In her 25+ years as a licensed Real Estate Broker and Mortgage Originator, Kathleen Kramer has closed over 2500 transactions for more than a $1 billion in volume. She ran a successful Real Estate club in Huntington Beach from 2002 to 2006. She and her husband, Michael, have personally invested in a variety of real estate backed investments including single family, multi-family, office, land development, reg D syndications and non-performing notes in several states.
Investing in real estate gave Kathleen the financial liberty to take a sabbatical from her Real Estate and Mortgage Brokerage business for the last two years. She spent the time rehabbing her house in Huntington Beach, travelling, homeschooling her daughter, caring for the older generation and planning what is ‘next’.
Kathleen earned a degree in Business Economics from University of California at Santa Barbara in 1990. Besides being a licensed CA Broker, she holds certifications in Commercial Real Estate, Private Lending and Mortgage Planning. She is a regular speaker at the Orange County Real Estate Investor Association, providing monthly macro-economic and local Real Estate market updates. She enjoys leading a Girl Scout Troop, teaching classes on real estate due diligence, and coaching her clients on moving up from single family to multi-family investing.
Bruce and Kathleen talk about the real estate market and how they think it is holding up and how it will help the economy going forward in a post pandemic world.
- How did she get started investing
- What was Kathleen doing in 2006?
- How is the real estate market holding up?
- What will the post pandemic recovery look like?
- What markets or classes of real estate are concerning?
Narrator This is the Norris group’s real estate investor radio show, the award winning show dedicated to thought leaders shaping the real estate industry and local experts revealing their insider tips to succeed in an ever changing real estate market hosted by author,investor and hard money lender. Bruce
Bruce Norris Norris. Hi, thank you for joining us. My name is Bruce Norris and today our special guest is Kathleen Kramer. Kathleen is in a 25 years as a licensed real estate broker and mortgage originator has closed over 2500 transactions for more than a billion dollars in volume. She’s run a successful real estate club in Huntington Beach from 2002 to 2006. That was good timing. And she and her husband Michael have personally invested in a variety of real estate backed investments including single family multifamily office land development, reg D syndications and non performing notes. in several states, investing in real estate gave Kathleen the financial liberty to take action Radical former real estate and mortgage broker business for the last two years, she spent time rehabbing her home in Huntington Beach, traveling homeschooling a daughter caring for the older generation and planning for what’s next. Definitely earned a degree in Business Economics from University of California in Santa Barbara in 1990. Besides being a licensed California broker, she holds certificates and commercial real estate, private and mortgage lending. She’s a regular speaker at the Orange County investment Association.
Kathleen Kramer Well, thank you, Bruce. That means a lot coming from you.
Bruce Norris You have you have charts that I that I haven’t seen and, and kind of a take on it that that’s pretty interesting to me. So yeah, I’m always I’m always interested in learning new things. I’m gonna open by asking you what was the mood of the real estate club in 2006? I’m just curious because I remember standing up and speaking and saying anything negative about real estate in 2006 was completely disagreed with by huge majority of people.
Kathleen Kramer That’s a great question. And I think it helps to put a perspective on some of the mood that we see today from real estate investors, maybe in light of the most recent announcement with the home builder confidence survey. So in 2006, we found that, that there was I’ll borrow a term from Alan Greenspan, I think it was irrational exuberance in 2006. And that’s one of the reasons we shut the club down is that as with a background in mortgage lending, what I saw was people taking on way too much debt. They were buying income property, single family homes across the country, on an 80/20 with adjustable rate mortgages. So that means an 80% first, with an adjustable rate mortgage, and I think the pricing on a non owner occupied single family was somewhere in the high fours low fives at that time for three quarters 5%. But then they were Put putting a piggyback second on for 10, 15, or sometimes even 20% for 100% financing in the very end of the cycle there. And what that led to was, I think, a lack of discipline with some of the investors who, you know, they saw the value of buying the real estate, they understood the model of building a portfolio. And but they were just anxious to get going too fast. And they didn’t consider the fact that it might not always be that great. And you’re going to have to build some equity so that you could refinance, those adjustable rate mortgages start to kick in. So that was one of the reasons, you know, that we kind of stopped doing the club was because as things started to fall apart, we just, you know, I just didn’t feel like I could really recommend anything any longer or stand behind. Having people build portfolios like that.
Bruce Norris That was a great decision and not one that everybody So that was, that was tough to do, because I’m sure the mood of real estate still was really good 2006 I definitely recall, speaking in front of the builders, basically saying some negative things were going to occur like it was going to crash. And of course, they were having a time with their life. So it was really hard to understand where someone like me was coming from. It is nice to have a perspective, like you were a lender seeing what people were getting to qualify for. And I didn’t realize, since I wasn’t in that business, I was just, I was kind of in a hard money loan business. And we also had just finished a track that we had we had sold. I didn’t realize the lending world had gone amok so much until even a couple years later, when I finally interviewed a lender in front of an audience. This was after Lehman Brothers crashed, so it was 2008. Probably, I asked her a really sincere question I stated income loans where does a stated income number come from? And I was really being sincere. I did not know who was She was gonna say she said, Oh, we just make it up. I just like, you know, I think I think we’re done. I know at the end of the interview, realize what the heck was about to happen. And we just, we don’t have any compunction about saying, are we committed fraud on every loan? So what?
Joey Romero Well, just to give you a from a consumer standpoint, I I refight the last I remember the last time when we got into the really bad loan. The gentleman just told me, Oh, don’t worry about it. Nobody ever keeps these loans, you’ll be able to refine them, you know, in another year or two.
Kathleen Kramer Yeah, it was a it was an interesting time in lending and being on the front line. So at the time when things really got crazy, I was running a net branch for a local mortgage broker and banker. I had a partner in that net branch, who was a top producer as I was at that time. It I call it getting the call from countrywide. So we got the call, right. So we took the drive up. To the valley, and had the interview and the lunch and offer, he took the offer. So he started a branch for countrywide, in the same building where we were. And at the time, my husband and I decided that and they were doing stated income stated asset loans. So I think that the perception in the industry was that if you had a certain credit score, it meant that you were so unlikely to default because your credit score was so important to you, that you would do whatever it took to make those mortgage payments. And so, somehow or another, you know, the quants on Wall Street decided that that was enough evidence with just one thing that FICO score and an appraisal to justify making these loans. And I really didn’t want to do that kind of business. They were putting people into the Neg-AM product. That was a huge thing back then. And I knew that if I went to countrywide, I would be expected to sell that Neg-AM product with equity lines behind it. And that’s where I drew the line. And I said, I just my husband and I, he was working with me in the business at the time, we had a discussion. So what we did is we went and we bought an office building in Huntington Beach. And we opened a net branch for a different company, who was doing as many of the net game loans but they were lending in 35 states. And that’s really where, what got me to open up my real estate investment club. And we started teaching clients how to buy these income properties across the country. We turned my conference room into a classroom. And as a loan officer, I had these clients who wanted to buy properties. So we basically offered free classes to my database, and that’s how we built, built the business and then I affiliated with a real estate firm We used the referral network for the real estate firm, and we refer clients to different areas of the country. And we would do tours. And we would take some of those clients on trips across the country to meet appraisers, and real estate agents and lenders and you know, all the local people, especially property managers, that you would need to have a business like that long distance, but really by 2006. What I saw was that the realtors had caught on to the idea that people were doing this from California and the California investors were expected to pay over market prices. They were turning entire neighborhoods into rental communities. These were some of the things that were kind of red flags in my mind. And I said, You know, I just don’t know if this is the long term thing, especially with such high loan to value on the loans. So we kind of just decided, and we sold our building in 2007, and it turned out to be the most profitable real estate transaction even to this day that I’ve ever done, was buying that building. And I really only owned it for like three years or something. It was a fantastic transaction that added a zero to our balance sheet. It was an interesting time and I went home and had a baby in 2008. So when the crash came, I was I was distracted I was I moved my entire operation we sold the building and move my entire vacation home. I brought my number one assistant with me and we worked out in my house of which wasn’t as popular at the time as it is now. She would hold the baby while I was on the phone. And then she would be on the phone while I was holding the baby. So it was a really it was a great time in my life. Even though the world was kind of coming down around us
Bruce Norris When we started 2020 Little did we know we would end up with with this mess. I guess first of all I wanted to talk about you do your you do your talk in front of the clubs and you you make a really astute comment about the impact of government intervention, as far as it, it kind of augments reality as what would have occurred.
Kathleen Kramer So yeah, we could talk about that a little bit. I think what’s freshest in people’s minds in talking about this type of government intervention is the same kind of manipulation of the mortgage market that we saw in the 2000s. So I, I’ve been to many of your talks as well. And, and I think it’s very astute observation to say that the run up in the prices in the early 2000s of real estate was really partially generated by the ease of the credit standards. And because of the lack of government regulation on the mortgages and the criteria that the banks had to use to make those loans. We had an unnatural if you will, or a non market based run up in evaluations. It’s a little bit of the other side of the coin list. In the beginning of my presentation with Orange County real estate investors club last week, I said, you know, you have to have one basic assumption right now. And it’s one lens that I’m looking at the entire market through. And that is the government intervention and subsidies. So right now, the federal government, as we all know, and have heard discussed, we have the cares act. So the cares Act provided that extra $600 a week to have unemployment benefits to the state benefits, whatever those are state by state, and that fact that the $600 check has really been sustaining the apartment market. So the tenants in the apartment market, the National multifamily housing council puts out a rent tracker and they track 1111 and a half million units they track on a monthly basis. These are mostly A and B class properties, because the C Class properties tend to be not as trackable because they’re not managed by large management companies and they don’t report to the council. So the members of the council tend to be the larger property owners that have a B class units. So, but they’ve seen collections in in the A and the B class hold steady to last year’s level. So this time last year, as far as the timing of when they’re collecting, how early in the month they’re collecting, and then by the end of the month, how much they collected. And they’re still rankings pretty much straight across where they were a year ago. So that tells me that there is something because we know we have 10% unemployment. And we also know that the majority of that unemployment is in the lower income brackets. So if you’re it, you’re probably a tenant in that classification, right. So the likelihood that the likely That those tenants are just living off of that subsidy is pretty high in my mind. What we don’t know is how many of them have actually saved some of that $600 a week, cuz that’s a significant amount of money that could sustain tenants in, you know, not in the big urban cities where the rents are super high, but in across the Midlands of the country, where rents are a little lower, that could sustain those tenants for another couple of months. If they were smart about it, and put that money in the bank, which a lot of the economic data suggests that they did. But that subsidy, of course, we know has now ended. It’s being modified and the White House stepped in and is moving some of the money around from the cares act that didn’t get spent by the deadline. And they’re just moving that money around and that money by whatever metric, you know, the White House says this should last until December. So if the states decide to continue that that subsidy of the Federal unemployment insurance, that’ll be $300 to the tenants per week, we’re on an unemployment. And then the states. At first were mandated but now it’s just a suggestion that states kick in another hundred dollars per week. So I know that our governor here in California kind of choked on that. And push back on that because saying, you know, well, California is already in deep enough trouble we don’t have the extra hundred dollars to just kick in. And we have a fairly high rate of unemployment here in California right now. So compared to some of the other parts of the country, so at any rate, when those numbers taper off, I’m going to be very interested to see what the August and the maybe the September collections look like. And I if the view if the listeners want to track that they can go to the national multifamily housing Council, and they have a rent tracker and they update Three or four times a month. And you can see, you know, if the lag time is very short, it’s maybe only a few days lag time when they put the post the results of their survey there so you can kind of see in lifetime, what’s going on in that. In that regard,
Bruce Norris You know, the government to me reacted really quickly, really aggressively which is, is kind of interesting because inside of about a what a month or so, we had great depression numbers in the stock market decline, Great Depression numbers and unemployment. And they came up with all this money, the $600 for the people that were unemployed, but also the PPP loan program. So a lot of these numbers turned around I mean that the stock market is back up to pretty close to the highs if not higher. And you know, we’re giving numbers of unemployment. But it to me, it’s all kind of based on what you’re saying is what what’s going to happen going forward because we were hoping this was going to be a Three months deal. And now it’s becoming a much longer one.
Kathleen Kramer So I think there’s three main things that that we could look at. And I don’t think it’s going to be a V shaped recovery because the government subsidy at least the way that it’s structured right now, is not all set to expire at the same time. It’s it’s set to expire on a staggered basis. So you look at the things that they did, and I agree with you, they’ve moved really fast. I think that what they’ve done with the forbearance plan on the mortgages, through the cares act, I think that that they really dodged a bullet or they helped the economy dodged a bullet, because housing, if anything will be the leader of this recovery, to keep the strong housing market I think is extremely important, especially because we’re all stuck in our houses right now. People are very much focused on where they’re living, they’re improving their houses. They’re spending a lot of money to make their nest whatever that is nicer so that they can be at home more often. And so I think that the forbearance plan that they put into place, although it had some issues for some of the Mortgage Bankers and the servicing companies, which they’re trying to fix, and they fixed, I think that that the giving the one years of forbearance is going to help give a runway to families to get back into the job market. They have equity in their homes, most of them. There’s very few percentage, very small percentage of homeowners that are upside down any longer. And also a very, most the majority of people have equity in their homes. So I think that those homeowners will be able to rejoin rejoin the workforce, at least I hope, it gives them a year. I have a sneaky suspicion that they’re already working on another version of a refinance like they did at the end of the crisis the last time that if you have a government that loan a Fannie Mae, Freddie Mac, FHA VA loan, you will be eligible for some kind of a streamline refinance, to roll that forbearance amount into a new loan, not to take any cash out. So I have a sneaky suspicion that they will have something at the end. So that would be April of 2021. That’s the soonest that we’re going to really see how many of these homeowners who have been in forbearance and there’s a lot of them, there’s 9 million of them, right, that have taken the forbearance agreement. Some of them are paying. Some of them have come off with a forbearance plans, but that’s a lot of homeowners. And but I also think that with as much equity as they have, being able to get back into the workforce, assuming that that can happen, then, you know, those people have a pretty good chance of making it out of this in one piece. So that’s the homeowners then you have the PPP loan That went to the small businesses. And I think that’s where the government ran into a little more trouble. It was very slow to come out. The rules keep changing, they’re still changing the, the forgiveness aspect, all of this start start and go with the economy of the restaurants and small businesses having to open and then close and then open again. All of that kind of fits and starts is going to, it’s going to diminish the opportunity for us to really have that V shaped recovery that I think some people are looking for, you know, the Federal Reserve Board. They get paid to be optimistic, I say, and so, you know, they think they’re gonna be back at five and a half percent unemployment next year. I doubt that very seriously. I think that would be a dream.
Bruce Norris I agree. I agree with that. I, when I was doing some numbers, I was talking to a friend of mine and I was still calculating with all of the unemployment. This continues, you know, it’s basically 10 times normal levels, with the weekly numbers even And now, I just thought, this is still closing in on 20% unemployment. It’s not happening because of the all the money that’s being given to people and everything and the forbearance and I think the forbearance is a good idea. But it’s going to be interesting because you have people in charge of statistics. So if I said to you, okay, foreclosures are up 400% year over year, that that would be like an alarmist statement, except for it would be completely insignificant to the marketplace because the numbers are so low.
Kathleen Kramer That’s right. So, I’ve been trying to get away from the percentages so much and get more into the numbers. So let’s look at the loans that are in forbearance as an instance as as an example because I think a lot of our listeners, or your listeners are single family, home investors or lenders on single family homes. And the Fannie Mae Freddie Mac data and the single family market is going to be the most interesting to them. So, of loans in forbearance there’s 4.7 million loans in forbearance right now across the platforms as being tracked by Black Knight. So Black Knight is one of the largest servicing companies, they provide services to loan servicers. And so they are tracking the foreclosure or not the foreclosure, the forbearance, statistics, and if you go to their website, Blackknightinc.com, they have a forbearance tracker, and they update it every six weeks or so. So let’s say there’s 4.7 million loans in forbearance, which represents 8.9% of the mortgages that are out there. So, but only only say 11% of homeowners have less than 20% equity. Their home. So if you have foreclosures, let’s say that, let’s say that everybody who has less than 20% equity in their home is going to be in trouble. I mean, that’s a, that would be a wildly high number, right? As far as that would be, because we all know that not all of them are going to have trouble. In fact, probably most of them are not going to have trouble. So but even if they did, you’re still only talking about maybe, if you’re, if you’re talking about 11% of 4.7 million loans, you’re really only talking about half a million, just 600,000 foreclosures, out of the entire country. Right. So So for those people that think that the single family home market is going to be one of these, you know, panaceas for investing, you know, because we’ve all heard your stories of buying all those properties in the Inland Empire for you know, $80,000 right, and we want to do that. So But, but I just don’t think that that’s going to materialize on this go around. I think the distress is going to be in other areas of real estate.
Bruce Norris You know, the reason that occurred is that about 80% of the MLS was REO’s in 2009. So I do think there was some lessons learned about that. So maybe we shouldn’t foreclose on everything. But the other thing is very different situation. Like you say most people have equity. A lot of people have a lot of equity. If you lose a property to address the sale doesn’t automatically become an REO. It goes through a bidding process. And if it gets bid on and bought by somebody, a third party, it doesn’t have the same impact as a as a foreclosure going to the reo channel. So I view this impact very, very differently than the last downturn. Even if these numbers of defaults were high. The number of actual foreclosures and REO’s would be to a very small
Kathleen Kramer I’m in agreement with you on that. And so, you know, in, in our business, my husband, as I mentioned, in my bio, I took a couple years off. And one of the reasons that I was able to do that is that my husband’s note buying business is really booming. And they buy a very narrow, specific type of non performing second mortgage. And, but they’re doing very well at it. And so we’ve been very interested in looking at the single family metric and following this data. And I actually think that the single family home values Well, I don’t think they’re going to go through the roof. I think that they could hold up and they will hold up a lot better than they did in the last cycle. And so what I was telling people at the OC REIA is that the larger opportunity is more likely going to be in the C class apartment space.
Narrator For more information on hard money, loans and upcoming events, With the Norris group, check out thenorrisgroup.com. For information on passive investing with trust deeds, visit tngtrustdeeds.com. The Norris group originates and services loans in California and Florida under California DRE license 01219911. Florida mortgage lender license 1577 and NMLS license 1623669. For more information on hard money lending go to thenorrisgroup.com and click the hard money tab.