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 Debra Still and Mark Palim 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. Debra recently served as chair of MBA’s Residential Board of Governors and is a member of the Association Board of Directors. 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.
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 their 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. If someone gets a refi, that does help out the monthly budget as well as should help the loan perform well over time. Bruce asked if it is accurate to say that the programs have changed, and now there are programs where appraisals are not necessary and they can get a refi 100% over loan-to-value. However, Mark said he was not sure about this.
Something Mark is very familiar with that is also a concern of the group at the event had to do with the fact that interest rates are going up and we have had the luxury of some ridiculous rates. There are still ridiculous rates as far as anything Bruce is used to, but just because they started with a 3 for the last year does not mean that it is anything normal. Now that interest rates are increasing, the thought is that it must be damaging to price or to volume of sales. Bruce asked Mark to share a little bit about the research he did and the timeframes it covered. Mark said it stands to reason that people think that mortgage rates are rising, then you would expect house prices to drop. It turns out if you look at the historical record this is not really the case. Generally speaking, interest rates rise when the economy is doing better and demand for lending increases. When the economy is doing better, employment is doing better and people have higher incomes to afford the larger payment. The exception you see to that is when you see a large increase in interest rates over a short period of time.
One recent instance they have had of this is where you tended to see a slowdown in sales and prices continuing to appreciate, but not as fast as in years prior. The other thing you have seen is people will shift ARMs for a couple quarters. You will see the market share of ARMs increasing. This time around we are not seeing as much of a shift in ARMs. One of the possible reasons for this is the new underwriting rules where you have to underwrite what the payment will be in the first five years. This is slowing down the shift in ARMs. So far there has been a little bit of slowing in new family sales and pending sales. Bruce asked if when rates shift it sometimes gets people off the fence. There may have been people who were waiting for the rates to turn into 2%, and they ended up turning into 4%. At some point you may be charging into action saying it will possibly get to 5% one day. Mark said one of the things they saw was the ten-year rate went up to 290, while mortgage rates moved up between May and September. When the Fed did not taper, you have seen ten-year rates and mortgage rates come down 25-30 basis points. The MBA data on applications shows a little bit of a pickup in refis. Setting this aside, refi volumes are down dramatically this year since they are very rate-sensitive.
What is going to be interesting involves a transaction the current ISRE audience would be very capable of doing. They may buy somebody’s property that has an existing loan with a very favorable interest rate, and they may want to keep it in place. These are not the rules, but they are going to do it a lot. Debra chimed in to say it is funny because this is where private capital is probably going to a role in wraps and other creative things from the 80s. This includes blended rates and other things like this. Bruce asked if they are ready to play this game with us, to which Debra said there are a lot of rules for small creditors. You are going to have to read the CFPB’s 3500 pages to decide whether or not you can put up that space. You would first have to get a good attorney.
Bruce asked what type of loans that used to be common are not coming back. Debra said the we can already see some products that have been very popular in the past. These include good products since there were some exotic products that should have gone away, such as pay-option ARMs. You have IOs, which are now prohibited in the QM definition. You have balloon payments prohibited in the QM definition. You also have loans with more than a 30-year amortization schedule prohibited in the QM definition. Some otherwise good product will not be allowed if you want to meet the definition of QM in a safe harbor. MBA just started a mortgage credit availability index in February. It was just the baseline, so it was set up at 100. Credit loosened up a little bit, and we have been at about 111, which is the jumbo market coming back for wealthy borrowers. It is starting to drop and is down to about 107 since some of these products are disappearing. If we were at the height of the housing bubble, this number would have been 800. This is a condition of how overly tight the conditions are today.
The cap on fees right now is at 3%, over $100,000, and no duel compensation. Bruce asked how different this is from what the mortgage industry is used to. Debra said with the definition of QM, one of the criteria is the borrower cannot pay more than 3 points. One of the things MBA would take exception to is if you are an affiliated business, you have to add the points that the borrower pays to the lender and the title company together. More loans will basically not meet the QM rule. The other thing they would take exception to is if you are a broker, you must count the fees that are paid to the broker in addition to the lender. The compensation paid from the broker to the lender is counted in the borrower’s 3-point calculation. It really puts a disparate impact on wholesale lending and the brokers.
Bruce asked what percentage of loans in 2013 would not meet QM. Debra said what she knows is if you look at the data for loans that have gone into foreclosure, the question is what percent would have been subprime versus Alt-A versus prime versus QM. They have looked at all of the data and suggested that QM will be slightly more conservative than what we may call a prime loan back in the day. Mark Palim said there is some data out there since different people put different numbers out. One of the problems with this question is that if someone is not using QM, then you have to ask what the consumer is going to do next. Are they going to look at a house that is a little cheaper and bring a little more cash into the transaction? Originators can run numbers on this data. You can look at your phone and check out the number of originations in year x and see how many were over 43 DTI. This is an interesting number, but what is more interesting to him is how the industry and individuals are going to respond when the lender tells them he cannot get them into a $250,000 home. They will have to put more down or look at a different house.
Debra said if you look at the 3-point rule, there is definitely a negative impact on small loan amounts. In the business sign-in where they do a lot of loans to active adults, you have large down payments and costs being associated with the sales price on the title side. You also have fees being calculated into a new loan amount, and large down payments actually hurt the borrower. It is almost an unintended consequence. Both the fees to brokers and the title affiliate are two things the CFPB will tell us they cannot fix. They believe Congress intended the impact to affiliates and brokers to go back to Congress.
Bruce asked what it means if you create a loan that does not meet QM standards. Is this a portfolio loan that you can keep? Debra said in the short term there are likely going to be portfolio lenders, credit unions, community banks, and other large depositories that may choose to do good non-QM loans to put into their portfolios. For those who are independent mortgage bankers who have to sell their loans since the GSEs will no longer buy anything but a QM loan, Debra said they will make the loans if private capital comes back. Someone also must buy them as well as there has to be a secondary mortgage market. Outside of this, however, they will not make a loan. Debra thinks this is why it will take time. In another panel they talked about the uncertainty, so she thinks private capital will wait to see what this regulation does exactly before it is back.
Bruce asked how big of a change 43% is compared to what everyone was used to in other years. He asked if it is much more restrictive. Debra said if you take out FHA and only use the GSE, most calculations would suggest that around 30% of all borrowers have back ratios is excess of 43%. This temporary patch is going to solve this for a time while the GSEs are in conservatorship. However, if the GSEs were to come out of conservatorship, they would have a concern for all conventional buyers. Mark Palim said the way the rule was written is that CFPB gave the rules, and everyone is concerned about unintended consequences. If you sell your loan to Fannie, Freddie, FHA, or the VA and it meets their standard, it will count as QM for certain things like the back end DTI. It is then up to the regulator or FHA to decide where they want to set the boundaries. This will give the market at least time to see the impact from these rules and create some safety valve. The numbers are a little higher than he would have thought, but it is definitely still going to have an impact.
Part of what is going on is credit was too easy. They had the boom and the bust because of this, and there was a need for credit to get tightened up as well as for practices to which some consumers were subjected to be driven out of the market. This is something where we just have to see how it plays out in the market. The pendulum swung way too easy, while the totem swung back way too hard. There are a couple things going on at the same time. You have a recession, which kills off people’s ability to save. They also barely demonstrate the income to qualify for the loan. You also have the loss of equity, which means a lot of people are underwater. This makes intergenerational gifts for down payments harder. There are a lot of different things that have hit the housing market beyond tightening credit. There is no doubt credit is tighter if you look at the average FICO. Down payments are not tightening as much, but when you look at FICO scores there is clearly tightening happening.
This all really comes from two places. Part of it is people like Fannie who have tightened up their standards. Lenders have also tightened up the standards they have placed on top of the standards the GSEs have. Their box in terms of FICO and LTV may be so large, and the actual deliveries they have gotten are concentrated at the higher end of the FICO. One thing they are watching for is to see that as the refi volume disappears and drops off, whether or not more competition in retail will lead lenders to use more of the box. Debra said if you look at what is driven by lender behavior over the last couple of years, these rules have certainly not gone into effect yet. It has really been repurchases and the loans that have had to be bought back.
If you have been in this industry a long time, the average cost of a repurchase 10-15 years ago may have been about $10,000. This was the disposition cost of the property. If the loan was current, it would not have been underwater. Now when you buy back the loan, you are buying back a loan that is a couple hundred thousand dollars underwater. Lenders have become very conservative saying they are going to lend inside the credit box. Debra agrees with Mark that refinance is loosening up, and this will possibly cause lenders to consider lending to the full credit spectrum of FHA and the GSEs that are now absent in this new environment.
Debra mentioned Fannie Mae and Freddie Mac staying in conservatorship. Bruce said he gets the feeling this decision is a long way away, and he wondered if it is closer than five years. Debra said no, but the debate has definitely started. You have the Henserling Bill and the Path Act. You have the debate going on, and you have proposals coming out from the chairman of the Senate Banking Committee. This debate is very active, and the ultimate resolution people would talk about would be 5-7 years of being the short end of the time horizon. Mark said it has been really interesting to watch the way the GSE reform debate has gone in the last couple of years. We started out with generally more academic plans that were in an ideal state where you would want the U.S. housing finance system look a certain way. Now this spring and summer, you have really had the beginning of a discussion around bi-policy makers, economists, and others.
Mark asked what some of the practicalities of a transition are since he does not think anybody is happy with the idea that 90% of the mortgages are being backstopped by the Federal government. This is happening either through government programs or through the GSEs. If you wanted to get to 50, you can forget about getting to 0 and need to figure out how you can do this. What does it mean to bring in private capital, and how much of it do you really need? How can you make sure it stays rather than just comes in when times are good then disappears? This is one thing that has really been a positive development in terms of the level of detail and the substance of the discussion.
Debra said at the beginning it was private capital that could fund the marketplace. There are statistics that would suggest that since 1955 private capital has never played much more than about 35% of the funding for real estate. Folks who started to acknowledge that there is an appropriate role for government and housing would have to ask what the percentage is as well as the model of the future. What is interesting is that we are about to implement a very restrictive new rule in the midst of the most profitable quarters in history for the lending industry or for Fannie, Freddie, and the FHA. Bruce asked if there is any thought that maybe we have already done more than enough and if there is any chance of cooler heads prevailing and saying we do not have to do all this.
Debra said there are a lot of wheels in motion. They talked about the 3500 pages, which is about seven rules. You then have QRM right behind it and another type of reform coming out in the fourth quarter that will most likely be implemented in the next year. You also have loan officer steering, which is another rule the CFPB is obligated to issue next year. HUD’s disparate impact rule is still trying to be figured out right now. You have another dazzle for the banks, and all these wheels are just in motion. Bruce asked Debra if she had met anybody who had actually read all of this. She said about half the MBA team had, although it is a tough assignment.
Bruce concluded by asking about servicing and if there had been significant changes to servicing loans. This includes the policies for not making your payment. Bruce asked what the responsibility is now for the servicer and the lender. Debra said the servicing rule is also part of the six or seven rules that are coming out in January, or the 1200 page rule. Most of the servicing rule is patterned after the large servicing settlement for the five largest servicers in the country. It is very detailed in terms of contact timeframes, processes, cycle times, and notifications to the consumer. It will basically guide a servicer to follow certain steps all the way from the first payment all the way to where loss mitigation and ultimately foreclosure would be necessary.
Bruce asked if the lender is forced to do loss mitigation as far as going through the process but not being forced to say yes. Debra said they do have to go through an appropriate process, but they can also decide to take back the asset. There is an analysis that now has to be performed both for the best interest of the consumer and the financial obligations of the servicer. Bruce wondered if the person who put the money out can ultimately decide the do not want to do loan modification but only go get the assets they were not paid. The unintended consequence of this would be learning something is not okay that they once thought was okay. Debra summarized by saying the appropriate process has to be examined, and it is a very detailed process. The consumer must be informed and involved throughout the entire process. However, the lender would still have some choice in the matter.
To find out more, tune in next week for I Survived Real Estate 2013, part 6. 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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