Rick Sharga with Carrington Holding Company, LLC #297

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 Rick Sharga.  Rick is an executive vice president at Carrington Mortgage Holdings, LLC.  Rick is one of the most often quoted experts and has been on almost every television show about real estate records.  He has been seen on NBC Nightly News, CNN, CBS, NBC.  He is a trusted voice in what is going on in the real estate world.  Carrington Mortgage Holdings has a large platform in the real estate business at this point.  The only thing they really don’t do with single-family real estate is cut down the trees.  The company started as an investment firm back in 2003 investing in mortgages.  They got into the servicing business in 2007 buying the servicing platform of New Century out of its bankruptcy proceedings.  They did this largely to protect the investment in the loans that it had made since they were servicing the large majority of these loans when it went bankrupt.  From ancillary services, it has gradually built on to augment the servicing business to manage the assets themselves and doing rental management of the properties, property preservation, and even the real estate brokerage of Atlantic Pacific Real Estate.  It really touches just about every aspect of single-family residential businesses, including creating new loans and making loan mods.  They have a mortgage lending division that has both a retail presence with its own branches and wholesale operations through mortgage brokers across the country.

Bruce said he really looks forward to Rick being on the panel this year because of Carrington’s position in the marketplace as a big buyer.  There are other companies who are doing similar things, so there has definitely been a change in the marketplace.  It is almost like residential real estate has a market maker, collectively if not individually, which would be the first time this has happened.  Rick said he has not looked at it this way, but Bruce’s insight is spot on.  The fact of the matter is there is a lot of money on the sidelines and not a lot of terribly attractive investment opportunities for that money to go chase.  A lot of investors would like to participate in residential real estate, and there are really not a lot of financial products that let them do that.  They are seeing a lot of interest in this category, and the interest exceeds the available inventory.  This is a bit of a conundrum.

What is interesting is that Bruce got phone calls last week from two new groups that were interested in them since The Norris Group name came up almost invariably when the groups looked them up.  The Norris Group got to have a meeting with them, and what is interesting as far as the learning curve goes and how easy it is to buy 1,000 properties.  The companies’ assumption is that it is going to be a lot easier than it is really going to be.  The truth of the matter is if you don’t care what you spend, then you can actually get a lot of properties quickly.  Carrington Mortgage Holdings just decided that their approach is that they do not plan to over spend on properties.  You can do that to get the critical mass more quickly, and perhaps you can bank on rental yields or come up with a security product that will reduce your capital costs.  They are opting right now to pay what properties are really worth; and this will slow it down for a little bit but it is a better strategy long-term.

There are some companies who seem like they want to reach critical mass, and Bruce wondered why this is so critical.  Rick said there are companies who have already announced plans to create REITs or other types of securities.  In order to do that, you really have to get to critical mass fairly quickly.  You need a certain number of properties producing a certain amount of cash flow.  What appears to be happening is that some people might be willing to over pay for certain assets in order to get to that critical mass more quickly.  What is interesting is that the volume of demand is outstripping supply by a considerable amount to where what you bought yesterday for what seemed to be a reasonable price is in fact tomorrow’s price.  Rick said he has heard this done before, and it did not end really well.

We would like to hope that history will not repeat itself and we will not have another artificial boom followed by an explosive bust.  However, as prices stabilize and begin to go up, you will probably have some of those people off the sidelines who are waiting for the absolute market bottom before they came back to buy.  They have normal trends of people looking to buy properties and investor interest as well as individual investor interest.  You have limited availability of assets for three reasons.  One, the new homebuilding has screeched to a halt over the last few years.  Second, the banks are not processing the foreclosures as quickly as they anticipated because of regulatory and legislative issues.  Third, until home prices go up a little bit more, you have a lot of current owner who are unwilling to sell because they are either upside down and cannot sell or they like to hold off and make a little bit more money on the disposition of their own property.  You have three things holding back supply, and at the same time you have more active interests in the demand side.  It has really created an unusual imbalance.

One thing that is unusual is Bruce had just looked at some statistics, and he had not really thought about how many people we foreclosed on in 2008 and 2009 being as significant as they are now.  If you add up 2008 and 2009 in, for example, an area in San Bernardio County, it is 200% of a year’s worth of volume.  These are people who are trying to re-enter the buying market.  A report recently came out that said the average FICO score on a successful mortgage application today is 740.  Bruce said he has looked at the reports from Fannie and FHA.  There has been a pretty significant change in attitude regarding who they are lending.  In 2007, 47% of FHA’s borrowers had a 619 FICO score or less.  In 2011, it was only 3%.  Even those people who are theoretically able to come back into the market at this point after being foreclosed on a few years ago probably are not going to have FICO scores that will make it easier to receive a loan.

What is interesting about this is one of the gentlemen who Bruce interviewed recently, Philip Tirone, understands the credit system and tells people if they do specific things then you will have a road back to a specific FICO score.  He said he does not know what has changed in the system, but it used to take two years of solid effort to get you from wherever you were to 720.  Now it is happening in nine months.  Whoever is in charge of making the decisions apparently wants people to have a better FICO score so they can buy things.  Bruce said he does not understand what the difference would be.  Rick agreed, but there has been a lot of speculation that it would be easier this time around for people to either correct their FICO scores or get loans with lower FICO scores because so many people had their credit damaged by this unprecedented wave of foreclosure activity and the subsequent economic meltdown.  There were also companies that were looking at creating new loan products for people exactly like that who have had damaged credit for a variety of good reasons, not something they did to themselves.  What you should be able to do is make a down payment, have a good track record of work history, and provide full documentation.  That is a hugely underserved market right now, and somebody is going to come in and serve it before too long, including the subprime number.  We can officially say no one will ever market in the subprime again.

There are definitely creditworthy people who are getting told no in this marketplace.  The California Association of Realtors is going to do a lot of presentations, and one of the charts basically showed that if you buy in San Bernardino, you save $500 a month over if you rent in the median price home.  For that to be the driver, you may have a bad taste in your mouth about owning, but if it saves you $6 grand a year you are probably going to try and get one.  However, this would be if you had the down payment that you need to buy the house in the first place and if you can find something to buy.  It is interesting with the mortgage rates being what they are, home prices still being at the low end of the scale, and the affordability vs. rental rates, you would expect to see more buying activity than what we are seeing right now.  It really appears that with down payment issues being one of the gaiting factors, another is there are a lot of people who just don’t want the long-term commitment right now since they are not completely happy with their employment status and would like the ability to move and find a new job without having to get out from under a long-term mortgage.  We are in that cycle right now where psychologically a lot of consumers have decided not to be buyers, and it will probably take time for that cycle to adjust again.

Bruce said when they went to do some 1031 exchanges in Texas, they really had to interview people and try to understand why they were doing what they were doing.  Bruce said some people were buying a house that was an 1800 square foot house in a nice area for $100 grand that was running for $1300.  The PI payment would have been $800.  Bruce was wondering why they were renting and why this was better.  They would tell him that Texas real estate goes up so few times in their lifetime that owning it has cost them every time they had to get rid of it or get transferred.  In their way of mind, it was the smartest idea to pay more for rent than have to sell a house.  In California, we have not been taught this but rather to own things most of the time.  The recent damage probably has some residual caution attached to it more so than normal.  The snapback is probably worse in places such as California, Arizona, and Nevada.  Rick read a recent RealtyTrac report where they were analyzing some properties in Las Vegas, and the average foreclosure start had a property with an LTV of 324%.  When you look at that kind of thing, it does urge caution before you enter into a formal agreement.

Apparently real estate prices can go down occasionally, you just have to figure out when and sidestep it if you can.  Bruce said he has also noticed a change in attitude toward lenders, including with principal reductions.  Chase actually has a letter out that has two phases to it.  They are basically mailing people letters that say they could not get a hold of them, so here is your new loan mod, new payment, and new payment coupons.  The second part of the letter said to just sign the bottom of the agreement of the principal reduction and send the pre-stamped envelope back to them.  This would then accomplish their principal reduction.  This happened courtesy of the Attorney General’s Summit and the National Mortgage Settlement.  Bank of America sent out over 200,000 similar notices saying they thought they were going to qualify for principal balance reduction and to get in touch with them.  They ended up getting a woefully poor response.  Rick said he has heard from a number of the servicers doing exactly what they were told was okay.  If their clients are not going to contact them, then they just give them their new deal.  Write it down, sign on the line, send it back, and it will all be official.  Even at that, Rick Sharga said his understanding was the response rates were not what they had hoped for.

Bruce interviewed Lance Martin, who is was a big REO agent and has a growing short sale business.  Just before the radio interview they did with him, he door knocked ten homes in Moreno Valley that were scheduled for sale the next week, one week away from the trustee sale date.  Lenders are even actually paying people to cooperate with a short sale.  None of them were interested in the least, and the reason was if they agreed with a short sale, they were not afraid of the trustee sale date since that would have come and gone many times.  They were not interested in cooperating with the short sale because that meant some kind of payment for housing would emerge from that decision.  There are an awful lot of borrowers who have figured out how to play the system, and if you have been living rent-free for a year or two, it is probably easy to get used to that arrangement.  You become numb to the notion that at some point somebody is going to eventually foreclose on the property and you have to come up with another solution.

Rick said he has also heard the same thing from servicers who contact homeowners.  Rick said his company buys a lot of performing loans; and when you buy these loans you try to modify as many of them as you can.  It is not only better for the borrower, but it is actually the best financial return for the investor to have those loans performing.  You would be surprised how often a servicer will be working on one of those loans that was purchased at a discount and offers a principal balance reduction.  The borrowers are often very polite and say it was nice of them to make the offer, but that reduced payment would be the first payment they made in two years.  It is difficult in this kind of environment to be more successful than most servicers are at doing loan modifications.  You need an interested borrower in order to be successful.

Bruce thinks people have been drug through the ringer a few times, so it is possible the mailer is coming at a bad time where they were probably interested at one point, were denied, and went through a process they felt was pretty rough.  Now they may not be interested in opening any letter from B of A.  There is clearly an awful lot of borrower fatigue, and that is a big part of the issue.  If you were trying to do a loan modification through one of the larger servicers earlier in the cycle, you probably never want to speak with a financial institution again since it was not a pleasant experience.  The servicer operations were never really set up to handle a massive wave of delinquencies and problem loans.  You are dealing with an industry that has a success rate of over 99% of all loans that were issued.  They suddenly have a 400% increase in the volume of problem loans and loans that really did not have any easy solutions that you could pull off the shelf to fix.  The mechanisms simply broke down, and it was frustrating for everybody.

We have faced unprecedented times, and this is a Great Depression of an industry.  Bruce said as he looks at it now, he sees prices going up now.  The Norris Group is in the buy/sell business and had a good month last month.  A lot of it had to do with them getting more for the properties.  This is something that is definitely starting to occur in which we are starting to see prices go up.  As prices go up, some of that $10 trillion of debt that we have on a value of property that diminished starts to become even instead of over-encumbered.  With what is going on in the last two quarters with what is going on with principal increase in the median average home price, there have been over 1 million borrowers going from negative equity to equilibrium or positive equity.  This is a pretty significant number when you stop to think about it.  As home prices do appreciate, we will see a lot of that paper debt disappear and a lot of the loans get right-sized.  This will really help psychologically if nothing else.  You can at least make a case for continuing to make your payment.  You now see there is some hope at the end of the rainbow.

There was recently a big bulk sale that went down in Florida with 600+ homes.  Bruce wondered if this is a typical pile that in which Carrington would be a participant bidder.  Rick said this was actually part of the FHFA pilot program with the selling off of the 2500 Fannie Mae properties.  They secured winning bids for about 2,000 properties in which they were unable to move a bulk pool in the Atlanta region for a variety of reasons.  This was anything but a typical bulk sale since those properties sold at 96% of BPO.  This was almost like a trustee sale.  The winning bidder only put about 10% of the cash down, and the balance was financed by Fannie Mae through a joint venture.  It was not exactly a typical sale, and 80% of the properties were currently being rented out.  This was the pile of programs that got a lot of attention about a year ago when it was first announced.  It was also the first of the pools to actually close, although there will most likely be a few more announcements over the course of the rest of the quarter.

In California, there was another pile of properties that were sold, and the California Association of Realtors disagreed with the process.  There were 484 properties in Riverside and Los Angeles Counties that were part of the pool.  What CAR was concerned about was this could become the status quo with FHFA moving large pools rather than pushing things through the more traditional channel.  Realistically, it looks like it is a one-time deal, and at 484 properties it is a rounding error in a state where you typically see 5,000-7,000 REOs change hand every month.  It is very likely we are going to see a very similar arrangement.  95%+ of BPO is being financed through these JVs with Fannie.  It has been a little big controversial in California, and you really can’t make a mathematical argument that says Fannie Mae needs to move these things in large pools since there is so much interest in the properties.  Rick said his perspective is there are 65,000 REOs in California that have not been sold, and there are another 250,000 properties of foreclosures.  Anything we can do to move this inventory out more quickly just leads to a more rapid housing market recovery.

Rick Sharga 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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