash. So what do you do with that cash? Most of redeploying it into their own business, but also, if you look at their income you see that they’re breaking even and covering their overhead to stay alive for another day. Some of the more creative ones are now thinking about new businesses to get into. Toll Brothers is buying nonperforming loans from the FDIC and starting a golf course management business. Lennar is buying nonperforming loans, and Beazer is buying REO in Phoenix and renting it out. There have been local builders that have been involved in the trust deed sale business to buy, resell, and have houses to fix. Bruce does not think they’re used to the margins, and how big the margins are is usually a common misconception. For example, in the business The Norris Group does the margins shrunk. Beazer, for example, is hoping to make a 6-8% return on their REO purchases and are not looking for anything bigger than that. They’re keeping them as rentals and not reselling it until some point in the future. If you’re buying and reselling it the return is quite a bit better, but it’s also risky.

They went on to discuss shadow inventory. John’s definition of shadow inventory is a distressed sale that is not yet on the market. If somebody is 90 days delinquent or more, research has shown that very few of those delinquencies become current and the borrower gets saved. There are about 4.5 million of these in the country today, and our best estimate is about 1-2 million of them are on the market. Therefore, there is about 3.5 million shadow inventory with more coming. The report Bruce saw had 91,000 resolutions in the month the report came out, so being in the buying and selling business, The Norris Group is feeling pretty comfortable right now. In Riverside when you look at what’s for sale, you have a few REOs, some in disrepair, and a lot of short sales. However, this is not too exciting if you are an owner-occupant buyer because it may take 4 months to get a yes or a no answer. You don’t really have a lot of real inventory to sell against, but if you look at what is behind you at the churning shadow inventory, a lot of times the thought that lenders have already taken back the property and are not presenting it on the market just shows that what John Burns believes about shadow inventory is true. Shadow inventory is the properties they refuse foreclose on, and this is one of the things they talked about when they met with Fannie and Freddie. About 30% of all the foreclosures are over two years behind. Bruce wonders if next year they will be three years behind. At some point, we need to cut to the chase.

There is a website called housingwire.com, which was founded by a man from the mortgage servicing business who is very well connected to the industry. They had a conference in North Carolina two weeks ago that John attended along with all the top foreclosure attorneys and the CEOs of Fannie and Freddie. Here, John became very convinced that virtually every judge in America hates the banks, does not trust them, and is going to make it very difficult for them to move and act and foreclose the way they want to. The Norris Group had interviewed the president of MERS right after he had testified in Congress, and simultaneously almost the same week Bruce interviewed the president of the Title Insurance industry. Bruce’s concern was that they’re buying REOs trying to resell them, and all of a sudden in the industry people are getting sued because somebody said they were foreclosed on wrongfully. The idea that you’re being hung out to dry is one of the reasons Bruce interviewed the president from title insurance. He’s asking himself, “Do we have title insurance?”, which is true if you have an REO. But if he buys at trustee sales, it’s not necessarily true. You’re stepping into lender liability issues and a whole bunch of other things. Sometimes he gets title insurance the day he wins the bid, and another time they were sued because there was not a reason to foreclose. Recently, there have been courts that have upheld that, when a commitment has been made verbally to a client that the lender is in fact going to pursue a loan modification and they foreclose on them anyway, the client does have recourse and rights to sue.

Another interesting twist with how the lenders conduct the sales is that the only way there is a deal, in Riverside for example, is if the lender lowers the bid. If they are owed $500 and start opening bids at $200, then Bruce said he will be interested at that point and will pursue checking out title and who is in the house. What he does not understand is when lenders let Bruce know at 8 a.m. about a 10 a.m. sale. He does have the infrastructure to be able to cope with this and get to a knowledgeable answer very quickly, so he might end up with some deals that he wouldn’t normally have. However, from a lender’s side it is absolutely ridiculous because you end up with far less qualified people being able to bid up the price. It’s rare that The Norris Group would do much interviewing of the person at the door because a lot of times they’re either not there or don’t answer or they will tell you stories. So it’s hard, but this is the business model. In the courts and politics there is definitely a leaning away from housing, and this is going to be so different than the 30 years we have just experienced for most of our careers.

Bruce stated that as we see the prices of homes go down in Riverside to where they are below replacement cost, then it’s a safe bet that we’re going to build a another house in Riverside. From the peak of housing construction to today, building costs are down about 30-35%. However, a portion of this reduced cost is that builders are putting fewer bells and whistles in the house. They have cut down on the amenities, and most of the savings have come from labor as well as all the materials. There are some cost increases with the commodity increases, but none on the labor side. They preferred not to go into depth on inflation and deflation; but Bruce said he reads everything he can on it and the practical side of him looks at the ability for labor to ask for more per hour, which he does not see happening anytime soon. Normally, printing more money causes inflation, but for some reason Japan has printed a lot of money and they don’t have inflation, so deflation and inflation are kind of a confusing situation. However, it does at the same time make it difficult as an investor to go forward and make the correct decisions, so you really have to be conservative, which most of the companies who have survived have done. As an interesting twist on costs, John has been receiving some early feedback from clients who think the cost of entitling lots is going to get more expensive. There are going to be environmental regulations along with storm water mitigation efforts moving about that could significantly increase the cost of new construction. The army corp. of engineers is making some changes. After Hurricane Katrina, they changed the definition of what a 100-year plane flood was and made an entire area of Sacramento that was under development just stop development in the middle because the workers had to go fix the levies in New Orleans before they could build any more. The environmental movement that is now taking a foot in the country is going to make construction more expensive. On the same note, when you’re fixing properties there are areas even in California where you now have to have a permit for every rental that you have. They will also most likely mandate more energy efficient homes, which will also be more expensive to build. There is one city that mandates repairs of the property to specific standards. It’s pretty scary. There is financing available for this type of work, and somehow it is equal to a tax lean, a superior lean to the first. So you can buy a property, borrow money to do the green rehab, and it becomes superior to the first trust deed in the case of a foreclosure and non-payment. On a related matter regarding CFD bonds and mello roos bonds, a lot of John’s construction lending clients suddenly woke up and realized that they didn’t make the first loan, but instead the second one. The mello roos one was superior, and now they’re the equity in the project instead of the debt.

In general, the construction business is down as well as commercial real estate. It’s unknown what the percentage of employment or GDP this represents, but it is possible that we are in the early stages of seeing a lot of apartment construction. This will be good for the economy, but only time will tell whether the apartment market will be overbuilt. If in the future the housing declines then about 4.5 million people won’t live in the apartments anymore, but at the same time it will create 4.5 million vacant residences. There could be a case for them building apartments that are more attractive if they have the amenities that people want, something about which builders ask a lot. They would not build an apartment complex that is bare bones, but instead they would build ones where people would rather be in the apartment than a house. They also would not build it in the Inland Empire, but rather San Diego, Orange County, and L.A in areas where people would traditionally rent anyway. The thought is that as we come out of this and create millions of jobs, for all the reasons discussed in this radio show people are going to be forced to rent. If you look at all the pro-government policies toward home ownership over the last twenty years reversing themselves, it’s going to create an opportunity to build some apartment complexes, even though there have not been a lot built over the last twenty years. Probably more importantly than anything else is that it’s not the fundamentals that matter, it’s the demand and supply of capital. The money is flowing in to build apartments.

When asked whether California’s employment situation has even been solved without construction being a major contributor, John responded that he has not sure it’s ever been solved. One interesting statistic is that there are 350,000 fewer documented employees in L.A. today than 1990. In Japan, it took them till about the year 2000 to get back to their 1990 levels of employment, while we have fallen since then.

The Pure Affordability Index, which looks at housing costs in relation to income on John’s website, holds an A+ right now. However, when you look at some of the other factors that John and his company group into the Affordability Index, things are horrible. This is why affordability holds a D+ on his scale even though it’s at the highest it has been. If you’re a renter, today is the most affordable time to get into the market. If you’re a homeowner, it’s an F. This is because you lack equity. The strongest F is the loan to value on existing loans, which holds an 85%, which is a lot higher than it was earlier. They also look at income growth, which is also not very strong right now. Also, the debt-to-equity ratio does not include properties that are free and clear, but only the ones that have debt.

In regards to California’s commercial market, it is a lot like what the residential market was like 4-5 years ago where people are staring at a lot of maturities coming due. The interesting conundrum here is if interest rates stay low, you are most likely going to see a lot of extend and pretend. This is because the loan to values won’t come in, but the properties can cash flow given the interest rate being so low. If interest rates go up, then there is no hope of extending and pretending and therefore you will see a lot of distress including the properties that have a lot of vacancy.

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

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The Norris Group Real Estate News Roundup 6/23/11

Thursday, June 23rd, 2011

Today’s News Synopsis:

New homes saw a decline in May of 2.1%, according to NAHB.  Mortgage rates remain at a steady low for the second week straight.  Shadow inventory is decreasing slowly, but is still high for the time being.  In other news, the House Appropriations Committee voted to cut funding for the Consumer Financial Protection Bureau. 

In The News:

Inman - “Mortgage rates hold steady again near 2011 lows” (6-23-11)

“Mortgage rates held steady this week, remaining at or near their 2011 lows for the second week in a row, Freddie Mac said in releasing the results of its Primary Mortgage Market Survey.”

RisMedia - “Shadow Inventory Slowly Fades” (6-23-11)

“The so-called “shadow inventory” of foreclosures—properties in the foreclosure pipeline but not yet listed on multiple listings services—slowly sank over the past year but still amount to five months’ worth of home sales. ”

NAHB - “Builders Back Reauthorization of Flood Insurance Program” (6-23-11)

“The National Association of Home Builders (NAHB) today expressed support for a five-year extension of the National Flood Insurance Program (NFIP) to ensure that the federally-backed flood insurance program remains efficient and effective in protecting flood-prone properties and creates more stability in the housing market”

The Wall Street Journal - “Jobless Claims Move Higher” (6-23-11)

“The number of people filing new claims for unemployment insurance ticked up last week in the latest sign that the U.S. labor market is sputtering amid slower economic growth.”

RisMedia – “MBA Study Shows First Quarter 2011 Mortgage Banker Production Profits Slide as Volume Drops” (6-23-11)

“Independent mortgage banks and subsidiaries made an average profit of $346 on each loan they originated in the first quarter of 2011, down from $1,082 per loan in the fourth quarter of 2010, according to the Mortgage Bankers Association’s (MBA) First Quarter 2011 Mortgage Bankers Performance Report released recently.”

Bloomberg - “Sales of U.S. New Homes Decreased in May” (6-23-11)

“Purchases of new U.S. houses fell in May for the first time in three months, showing the industry is struggling to gain momentum.”

Housing Wire - “Audit says FHFA failed to address consumers’ GSE complaints” (6-23-11)

“The Federal Housing Finance Agency mishandled consumer complaints about Freddie Mac and Fannie Mae, including complaints about possible foreclosure actions, the FHFA Office of Inspector General said in a report this week.”

Housing Wire – “House committee votes to slash CFPB funding” (6-23-11)

“The House Appropriations Committee voted Thursday to cap funding for the Consumer Financial Protection Bureau at less than half of what was originally estimated for the agency”

DS News - “Distressed Sales Drive CRE Prices Down for Fifith Month: Moody’s” (6-23-11)

“Commercial real estate prices (CRE) in the U.S. declined in April by 3.7 percent, according to a new report from Moody’s Investors Service.”

NAHB - “New-Home Sales Decline 2.1 Percent in May, Holding Above First Quarter Average” (6-23-11)

“Sales of newly built, single-family homes declined 2.1 percent to a seasonally adjusted annual rate of 319,000 units in May, according to figures released by the U.S. Commerce Department today.”

Looking Back:

One year ago, new home sales decreased by 33 percent in May 2010. The MBA’s weekly survey showed mortgage applications decreased by 5.9 percent the previous week. The Franchise Tax Board announced 80% of the credits for first-time home buyers program in California had been applied for. Borrowers who strategically defaulted were banned from obtaining new mortgages backed by Fannie Mae for seven years from the date of foreclosure.

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

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The Norris Group Real Estate News Roundup 6/22/11

Wednesday, June 22nd, 2011

Today’s News Synopsis:

Susan McFarland was just named the new CFO for Fannie Mae, according to Housing Wire.  Sales of existing homes decreased 3.8%, while home prices actually increased a slight .8%.  They rose slightly despite having fallen 5.7% back in April.  There was also an increase in the sale of pending homes for the first time in 17 months.

In The News:

Housing Wire - “Fannie Mae names McFarland CFO” (6-22-11)

“Fannie Mae named Susan McFarland executive vice president and chief financial officer.  She replaces David Johnson, who had been head of the government-sponsored enterprise since soon after the feds put Fannie in conservatorship. Johnson announced plans to resign in November. Deputy CFO David Hisey served in the interim.”

Bloomberg - “U.S. Commercial-Property Index Falls to Record on Distressed Properties” (6-22-11)

“U.S. commercial property prices fell in April as sales of distressed assets made up a large share of transactions, according to Moody’s Investors Service. ”

The Wall Street Journal - “Home Resales Slide 3.8%” (6-22-11)

“The housing slump has reined in Americans’ once-insatiable appetite for bigger and better homes.  The trend can be seen in the latest report on sales of existing, or previously owned, homes for May, released Tuesday by the National Association of Realtors. Overall, the report showed that sales of existing homes fell 3.8% in May, underscoring the weakness of the spring selling season and the uneven nature of the housing recovery”

Inman - “Opposition to QRM proposal picks up steam” (6-22-11)

“The campaign to shoot down a proposal by federal regulators that lenders be required to retain at least 5 percent of the risk on mortgages they securitize when borrowers make down payments of less than 20 percent continues to pick up steam.”

RisMedia - “Existing-Home Sales Decline in May with Market Constraints, Temporary Conditions” (6-22-11)

“Existing-home sales were down in May as temporary factors and financing problems weighed on the market, according to the National Association of REALTORS.”

Housing Wire - “US home prices increase a scant 0.8% in April: FHFA” (6-22-11)

“U.S. home prices rose a scant 0.8% between March and April, the Federal Housing Finance Agency said in its latest home price index report.”

DS News - “Shadows Shrink on More Distressed Sales and Fewer Delinquencies” (6-22-11)

“The shadow inventory of repossessed and soon-to-be repossessed homes not yet visible to the market has been trimmed, according to new data released by CoreLogic Wednesday.”

The Orange County Register - “Calif. sees 1st gain in pending deals in 1 1/2 years” (6-22-11)

“Pending home sales — the number of housing deals going into contract — increased in California in May for the first time in 17 months, the California Association of Realtors reported.”

Bloomberg - “U.S. Home Prices Fell 5.7% in April From Years Earlier as Housing Struggles” (6-22-11)

“U.S. home prices fell 5.7 percent in April from a year earlier, signaling the housing market is struggling to recover as foreclosures weigh down values.”

Looking Back:

The level of commercial/multifamily mortgage debt outstanding decreased to $3.31 trillion in the first quarter of 2010. The NAR reports existing home sales decreased by 2.2 percent in May of 2010. California home sales increased 1.2 percent in May 2010. An amendment to the Wall Street Reform Bill being debated on the day of June 22nd in Congress would eliminate the hotly contested Home Valuation Code of Conduct.

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

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229-TNG Radio – Ivan Choi 6-11-11

Friday, June 10th, 2011

Ivan-Choi

Ivan Choi

President of REOMAC


(Full Bio)

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This week Bruce is joined once again by Ivan Choi. Ivan is recognized as a mortgage default expert and industry speaker. He serves as the president of REOMAC, a national non-profit trade association of mortgage servicing executives, asset managers, foreclosure attorneys, real estate brokers, and real estate closing service providers. Mr. Choi currently serves as a national default sales executive for New Vista Asset Management.

One problem occurring in the real estate market is the servicer’s interest is not aligned with the lender’s interest, which is difficult to understand. Bruce Norris services a certain amount of loans inside the hard money loan business alone, and in his opinion he is always directed by another lender and has to do what they say. However, for some reason servicers have a misaligned interest. A lot of times during a foreclosure process, it’s almost not in the servicer’s interest to proceed quickly and for some reason they get paid for not moving quickly. According to Ivan, there are a number of conspiracies regarding the foreclosure default topic and banks, and the aforementioned is one of them. There is a certain number of people who either misread mortgage servicing data or there is a certain specialized package of loans where for some reason the bank is indemnified against any losses. Therefore, they don’t have an incentive to move quickly on a foreclosure case. However, this kind of case is so far in the minority of the overall landscape of loans that this is actually not true most of the time. For the mass majority of all loans out there today, banks and loan servicers are under heavy pressure move through the foreclosure cycle and actually recover whatever value they can for a property if a borrower is not paying their mortgage on time and the loan is therefore not performing.

Bruce wonders what is mandatory for a lender. If someone stops making a payment and the lender decides it’s time to start foreclosing, would there be a process of phone calls or notifications that’s mandatory for the lender to make? Ivan does not believe it’s fully mandatory by anybody. Because of everything that has occurred during the meltdown and the dissent into foreclosure, all the major banks and significant loan servicers have adopted very firm policies. Therefore, the process of default, where phone calls are made and who they’re made to, the notices that go out, and the contact to the borrower is a lot more regimented and more of a defined process than most people may realize. The number of foreclosures files being dealt with is unprecedented by about 1,000%, which is ten times greater than ever. When you’re a loan servicer, you’re not thinking that you’re foreclosing on 10% of your inventory. It’s less than 1% historically. However, Ivan believes that today that number is closer to 5%. In a “normal market,” for any mortgage lender, typically less than 1% of their entire loan portfolio is in default. The number of loans in default is much smaller than people realize, and it has really been overblown because of a number of events during our financial meltdown in the last couple of years. It’s been more a crisis of confidence versus raw numbers.

Lenders today are more open to loan modifications and are aggressively pursuing them prior to the foreclosure process. Ivan has always been a bit skeptical of servicing and foreclosure release, but it’s very true that lenders are pursuing loan modifications more aggressively. If you were able to take an inside look at any banking institution today, you will see that they have essentially hired on and ramped up very significantly on staffing and in a lot of cases moved a lot of folks that they normally had on REO into the modification and short-sale areas. What’s interesting in trying to obtain a loan modification is that you have to prove a case of hardship, but the FBI has the exact opposite problem being created where stated incomes from loans received in 2005 were exaggerated. In 2011 when these same people are trying to get a loan modification, they’re trying to hide their exaggerated incomes from 2005. From a bank servicing standpoint, there is actually a little bias in favor of the homeowner. If you look at a scanned copy of the owner’s loan application from five years ago when they received their interest-only loan, you will see that at that time they were CEO of the world and making a lot of money. However, you look at today and see them trying to obtain a loan modification, you see that what happened years ago doesn’t really matter and that they are having a hard time finding a job.

There was a recent court case where somebody went to jail for falsifying information on a loan application for a stated income loan back in 2005. This should be a scare to several people as normally the borrower is not pursued. Ivan believes that not enough of these cases have come to light, and therefore most homeowners still think it’s safe for them to fudge some of the details of their situation. You speak with any real estate broker or agent that is heavily involved in trying to help with short sales, and you often hear a number of “war stories” of how they go visit a homeowner who is apparently in major distress, and the first thing they see in the driveway is a hummer and a late model Mercedes. Some reports and statistics have shown that if you’re surrounded by people that are not making payments and you are the last one in your family, there is a lot of pressure for you to join.

If Ivan were a lender, he does not have a specific preference whether he would choose a short sale or REO status. He says it all really comes down to the numbers. Typically when a loan servicer or lender evaluates a case for a short sale, they take in all the details they can on the property itself. This includes what the property is valued at today, hardship letters, and financial information from the borrower. They will take this information and put it on track for short sale, and they will also take this information and send it to their REO department. They essentially ask the REO department that if they were to try to sell the property in the next 60 days how much they could reasonably sell it. They then compare the short sale with the REO status; and if it’s less of a loss as an REO, then the loan will probably go to REO. This is where the servicer will recover value on behalf of the loan investor. As for hardship letters, the reason for having them on hand is you have to give the forum for a homeowner to explain details of their situation that otherwise are not explained well as well as giving them information on your financial status. As an example, a short sale would occur if someone wrote a hardship letter explaining that they owed $400,000 on a $200,000 house and decided this was not reasonable to pay. This would not make it very far, and yet more often than not this type of situation occurs.

One of the biggest roadblocks and frustrations stems from a second lien; in other words, a second loan or lender often gets in the way of a yes answer for short sales. This is what any real estate agent that’s been involved in a short sale or any homeowner or party to a short-sale transaction will tell you. The issue is getting a lender in first position and then a lender in second position to agree to the terms of a loss on the loan of the property. From a legal standpoint, the lender that holds the first mortgage is entitled to relief from losses before the second lien-holder. Most of the time, it’s hard to get both parties to agree and move ahead with the short-sale. However, there are times when the second would have recourse against the borrower, and if he signs something saying he wasn’t owed anything, then the sale would go away. Usually, however, this is not the case since the signing would usually be simultaneous with the purchase.

Securitization has not affected the foreclosure process or the ease of accessing information or receiving answers from lenders. Unfortunately, the process is still difficult as ever. There is a lot of focus and staffing since servicers and lenders really want to be able to help on loss mitigation and complete more short-sale cases. Sometimes in a lot of markets you have to buy necessity to do a short-sale transaction since these are really the only transactions getting done in today’s market. However, Ivan feels that if he was a real estate broker or agent today, as soon as he found an opportunity to diversify away from short-sale, he would run away from short sales as quickly as possible. The reason is it is still an inherently complicated situation because you have to have multiple decision-makers in line; you have to have a homeowner in distress be engaged to the process. A homeowner going through foreclosure is typically not in their right mind because they are under tremendous emotional and financial distress. In addition, you have to have a special buyer since they’re not talking about a 30-day escrow when they know they’re going to move. Therefore, if somebody makes an offer, they’re usually not informed until 3-8 months. For example, a first-time homebuyer with two kids is not the best candidate, even if they’re the ones who will pay the most for the property.

The reason for the long process is because you have to inherently go through a bureaucracy. The servicer takes in the information, then they go through their analysis of the situation, then they recommend whether a short-sale should be done or not, then that case goes to the trustee or whoever represents the loan investor. If there’s mortgage insurance, the mortgage insurance company has to weigh in on the decision. The other issue that doesn’t really get raised much is that there is a certain level of fraud, which slows down the cases as well because when the servicer is going through information, they’re trying to ensure that they’re doing the best they can to understand that what the homeowner and parties to the transaction are putting down on paper is in fact true. There are lots of schemes going on today, so if you look at it from the seller’s perspective they typically want to move out of the house and be done with it. They buyer, even today, is still thinking they’re going to get a good deal; and the agents are trying to figure out a way to work the system best so the transaction gets done. One example of fraud that occurs today is on the buyer’s side you have a buyer agent and a buyer. A common tactic of a buyer agent is they put in offers with straw buyers because they’re trying to figure out how low the bank is going to go on that short-sale. If it’s low enough, they will do the “switcheroo” of taking out the straw buyer at the last minute and putting in the real buyer and trying to close. Usually the intent is to resell the property right away. Bruce read an FBI fraud document that spoke of perpetrators. Some companies do transactional funding and are actually just buying and selling the property inside different escrows, flipping back and forth.

A term that usually comes up when someone is dealing with REO is “adverse occupancy.” You either have a homeowner that’s not happy they lost their house and have to start paying rent somewhere; or you have an occupant tenant that’s surprised that he no longer has a place to stay. Usually when properties are foreclosed on, approximately 50% are unoccupied by the time foreclosure is finally completed. The Norris Group buys about 15-20 homes a month at trustee sales, and there has been a transition in customer attitude. There is no one at a trustee sale who doesn’t know the term Cash for Keys. It’s almost become the expectation for people to get paid to leave; no one feels bad anymore about not making a payment on time for a while. On the flip side, in some metropolitan areas, especially cities where municipalities enforced an eviction moratorium, there are organized crime groups who have caught on and looked for vacant houses to send someone in and make up a false lease contract. When a bank representative comes by the property to do an occupancy check, the crime member simply shows their fake lease, and they get to stay in the house.

According to the California Association of Realtors, about 71% of the Norris Group’s transactions are either short-sale or REO. This means that, emerging from all the sales, there is not a repeat buyer amongst them. They simply would not qualify. Therefore, when the Norris Group sells 100 houses, only 29 buyers are emerging while 71 other properties are finding someone else to buy it. However, the statistics have never been close to this. Normally, if you have 100 sales you probably have about 95 buyers that reemerge for another property. Now, the percentage is about 29. This is one of the biggest problems, and one solution according to Ivan is you really have to help the buy side. You have to find a way to increase the buyer pool. This does not necessarily mean relaxing loan guidelines to a very significant degree to the point that we’re back into subprime lending. However, if you institute some guidelines to be able to institute the character portion of a borrower, and also do things to appeal to immigrant populations that are very focused on home ownership, then you’re increasing your buyer pool. If you have a large number of owner occupants within this buyer pool, then these strategies by far are the best solution to soak up some of the backlog of inventory out there and help the overall housing industry recover. Numerically and with the current policies in place and the direction of the new policies, this strategy is unfortunately probably not going to happen. You have lenders that are of the mindset that they have to make it very difficult for people to qualify, and you have policy decisions that are saying, “Let’s reduce the loan amounts that are available from FHA and Fannie Mae.” The Republicans just put in a bill into Congress demanding that FHA have a minimum of 20% down payment, which Bruce believes won’t fix much. They’re really under the gun in Washington, and some of the things they would like to do they don’t think they will be able to do. In D.C, there are a lot of people tackling head-on and coming up with very good solutions for very complex problems. At the same time, when you’re speaking of policy-makers, there are still agendas on other issues that get in the way of good solutions for housing.

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

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228-TNG Radio – Ivan Choi 6-4-11

Friday, June 3rd, 2011

Ivan Choi

President of REOMAC


(Full Bio)

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This week Bruce is joined by Ivan Choi. Ivan is recognized as a mortgage default expert and industry speaker. He is the president of REOMAC; a national non-profit trade association of mortgage servicing executives, asset managers, foreclosure attorneys, real estate brokers and real estate closing service providers. He serves as the national default sales executive for New Vista Asset Management.

The core membership of REOMAC are those who serve in the foreclosure or default function for any banking or depository institution. Also, real estate brokers are welcome; as well as title companies, escrow companies and outsourcing companies who handle REO/default activity. New Vista is an example of an outsourcer.

There has been a lot of foreclosure activity in the last 5 years. Many people want to join REOMAC, but as a non-profit company, the laws require that 33% of the members come from a financial/depository institution, so in order to add brokers into the company, REOMAC would have to add many people from financial institutions. REOMAC has closed membership to brokers and agents for the last few years, but membership has recently opened to those people. In order for an agent to become a member, they must recruit at least 3 additional bank employees.

Three years ago, we were expecting to see unprecedented levels of foreclosure activity in commercial space. REOMAC was pressured to create a commercial organization, but REOMAC did not succumb to this pressure. However, they are offering commercial education and networking sessions at downtown, Los Angeles at the Jonathan Club.

A company recently held a commercial property auction worth a total of $1 billion in Las Vegas. If you look at the catalog for this auction, you will notice that 85% of the value being auctioned from that company is held in trust deeds. Many of the trust deeds were worth $13 million, and their opening bids were $1 million.

Ivan’s professional background is in residential real estate. Because of all the discussion about commercial real estate over the past few years, many residential specialists have developed this mentality that they can work in the commercial foreclosure sector without serious difficulty. Ivan believes this is not a good idea. Commercial is completely different from residential, and the buyers have a completely different mentality.

REOMAC allows Ivan to speak to many of the servicers in the residential market, and it allows him to learn about the issues that everyone is facing. Ivan’s role at New Vista is to connect the company with more servicers in order to handle additional REO properties. There are not many REO properties currently on the market.

Ivan defines shadow inventory as property that is delinquent by 1 or more months and has not reached the final closing of the foreclosure process. Bruce believes this is the most accurate definition. After the meltdown, there were conspiracy theories that banks were intentionally holding inventory for a variety of reasons, for their own benefit. The truth is that banks are under tremendous pressure to recover values on foreclosure properties. Bruce feels that banks have handled this problem in a way that prevents them from reaching their goal. Ivan agrees.

REO inventory peaked in 2008. After we peaked in REOs, defaults tripled beyond that number, and yet we somehow ended up with fewer REO properties after that.

The lenders’ best interest would be to continue their foreclosure along a normal timeline, and recover as much value as they possibly can.

From mid 2008 to mid 2009, active REO inventory dropped by 45%. In that same time period, delinquencies went from 4% to 11.9%. There were many reasons why the flow of foreclosures got stopped. One reason for this is because of government intervention at the federal, state and municipal levels.

HAMP included guidelines around loan modifications, and HAFA included guidelines on how banks and servicers were to manage the short sale process. The intent was to get multiple servicers, and by extension, multiple loan investors, on the same page, so that they could use one process to handle loan modifications and short sales. Ivan believes everyone can agree that both programs were a failure.

When HAMP came out, 70% of the people who were given a mortgage modification fell back into foreclosure. Ivan believes this program just delayed the inevitable. The federal government still believes it was necessary to put these programs in place to help homeowners in trouble. The federal government was looking out for the overall benefit of the economy. It seemed that they perceived the failures in the real estate market to be collateral damage.

Ivan does not believe anything could have been done to make loan modifications successful. You have to truly distinguish between borrowers who were victims of predatory lending, and people who took advantage of the system. Ivan and Bruce believe there were far too many people lying on their applications to receive a loan they should not have taken. The people who lied on their applications were not going to take their loan modification seriously.

Some people think that principal reductions are the answer to our current problem. Some have even advocated forcing principal reductions in court. Bruce feels that would be a terrible choice to make. From a lending standpoint, principal reduction is a very slippery slope, because then you have to ask the question, “Where do we draw the line between who gets assistance and who doesn’t?” That line is very hard to define.

Another issue today is our lack of available loan programs. We have to solve our issues in a way that is fair to everyone including the lender.

Bruce was invited to speak with Fannie Mae last week. Fannie Mae suggested partnering with investors going forward, and split the upside. Bruce said he would not be interested in that deal.

Ivan feels that lenders are not making many independent decisions, because the government is guiding their actions. Mid to large lenders are still under a lot of scrutiny from the public, which affects the decisions of policy makers.

Bruce attended a trust sale in which a $1.1 million loan was being sold. The opening bid for that loan was $300,000 and it sold for $400,000. After the sale, Bruce discovered the seller was forced to declare his asset to be worth $400,000. Up until the day of the sale, he was still able to declare that trust deed to be a $1.1 million asset. This is why these sellers are in no rush to declare the position that they are actually in.

The robo-signing and MERS issue kept the loan industry stalled. Once this issue came out, all the major loan servicers had to recheck their documents to ensure their foreclosures were valid. Servicers are expecting many assets to come to the market by the third and fourth quarter, because the robo-signing issues have now been concluded.

30% of foreclosure in the country are over two years old. That pile of inventory will land somewhere, and California will experience a lot of it. Bruce does not know how we will produce buyers for all those properties.

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

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