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By Bruce Norris .

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

Friday, December 2nd, 2011

I Survived Real Estate 2011

I Survived Real Estate 2011


(Full Bio)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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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252-TNG Radio – I Survived Real Estate 2011 part 5 11-19-11

Friday, November 18th, 2011

I Survived Real Estate 2011

I Survived Real Estate 2011


(Full Bio)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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 for many years.

To find out more, tune in next week for I Survived Real Estate 2011, part 6. The Norris Group would like to thank their gold sponsors for the event: Adrenaline Athletics, Coldwell Banker Pioneer Real Estate, Conaway and Conaway, Delmae Properties, Elite Auctions, Inland Empire Investors Forum, Inland Valley Association of Realtors, Keller Williams of Corona, Keystone CPA, Kucan & Clark Partners, LLC, Las Brisas Escrow, Leivas Associates, Mike Cantu, Northern California Real Estate Investors Association, Northern San Diego Real Estate Investors Association, Pacific Sunrise Mortgage, Personal Real Estate Magazine, Raven Paul and Company, Realty 411 Magazine, Rick and LeaAnne Rossiter, Southwest Riverside County Board of Realtors, Starz Photography, uDirect IRA, Wilson Investment Properties, Tony Alvarez, Tri-Emerald Financial Group, and Westin South Coast Plaza. Visit isurvived2011.com for more

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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251-TNG Radio – I Survived Real Estate 2011 part 4 11-12-11

Thursday, November 10th, 2011

I Survived Real Estate 2011

I Survived Real Estate 2011


(Full Bio)

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

Bruce continued his discussion with the panel on rental properties and homeownership. If some gigantic company owns 10,000 rentals, then Bruce for example would not know what to do with his because he would not know if the playing field was legit and if they are going to put 10,000 houses for sale. However, as a builder Bruce certainly would not carve up dirt waiting because that risk is out there that others could be his competitor at the drop of a hat. We should give investors a shot at taking the inventory down because it is manageable if we do not put it on the market.

Doug mentioned how he had come out of the venture capital industry, and a lot of folks in his industry put a lot of money into bad companies back in the late 90s. When there was a crash, they lost their money from bad investments. Therefore, the question is if Doug, for example, were to lend Bruce $100,000 and does not figure out what his ability to pay is and Bruce ends up stopping payments, then whose fault is it? The answer in this case is the lender. If you want to know how to fix things like this, from a market perspective the foreclosures should work through the system and let the banks take the loss. The issue in Washington is that the public has poured a lot of money into Fannie Mae and Freddie Mac, and a lot of those losses are going to rebound back onto taxpayers. You see the functions of the GSEs in terms of working other options other than the principle write-down piece, which will put those losses right back on taxpayers. Part of the reason that he hosted a meeting with some people at I Survived that night was to explore the investor option. They have a rule to have no more than ten loans per single investor. In the course of the bubble, the homeownership rate got well ahead of what was sustainable. There is not a broad based program to tear the properties down, and when Doug made a suggestion that it would be a good idea to tear them down, he was labeled within the company as “Dozer Duncan.”

Bruce said this actually happened in California with a brand new housing tract that The Norris Group made a bid on. Someone had sent Bruce an email with a YouTube video, and when Bruce saw the housing he thought they looked familiar. He asked Greg, and he told him those were the houses they had just made a bid on earlier. These were all brand new homes; the originals had all been torn down. Doug mentioned the evidence with the company’s portfolio from how they treated the properties, whether or not they were sold to owner occupants or to small investors and hedge funds was that the loss severity was greater. The loss severity on hedge funds is the greatest when you sell to owner occupants or small investors.

Sean talked about how you have 600,000 people right now who are 90 days or more delinquent, and there are another 200,000 who have a notice of default or are in the process of foreclosure. However, even though there are 800,000 in these groups, we have 2.4 million who are underwater. Between short sales and foreclosures, we’re cleaning up about 18,000 houses a month, so we’re looking at a span of five years if things stay at the same pace. It’s amazing that our pace of sales has stayed as high as it has, and it clearly would not have stayed this high without investors in California because repeat home-buying is gone.

Bruce next talked with a second group of representatives from the Mortgage Bankers Association, the National Association of Realtors, and the Appraisal Institute. The first, Debra Still, is President and Chief Executive Officer of Pulte Mortgage, a national lender headquartered in Inglewood, Colorado. She is the vice-chairman of the Mortgage Bankers Association, and she has been in the mortgage industry for 30 years. This year marks the first time Debra Still has been on the panel for I Survived Real Estate.

The next person was Sara Stephens. Sara is the 2011/2012 president of the Appraisal Institute, and she will become president on January 1, 2012. She serves on the organization’s board of directors and on its executive committee. Sara has been active in appraisal institutes up to regional and national levels for 20 years, and she is owner and principal of Richard A. Stephens and Associates, the oldest appraisal firm in Little Rock, Arkansas.

The next representative, Gary Thomas, is the first vice president of the National Association of Realtors. He is the second-generation real estate professional and owns Evergreen Realty in Villa Park. He has owned the business for over 30 years and has served the industry in countless roles. One of the things that struck Bruce was he has 16 grand kids.

Debra Still went first to say that her company is a national company, so they do business in 29 states, wholly on subsidiary of the homebuilder. She is very pleased to say that real estate is very stable and feels pretty flat, even with some of the dramatic headlines they have had in the last couple months. Their new orders and sign ups are very steady. In the third quarter they ran around a 22% cancellation ratio.

Sara Stephens said the market in Little Rock is doing well, and their public supply is officially in the office area. The retail properties are multi-family, while the residential market is stable in some parts of the city, more than other parts. It’s specifically in the Delta where they see declines and real problems.

Gary talked about how Orange County has faired pretty well for Southern California. It’s actually the best performing county in the Southern California area. They are holding their own and doing fairly well. He has not seen any challenges with loan reduction amounts, but he thinks we will sometime, especially along the coast where the average sale price is much higher and will therefore have an effect there. Bruce wondered what his down payment would look like if he was getting a down-payment loan and if he would be able to be self-employed. Gary said this would be very tough as it is harder to get a loan when you are self-employed. He would probably still be able to make a 20% down payment, but the loan would be harder to obtain.

Legislation passed the Dodd-Frank bill about a year ago, but it is almost to be figured out later what it needs. We’re arm-wrestling right now for the terms of what Dodd-Frank is even though it already passed a year ago. Bruce wondered what they did and if they had said what they wanted accomplished and were still trying to find a way to get there. Debra said the Dodd-Frank Act has about 250+ rules that need to be written, about 100 focused on mortgage lending. Now, the regulators are charged with actually writing the rules and the definition to meet the spirit of the law. There is a lot of facets to it, but one of them is a qualified residential mortgage. This could be a problem for our industry because if in fact they adopt the rule, it would mean to receive the better rate, you would have to have a 20% down payment. The problem with the thinking that you have to have skin in the game or it’s not a performing loan is because they’re not concentrating enough on the underwriting, which is what they really need to focus on rather than the down-payment. If somebody can afford the payment, it does not matter whether they have put 10% down or 20% down, or even 5% down. It’s really about whether or not they are a qualified buyer and if they can afford the property that they are buying. That went out the window in the past, so now it has to come back. There is a thought that that is getting back to basics, so Bruce wondered when the basics existed because it was not true in his first house purchase.

The risk retention rule is the rule that the definition of QRM comes up under, and the rule would say that someone who securitizes mortgages needs to retain 5% risk or reserve for the loans that they securitize. When the rule was originally published, there was no exemption other than FHA, USDA, and VA. One of the things the Mortgage Bankers Association lobbied very hard for was the notion of a carve-out for a qualified residential mortgage, and the definition of a QRM was left to the regulators to write. The regulators put out the first definition of a qualified residential mortgage that required the 20% down payment, a 28/36 jet ratio, and required no late payments within the previous 24 months. This is what the industry has been reacting to asking whether the regulators wrote a rule that was more conservative than the spirit of the law. Hundreds and hundreds of comments were filed, and whether it was mortgage bankers, realtors, homebuilders, or consumer groups, Debra believes everyone agrees that the rule went too far and we need to try again. The sound goal of it all was to encourage sound lending behaviors that reduce future default without harming responsible borrowers and lenders. This is where the rub is in that if it’s a 20% down purchase or 30%, it’s 30% equity for a refi. That is a big chunk of equity. The Mortgage Bankers research would suggest that if you look at the law, it provides for fully documented loans, no negative amortization, no exotic loan programs like IOs or payoffs in arms. Their research would suggest that the loan parameters inside the law were strong enough to prevent extraordinary default, and you don’t need the other underwriting restrictions that normal protocol for underwriting should prevail.
Risk retention sounds almost like a good thing because somebody who is creating a loan would have skin in the game, but there are unintentional consequences. If you think about the spirit of the regulation, it was to protect consumers; yet the regulation has gone so far that it is probably denying credit to well-qualified borrowers. Statistics would show that you can have the right risk balance without going as far as the 20% down or the debt-to-income ratios. MBA’s stats would show if you look at the 2009 Book of Business, which was a pretty conservative underwriting year, you see that still 70% of the consumers that received loans in 2009 would not qualify for a QRM loan. For a non-QRM loan, the difference in the interest rate would probably range from 100 basis points to 300 basis points. This would apply to a lender who would want to put capital reserves up and make a non-QRM loan. This is the concern as the Mortgage Bankers Association won’t have that kind of capital, so there would be too many of us that will not be making non-QRM loans. It would also eliminate a lot of buyers from the marketplace if your interest rate was 1 ½% higher. If it was necessary for safety, it would make sense, but if not then it would not make sense.

Another part of the bill is reps and warranties. This basically means that the person who has represented their mortgage as exactly what MBA would buy then has something go wrong with it; this person would be asked to re-buy it. If you look at one of the things those lenders are struggling with right now and the primary driver of some of the behavior that you see from lenders in terms of concerted underwriting guidelines is the notion of reps and warrants. When MBA sells a mortgage in the secondary market, they make reps and warrants to the investor as to certain parameters. They are always on the hook for borrower misrepresentation as well as on the hook for not following the investors’ underwriting guidelines. As investors have gotten more and more conservative and as loans have been put back to lenders, the lenders are starting to get more and more conservative in today’s environment because we are on the hook for reps and warrants. One of the parts of the law suggests that a third party do all of the reconfirming of verifications. This would probably get to the stated income loans that the industry was doing in the past. The fact that we did not have a third party with a verification of employment or depositor bank statements means it would address more a fully documented loan.

Sara went on to say that the appraisal business has not been left out of the Dodd-Frank Act. HVCC came first, and this did a fair amount of damage to the appraisal industry. Bruce wondered what changes happened with HVCC and if that has been replaced with what is intended with Dodd-Frank. Sara said one of the things that most real estate appraisers, especially those who are doing residential real estate, found was that the firewall was initially installed between the appraiser and the lender. Rather than communicating directly to the lender, the appraisers would be placed in a situation where they were directly communicating with the management system and management company. In many cases, their residential appraisers surveyed who worked with them extensively have lost 40-60% of their business. Whereas, when they had a direct relationship with the lender, they were suddenly thrust into the idea that they had to communicate with a management company. In many cases, rather than look for quality, expertise, education, things became quick and cheap. This is what so many of our people are facing now. We see people coming in from 250-400 miles away from markets where they probably had very little expertise. This has been a real problem for the Appraisal Institute, and it has changed the face of residential lending activity in a huge way.

Bruce said if he was an appraiser who had gone to sleep in 2007 and woke up in 2010, he would have been quite surprised at what had happened. You would have your income divided by multiples because you would have the assumption that you must be doing something crooked if you have a relationship, and you also now have to have a middle person taking half of your fee. This would be very frustrating, and the industry has unfortunately lost a lot of people who said they are not interested in this anymore. The statistics on renewal for our specific certification requirements has seen that in some states the renewal rate is as low as 30-40%. If you cannot continue to support your family doing what you are trained to do and what you have expertise to do, then you have to look for something else. This is what so many member of the Appraisal Institute have had to do. It is extremely difficult to re-train yourself to work in a lending environment where your expertise, education, and you qualifications really don’t mean that much to the person or persons that you are communicating with. This is unfortunate, especially for the consumer.

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

To find out more, tune in next week for I Survived Real Estate 2011, part 5. 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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250-TNG Radio – I Survived Real Estate 2011 part 3 11-05-11

Friday, November 4th, 2011

I Survived Real Estate 2011

I Survived Real Estate 2011


(Full Bio)

 streamitunesdownloadrss

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

Bruce continued his discussion with the panel on loans and the market. An $8,000 rebate was equivalent to a nothing-down loan most of the time on prices. It is not known how well this loan portfolio performed, but it would be interesting to know since it is in essence a nothing-down program without spending the $8 grand. It was pointed out to most of the bankers who had made loans under this program and held it in portfolio that the loan-to-value ratio they believed they had at the time they made the loan was higher after prices receded again, so they had more risk in their portfolio than they thought they did. Bruce and Doug still think it will come out very well. We’re close to the bottom, but we have probably already created a payment that was less than rent. Doug bought a house in Florida last September since they were on sale.

Eric Janszen wrote a book called The Post-Catastrophe Economy, and one of the main things Bruce underlined in the book stated, “The United States will rebuild on its ethics of hard work, education, fairness and honesty, its culture of entrepreneurial vs. risk-taking, of competition of savings and of avoidance of debts, it core competencies in technology development and original invention, its strong institution of property rights and rule of law.” It was Eric’s hope that we would have spent the last two years going forward and hopefully building infrastructure to a new set of tools, transportation, energy, communication, and infrastructure that you call Techi. However, this was not something we did. The policy we took instead was characterized by Eric as “print and pray.” There was no consorted effort or consensus on what to do beyond the emergency measures that were taken to halt the deflationary process in the recession. This is why Bruce asked the question about fiscal policy because a long-term fiscal policy would not be short-term relief or pleasing. If we really did something long-term, the results would be out there a ways. If we approached it as a return on investment and followed the idea that there is certain infrastructure that if you invest in it in a country, it increases your capacity for economic growth and not as an expense but a multiplier effect, then you would have to think very carefully about how you would do that. This takes some planning and execution. In order to pull this off, you have to have enough of a consensus within government to not get into a dysfunctional argument about whether it’s going to result in the short-term and increase in deficits.

As Doug mentioned, the American public was pretty aghast at the quality of the debate that was going on about the debt ceiling. It was not a particular constructive discussion, so most Americans are frustrated by this. There is a document that has a joint effort from Republicans and Democrats regarding the budget deficit and reducing it. You have a few people from each side pour their hearts into a year or two’s worth of work and come to a legitimate conclusion, so Bruce wondered how each of the parties have reacted to the document, whether they knew it was not everything they wanted but had to sacrifice; or did they get beaten from both sides. It’s very difficult to put anything forward since all their discussions are so ideologically charged. It’s a simple constructive plan based on a simple factual argument. You very quickly obtain a dialogue that devolves into some argument about whether we are going bankrupt tomorrow, which is not going to happen. Doug agreed with this; he thought the roots were there for a good discussion. If you take Paul Ryan’s plan and the president’s deficit commission plan, the two of those elements together could lead to a very constructive debate about how to make some long-term adjustments. You’re not going to fix it in two years; it’s something that is going to take some time. Washington did not engage with those elements as prep-starting reference points.

Eric mentioned an output gap in his book. The concept of an output gap is every year the Congressional budget office puts out what they project is what the growth rate of the economy would be if everybody who wanted to have a job had a job. All the producers and consumers are efficient actors in the market. What happens is in a recession you are operating below a theoretical growth rate, so the difference between your theoretical growth rate and where you actually are is the output gap. It’s really a measure of unemployment. In the 1970s, the policy was to try to close the upper gap by any means necessary, which is the wrong approach as we will end up with a lot of inflation. The challenge is that usual reflation measures, monetary policy, and fiscal policy for the last 30 years has been very effective at closing output gaps quickly after recessions. The problem is if we do not close the output gap before the next recession, we would have a mid-gap recession. This is another recession that opens the gap further with what was left over from the previous recession. We have not had this since 1938. Mid-gap recessions cause very significant add-on problems. It’s feasible that we could have one of these, but as Doug said it would probably be caused by an external event, probably in Europe.

The next ten years of investing will not be like the last ten. In 2001 a portfolio was created that was composed of treasury bonds and gold, which outperformed everything if you did not do anything with it. It beat the S&P, both in terms of volatility, draw-down, and batting average, everything you could think of. This is not good. Hopefully over the next ten years we get back on track where we are growing the economy by growing it in a more organic fashion, not to refinance. One of Eric’s investments happens to be connected to apartments, and one particular investment is in a company that sells into B markets of multifamily residential real estate. The theory behind it was the cost of capital was going to remain low, but the rents were going to start to rise. Cap rates were going to improve, and they were going to be profitable investments.

Eric also talks about in his book the concept of having public/private partnerships create an infrastructure. We have not done that much in this country to create this type of infrastructure successfully. Back in the early days a lot of our highways were built with European money funding private enterprises to build our highways. Most people forget that, but we took the public route after World War II, and our infrastructures were rebuilt through public finance. In Europe when they did not have any money, they used public and private partnerships to build infrastructure roads, highways, and bridges. Typically that model is adopted in times when governments are very constrained fiscally. It becomes more efficient to combine private enterprise and the risk management of government to combine together to build new infrastructure.

One of the things Eric warns about in his book is the right and wrong ways to do public and private partnerships. The wrong way is getting public money and giving it to your buddies to go build things. The right way to do it is to create a real competitive market where the partnerships actually have to compete with each other and perform to metrics, and they can’t get another job unless the last one worked really well. One of the hardest things is that there seems to be a lack of credibility to say the least when you want to tax people more or you want to have partnerships, and then you find out that the basis for that partnership was other than for a good reason. You get very suspicious about someone writing the next check or asking you to contribute more. Bruce did not understand how we get away from that. It’s no secret that most Americans are frustrated with American finance, and that is one of the first things we have to fix in this country.

In the past, there were common reasons for foreclosures. Sean O’Toole started investing in foreclosures in 2002, and one of the things he had the hardest time with was none of them made any sense. Everything had equity, so all of the folks could sell. Sean really struggled with this, especially as a son of a logic professor. It finally dawned on him, with the help of his business partner, that it was the five D’s: drugs, debt, disease, divorce, and denial. When you knocked on people’s doors, it was one of those five things. This was back in 2002-2006, so there was equity everywhere. Those five things were what he called the base rate of foreclosure, and this will always be there. If Sean had them in 2002 and 2006, he would have had them every time. The problem was not job loss because you could sell your house. It wasn’t negative equity because it just did not exist at the time. Today, your average property in California right now is $150,000 upside down by the time it hits foreclosure. It sold for $400,000, and it is now worth $250,000. It’s really an insurmountable debt, and if you look at the cost of repaying that debt over 30 years, it’s really not practical or smart for anyone trying to pay it. There are moral issues around that and what a lot of people have, but a lot of it does not make sense.

Bruce recently read an article about Fannie and Freddie not wanting to do principle reductions, and to Bruce this makes sense because you have ramifications to that that are negative. One idea Bruce had was to give somebody a principle-only payment until they break even with an appraisal. There are a lot of people who are not current, but you have more people who are current in that situation. Bruce does not want to reward the group that has not made a payment in two years and get in an article saying that it’s wonderful. However, for the people who are making the payment, there might be an eventuality where it gets to them too, especially if the people that aren’t making the payment get the goodies. However, if you just willingly said for whatever it takes, 5% a year you are going to pay principle-down, so at 25% in five years you are back to square. You would probably have a lot of people sign up for this, but Bruce did not know if this was an acceptable suggestion to lenders. Doug, the lender in the group, said there were lots of things that are going to be explored, including principle write-down. There is a lot of momentum building in Washington toward that in particular. The difficulty has always been in the foreclosure space in that there is a run rate of 1 million to 1.5 million given the level of homeownership and the number of households there are. However, the solutions have typically been one on one treatment.

When Doug was in the mortgage-servicing business at the Mortgage Bankers Association, they did a study where they took apart the servicing operation in which there were 17 elements, 14 of them having very clear economies of scale. Three of them have diseconomies of scale, and economies of scale are more expensive as they get larger. One of these is taxes of insurance, so it’s everybody else versus that because of all the local knowledge that you need about the jurisdictions. The other two are default and foreclosure. The question was if the diseconomies of scale were sufficient to override all the other efficiencies in the servicing business. Now that the experiment has been run and we know that are sufficient. The problem in solving it and why the diseconomies exist is that the treatments are a one on one kind of treatment, and you have to have quite a bit of experience in understanding the households’ situation to determine whether or not you have all the information. This could include whether or not the other people fully understand the obligation, whether they are telling you about their willingness to pay, all of the resources that they have available to pay, and their other commitments. It is very intensive.

With a program like this, you should sit down and find some households that would be very effective under that kind of household because you can determine they are willing to meet the commitment over a period of time, they have the resources that are available, and they are willing to have everything documented and make a commitment to that type of program. There are others who you could put in this type of program who would not succeed because they don’t have the criteria. The difficulty is in putting up broad based policy and applying it to everyone because this is where you find problems with the adverse selection. You would also have a bigger problem because not only would you not be selecting some, but you will also be not selecting completely the people that are current. Doug told a funny story about when TARP was voted on for the first time, his mother called him to ask him what he was doing with their money. They paid their mortgage, so when you do debt forgiveness there is a whole bunch of people who have met all their obligations, and there are going to be losses. While they were not involved in the transaction, on the tax side of things they’re going to be involved in repairing the losses. For those who own free and clear houses, they can just get a check.

Sean O’Toole said the idea that the foreclosure process is tough from servicing standpoint is a self-inflicted one. In California, there is a brilliant piece of policy which is on a purchase-money mortgage, there is no recourse. This creates a really fair balance that resolves the issue and makes it very quick and easy to deal with somebody who is not paying. Bruce and Sean jokingly said this is why it only takes 600 days to foreclose in California even though it used to only take 150 days. 150 days is a lot of time to give somebody to try to work through their problems, sell the property, and do whatever else they need to do. If they can’t, they lose the home. This is okay given that it’s no recourse. If you compare it to the rest of the world where you have significant recourse, it can pass on to your children. It’s also a fair balance of risk with the lender because the lender should take that loss. Sean does not think it is fair to let the person stay in the house when they had made a bad decision by buying their house at a certain price. They had plenty of folks giving them bad advice, a lot in the Federal government, but they were part of it. They should lose their house, and we should move forward.

The losses we are trying to prevent are multiplying. You are also creating a whole group of people that feel very entitled to still stay. When The Norris Group buys foreclosures, they have met people at the door who had not made a payment for two years, and the first sentence out of their mouth was, “Cash for Keys.” That is now the expectation. The policy coming out of Washington is increasing that expectation that they should get to live in a home for free for the rest of their lives. Imagine when the government owns all the rentals. If you want to talk about rent control problems and having no future for real estate, that is the proposal that will kill real estate in the United States forever. One of the problems is uncertainty. If some gigantic company owns 10,000 rentals, then Bruce for example would not know what to do with his because he would not know if the playing field was legit and if they are going to put 10,000 houses for sale. However, as a builder Bruce certainly would not carve up dirt waiting because that risk is out there that others could be his competitor at the drop of a hat. We should give investors a shot at taking the inventory down because it is manageable if we do not put it on the market.

Eric mentioned how he had come out of the venture capital industry, and a lot of folks in his industry put a lot of money into bad companies back in the late 90s. When there was a crash, they lost their money from bad investments.

To find out more, tune in next week for I Survived Real Estate 2011, part 4. 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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249-TNG Radio – I Survived Real Estate 2011 10-29-11 part 2

Friday, October 28th, 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 told a personal story to illustrate what America is about. He was married when he was 17, and he did not catch on to work very well at the time. He was fired 5 times very quickly because he did not know how to disagree with an owner. The first time he came home with cash, Marsha was really happy, but after that she knew it was severance pay. When they were 21, they had a chance to buy a home in Mira Loma, and he had rectified his problems with working. They bought a house, and they did not know what they were doing at the time. The toilets flushed the wrong way, the windows did not work. The Sunday morning they fixed Sunday dinner, they had a swamp cooler that coughed dirt all over their dinner when they started it up, so they had to eat out. However, the next day Bruce got to mow his own grass for the first time. This was the first day he felt like a man. This is what ownership meant to him; a transformation. He does not want to see our country lose this.

Bruce had the opportunity to talk to Rafael Bostick while he was in Washington, someone he really like but did not like his statement, “There’s a notion that being housed well is synonymous with being a homeowner. This narrative has to change.” Bruce does not want this to ever change. He wants investors to get financing, but we should not buy all the houses by any means. We should be allowed to assist to get things back to a normal market. Sheila Bair also stated, “Clearly there’s a strong correlation between the amount of skin in a game a borrower puts up front and how the loan performs.” It’s only common sense. Did you put 20% down, you’re committed to the house, and you walk away from the house which you’re going to lose a lot of money up front. Based on it being common sense, we now have a challenge for laws that are in process for 20% down being mandatory for the best rates. However, what if this thesis is wrong? What if 20% down does not get you a better record for avoiding foreclosure?

Bruce showed a 25 year chart during the presentation that showed foreclosure rates. He said if you start at 1986, we had a boom in real estate prices from ’86-’90, then we had a downturn, the worst downturn we ever had. You cannot distinguish a foreclosure rate of a VA nothing-down loan, an FHA 3% loan, and a 20% Fannie Mae loan. The lowest one historically happens to be a VA nothing-down loan. If you go all the way back to the 1950s, that is highest performing loan. One of the reasons you know they performed is by looking at the national price in gold and seeing that we never had a price decline nationally. Whatever we were doing was smart policy until the early 2000s. Whatever we did after that is what we should correct. Whatever we were doing before that is what we should go back to. However, one of the things that happens is we’re not in the mood just to fix, we have to revamp. Sean O’Toole also made his own chart showing how prices escalated beyond where they should be. First of all, we had interest rate drops. When people could not qualify, we gave them interest-only loans, then pay option loans, and then stated income loans. We finally figured out that we should not let people tell us what they make to get a loan.

One of the other things Bruce talked about regarding investors is it is hard to get investor financing for unknown reasons, but this is one of the programs The Norris Group offers. Bruce said they funded $15 million of a loan at 9.9% interest at a time when every loan was current. With the interest rate at 9.9%, there is a possibility that people were afraid to loan to the wrong group of people and that there is a connection to investor/speculator. The people who attended I Survived Real Estate were investors who wanted to buy something and keep it, and this is The Norris Group’s qualifying criteria for that success. They look at credit, but they do not make it the determining factor. The after-repaired market value must be supported by comps, and payment must be supported by comparable rents. We’re making rational decisions; we’re not loaning somebody with a payment of $1200 when the rents are $800. It is going to be at least the opposite of this. People have money down, and investors expect they’re going to have cash or skin in the game. To do this, they have to have cash reserves. If you put together a national program like that, you have the best securitized paper in America.

The effects of the current lending policies on investors are they limit the ability of full-time professional investors from assisting in the housing recovery. The Norris Group conducted a survey that showed that people would buy 1,000s of houses if they had the financing. The effects of the current lending policies also prevent the beginning investor from creating wealth for their families. Bruce has a feeling that social security and Medicare might be different in the future. One of the ways that it might not matter is if we can create our own wealth, and this would be a way to do it. The lending policies also prevent 1031 exchanges where financing is involved. You already have 12 loans, properties in another state, and you want to come back to California, you cannot do it. This is one thing that encourages bulk sales to the same people who caused the problem in the first place. One of the things being considered for current loans is to sell a lot of houses at a time to hedge funds. Bruce hopes we don’t do this because he does not think this solves the problem and the local investor would do a better job.

Temporary solutions increase the number of loans available to qualified investors to an unlimited number. We just need a window of about 3 years. Back in the 90s, FHA had a loan program called 203k where you could get the purchase and the repairs built into a loan. Everything that is being suggested used to be there. We already know how to solve things; we just have to go back to programs that worked. Allow simple assumptions of any Fannie, Freddie, or FHA loan for the next three years. A simple assumption originally was you wrote a check for a very small assumption fee without paperwork. In the 1980s, we had a ridiculous interest rate of 17%. However, you did not have any price decline because 60% of the transactions happened because no one needed a new loan. You were able to take financing from the past and bring it forward. This would be very smart to remember that this works. We need to allow equal access to all government-owned inventories for investors and owner occupants alike, and if you have a lot of rentals make reasonable cash reserves.

Cal Poly Pomona and Michael Carney put together a study, and one of the most unique things about the study is that they keep on appraising the same property every 6 months, something they have done for decades. It’s not like a median price or a Case-Shiller Index, it’s actually what the certain address was worth over the course of decades every six months. What Bruce did was he took Lancaster and Palmdale, two properties a piece and he took a look at the square footage they went for in 1990 when they were brand new. They appraised for $83 a foot, and now those same properties appraise for $74. You lost 11% in real dollar terms over 20 years. Now, if you convert that to the payment that is necessary; your payment in 1990 would have reflected a 10% interest rate, and today it is 4%. You have an 11% price discount and a 60% interest discount, so you’re making more money in that area in 2011 than you were in 1990. If you put that all together, you’re buying that house at a 70% monthly discount. This brings up the fact that maybe we need a nothing-down loan program.

One of the problems is some of the ideas are very politically difficult to sell. Common sense sometimes does not sell politically, but we do have a very large group of people who do not own a home or have a down payment only because if you look at a historical chart, you can let them in at a specific payment rate and they would still be okay. If they fail to make the payment and someone else can pick it up without really qualifying but they just write a check and make it current, this would solve 99% of the foreclosures. If you go to a trustee sale eventually just for this new loan program, you need to let the opening bid be the late payment. If that happened, everyone in the room at I Survived Real Estate would buy the remaining properties and take over the loan subject. You would have a nothing-down loan program that would feed huge volumes to get the owner occupancy rate. It is legit and not phony; you do not need to create anything that is bad paper or wink at a certain foreclosures. However, we can think out of the box or go back to where we were originally and say we already know how to solve the problem. We just need to get the politics out of the way and let us handle it.

The first person on the panel to come up was Doug Duncan, the Chief Economist and vice-president of Fannie Mae. He is responsible for managing Fannie Mae’s strategy division, economics, and mortgage-market analysis groups. Doug provides all economic housing and mortgage market forecasts and analyses. He serves as the company’s sod leader and spokesperson on economic and mortgage market issues.

The second person was Sean O’Toole. Prior to launching Foreclosure Radar, 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 investor track record. Now he has passed those advantages on in ForeclosureRadar.com.
The next panelist was Eric Janszen. Sean O’Toole spent 15 years in high tech before getting into foreclosures, and he was always looking for people he thought had good insights. Eric wrote articles for a newsletter called “Always On.” Sean would wait for this newsletter to come because he thought the articles were so insightful and important. Eric spent 20 years in the high technology industry, did two stints in software startups as CEO, then moved on into venture capital. Foreclosure Radar would not have existed without him as he recommended getting out of the stock market in 1999, which Sean did. Eric recommended buying gold in 2002, which was close to what he did. He figured out that there was a housing bubble going on, knowledge which benefited Sean when he was flipping foreclosures. When Sean did not even know Bruce yet, Eric was the one who advised him to get out of the housing market in 2005, which he did. This was really the start of Foreclosure Radar. In September 2008, Eric told Sean to get out of the real estate market, something which he also told thousands of people who followed him at his website iTulip, which he started in the ‘90s to warn people about the .com bubble and brought back to warn people about the housing bubble.

Bruce’s goal was to talk about the economy that he watches and the world that he watches it in. He now has the habit of staying up until 11:00 or 12:00 at night just watching to see if there is a Greek default or what is going on over in Europe because there seems to be a correlation. Doug Duncan explained how his CEO Mike Williams had him lead off one of his quarterly meetings with Fannie Mae with an update about the economy. One of the opening remarks he made was you could look at it as the frat house party side effects. 11 million Greeks party into the night and bring down the global economy, targeting the 25-35 year old bracket. Doug does believe one of the primary risks that face us today is a Greek default. The current forecast is on Fannie Mae’s website on the 15th of every month, and here people can take a look at their opinions on the economy. Fannie Mae sees growth in the third quarter as being decent, possibly upwards of 2 ½%, but then receding back to under 2% through the end of 2012.

One thing they believe is certain is Greece will default. The question is whether they will default in an orderly manner or not. Will there be a plan for managing the losses and how the losses will be distributed. If it is orderly so that the banking system is recapitalized while that default takes place, the likelihood of putting the U.S. into a serious recession is low. If it is disorderly, then this is one of the primary risks Fannie Mae sees facing our own economy. Europe is our biggest trading partner. China is the second biggest partner, but they are Europe’s biggest trading partner. If there is a disorderly default and Europe goes into recession, the export business will recede, which is one of the things that has been keeping us growing. This will likely lead to a recession. The question is if we go into a recession, do we have at our disposal the normal monetary tools that we usually have. Doug’s personal view is that from a monetary policy perspective the Fed has exhausted the tools that they have. They made an explicit statement that would keep rates low through mid-2013, which is highly unusual. The general public understands this as shown in their surveys for consumers last month subject to Fed announcement. The percentage of people who expect rates to rise fell 12 percentage points. This shows the public is paying attention.

If you don’t have a monetary policy to help out a recession, then you would use fiscal policy. The survey consumers give information here as well. Fannie Mae gives 1,000 phone calls a month for 16 months. Last July they were making their phone calls while the debate debt ceiling was taking place. The percentage of people who said the economy was going the wrong way rose 6 full percentage points during that month. It culminated at the end of July, so in August they pulled in the first three months wondering whether or not the full effect of that debate had taken place. The percentage of people thinking it was going the wrong direction rose another 8%, so at that point 78% of the people in the country believe it is going the wrong way. This is a function of fiscal policy decision-making in Washington. They’re watching Washington’s actions with one eye, and they’re watching Europe melt down with the other eye and saying if they don’t act responsibly in this face, then that is our destiny. 78% of the people think we are going in the wrong direction.

Sometimes it is a little hard to take the end result that may be inevitable at some point seriously because we have a credit downgrade and an interest rate decline. You do not connect these two dots, but you think that we just had our rate lowered so now interest rates are going to be more expensive. This would be the first time in history the headline of an article has read “Interest Rates Back Over 3%.” When fiscal tools are used, Congress has recently been thinking in short term application. The stimulus bill was intended to be a boost to the economy in the short run, which would then run on its own. Fannie Mae’s forecast, however, would reflect that they do not believe this. Their expectations for growth were not actually stimulated by the activity. They take their signals from what happened in the housing market when there was a temporary tax credit. The advice to the executives of the company was that there would be a temporary price rise, but the market would take it all back and prices would continue to fall subsequent to that.

An $8,000 rebate was equivalent to a nothing-down loan most of the time on prices. It is not known how well this loan portfolio performed, but it would be interesting to know since it is in essence a nothing-down program without spending the $8 grand. It was pointed out to most of the bankers who had made loans under this program and held it in portfolio that the loan-to-value ratio they believed they had at the time they made the loan was higher after prices receded again, so they had more risk in their portfolio than they thought they did.

To find out more, tune in next week for I Survived Real Estate 2011, part 3. 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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248-TNG Radio – I Survived Real Estate 2011 10-22-11

Friday, October 21st, 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 sponsors: 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.

I Survived Real Estate started just four years ago. For those who had been there for a long time, it has gone by fast. It started with a simple formula, a conversation, and a cause. The last four years in real estate have been particularly difficult. Many who attended the live event would be considered survivors. Long gone are the days of condo hotel investing in Las Vegas, a realtor in every household, stated income loans, and 10% price increases every month. True professionals working in the environment today stay on top of trends, challenges, and all different facets that makes up the market. The event featured six special guests from all over the nation. Some have or soon will be representing their national organizations in Congress trying to influence change. The conversations on stage covered what we should expect in 2012 and how our businesses might change. 100% of the proceeds went to Susan G. Komen for the Cure, and this year alone they raised close to $80,000. The walkers alone raised $15,000. On September 30 several people walked in a breast cancer walk, and some joined the walk to earn a seat at I Survived Real Estate 2011. Over 50 people participated in the walk.

Rebecca Hultquist thanked the Norris family and everyone at the event for their support over the past three years. Over all the years they have raised over $250,000 for women in need in the Orange County area and other surrounding areas. Rebecca recently had a friend who was diagnosed, and because she was under the age of 40 was able to have a mammogram through the funds that Komen offered her. In turn, these funds came from the supporters of I Survived Real Estate, and with their donations they became advocates, volunteering and becoming a part of the movement. Rebecca herself is breast cancer survivor, which she first had when she was 33. She was a wife and a mom with three daughters, and if it wasn’t for a life-saving mammogram that she had that year, she would not be here today. It was stage 2 invasive breast cancer, through which she endured chemotherapy radiation and surgery. Through this, she became involved with Susan G. Komen for the cure. 75% of the funds raised stay in the area to help women in need through treatment and clinical mammograms. Women can get the treatment they need. Early detection was what saved Rebecca’s life and what will save the lives of the future women. Through the science being funded, we look forward to a day when our daughters, children, and granddaughters live in a world without breast cancer.

Aaron talked about his mother, Marsha Norris, who passed away last January after a 17 year brave fight against cancer. The first three years of I Survived Real Estate were launched with a radio show between Marsha and Bruce, and each of the past events really showed her spirit, her stubbornness, her unwillingness to give up, and her faith.

Bruce took a moment to talk about his wife Marsha. She started every day by doing two things. She said prayers for everyone in her family every day, and she took time to think of all the things that were blessings in her life. The one thing you could not mistake about her was that she was thankful for the smallest things. If you took her out for coffee, you never failed to hear her say thank you. Marsha was an amazing blend of stubborn determination and kindness. She had an iron will when it came to some things, and one of those things was dealing with breast cancer. She decided early on that breast cancer was not going to rule her life and that she was going to put it in a little corner and tell it to stay there. There were times she was afraid and was hurting, but that was dominated by her wanting to go on cruises and live a life. If you know somebody who has cancer, it’s a choice on how to handle it. Marsha handled it with such grace and dignity that it was amazing. The people in the audience put a smile on her face constantly during her 17-year journey with cancer. She received cards, calls, flowers, and she felt everyone’s love when she came to meetings.

This year’s I Survived Real Estate was the most important meeting they had, as there is a lot at stake for not only investors but collectively as well. Sometimes as investors we think of ourselves as the lone Mohican, but all of a sudden there is legislation that really deals with the entire industry, how it affects how people buy property, and how much down payment they have to have. We have a common enemy with everyone in the industry. On the other side of things, there is a lot going on in the world that Bruce never thought he would have to think about as a real estate investor. All of a sudden, Bruce found himself staying up late at night watching Europe to see if Greek is going to default. The goal at the event was to bat it around with people at the top of the industry. We had to have a lot of respect for the journey it took to have the positions the speakers had. It’s a lifetime commitment to get to where they are in the industry. They have dedicated themselves and therefore we have a lot more in common than not.

During the presentation, Bruce showed a property that The Norris Group had bought that sold at the peak of the market for $436,000 in Moreno Valley earlier. About two and a half years later, The Norris Group bought it for $64,000. They put $35,000 into it, and they rented it out for $1,400 a month. The property was much nicer when they fixed it up, and Bruce said this was exactly how they fixed their rentals. One of the things Bruce wanted people to realize is sometimes there is just an assumption that when you have rentals, then you are a slumlord. Not true. The reason The Norris Group does what they do with rentals is because they do not have any competition because no one is going to put granite into rentals unless they think like The Norris Group. The way they think is they are going to get the best tenant, the most applicants, the least amount of people to move out, and fix everything nice right now since labor is on sale right now.

Sometimes cities are worried about there being too big a percentage of rentals, but there were most likely a lot of people at the event who fix the houses the same way. One of the problems is someone bought the house across the street for $436,000, and they still owe this same amount. This house may be worth $150,000 or $170,000, but where the problem lies is we have a very large percentage of people who are upside down. In California, we have about 30% of the people who are upside down with another 4-5% who are very close. This is a big problem, and some of the cities are a lot worse. In one particular city, Hesperia, people owed twice as much as the house was worth on 9,000+ households; while 5,793 owe 120%-200%. If you add the entire negative up, you have 76.9% of the people in Hesperia who are not going anywhere; they cannot move up or out. This is a problem when 76% of your city is stationary and cannot go anywhere. This is an extreme example, but the whole state has problems.

One of the things that is occurring is we are having a decent volume in sales in California. This is a historic look at volume in the brown line. In 2010 there were about 500,000 sales, and in 2011 there were similar sales. The difference is the mix of sales. You look at the mix of sales released by the California Association of Realtors for August of 2011, and you see that you have about 43-44% of all sales either being short sales or REOs. If you think about a short sale or REO, the person that leaves that closing has damaged credit. They are not buying another house, so you have just lost 43% of your former owners to non-ownership status, which has never happened in the past. This is the average for the state of California. If you go to areas such as Riverside, it’s 65% combination of short sales and REOs. For every 1,000 sales, 650 buyers no longer emerge as an owner-occupant. They have to be sold to an investor, or you have to have new people migrate into the area.

In Riverside, we have about 15% unemployment, so the likelihood of them showing up is not as good as it once was. This is the dilemma because we have some dominoes to solve, so one of the things we have to ask is how we fix unemployment. In our area, you don’t fix unemployment without fixing construction; and you can’t fix construction until you have a price per square foot that makes a builder a profit. Unfortunately, we are a tad away from this. We have to figure out how to move a lot of properties to another group of people. CAR also released data showing a portion of sellers planning to repurchase, and it showed about 37% of people when they close escrow are saying they will buy another property right away. You have the damage group, but you also have the people who are mentally beat up. This could include people who just closed escrow who used to have a $400,000 house that closed for $190,000. These are the people who do not want to participate in another one right away. You have this lag effect that goes on when you are not too excited about real estate. Consequently, what is going on is the cash sales have exploded. You have people buying properties, but the problem is when we buy properties for cash we eventually run out of the cash. Therefore, we have to shove the same property in a better condition on the market. Instead of it being able to back up the truck with the REOs and unloading a lot of them, you are constantly competing with very nice inventory that is coming back around. If we can get financing, we would not have to do this.

33% of loans in foreclosure have not made a payment in over two years. 41% of the people have not made their payments in a year or more. People stay in foreclosure for a long time. There was a news article in the Riverside Press where a family being interviewed said they were actually pretty delighted about how their lifestyle had changed since they stopped making their house payments. They believed life was so much better: they had extra money for the business, went on a vacation, and bought a barbeque. The problem is eventually this inventory might show up, and this is the ball of inventory that is turning behind the scenes; 90 days late all the way through properties already foreclosed is 4 million properties. This is about 8% of the entire inventory in the country. If you think this is over with, it’s not. The question is why we are letting this happen and why this is the best strategy that is going on right now.

One of the things that is happening right now, and this is important for everyone in the industry, is there is trying to be a retooling of our minds toward ownership of homes. On the recent cover of Time Magazine, the title was “Rethinking Home Ownership: Why Owning a Home May No Longer Make Economic Sense.” They could have said anything else but that. You have half-priced real estate and interest rates at 4%. This is economically a bad idea. People need to call up their landlords and see if they can get a 30-year fixed rental rate. This is not going to happen. It’s not economically infeasible; it’s actually the smartest thing you could possibly do. However, what is interesting is we have decided that, media-wise, we are going to say that we have had it wrong the whole time about owning a home since it has damaged so many people recently.

Bruce was married when he was 17, and he did not catch on to work very well at the time. He was fired 5 times very quickly because he did not know how to disagree with an owner. The first time he came home with cash, Marsha was really happy, but after that she knew it was severance pay. When they were 21, they had a chance to buy a home in Mira Loma, and he had rectified his problems with working. They bought a house, and they did not know what they were doing at the time. The toilets flushed the wrong way, the windows did not work. The Sunday morning they fixed Sunday dinner, they had a swamp cooler that coughed dirt all over their dinner when they started it up, so they had to eat out. However, the next day Bruce got to mow his own grass for the first time. This was the first day he felt like a man.

To find out more, tune in next week for I Survived Real Estate 2011, part 2. 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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242-TNG Radio – Eric Janszen 9-10-11

Friday, September 9th, 2011

Eric Janszen

Eric Janszen

Economic & Financial Analyst of iTulip, Inc.

(Full Bio)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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193-TNG Radio – I Survived Real Estate 2010 9-24-10

Friday, September 24th, 2010

I Survived Real Estate 2010

I Survived Real Estate 2010


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September 17th, 2010, The Norris Group returns with its award winning event I Survived Real Estate 2010. The video also now available on The Norris Group website.

The Norris Group has assembled an incredible line up of industry experts to discuss the state of REO from the inside. Topics will include regulatory intervention and aftermath, bulk buying, myths and facts, and opportunities emerging for real estate professionals. 100 percent of the proceeds support the Orange County affiliate of Susan G. Komen for the Cure. This event would not be possible without generous help from the following platinum partners: Foreclosure Radar and Sean O’Toole, the San Diego Creative Real Estate Investors Association and Bill Tan, Investors Workshops and Shawn Watkins and Angel Bronsgeest, Invest Club for Women and Iris Veneracion and Bobby Alexander, Claudia Buys Houses, The Business Press, Frye Wiles, MVT Productions, and White House Catering.

This week The Norris Group Real Estate Radio Show is broadcasting the first segment of I Survived Real Estate 2010.

This is our 3rd I Survived Real Estate event. Over the last few years we have covered the reasons for the meltdown, ever changing legislation, government stimulus, and possible industry solutions. That is part of the conversation for I Survived Real Estate 2010, but this year we are focusing on “the state of REO from a multi-sector viewpoint.” We are proud of the ensemble we have put together for this event. Thank you for listening online. We appreciate your support.

The benefactor for this event is Susan G. Komen. Susan G. Komen is the world’s largest grass roots network of breast cancer survivors and activists, which works to save lives, empower people, ensure quality care for all, and aid science in finding the cure. As of 2pm on September 23, 2010, our sponsors raised $63,000 for Susan G. Komen. That brings our 3 year total to over $160,000.

I Survived Real Estate 2010 would not be possible without out platinum sponsors, who allowed us to dedicate 100% of the ticket sales to Komen. Those sponsors include Foreclosure Radar and Sean O’Toole, San Diego Creative Investors Association and Bill Tan, The Investors Workshop, Shawn Watkins, Angel Bronsgeest, Frye Wiles, Invest Club for Women and Iris Veneracion, Bobi Alexander, The Business Press, MVT Productions, San Jose Real Estate Investors Association and Geraldine Barry, Claudia Buy’s Houses, White House Catering, and The Nixon Library. Thank you as well to all our gold sponsors. Their information can be found on www.isurvived2010.com. We are grateful to all who have participated.

We would like to thank two heroes. First, we would like to thank Marsha Norris. Her 17 year fight with cancer has been nothing less than spectacular. Its not just about strength, but its also about attitude. “Surviving is important, but thriving is elegant.” Second, we would like to thank Bruce Norris. Thank you for giving us an incredible example of what it means to be a great partner through thick and thin, and through better or worse. You show incredible grace when under fire.

Our host for this evening is Bruce Norris. He has been in real estate for almost 30 years as a builder, money partner, and investor. He has over 2,000 transactions under his belt. He is most known for his market timing predictions and his research.

This event would never have occurred if Aaron Norris had not developed our radio show. When Aaron originally told Bruce that The Norris Group should have its own radio show, Bruce asked, “Why in the world would we do a radio show?” Aaron responded saying, “I think it would be a great service to our industry.” It has been on of the best things Bruce has ever done in his life. Every week Bruce is challenged to interview someone who is an expert in their field. He has to read and work a lot to prepare for those interviews. We now have the opportunity to put a panel of those interviewees in front of you, and discuss solutions for our industry. Two of the panelists gave Bruce home work assignments. He bought those books and did his homework, so we will be discussing some of the issues in those books. Christopher Thornberg is back. When Bruce recalled memories of last year’s event with Thornberg, he decided to buy head gear just in case Thornberg’s speech gets rough again.

Bruce wants to be able to share good ideas for good questions during this event. Bruce has been a part of panels in which he did not feel like anything was accomplished, because no one was willing to cross a line or two. With this group of panelists, we may need more than one set of head gear. One of the hardest things for Bruce to do is disagree with a conclusion that is probably correct but not understood. Tonight, Bruce is going to do that. Bruce is going to be asking questions about issues that he does not fully understand.

Are we going to inflate or deflate? That is a very important question, because investors do something very different if they expect one or the other. Thornberg and Bruce will be discussing that issue. Thornberg gave Bruce a book to read, but Bruce still doesn’t agree with him. This event is about getting answers to important questions for real estate investors. Bruce would like to develop his business plan for the next few years based on what is said during this event.

Bruce would like to thank his company for the hard work they put into preparing this event. Aaron and Diana did as much work for this event as most people do for a wedding. Bruce gets to show and get a standing ovation because of their work. It doesn’t get any better than that.

Bruce and Marsha recently moved after living in the same home for 25 years. One of the first problems that came up during the move was what to do with the wheat? For those who have not heard that story, Bruce would like to tell it again. In 1975, Bruce got married and bought his first house. During that time, he read a book called The Coming Bad Years. The book claimed that if you are concerned for your financial future, then you need to buy 200 pounds of wheat per person in your family, so that you will have food to make it through the coming rough times. Bruce only had 4 people in his family at that time, but he bought 1,000 pounds to make sure he had plenty. So 35 years later, Bruce had to decide what to do with what is left of the wheat. He sill has a bucket of about 5 pounds of wheat, and he doesn’t want to give it up, because that wheat taught him something. First of all, it taught him that wheat lasts a long time. The second lesson was that when you get input from somebody else, listen to them, but don’t just let their input determine your opinion on the issue. Your informer may not be right. Bruce managed to build a house in a very nice neighborhood during a time in which he falsely expected a depression.

We have an important year coming up. We’ve experienced the great recession of real estate, and we are now in its aftermath. Just 24 months ago, Lehman Bros failed and set off catastrophic losses on Wall Street. Just like the wheat example, we now have groups of people overreacting. Policy changes are about to be made that could have very negative outcomes. The title for a recent article in the Los Angeles Times read, “Rethinking Homeownership: Why Owning A Home May No Longer Make Economic Sense”. That is not the mentality we want to have as a country. The little house purchase that Bruce started with was a “subject to” deal before Bruce knew what a “subject to” deal was. He bought the home with 500 dollars down, and he probably couldn’t have qualified for the financing on his own. Many good things happened in his life because he bought that property.

In the article titled “Rethinking Homeownership: Why Owning A Home May No Longer Make Economic Sense”, the author claimed we should take all tax benefits away from real estate. The article said, “there is only one affect that seems consistently caused by homeownership. Owners invest more time and money in the physical upkeep of their homes. They are more likely to make repairs and guard it.” Isn’t that called pride of ownership?

Tommy Williams once said that whenever he auctions off a house, that house stops being loved by somebody. An auction finds somebody that will love it next. We all want to live in a neighborhood that is well kept. Society is better off when the majority of us have a chance to own a house.

Some people are in positions were they can make policies. Raphael Bostic is the Secretary for Policy Development and Research for HUD. This is a statement from HUD: “There is this notion that being housed well is synonymous with being a home owner. That narrative has got to change.” That is an interesting statement coming from people who provide a lot of houses. The Chairman of the Federal Deposit Insurance Corporation said, “Clearly there is a strong correlation between the amount of skin in the game a borrower puts up front and how that loan performs. Its only common sense. If you put 20 percent down, you are committed to that house. If you walk away from that house, you are going to lose a lot of money.” Her solution would be to go to a 20 percent mortgage, but Bruce does not feel that is necessary.

In the mailing business, there is something called a control piece. A control piece is something that gets a known result when used. People in advertising use control pieces all the time. They send mailers designed to get a specific response repetitively. If they want to change something, they do the changes one at a time. If the change improves their control piece, then they add the changes to their mix.

We already have a control piece that has worked for 40 years. This control piece is called low down payment purchases. We have statistics showing that the damages caused by low down payment purchases have not been consistent over the past few years. Giving someone a VA loan with no down payment does not cause society big losses. Look at 1970 through 2002. During that time, we had FHA loans with only 3% down, but we did not have many foreclosures. Foreclosures were between 5 to 10% during that time. Foreclosures did not significantly increase until after 2003. The low down payment deals did not cause the problem. The subprime, low qualification, and option-ARM deals that caused the problems. We already know what works. We don’t need to reinvent our control piece, and we don’t have to practice over kill.

From 1975 to 2005, you did not have significant price decreases. If low down payment programs were causing the problem, why don’t the statistics show it? Bruce thinks that changing the low down payment policy would be a big mistake. Right now, a decline of ownership is occurring, and that is probably healthy. If the Chairman of the FDIC has her proposition in place, then homeownership will probably dip below 60%. Sellers are not netting very much when they sell properties. It would be difficult to crank up 20% from this price.

If we get rid of low down payment programs, you will have a lot more vacant properties. There is not enough financing for investors to absorb this inventory. You will have less stable housing costs for people who don’t own. When you buy a home, it can be rough at first, but once you’ve owned for a few years, you adjust to the cost, and it becomes easy. If we have more vacant homes, then we will also have lower quality neighborhoods with more unkempt houses. We will also have less equity to access other investments with.

Right now, Bruce believes that a zero down payment program would work perfectly. Warren Buffet believes that when other people are greedy, you should be fearful. If he had been in the loan business during 2006, he would have gotten out. In 2010, he would probably suggest making a lot of loans, because the payment on these loans is probably less than rent. If you are ever going to take a risk, you should take it in 2010 and 2011, because interest rates are at all time lows. Right now, people between the ages of 20 to 30 are underserved in the mortgage industry. Under Bruce’s proposed program, people would still have to qualify, but they wouldn’t need a down payment. Some people think this is crazy, but if you think about it, we’ve already done this for people with the $8,000 tax credit. We were giving homebuyers tax credits, so that they could make an $8,000 down payment. 48 percent of the 2 million people who received the tax credits will have to pay the $8,000 back.

People over the age of 35 have a homeownership rate of over 60 percent. People from the ages of 20 to 30 are underserved, and they probably did not receive the credit damage that many of their elders received from losing their houses. What is wrong with giving these younger adults a shot at homeownership? You must have 2 different criteria for Bruce’s no down payment program in order to prevent foreclosures. The reason why this program will work is because it is set up to serve 3 borrowers simultaneously. Yes, you are going to have a failure rate with a no-down mortgage, but you pick the percentage. When your payment is less than rent, is it going to be 20 percent? Bruce doubts it. But for the sake of argument, let’s say that foreclosure rates are at 20 percent under this program. If 2 million people sign up for the no-down program, and 400,000 people walk away, then let that loan get assumed by the next buyer without qualification. The likely target buyer will be the person who lost their house in foreclosure during the past 3 years. They can’t get new credit, but they might want to return to those “pride of ownership” homes. They will write a check, and save the system from 1 more 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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