194-TNG Radio - I Survived Real Estate 2010 10-02-10
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You must have 2 different criteria for Bruce’s no down payment program in order to prevent foreclosures. The reason why this program will work is because it is set up to serve 3 borrowers simultaneously. Yes, you are going to have a failure rate with a no-down mortgage, but you pick the percentage. When your payment is less than rent, is it going to be 20 percent? Bruce doubts it. But for the sake of argument, let’s say that foreclosure rates are at 20 percent under this program. If 2 million people sign up for the no-down program, and 400,000 people walk away, then let that loan get assumed by the next buyer without qualification. The likely target buyer will be the person who lost their house in foreclosure during the past 3 years. They can’t get new credit, but they might want to return to those “pride of ownership” homes. They will write a check, and save the system from 1 more foreclosure. The original intent of the program is to get first time buyers into a house. The secondary benefit is it will get homes back to the people that lost their homes.
Have you ever noticed that if you have great financing, then you can get more for a property? You could probably get a premium for financing on Bruce’s program.
A secondary feature of this program is that when it goes to trustee sale, the opening bid would be just the back payments. Example: Lets say you have a loan amount of $150,000 at 4.5% interest. 3 months behind, people begin the foreclosure process. 4 months later, the foreclosure sale begins. You’re 7 months behind on the property’s payment, with $1,000 dollars of payment per month. If the opening bid at the trustee sale was only $9,000, how many do you think would revert to the lender? None of them. We would fight over them. At 4.5% financing, that is an amazing deal. Not a large percentage of the sales would get to that point, but they would provide financing to investors; the group that no one wants to finance. Investors would overbid on a situation as competitive as that.
What would we do with the excess money being raised from these properties? Lets not reward people who do not do what they sign up to do. Let’s build a fund for something that does good. It doesn’t even have to be a government program. Bruce frequently sees ads in the newspaper in which wealthy people are encouraged to donate their money. We should donate this money to a nonprofit company who can make this loan. Doing this will cause no losses, and it will end in a yield. Bruce cannot see this program losing money.
Over the next few weeks we will be broadcasting the speeches given by the rest of panelists. These panelists are Peter Wayman, Christopher Thornberg, Joseph Magdziarz, Sean O’Toole, Tommy Williams, Daniel Phelan, and Sarah Letts.
Peter Wayman joined Freddie Mac in January 2010 as Sr. REO Sales Director. In this position, he oversees the design of sales strategies and how they are applied across REO portfolios. His group oversees the retail sales process as well as auction and investor sales. Peter is also responsible for the affordable strategies selling homes to organizations engaged in neighborhood stabilization.
Wayman came to Freddie Mac with 32 years of executive relocation experience working with various organizations including Cartus, Prudential and Citigroup. He was recognized for a lifetime industry achievement and inducted into the Hall of Leaders by Worldwide ERC. Peter is a graduate of Cornell University with a BS in Hotel Administration.
Christopher Thornberg is an expert in the study of regional economies, real estate dynamics, labor markets and business forecasting. In 2006 he co-founded Beacon Economics, an economic research and consulting firm that specializes in real estate markets, local economic development, and public and private policy issues.
Dr. Thornberg has established a reputation as one of the state’s leading economic forecasters. In December 2007, he was appointed to California State Controller John Chiang’s Council of Economic Advisors – the body that advises the state’s chief fiscal officer about critical economic issues facing California. Dr. Thornberg also serves on the advisory board of Paulson & Co. Inc., one of Wall Street’s most successful hedge funds. He has been involved in a number of special studies measuring the effect of important events on the economy.
Joseph C. Magdziarz, MAI, SRA is the President Elect of the Appraisal Institute. Magdziarz has been an active member of the Appraisal Institute for 38 years. He has served in a variety of capacities at all levels of the organization.
At the regional level, Magdziarz has served two terms as Regional Vice Chair and two terms as Region III Chair. He has also been a regional representative for many years. On the national level, Magdziarz served two terms on the Appraisal Institute’s National Board of Directors. He has served as Chair of the Education Committee for five years and has also chaired the National Audit Committee, Instructor and Faculty Committees, and Education and Publications Committees. In addition, he has served on a number of project teams.
Mr. Phelan is President and CEO, charged with the day-to-day leadership of Pacific Southwest Realty Services mortgage operations. Pacific Southwest Realty Services is an investment firm focused on commercial real estate, representing and advising both real estate clients and institutional investors in debt and equity placement, strategic planning, property sales and loan administration. Pacific Southwest Realty Services brings competence and integrity to helping Investors and Owners meet their capital needs.
Mr. Phelan joined Pacific Southwest Realty Services in September 1973 after graduating with a B.S. from Creighton University and has been working in the mortgage banking industry ever since. He is both a Certified Mortgage Banker (CMB) and a Charter Realty Investor (CRI) and has been very active and has held various positions in the Mortgage Bankers Association (MBA), California Mortgage Bankers Association (CMBA), local building industry trade groups and the CRI Society Board.
Thomas L. Williams is a graduate of Penn State University (B.S. Animal Science) and the Certified Auctioneers Institute (CAI). Representing the third generation of Williams family auctioneers dating back to the mid-1800s, Williams is also a graduate of the historic Reppert School of Auctioneering. He has over 40 years experience in real estate auctions, land development and real estate investment. He currently serves as Immediate Past President of the National Auctioneers Association.
A founding partner of Williams & Williams, Williams served as president from 1986-2000, and became board chairman in 2001. He also co-founded and served as managing partner of Lowderman & Williams Auctioneers from 1965-85. He has conducted over 10,000 auctions in all 48 of the contiguous United States and Canada, and is an advisor to auctions conducted throughout Western Europe, South Africa, Australia and New Zealand.
Sean O’Toole is Founder & CEO of ForeclosureRadar.com, the only company that tracks every foreclosure in California with daily updates on all foreclosure auctions. Prior to ForeclosureRadar Sean spent 15 years building and launching software companies before entering the foreclosure business in 2002 where he has successfully bought and sold more than 150 foreclosure properties.
Sarah Letts is responsible for implementing Fannie Mae’s neighborhood stabilization strategies including pool sales of REO to government entities, land banks, and nonprofits. She joined Fannie Mae in 1999, and prior to her current position, she specialized in debt financing and equity investments for affordable housing. Before joining Fannie Mae, Sarah developed affordable housing on behalf of community development corporations in Los Angeles and Chicago. Sarah received bachelor’s degrees from Stanford University in economics and political science and a masters degree from UCLA’s graduate school of architecture and urban planning.
Thornberg was the next speaker for the event.
Thornberg begins by disagreeing with Bruce over his zero down program. He explains that FHA loans have been spiking over the last 10 years. Bruce asks, “What about the first 35 years?” Thornberg believes that the activity over the last 5 years is the most relevant, but Bruce believes it is the pricing structure that is most important.
Paul Romer from Stanford University once said, “A crisis is a terrible thing to waste.” Thornberg believes we have wasted our most recent crisis. We keep hearing how the consumer has taken over too much debt, but this is not the case. We learned in the Great Depression that banks should not be allowed to leverage up. Leveraging up turns a small problem into a huge one.
In 1960, of all private sector debt in the U.S., 10% was from the financial sector. In 2007, the financial sector represented 43% of outstanding private sector debt. Consumers didn’t really leverage that much.
We still haven’t really addressed the problem of leveraging. After Lehman Bros fell, they created TARP, and handed money to the organizations causing the problem.
Bruce has a hard time understanding how inflation emerges when it is difficult for wages to increase, and when it is difficult for businesses to ask for product increases. Because Bruce read a book given to him by Thornberg, he now understands that inflation actually drives both of those things. Inflation occurs when the quantity of money rises more rapidly than output. This is known as real GDP. The more rapid the rise in the quantity of money per unit of output, the greater the rate of inflation.
Bruce asks, “If Milton Freedman was looking at Japan’s growth of money over the last 20 years, haven’t they created a lot of money?” Thornberg replies, “no”. Economists agree that the problem with Japan’s central bank is that they have been unwilling to poor liquidity into the economy. Japan went through a period of quantitative easing. All their cash sat in banks as a form of excess reserves. Japan’s banks refused to let money leave their reserves, and so their money supply did not expand.
In Argentina, the government prints money and they spend it directly. That is automatically inflationary, because it is instantly being put into the economy.
Ben Bernanke was once known as “Helicopter Ben”, because he had an interesting proposition. If you quantitave ease with the banks, they may not lend it out. If they don’t lend it out, you can give the money to the government to spend, or you can fly around in helicopters and throw the money out in bags. Thornberg does not think that this is a bad idea. One might even argue that this is a better idea than giving the money to the banks or letting the government spend it.
Right now, we are going through a period of quantitative easing. Our government poured money into the banks, and most of it is sitting in the reserves. However, some of the money has gotten into the money supply. As a result, we are staying in the 1 to 2 percent growth range, which is not deflationary.
Thornberg believes price levels can be effectively controlled by policy, if you are willing to go far enough. Ben Bernanke has stood in front of congress, and has announced that he will go far enough. If he sees any hint of deflation, he will pour more money into the system. If he has to go up in a helicopter and throw it out, he will. Ben Bernanke has an incredible amount of control over the price level. The biggest potential problem is that if he fights it too dramatically, then he could set off inflation. At this point in time, Thornberg thinks Bernanke has done a great job with keeping things balanced. Inflation might be a little too low, but we haven’t gone into an unhealthy range of inflation or deflation.
If Bernanke had not poured trillions of dollars into the system, we may have gone into a deflationary situation. That would have lead to deeper problems inside the economy. Bruce worries that we may be mortgaging our future, but Thornberg is not concerned about this, so long as Bernanke is willing to pull the money out at the right time.
Thornberg is not concerned about what Bernanke is doing with the Fed’s cash, but he is concerned about the fiscal problems that may develop. Fiscal changes occur when congress chooses to spend $4 trillion, but only tax $2.7 trillion. In this case, they would have to borrow the extra $1.3 trillion from the rest of the world. That $1.3 trillion must be paid back. When Bernanke moves money around, he doesn’t cause any future liabilities, because he can withdraw that money.
When Bernanke chooses to withdraw that money, it will have a significant effect on the real estate business and the entire economy. Bruce owns a book named An Antique Book of Interest Rates, which was made in 1955. The lowest interest rate in the book is 4.5%. This is not as low as the rates we have right now. This is what Thornberg is most worried about right now. We are in a bond bubble.
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