On October 19, 2012, The Norris Group proudly presented I Survived Real Estate 2012. 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 $77,000 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: ForeclosureRadar, the San Diego Creative Real Estate Investors Association, the Investors Workshops, Invest Club for Women, San Jose Real Estate Investors Association, Frye Wyles, MVT Productions, and White House Catering. Lean more about the panel and how to attend at isurvivedrealestate.com.
Bruce continued his discussion with Sara, Gary, and E.J. Sara continued her discussion on single-family homes and said that for all of us, that single-family dwelling is probably the most important financial decision we will make. Having some kind of support for that financial decision is extremely important. Having a qualified, educated appraiser work on that appraisal who is local and has expertise in the market and understands what is going on is key to helping consumers make that decision and shoring up a process that is ongoing.
Bruce asked who owns the appraisal management companies. Sara said in many instances it is the large financial institutions that have a huge part in some of these amcs. Some of them are independent and small, so it really depends. Bruce wondered if he was appraising in 2005 and later in 2012 how his income would have been affected. Sara said according to the surveys that the Appraisal Institute has conducted with its designated SRA members, in most instances and for many residential appraisers they are earning 50% less than they did in 2005. Many are leaving the market and leaving the industry to look for other things to do. You cannot support your family in 2012 by earning 50% of what you earned in 2005. This is very unfortunate.
There is a notion that no one can talk to the appraiser about a transaction, but this is not true. Sara said one of the things they tell people all the time is the buyer and the seller need to be proactive people and understand what your market is and where it’s going. Sara said at the Appraisal Institute they depend on their realtor friends to help in that particular process. An appraisal is as good as the information that is used to develop it. They encourage their appraisers to ask questions. Their SRAs understand how to conduct an appraisal, how to gather the data, and how to interface with an owner to find out what is happening in that particular market or home. If you have added energy efficient windows and doors and you have a new heating and air system, that appraiser needs to know. You cannot leave those things to just blind luck. You have to be pro-active, the appraiser has to be open to information, and that is when we get this market moving again and this appraisal process becoming a positive thing.
When Sara testified in front of Congress, Sara used the term that the appraisers were scope crepe. When she testified in late June before the Congress in regard to many of the problems that the appraisers are experiencing, she said we are experiencing more of the scope of work being dictated by our amcs. They want more comparables and information. Generally an appraiser might use 3-5 comparable sales, and many of the amcs are requiring 9 or 10. They are imposing on some of the things that appraisers do in the general part of business and are making it more difficult for appraisers to perform.
In the review process, Bruce wondered which value will be used for the transaction if the review suggests a lower appraisal value. Sara said it is her understanding that the review value will be used over the appraisal value. This is very problematic because in many instances the people who are doing that review are not trained. They probably have very little experience and expertise in the appraisal process. It is a matter of asking for more and more information and less weight being placed on that information.
Bruce wondered if there are any negative ramifications for the appraiser that came in with one value and had that appraisal lowered by some process. He wondered if there is some black mark that says you are no longer on our list and if there is a danger of not getting assignments. Sara said she cannot speak to this from experience and has heard from appraisers that the list of qualified people is certainly expanded or declined by the interface they might have with reviewers and the performance they have with regard to how those reviews are conducted.
Bruce said we are used to seeing an appraiser with initials behind their name, so he wondered if this was a way to get more assignments by having these initials. Sara said she is not so sure this is meaningful from the standpoint of revenue. It is absolutely necessary from the standpoint of credibility. People who have gone the extra mile to become professionally designated by a recognized organization or out in front with expertise, technique, an understanding, the tools to analyze that market, and to provide the consumer with the most up-to-date and authoritative information that can be gleaned in the appraisal business. Bruce wondered about an appraisal management company making a decision between two people, and the appraisal assigner comes up and one person in the party says they will do it for $225 and have it to the appraiser by tomorrow, but the other person says they need $300. Bruce wondered if the first person in the party will likely get the appraisal, to which Sara said they would.
The formula to get an edge in the appraisal business is to do it cheap, do it quick, and come in conservatively on your price. This doesn’t really sound like an industry that has been helped out much. Not all of the amcs operate like that, but we are talking about a vast majority that do. The most important financial decision that most Americans make is a purchase of a dwelling. That is huge. Sara believes to make it a commoditized kind of experience in terms of the documentation that one has going forward is absolutely short-sighted and puts the whole process at risk. We are the only part of a real estate transaction that does not have an interest in terms of the sales price. Whether it is sales of not, they are there to report the data and analyze the market. We are not there to verify a listing price or verify anyone’s opinion. They are there to give an opinion based on solid data, their skills, and their expertise. Sara thinks they have always played an important part in the real estate community. We are going to have to continue to play a big part in the real estate community to continue recovery and to get us back to the point where we need to be and want to be in this housing market.
Bruce continued his discussion with E.J. Burke. He mentioned about Dodd Frank being passed in 2010, and he wondered if we know what it says yet. E.J. jokingly said not that much. E.J. said he lost track of how many rules are past the deadline. Bruce wondered if there is any importance in January 1, 2013 and if this is supposed to be a date that is now decided on. E.J. said he thinks this was the original implementation date for a number of the rules. The rule that everybody is looking for, at least who was in the room at I Survived Real Estate, would be QM. E.J. said he personally does not know when we will see it. Bruce wondered if we have made progress on what they intend to do since their original intention was pretty restrictive. If that had been implemented, about 16% of the loans funded in the last decade would have met the criteria.
In the beginning the regulators had a thought that you needed to have a 20% down payment. This big focus on down payment ignored the impact having a job would have on your ability to pay. It seems that perhaps over the last year or so we have seen a movement away from that and a recognition that if you are going to focus on a large down payment you are going to cut a huge portion of the buying public out of the market. In terms of the whole economics spectrum of buyers, you are going to end up with buyers who are all going to look the same.
Bruce asked what types of loans are exempt from the QRM standards. E.J. said we don’t have them yet. Bruce wondered if there is any group of loans that will be exempt, for example Fannie or Freddie. E.J. said that while Fannie and Freddie are under conservatorship, they are not subject to the risk retention rules. This would make them not subject to QRM either. Today, we do not really know what the rules are going to be, so at some point Fannie and Freddie will probably go at it. Bruce wondered if this presents a problem if you are a lender. Risk retention is part of what is supposed to be settled, so he wondered if it is unsettling to not have it settled. E.J. said if you look at the two markets that use securitization, both residential and commercial; you see that on the commercial side there are a number of nuances in the Dodd-Frank rule which allow people to avoid risk retention. Those have not quite been settled yet, but there is less concern over on the commercial side. On the residential side, there are a number of smaller independent mortgage bankers who are very concerned that if they have to retain risk, it could put them out of business. E.J. said today they are less focused on that than they are on the repurchase issues. This probably has a more chilling effect on the mortgage market today than what QRM will actually look like.
Regarding repurchase issues, Bruce wondered how far back they can go. E.J. said as far back as when you made the loan. From talking with his friends who are independent mortgage bankers, E.J. said he thinks this is one of the biggest issues we have. The idea is that if you missed one piece of paper, that is probably inconsequential. They can say, “Got you, you buy that loan back.” Bruce asked if it is true that if the loan could have already been foreclosed on. The loan could not even exist anymore; it went to foreclosure, was resold as an REO, and six years after you funded the loan and two years after it was an REO you get a call back to write a check at par. E.J. said this could happen, but the fact of the matter is most of the repurchase claims are occurring once the loan becomes seriously delinquent.
Bruce asked Gary Thomas about if you had a single-family buyer who was well qualified, had a great FICO score, a good healthy down payment, and a lender letter, and you make an offer on a property at full price every day for a month, would he buy one. Gary said it depends on what the price range is in which you are making the offer. However, if you are in the affordable price range it is going to be tough. You are going to make multiple offers before you get one. You eventually would get one, but unfortunately in places like Orange County they currently have about 40 days’ worth of inventory. It’s next to nothing. Bruce wondered how this has changed in six months, to which Gary said at that time it was a little higher but not a whole lot higher. A year ago it was quite a bit higher.
Bruce wondered if there is pressure in the marketplace that has not existed before, whether it is coming from the large hedge fund buyers and investors or elsewhere. Gary said the problem was we had so many properties that were underwater and still do, so those sellers are not putting their property on the market. We do not have as many foreclosures as was originally thought, so that is down. The number of short sales are also down. We have a restricted supply, and a lot of people are realizing that it now is the time to buy since they have done the rent analysis and have analyzed that it is better to buy than to rent. We have the pressure of the number of buyers getting off the fence and ready to buy, but we don’t have the inventory to sell.
Bruce wondered if you had a short sale what percentage of them are actually getting offers of cash to cooperate with a short sale. As a seller with the offer of cash to go through with the short sale, Gary said we have not experienced a whole lot of these yet. Most of them have been a scenario of if we can get out from under the property in a short sale; we would rather do that than have the property foreclosed on. They are willing to work through this, but it takes time. Gary said this has improved somewhat, but not a whole lot. It is better than it was when they first started into short sales because most of the lenders have ramped up with the staffing to be able to handle them better. However, in the beginning neither the staff nor the expertise was there, so it was difficult to get them through the system. However, it is still a lengthy time.
On the issue of debt forgiveness not being taxable at the end of the year, Bruce wondered if this expires or gets extended. Gary said he thinks there is a 90% chance that it will be extended, so he does not think it will go away. If it did go away, this will have a very chilling effect on the market. Bruce also wondered about when you see inventory sold in bulk, whether it be notes or bulk REOs, if that is something that is completely unnecessary. Gary said it absolutely is, and he has told this to both Fannie Mae and Freddie Mac. This is something they do not agree with, especially in California. It is not needed. In some areas it may be needed, but for California in particular it is not. Most of the hardest hit areas, such as Florida, Arizona, and California, have healed rapidly. In cases such as these, bulk REOs does not make any sense.
Bruce wondered if he sees investors getting short sale offers accepted when they know they are not going to occupy it and if he sees a certain percentage going to investors. Gary said most of the investing he has seen has been on the REO side, not on the short sale side. There are not a lot of REOs, so we have definitely changed gears. We are very flexible, and cash does talk. It is one of those things where it is absolutely necessary in any career, whether you are a mortgage broker, realtor, or appraiser. You have to stay on top of things, and the investors are no different. They have to learn how to switch gears and do what is appropriate to stay in business.
To find out more, tune in next week for I Survived Real Estate 2012, part 4. The Norris Group would like to thank their gold sponsors for supporting the event: Adrenaline Athletics, California Property Solvers, Coldwell Banker Pioneer Real Estate, Elite Auctions, For Investors By Investors, In a Day Development, Inland Empire Investors Forum, Inland Valley Association of Realtors, Investor Experts, Inc., Keller Williams of Corona, Keystone CPA, Las Brisas Escrow, Leivas Associates, Mike Cantu, Northern California Real Estate Investors Association, Northern San Diego Real Estate Investors Association, Personal Real Estate Magazine, Pilot Limo, Realty 411 Magazine, Real Wealth Network, Rick and LeaAnne Rossiter, Southwest Riverside County Association of Realtors, Jon Risinger Photography, Sonoca Corporation, Spinnaker Loans, uDirect IRA, Wilson Investment Properties, Tony Alvarez, Westin South Coast Plaza, and Winning in Tough Times, LLC. See isurvivedrealestate.com for the video from the live event.
For more information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 550 podcasts in our free investor radio archive.