On Friday, October 19, the Norris Group proudly presents its fifth annual award-winning event I Survived Real Estate. An incredible line-up of industry experts joins Bruce Norris to discuss perplexing industry trends, head-scratching legislation, and opportunities emerging for real estate professionals. Proceeds for the event benefit Make a Wish and St. Jude’s Children’s Research Hospital. This event would not be possible without the generous help of the following platinum partners: ForeclosureRadar and Sean O’Toole, the San Diego Creative Real Estate Investors Association and President Bill Tan, Investors Workshops, Invest Club for Women and Iris Veneracion and Bobi Alexander, San Jose Real Estate Investors Association and Geraldine Berry, Frye Wiles, MVT Productions, and White House Catering. Learn more about the panel and how to attend at isurvivedrealestate.com.
Bruce Norris is joined this week by Gary Thomas. Gary Thomas is the broker/owner of Evergreen Realty in Villa Park, California. He has been in the business for more than 35 years and has served the real estate industry in countless roles. Gary is currently the 2012 president elect for the National Association of Realtors, which has been the voice of real estate professionals. It is the largest trade association with 1.1 million realtors involved in all aspects of residential and commercial real estate.
Bruce asked what some of the benefits would be for joining the National Association of Realtors if he had a broker’s license. Gary said one of the main benefits to being a part of the National Association of Realtors is the lobbying they do on behalf of not only realtors, but all homeowners in Washington D.C. and at the local and state levels. They do a lot of lobbying on homeowners’ property owner’s, and the industry’s behalves. They also have a lot of educational tools to utilize as well as a lot of discounts that you get with vendors when you are a member of the association.
Gary will become the president in the middle of November the day after the closing of their national convention held in Orlando, Florida this year. His duties will be to be the voice and the face of the National Association of Realtors and to lobby on their behalf when called upon to meet with different groups, including the banks and GSEs. Wherever he is needed, this is where he is going to be, including in front of Congress.
Bruce wondered if 2012 and 2013 are particularly important. Gary said absolutely since there are so many attacks on our industry, whether you are looking at the QM and QRM or what potentially could happen with the mortgage interest deduction. The fiscal cliff is also coming up, and there are so many things going on as well as the GSE reform. The industry is under a pact, and he does not mean just realtors. He is also talking about lenders, investors, banks, and builders. They are all in the same boat. It is really one of those years where you would find it almost hard to imagine that real estate will emerge with the status quo intact in all areas. In some way, you may even have to pick and choose some of the battles that are most important to win. Some others may not survive, and it will be interesting to see.
Regarding the fiscal cliff, Bruce said he read the document that suggested some of the things that real estate would give up if they had their way. Some of the things they talked about giving up are things we assumed would always be there, including the interest rate deductions. Bruce wondered if that is affected would their effort be to bring it down from where it is to about half of that. Gary said there are several things on the table they have talked about. One is naturally $1 million for a first and $100,000 for a second trust deed. In effect, it is $1 million ones combined. What they have talked about is either reducing that down and/or eliminating it completely. The other thing they have talked about is eliminating the second home deduction. These are the three things that are in play, none of which are particularly appealing. They said they will fight any of these three because if they bring it down, then what is to stop them a few years later from bringing it down a little more.
One of the things Bruce said he was surprised we ever got was the $500,000 nontaxable profit on a residence. When he heard this, he was surprised when this passed and even had to make a phone call to a gentleman who was a very smart man. He called him up to ask if he was reading the news right. He said if there is something that has to go, then is this not what would be sacrificed for the rest of it sticking around. Gary’s job is to keep all of it intact.
Since it is an election year, the question you have to ask is if the real estate industry as a whole better off in 2012 than 2008. Gary said we are doing better now from the sales standpoint inventory-wise. However, as an industry we are not better off today. Bruce just interviewed Sara Stephens a couple weeks ago; and he asked her if she went to sleep in 2008 and woke up in 2012, would she be happy as an appraiser since this was one of the areas that changed radically.
Bruce wondered what happened to the great pile of foreclosures that are supposed to inundate the market, aka the shadow inventory. Gary said some of the shadow inventory is still there, but if you ask the lenders they will tell you they do not have that much. If you ask the GSEs, they will say there is some out there. In Orange County, for example, there is very little inventory now. It is very low, and this is not just referring to REOs but anything. REOs are almost nonexistent right now. Anything that comes on the market as an REO is snatched up instantly. If there is a shadow inventory, it seems they would start releasing it. In some parts of the country where they had the robo-signing, this was a problem for them and they probably have held back releasing it. However, in California this really did not exist.
Bruce wondered what type of inventory levels we are talking about in Orange County since an average month’s supply of inventory would be six months. However, Gary said it would be one and a half months, which is ¼ of normal. Anything that is $500,000 or below is half a month. If you have 15 days of inventory and you have pretty good demand, Bruce wondered if you have multiple offers almost every time. Gary said this is true if it is a decent property, price right, and comes on the market in that affordable range. When there is an increase in prices, then that is a problem. It is always a problem whenever you are coming out of the bottom of one of these recessions. This time may be exacerbated by the infrastructure of the review process and all the regulations that are put on the appraisers and the lenders. They are afraid to make a loan.
Gary tells clients that you are really not going into a loan process, but rather you are going into an inquisition. You can’t be surprised what they are going to ask or get upset; this is just the way it is. You also have to be prepared for how many times they are going to ask for the same thing. It is a very frustrating process unless you are doing a loan mod. This has become a dichotomy of effort. Bruce just had the experience of somebody working for his company who was getting a loan modification. He was told the lender was going to call and he was going to verify employment for them. Bruce said he prepared carefully for this since he figured he would have to go back when they started and have a pretty good history of what they had made both last year and this year. The question from the lender was if that person worked for the company, to which Bruce said they did. He asked if they wanted to know what the person made, to which the lender said it was not necessary. There is nothing necessary for a loan mod anymore other than to basically be a human being who can fog a mirror, but that is not true if you are going to originate one. If you are going to originate one it does not matter.
Gary said he talked to one of his agent’s clients on Friday who was putting over 50% down and is having a hard time getting the loan approved. Gary told him it was not his fault, it is the system right now. They are afraid to make the loan and it is an inquisition you are going through, but you just have to know you are not being adversely selected as this is happening with everybody. You would think they would want to make the loan and hope you don’t pay since they would make money on that one. When a lender deals with being afraid to do a loan, usually the situation is if you took it back you would create a loss. In this market, with a down payment of almost 20% they would almost definitely be creating a profit center. It is still like they are biting their nails right to the bitter end as if it is going to be a foreclosure without any doubt. Because of what they have been doing, they probably have the safest pile of loans in the last two years than ever in history. Part of the reason is because of the unknown consequences of the impending regulations coming out on the QM and the QRM. They really don’t know yet whether they have a safe harbor or if they can have a loan called back at any time in the future, whether it is ten years from now. Gary can understand why they would be a little gun shy themselves.
In the Qualified Residential Mortgage part of the Dodd-Frank Act, we are talking about a mandatory down payment of about 20%. This is what they had originally proposed. However, Gary said he thinks they have them convinced this is way too high, so they will bring that down. If you have made a mistake in the file at all, even if it is just a minor error or something that really does not affect the quality of the mortgage, and the people default on it in ten years, they can come back and have you buy back the loan. There has to be some safe harbor after a certain period of time. There are a lot of things that could be done to protect themselves, but in all the bureaucrats are trying to come up with something that is really not going to work.
One of the confusing things is that we have a shortage of inventory for sale in the Inland Empire as well. If there is a shadow inventory issue, Bruce said he would have thought it would be on the people that they don’t foreclose on and who have allowed to have been two years late. In talking with REO agents, they have been told that this is not going to be the path that most of these properties are going to fall into and they will probably fall into almost every other category rather than be foreclosed on. You are really going to see the growth industry of a short sale, possibly a deed in lieu of foreclosure, an aggressive loan mod, or principal reduction. You will see all of this taking inventory that might have shown up for sale to the sidelines. Gary is probably dumbfounded by their new policy of selling Fannie Mae properties in bulk. There does not seem to be any justification in that. One has already been done in California where there were about 500 properties. One is about to be done in Florida that just closed today and the winner was announced. This one involved about 695 properties, the majority of which they say are already rented. They did show the percentage of what the bid was compared with their asking price or CMA. It was pretty close, so they did a good job there. However, Gary said they have been lobbying them heavily to not do any since the inventory is so tight. It certainly does not add to the local economy since there could be a group of realtors that just received 600 commission checks. If there is any strategy to an area that is better off with owner occupants, they have basically negated this and created permanent rentals.
Bruce wondered if there are some restrictions on when you participate in these bulk buys and if there is some type of statement that says you will not present the property for sale for a certain period of time. Gary said he can’t remember but it seems there was a restriction on them reselling them right away. What is interesting is that we are taking inventory that would not have naturally gone through the process of possibly being sold to an investor who would fix the property up and present it in great shape to a retail buyer. Now, you have negated all these things and the property is not emerging for sale but rather being set on the sidelines. It is a puzzling strategy. We also now have FHA selling loans in bulk that are delinquent. It just came about where they were selling thousands of those to people, and they also have restrictions where people cannot foreclose on them 50% of the time. It seems they are making a concerted effort to make this inventory not show up from the lender side. The problem is that it is not showing up from any side, and he is not sure where they expect it to come from.
None of this makes sense unless you drive the price up. Brue said he could see how some have not thought this through. If you drive the prices up, then you would probably save trillions of dollars in upside down debt. You would get people to be in a positive equity position much quicker. This is not an unreasonable goal, but Bruce said he is not sure if they have actually thought it through all the way. Another thing that is interesting is that we did aggressively foreclose in 2008 and 2009. For those numbers of people in, for example, San Bernardino, a typical sales number is 27,000. We foreclosed on 54,000 families in the years of 2008 and 2009, and after three years those people can get an FHA loan. On top of what normal demand would be in 2012, you now are stacking two years of potential former owners on top of that demand with nothing for sale. Orange County has a similar situation where they were aggressively foreclosing in 2008 and 2009 to a lesser percentage, but nevertheless you had a back supply of former owners that would probably want in at 4% interest or less. This would make perfect sense.
Bruce wondered what the attitude of the buyer in Orange County is. It would seem like there would be a frustrated wannabe, which Gary said this is exactly what it is. Unless you are coming in with all cash, a heavy down payment, or something of that nature it is pretty tough. At some point short sales may be the natural target, but you go into that not knowing that you are going to get a yes answer. Even though they have probably improved the timeframe of all that, there is still a fair amount of time involved in getting a yes answer in that process. The process is not fast and still takes a while.
Regarding the REO agents who Gary has access to, Bruce wondered if they make any comments about what they have been told regarding whether next year is supposed to be similar to 2012. He wondered if they have been told if there will be a decline in that year or if we will go back to foreclosing on a lot of property. Gary said he has two agents who do a fair amount of REO business, and they have actually not been told anything as of yet. They are receiving assignments, but they are still in the dark and are not sure what their assignments will be. Gary speculates a lot of hesitation is dependent upon the election.
Bruce wondered if Gary has the hedge fund buyers in Orange County like we do in the Inland Empire. Gary said he has not heard of any; but his guess is that some of them may be there, but the prices are much different in Orange County than the Inland Empire. The hedge funds have a better shot at making a good profit on picking up properties in the Inland Empire. At the same time, he said they do have individual investors who are buying. On top of what normal demand is when you have interest rates at this price point, we have approximately six hedge funds with upwards of $1 billion ready to write a check for anything that is moving. If you are just a regular buyer who is going to receive an FHA loan, it is one tough assignment to get a winning bid passed.
There are some rules that have been very beneficial for aiding short sales, and that is the way debt forgiveness has not been a taxable event. That is one of the things that is due to change at the end of the year. Bruce wondered if this has agreed to be extended or if is still up for grabs. Gary said the debt forgiveness is still up for grabs, but they do have it through the Senate Finance Committee, and they are hoping to get a vote out of both the Senate and House this month before they go campaign before the election. There is a very good chance that it will pass at that time, and there is little resistance to it.
Gary Thomas can be heard again on the panel for I Survived Real Estate 2012, which will take place Friday, October 19.
The Norris Group would like to thank its Gold Sponsors for supporting I Survived Real Estate: Adrenaline Athletics, Coldwell Banker Pioneer Real Estate, Elite Auctions, FIBI, Inland Empire Investors Forum, Inland Valley Association of Realtors, Investor Experts Incorporated, Keller Williams of Corona, Keystone CPA, Las Brisas Escrow, Mike Cantu, Northern California Real Estate Investors Association, Northern San Diego Real Estate Investors Association, Personal Real Estate Magazine, Realty 411 Magazine, Rick and LeAnne Rossiter, Southwest Riverside County Board of Realtors, Starz Photography, uDirect IRA, Wilson Investment Properties, Tony Alvarez, Westin South Coast Plaza. See isurvivedrealestate.com for more on the event and all of the I Survived Real Estate sponsors.
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