On October 18, 2013, The Norris Group proudly presented I Survived Real Estate 2013. An expert line-up of industry experts joined Bruce Norris to discuss perplexing industry trends, head-scratching legislation, and the outlook for real estate in the coming year. Over $90,000 was raised to benefit Make a Wish and St. Jude Children’s Research Hospital. This event would not have been possible without the generous help of the following platinum partners: This event would not be possible without the generous help of the following platinum partners: PropertyRadar and Sean O’Toole, HousingWire, the Apartment Owners Association, the San Diego Creative Real Estate Investors Association and President Bill Tan, Investors Workshops, InvestClub for Women and Iris Veneracion and Bobi Alexander, San Jose Real Estate Investors Association and Geraldine Barry, MVT Productions, Wilson Investment Properties, RODA Construction, and White House Catering. For event video and information, visit isurvivedrealestate.com.
Bruce continued his discussion with Leslie Appleton-Young and Sean O’Toole. Leslie is the vice-president and chief economist of the California Association of Realtors, a statewide trade organization with over 164,000 members. Sean O’Toole is the creator of ForeclosureRadar, now PropertyRadar. Sean was a successful trustee sale buyer, having bought over 150 properties.
Bruce asked what will happen to first-time buyers in 2014 and why they are not a participant to the extent they normally would be percentage-wise. Leslie said the reason is they want to participate, but they cannot. They do not have a job or a down payment, but they do have student loan debt. They cannot compete with all-cash buyers. FHA is no longer a competitive program for many of them since the fees have increased. Loan limits may also be coming down since there is a lot of things on the horizon that are going to impact them negatively. This is one of the problems with the housing affordability index because it gives you a number, but it does not give you the context of the market or how you put up the FICO scores. From just 750 to 710 you get rid of 15% of the market.
It is really a shame since there is a lot of young potential homebuyers who, at 715, are a really great risk. They cannot get loans, nor can they compete in this marketplace. One of the positive things about rates coming up is that refi activity has gone down, and lenders have been a little bit more interested in making loans. From her membership, Leslie gets a lot of feedback. Bruce asked if they find that there is a lot of overlays on top of what they think is available for loan products that the lenders have for things that are more restrictive than they think will be out there. They then cannot get loans that they thought they could get. Leslie said it is very challenging when you are working with someone who needs a loan. They do a survey every year where they ask realtors about their last closed transaction, and they have been doing it for 35 years.
Last year they had the highest percentage of all cash at 30%. They had 17% of the realtors say they were working with an investor. Leslie has heard of there being 50 offers on one property; and they are not even looking at contingencies, whether they be a loan or appraisal contingency. The market has changed a little bit, so instead of 50 there may be only ten offers or even 4 offers. It is all a question of degree. This whole issue of first-time buyers is absolutely critical. At her organization, they are really gearing back up for a huge housing affordability problem and a need to reach out to first-time homebuyers. They can then help them to get back into the ballpark. They just cannot compete in this market since it is really tough.
Bruce asked about what Leslie means when she says she is gearing up for an affordability problem. Leslie said they are putting on six regional home buying affairs next year to reach out to potential first-time homebuyers. With respect to that group, you have to speak to them early and often. They can find homes on their own, but the question is how they save money and get their debt in order. Freddie Mac has a wonderful program called Credit Smart that really helps people understand the responsibilities of homeownership and how to get into the market. As an organization, they are getting much more focused on that because it is one of the big issues forward. Whatever happens in Washington with respect to the mortgage interest deduction and GSEs is not going to get easier.
Bruce told Sean when he did the last report, he provided data for hedge fund participation. Bruce and Sean discussed what was bought during those years and whether they are slowing down or changing. Sean said they measure the purchases by LLCLPs, which peaked in October 2012 by about 10% of the sales. It is now down about 55% to right under 5% of sales as of last month. The LLCLP is a little bit broader, and they definitely have plenty of small professional investors who buy in those kinds of entities. It does include them as well. They have gone through and handpicked some of them out from some of the names that they know. Overall it is tens of thousands of records, so this has been the fastest way to measure and keep track. Some of these folks are creating new entities every month, so tying them back to the parent entities becomes a little tough.
Bruce asked Sean if he considers them to be a market-maker, forcing prices upward. He also asked if he considers them dangerous if they exit. Sean said absolutely. The realized early on that home prices were well below what they should have been and that ROIs were higher than expected. They saw a buying opportunity, came in and took advantage of it. It is fairly clear that the reason they have left the building or are currently leaving it is because prices have risen to a point where the ROIs are no longer attractive. This makes perfect sense.
Bruce asked if they are keeping this inventory, or are they all making scattered decisions. On the exit side, you certainly have some who have decided to exit, but they are primarily looking for another bulk purchaser to come and take the portfolio on rather than say they are going to drop the single-family homes. Back in 2004, there was a gentleman who bought 300 homes in the Sacramento area. He decided in 2004 that he has seen enough appreciation and wanted out. He went to evict all 300 tenants at the same time. The government jumped in and told him he could not do this. They ended up negotiating with him that he would sell them slowly over a period time. Even if the people decide they do not want to be in the business anymore, Sean does not think the hedge funds will suddenly put all of their inventory on the MLS.
Bruce asked if the people have been market makers in rent values. Sean said they would like to be, but he does not have any data here and cannot say for sure. He has some anecdotal stories from some principals who have said they hoped to see more rent appreciation than they had seen. Renting the homes was also tougher than they hoped, which was obvious to anyone who has ever owned a rental.
Regarding the decline of loan limits, Bruce told Leslie that it is not so much the amount but seems like the intent. If they lower loan amounts 5%, that is going to not be as big an effect. However, it is not the intent to stop there as far as it going to be the trend. Those loan limits on Fannie Mae are really going to start changing. There is so much policy uncertainty right now. There were a couple bills introduced in the Senate House on the GSEs that do not mash. There is also a new proposal out that makes it very difficult to make long-term decisions about anything at all. Anything that reduces the loan limits in the current environment where we have 85% being purchased by the GSEs will be a problem for California.
Our statewide median is at 440, and there were a couple of months at the peak of the market where the median was 625. In many areas we are still 20-30% below that prior peak. This is not the case in the Bay Area of in Silicon Valley. We are right up with and almost surpassing some of the areas. The loan limits are a huge issue.
The next speaker on the panel was Debra Still. Debra is president and chief executive officer of Pulte Mortgage, a nationwide lender that is headquartered in Inglewood, Colorado. The company employs 542 individuals throughout the United States. Since 1972 it has helped more than 300,000 homebuyers finance their new home purchases. Debra recently served as chair of MBA’s Residential Board of Governors and is a member of the Association Board of Directors.
Bruce also welcomed back Mark Palim, vice president of applied economic and housing research at Fannie Mae. Mark is responsible for overseeing the economic and strategic research groups and forecasting functions. He manages multi-disciplinary partnerships across the company to address specific business issues facing Fannie Mae. His work focuses on the impact of trends and financial service sector on both the economy and Fannie Mae.
Debra had her 100 year bash in late October for the Mortgage Bankers Association. Bruce asked about the mood of the industry at the moment. Debra said the industry has come off a pretty good year, very much driven by refinances for a lot of lenders. Debra said they were about 90 days away from implementing about 3500 pages of Dodd Frank rules. You have a bit of tentativeness with readiness from lenders. Refinances are down about 70% in the last 60 days, so at a time when revenues are coming down, overheads driven by compliance are coming up. You have an industry that is feeling good, but a bit tentative going into the new year.
Bruce asked what changes were made that concern her the most, and are there changes yet to come that she does not even know the full story on yet. Debra said the challenge for Washington right now is to really thread the needle and get the perfect balance between consumer protection and broad access to credit. We know that the credit markets right now are overly tight. They saw some of that data showing that FHA credit scores are averaging about 700. They have an overly tight credit environment today. The question is what happens in January when you have the complexity with the ability to pay rule. The ability to repay rule is going to define who does and does not get loans for the next generation of consumers. They have to get the rule right.
The CFPB has done a good job and said that any loan sold to a government agency can be considered a qualified mortgage and therefore there is a secondary market. They put a patch in place that says that as long as you can sell a loan to the GSEs while they are in conservatorship, you can consider that the definition of a qualified mortgage. Fannie and Freddie now only buy QM loans, or qualified mortgages. You think about California, a high-priced market, where you have a lot of jumbo buyers and the loans are not eligible for them in some cases to be sold to an FHA or VA. You have a jumbo buyer where the maximum-backed ratio is now 43% as of January 10. They have a whole lot of credit-worthy jumbo buyers that exceed the 43%. Therefore there is concern regarding the high-priced markets.
Regarding loan limits coming down, lenders get concerned that if loan limits come down you are putting more folks in the jumbo space. Right now private capital is only back in a very small part, possibly 10% of the market. In addition, it is only back for the wealthiest borrowers. Private capital has not historically provided broad access to credit for middle class America, and they have to be concerned about all the tensions as they move into January.
Bruce said you would think one of the considerations they would have to have would be that this industry would be a driver to GDP, which it really needs all the help it can get. We are about to make some changes that will probably reverse some very positive effects. In one example, it is obvious that refis are not going to be the biggest driver of income for a very long time. Bruce asked if this usually lends itself to more creativity in the non-government space. Bruce asked if we are going to see some lenders emerge with programs that will be able to pull it off despite the risk because of the price aggression. Debra said if you do a qualified mortgage, you are in what is called a safe harbor. This means you have maximum legal protections as a lender.
If you are outside of the QM box, the penalties for not appropriately establishing the ability to repay for a borrower are very expensive. MBA’s data would suggest if a lender were to make a loan, make $4,000 on that loan, and be challenged by the consumer in court the penalties would be approximately $100,000. This is why lenders are going to make sure that, at least initially, they are lending in the safe harbor space rather than in this experimental space. If we are going to be in the non-QM space, lenders will in all likelihood lend to the high end of the market or wealthiest borrowers.
Bruce talked about the drivers of future housing demand, and the data Debra looks at for this suggests that about 60% of household formation between 2010 and 2020 comes from two coverts. One is the Echo Boom, which is about 5 million more individuals than their parents. These were the baby boomers who drove housing the 80s. You also have the immigrant buyers. This is 60% housing growth that is going to come from the first-time homebuyer. We will not get a sustainable housing recovery without that first-time buyer. The big question we have to ask that Washington is also asking the administration and CFPB is if we have credit that will be available for those borrowers.
Bruce asked about the attitude of the decision makers in regard to the final version of Dodd-Frank. He wondered if it was punitive or constructive. Debra said she thinks the CFPB did a really good job of doing the best it could with the Dodd-Frank law. With Congress’s intent, we still have a lot of clarifications. The biggest challenge right now with the ability to repay rule are the definitions. QM says the borrower may not pay more than 3 points. However, Bruce’s definition and Debra’s definition of 3 points is not the definition inside the QM rule.
There is a portion of the mortgage insurance premium in there as well as a portion for affiliated businesses. The title fees go in here, and it is a very complex calculation and involves more complexity. This rule, when originally published, was much more restrictive than it is today. The CFPB has gotten us a long way down the road. Where they have stopped short is where they believe Congress had intended for something, and if you want a wider credit box you have to go back to Congress. It is eased during the process of creating the law, so Bruce wondered if it is usually true that after something is established that there can be changes made to it that may be more aggressive. Debra said the CFPB has some interpretive authority, so we will be able to tweak over time as we understand the impact. MBA has been lobbying for some sensible changes to ensure broad access to credit.
CFPB has said at this point they are done writing rules and will implement in January. They can then see the impacts and consider what they need to do next. If it was specified in the law, we are all going to have to go back to Congress and get them to change the law. There are a whole lot of people in Congress, particularly the architects of Dodd-Frank, who do not really want to open that box and allow that debate to totally wipe out the law. During the process over the last three years, the Mortgage Bankers Association and National Association of Realtors have been lobbying for our industry and helping. A couple days before the event he decided to pull up some recent amendments to Dodd-Frank, one of which was over 280 pages and the other only 82 pages. For some light reading, he went home with four inches of material. You then realize the bill is 2800-3500 pages, and when you are sitting across from people in Congress you could make the brightest suggestion in the world. Maybe nobody is home because they do not understand.
You think about it from a lender perspective, so the ability to repay rule is 806 pages. The big concern now is if lending will stop if lenders are not ready on January 10. The good news is we do have the patch to the government agencies, so we know we can make those loans safely. It is everything else where we will have to wait to see if private capital is interested in playing in that space.
Mark Palim wrote a report on the impact of rising interest rates on the housing recovery and its history. Bruce asked Mark about the refi programs and if they have benefited as far as the characteristic of people making payments on time. Bruce asked if these improved in 2012 and 2013 versus the former efforts. Have prices increases helped people stick with the payment structure and make it a safer program. Mark said in general they have seen a decline in the delinquency rate for quarter after quarter. Because of this, their book is performing a lot better than it was a few years ago.
To find out more, tune in next week for I Survived Real Estate 2013, part 5. The Norris Group would like to thank their gold sponsors for supporting the event: Adrenaline Athletics, REIExpo.com, Coldwell Banker Town and Country, Claudia Buys Houses, Elite Auctions, FIBI (For Investors By Investors), In a Day Development, Inland Empire Investors Forum, Inland Valley Association of Realtors, Investor Experts Inc, Keystone CPA, Las Brisas Escrow, Leivas Associates, Homevestors, Bottomfeeders, Northern California Real Estate Investors Association, Northern San Diego Real Estate Investors Association, Orange County Real Estate Investors Association, Orange County Investment Club FIBI, Personal Real Estate Magazine, Pilot Limo, Primary Residential Mortgage, Realty 411 Magazine, Rick and LeaAnne Rossiter, Southwest Riverside County Association of Realtors, Sonoca Corporation, Spinnaker Loans, uDirect IRA, Tony Alvarez, and Westin South Coast Plaza. See isurvivedrealestate.com for the video from the live event.
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