Bruce Norris is joined again this week by Mike Novak-Smith. Mike is with REMAX Results and is in the top 1% of agents nationwide. He is an expert in the disposition of REO, short sales, bankruptcies, asset management, and negotiation.
Dealing with REOs almost forced a learning curve in all the areas that Bruce and Mike discussed. You have to become an expert in dealing with bankruptcies and asset management negotiation. Bruce asked if this time around the owners’ expectations is different than it was in the 90s. Bruce wondered if the occupants foreclosed on were more difficult to get out and if their expectations were higher than they should have been. Mike thinks it was back in the 90s that people took it much harder than they do now. Most everybody in the 90s actually had to qualify to receive the loans. There was no easy loan or pay option ARMs. There was nothing that happened in the last go-around that had a lot of people who just were not qualified to own homes. Everybody qualified at one point; and he does think that emotionally people had much more difficulty than they have now. Today there is more of a mentality that people are owed something and entitled to something.
Bruce said it almost seems like there is a class being taught at night because it seems that everybody knows what is going on and everyone’s mentality. Bruce said at one of his events five years ago is that when you have a society where people feel that they do not have to pay what they owe, you have a problem. Mike never forgot this statement because that is the way it is. We do have a problem, and they get by with it. In the old days Fannie Mae used to get accused of dragging their feet on foreclosure since it took them nine-ten months. By 1998 they had bragging rights since they were down to five months. Today, they brag that they do not foreclose, so the game has changed.
Bruce said when people are being offered cash for keys. Bruce wondered if this has accelerated over time and what the amount is somebody usually receives for exiting a property. Mike said it was common in the 90s. If you look at Countrywide, they paid nothing to an owner-occupant. If it was a tenant, it was a big deal if you got up to $1,000. The average amount was $300-$400. World Savings also went high on the cash for keys and paid around $1,000. Mike did one recently around $10,000, and they usually get a lot of these. It is very common to receive around $3-$4,000.
Bruce asked about short sales and if people are getting money to cooperate for them. Mike said they are. His office does quite a few short sales; and it is quite common to get around $5-$10,000 for doing them. Mike heard some of the major banks pay up to $30,000. A lot of the short sales have become much easier. If the numbers are anywhere close, they get approved and they pay people to do them. One problem real estate agents have is that when you go into a listing appointment and they tell you they have not made a payment 3 years. It is kind of hard to get them to want to sell the house, whether they receive the money or not, because now they are going to have to start making payments. This is a sales challenge that they have, but offers nowadays for doing short sales are fairly generous.
Of the MLS inventory, Bruce wondered what percentage are short sales. Mike said today it is at about 35-40%. At some point this turns to 0, and Bruce wondered if we are a long way from this happening. Mike thinks we are because loan mods, refis, and principal reductions are happening at a great rate. However, he thinks many of these people are going to be back in the trouble category within a short time period. If you took everybody’s home loan today with everybody paid in full and not owed anything, if the real estate industry started doing refis and loaning money within three years you would have REOs again.
Mike thinks there are a certain number of people who will go into foreclosure. What he thinks is interesting is that banks are getting to where they are fulfilling some of their obligations under the settlement with the government where they have to help the borrowers with short sales, loan mods, and principal reductions. Once they have passed that point where they have done what they legally had to do, it will be interesting to see what happens. The problem nowadays is people have expectations. Somebody who has waited for three years has seen everything get more generous over time. If they are still waiting and the generosity suddenly goes to 0, people are definitely going to be screaming about that. Mike thinks there are going to be some surprises coming up. He thinks a lot of the loan mods will fail, and in the end people will end up losing the house.
Bruce asked what percentage of the short sellers are actually current on their mortgages. Mike said most of them are not. His opinion on this has always been that once people decide they are not going to live in the house anymore, have given up on the idea, and quit making their payments has been the general attitude among owners. The first short sale he ever did was 23 years ago, and it has been this way ever since. Once they have the mindset that they are done with the house, then they do not want to pay for it.
There are times in people’s career in California that you go ten years and would not even know the definition of a short sale. We probably will not forget it now, but that was really true. Mike thinks a lot of the agents who got into the business from 1999-2007 got a really big shock. They learned a whole new definition real estate, REOs, and short sales. It was quite a shock for all of them. It is hard to make a living if all you have known is that everything you touched sold quickly and went up for people who bought it from them. Mike said after the first go-around when he used to do a lot of evictions with real estate agents and people in the business, it really taught him to be much more conservative in his finances.
The best financial lesson Mike ever learned was being on the front lines of the foreclosure business. This makes you very conservative with your money and how you invest. It helped him, and he hoped everyone in his position learned their lesson and paid attention. There is nothing like a downturn to teach you things, and it is important to remember. You do not want to make the mistakes 2006 that you did in 1989.
Prices have increased quite a bit. Mike mentioned how he thought the hedge funds were overpaying for some things and wondered if he saw any signs of a bubble. Mike said he has heard from some investors he recently did a deal with that their eviction attorney had an uptick in business because he was having to do a lot of evictions on these hedge fund homes. What they discusses earlier was they were trying to get over market rent, but the ones who will pay this are the ones with bad credit and do not qualify. Time will tell how the hedge fund business will turn out. When he sees people paying $300,000 for a house with roofs and HOA fees on it that rents for $1500 a month, he does not really see how this makes sense. Bruce asked Mike what he thought the house sold for at the peak of the market we were in back in 2006. Mike said it was around $500,000, so maybe it will pencil out for them after they sell it. The hardest thing about this time is that there are so many different twists to this that it is hard to be in the prediction business.
Bruce asked Mike if he is seeing any signs of life in the new home construction business. Mike said they do get a lot of flyers, and he does see brochures and receives a lot of emails about new homes. One thing he finds interesting is that when he drives by lumber companies, he sees rail cars full of lumber in them. He saw one the other day on Highway 74 at the 215, and he saw rail cars being unloaded here. He has paid attention to this for about the last five years, and the most you would see is about two at a time. When you have nine rail cars of lumber, that is a lot of lumber and you can build a lot of houses with this. He has seen this elsewhere, and he does believe the homebuilding is picking up. How much of an impact it has he does not know, but the issue with new homes is there are two different markets. There are many people who will only buy a new car and only buy a new home. There are others who will never buy a new car or buy a new home.
Bruce said they had a surprise recently in Riverside on a new house. It seemed like the price that they paid for the new house was pretty excessive. It was built on a scattered lot, so it was in an area where you could not really comp out the house that was next door and say it was similar. They were in escrow for a price that exceeded what they were asking for and was $150,000 more than the neighborhood. Bruce asked Mike if new homes are getting into the mix usually at a much higher price per square foot. Mike said new homes in a decent market have tended to go for more than the existing homes. However, he has not noticed this trend recently.
Bruce wondered if they are going to build a different size product this time or continue on with the 3-4,000 square footers. Mike said he thinks they are going to build big houses. It is like the car companies who make the most money on the big trucks. This is why they want to sell trucks. In the same way, there is a lot more money in the big houses. It is also expensive creating all the infrastructure and building lots, so you cannot really pile all that cost onto a $200 grand house. When you drive around Rancho Cucamonga, go up as far north as you can, and look at some of the new homes you see how big they are. The new homes will be big just because of the profitability in larger homes.
Bruce asked Mike if he sees lots being created. He said he does not, although he has seen a higher demand for lots. He recently sold one in Victorville; and if you had looked at lots three years ago you would have seen numbers up available. Most of the lots available now out in the desert were pending or recently sold. The market has picked up in vacant land for people who want to build. Bruce wondered what the size of the Victorville lot was and for how much it sold. Mike said it was half-acre and went for $33,000. At the peak of the market last time that was over $100,000. One person Mike knew bought lots for $90,000 and put houses on them. He sold them in the $250 range, so when the market was at its worst the houses on the lot were selling for less than what he paid on the land.
Bruce is amazed that anybody who owns building lots or is creating building lots will build on them the second it pencils. Two years from then they could have gotten $100 to $200,000 more per house. However, they build on them the second it pencils. Mike said this is something that is difficult to time correctly. You wait too long and get over the curve, and you will be sitting on them. Mike was not really sure since this is a hard one to predict.
Bruce asked about the process for qualifying for loans today. He has seen articles that talked about easing going on. Cary Pearce talked on the radio show recently about some of the files he had that were approved that surprised him. He wondered what Mike’s take was on the trend of getting people approved for loans. Mike answered that three years ago, getting a jumbo loan was almost impossible. He thinks the jumbo loans have gotten easier, but the people still must qualify. He thinks it has maybe gotten a little easier, but it is still very difficult. When it is difficult to enforce your contract as it is for the banks, they are going to be very careful with whom they go into contract. Mike thinks this is still the problem, and you can’t blame them. He does believe there are equity lines getting done again, and there are people out doing seconds. However, you have to have a job, you have to have credit, and you have to have money for a down payment. This is not unreasonable, but it is something that businesses were not used to for quite some time.
Bruce wondered if the jumbo loans funded are staying with the lender as portfolio loans. Mike was not sure about this, although he would bet that most of them are portfolio. How much of it they were doing he was not sure, but you can get one now where three years ago you could just forget it. In California, 6-month inventory is considered almost the standard. If you are over this you probably have a problem, and if you are under this you have a healthy market. We probably have about a month and a half of inventory.
Bruce asked Mike if he sees inventory levels returning to anything close to normal in 2013. Mike said he does not see any change and that this year is what it is. He thinks the big problem is that many people in homes today who would try to sell would not qualify to buy their own house back under today’s guidelines. They have made the payments and kept them current, but they would not qualify. If you have someone who lives in Mission Grove or Orange Crest in a $300,000 house who wants to move to Canyon Crest or Orange County to a $5-$600,000 house, he would not be able to do it since he could not get a loan. This is a huge problem since the mid-level buyers are really stuck between a rock and a hard place.
It is almost really important that the investors are participating right now for price support. Mike said you would wonder what would happen if they would flee the market. This is an unknown since it has never happened. The investors are important and have been important, but it really depends on how you define investors. It could mean the traditional people we are used to and who Bruce and Mike are, or the hedge fund type of investors. Bruce thinks if the hedge funds disappeared, their volume would be absorbed by the people who are not being served right now. If you are an FHA buyer, it is really tough to get a house. However, it does not mean the demand for the product or the loan is not there. He thinks it is there in large quantity due to all the foreclosures that occurred three years ago.
Mike agreed and said the demand is there. Last year he had an REO in Moreno Valley that was sold for $90,000 that would be worth around $140,000 today. What he found interesting that he has seen a lot of over the years was a husband and wife who both worked at Jack in the Box and both saved their money to buy a house. It was an American success story in that they were able to pool their money and received the loan and house. Today, they would have 0 chance of doing the same thing. The whole goal is to help the little guy and help the down trodden, but there has been more that has cut out the little guy and they are down trodden out. They have almost no chance to buy anything currently. If somebody called Mike and they were an FHA buyer, he would refer it to one of the buyer agents with whom he deals. He would not even bother with it because he knows that he is going to spend three months trying to find them a house. If you are an agent and are busy, it becomes a time issue and a business decision. The question is how many offers he can write for somebody he knows will be rejected. It has to be tough to be on both sides, both the first-time buyer and the agent who deals with it all.
For a lot of agents, their pool of referral business may be entry-level buyers. The question is where they all are now. The answer is they are in trouble. Bruce wondered if there is any substantial HUD list or VA list like there was in the 90s. Mike said there is not. Those lists used to get pretty long and ugly. However, in the 90s they also did not market very effectively as much as they do now. VA got their act together in the late 90s, and then HUD went online and cleaned things up too. Their backlog back in those days was just poor management of the property. Now they are selling note pools, and a lot of the properties that would have been foreclosed on are probably going that route also.
A lot of them are not foreclosing, or they are giving them a loan mod or principal reduction. This will keep them going for a couple years until they go out and use up what available credit they have to buy new toys and spend more money. They will then be right back to where they were, and this is the thing that needs to be watched. The question now is if the mortgage companies will have the same attitude now and if the government will be on their back to make them give everybody a break. If that were to change, you are going to have a huge foreclosure problem. It is really hard to predict any of what is going to happen.
Bruce said one of the questions we will see will be in regards to unintended consequences. Bruce is a lender, and whenever he talks to people about how easy it will be for them to write off the principal of someone owed money, having dealt with private people he will tell them to put a certain person in a trust deed. He will then ask what the likelihood will be once you cram them down from being owed $100 to getting $60 of her putting money up again for the trust deed. There could be some consequences for the lenders looking at this thinking they had certain rights and finding out they really didn’t. If you watch the mortgage settlement money, Mike saw this past week where several of the large lenders fulfilled their obligations and did what they had to do that was honorable and kept their commitment. A year from now they may think they do not have to do any of this and they better get paid or else. The likelihood of this happening is very high.
Bruce said as far as future decisions go, we have Dodd-Frank that is still to be fully implemented. Bruce wondered if he sees any danger of this coming in 2014. Mike said he was not sure since he had not really kept up with this. When you look at the restrictions on borrowing, they probably have almost implemented the entirety of it. Bruce wondered if they would be playing with the mortgage deduction. Mike does not think they will since he does not believe the mortgage deduction will go anywhere. He could see them possibly cutting the high limit down, but it is so strongly supported by NAR and CAR that he does not see it going away. There is too much downside for any politician to go along with removing it. Bruce also asked if the feelings are the same for Prop 13 in California. Mike said a lot of the politicians would love to get rid of Proposition 13. He could see it possibly going away for the commercial property owners. However, for the residential he just does not see it happening. You have a lot of people in Sacramento, the majority of whom would love to get rid of it and have not yet. He has not seen any bill pursuing this, so he thinks it may be a third rail for politics in California.
The governor is a pretty worldly person. He was in the 70s, and he first fought against Prop 13, and then when it happened he jumped on the band wagon to make sure it was implemented. He knows which battles to fight. Bruce thinks we could end up with more revenue in both the Federal and State in the next few years.
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