What I learned from “Breakfast with Countrywide”

Almost everyone knows the name “Angelo Mozilo”-he’s the former CEO of Countrywide and he’s been in the news a lot in the last few years, mostly with negative connotations. This morning I  had the opportunity to meet and listen to Andrew Gissinger. It’s likely you haven’t heard his name much, but I think you might in the future, and if you do I suspect it will  be with good connotations. Andrew (he goes by “Drew”), is the new Executive Managing Director and Chief Operating Officer (COO) at Countrywide, and he actually wants to meet the people out there on the front lines everyday and get their feedback on how Countrywide can improve. What a concept! He struck me as approachable, reasonable, fair, willing to critique his own company and clearly understands the entire loan process, from underwriting to the variety of products available; and he had some interesting thoughts on what is happening and will likely happen in the future.  I mention this because I think “no nonsense” people like him will lead us out of the problems that we face in the Real Estate Business and I can only hope that Wells Fargo, Bank of America and the others have similar leadership.

     So what did I learn? Lets start with facts and figures. Everyone wants to know when prices will stop falling-here is what the Countrywide people are looking at:

1. Based on data I will share in a minute, they expect prices nation wide to bottom out at the end of 2009. Further, as prices firm and start to rise, they will not hit January 2007 levels until 2013.

2. The reasons for another 18 months of decline break down to a combination of things that are happening:

   a. Foreclosures are at the highest level seen since 1981.  1 of 9 sales in California today is a foreclosure. This won’t slow until late 2009.

  b. There are about 1.2 million homes for sale in the US that are vacant-this is a huge number of homes that need to be absorbed.

   c. There is an 11 month supply of property for sale vs. 4.5 month supply in July 2005.

   d. There is still a tremendous problem with availability of financing for buyers. Simply stated, there are no investors to buy loans unless they are solid gold credit, lots of money down etc. Until this changes the market won’t have the demand it needs to get these homes absorbed at a rate that would stop prices from falling further. Also, because of this, FHA loans (where the Government is the “investor”), will dominate the next few years-Drew thinks up to 35% of new loans will be FHA.

3.  On the positive side, there are other trends that will ultimately help lead to stability;

   a. Building permits for new construction are at their lowest point in decades. Because of immigration, desire to rebuild/rehab existing properties and desire for new homes, this lack of product will firm up the resale market. This is confirmed by my builder friends that all seem to mention 2011 as when they will focus on building in earnest again. Lack of supply=price stability.

   b. Past housing declines in California have been driven by unemployment and that isn’t happening now. Unemployment is about 5%-higher than the 3.75% of 2000, but nothing like the over 9% of the early 1990’s. People don’t buy homes if they don’t have jobs, but that isn’t the issue. Buyer confidence and availability of finacing are the issues this time (thats me talking, not Drew but I think he would agree). As liquidity opens up and defaults wane, prices will stabilize. According to Coutrywide-that’s late 2009.

   c. Possibly speeding up the process is the unprecedented involvement of our Government-The Fed, Congress and Regulatory agencies. Bottom line-they don’t want foreclosures and further price decline if possible. What they didn’t want to hear 9 months ago, seems to be open to discussion now-anything to keep people in their homes (rate and term modifications, tax breaks for short sales, raising conforming loan amounts, etc) and create quicker stability is on the table.

 So thats what is happening-high rates of default and large inventories of foreclosures driving down prices on one side, lack of new building, no real unemployment problem, lower interest rates and possible Government involvement on the other. A few other opinions I found interesting:

The whole idea that loans coming due and owners couldn’t afford the “reset” hasn’t been nearly the reason for foreclosure that people speculated a few years ago-mostly because the reset rate is at or BELOW in many case what it was before the reset. Not in all cases of course, but as I wrote 2 years ago, far more foreclosures have been created by investors and owners walking away from a bad investment than people that truly can’t afford their “new” rate. For those, Countrywide alone has modified over 60,000 loans.

 The problem of getting “short sales” approved has improved but is still a disaster for many potential buyers and their agents. There are far more short sale listings than there are foreclosures. Unlike the 1990’s though, lenders like Countrywide have sold these loans to literally hundreds of investors. They are the ultimate decision makers on accepting these and it remains trying. Still, the investors-unlike most of 2007-are starting to be more open to resolving deafults with short sales and the response time has clearly improved in most cases.

 There was a lot more shared but these were the high points. It confirmed my feeling that the market today is a lot like 1997-prices are still declining and foreclosures will continue for awhile but there are underlying trends that lead me to think that 1999 (read-stability/appreciation), isn’t that far away-our inventory is down to 1945 homes today from 2500 at the beginning of the year. I’ll keep you informed! 

The Difference Between Short Sales and Foreclosures

I had a conversation today with a past client that wants me to help her find a home this Spring and by the end of the call it was clear to me that there is no topic more important for buyers and sellers in today’s market to thoroughly understand than what a “short pay” listing is compared to a foreclosure listing. First lets start with the basics.

A “short pay” or “short sale” listing is one in which the seller will get no money. They owe more than the home is worth. They want to sell but in order to do so they have to ask their lender-or lenders-to take less than what is owed. As such, they have little concern in most cases at what price the property ultimately sells, because they see no proceeds either way. Enter the Real Estate agent, anxious to make a sale. They suggest to the seller, ‘lets price this well below the others to guarantee you get an offer, which we will then submit to the lender(s), to see if they will approve you for a short sale”. Seems innocent enough, but this is how the problems start.

I call short sales “maybe” listings. I have also called them frustrating, time consuming, impossible to predict and a waste of time. Here is what you need to know:

1. The whole process can take anywhere from 2-9 months to get a final answer from the lender if you make an offer. There are often multiple decision makers involved that will determine;
a. Does the seller even QUALIFY for a short sale? Do they have hardship? True inability to pay? Any possibility to re-finance and keep them in the home? Etc.
b. Does the offer price reflect a fair price for the property? Lenders aren’t stupid. They may be willing to accept an offer that is close to market value but they aren’t going to accept something WAY under it-why would they?
c. Who are the real decision makers and what is their agenda? Back in the 1990’s most short sales were processes that took about 6-8 weeks. In almost all cases the agent dealt directly with a person skilled in evaluating what they call “loss mitigation”. In cases where there was a second trust deed (which was the majority), we dealt directly with a Private Mortgage Insurance Representative. They were motivated to get what
they could to minimize their loss. Because the majority of todays defaulted loans do not involve PMI (the defaulting seller usually got an 80/20 piggyback loan or some type of loan specifically designed to avoid PMI) we now try to communicate and negotiate with 2nd Trust Deed holders that represent pools of investors that bought the Security on Wall Street. Sound complicated? It is. We often don’t know who the real decision
makers are and how to negotiate with them, hence the huge increase in time frames for an answer.

And then the anser is “NO”. “No” we won’t approve the seller, “no” we won’t accept that price, “no” we can’t get the other investors to sign off. And it only took 3, 4, 5, 6 months of hard work to get to that. How many buyers are going to be excited about going through that??

2. Another problem with “Short Sales” is how poor many agents are at handling them, especially with respect to pricing. I mean it isn’t for me to say how they and their client should price it, but when it is obviously so low the bank will never approve the price, something is wrong. I can look at virtually any list of homes for sale in Santa Clarita and tell which ones are short sales solely by the prices. Now 10 years ago this wasn’t too big of a problem because the buyers didn’t even know about them. Today, with the Internet, all buyers see these homes and think they are “normal” listings that they can buy today. They aren’t and they can’t. Agents are not required to disclose to the public that a listing is a short sale-they only have to disclose it to other agents.
As such, agents have gotten creative calling these listings “pre-foreclosures” on realtor.com as an attempt to draw calls from buyers hungry for “deals”. I’m not going to say “short sales” don’t sell-they do. Sometimes they are good deals. But boy are they a headache for the 80% of the time they don’t go through, and in the
process of marketing them the public sure can get confused-and frustrated.

A foreclosure on the other hand is completely different. This is a home owned by a Bank or lending institution. They want to sell it, they have an established price based on an appraisal and can give a buyer an answer in a matter of days-not months. These are fantatstic opportunities for buyers in today’s market as they represent highly motivated sellers with prices that now are almost always are the lowest in tract. Whenever you see “bank owned”, “foreclosure” or “REO” that is a property to investigate. There are dangers-they are always sold “as-is” and often need repairs, but at least there isn’t the painful process of the “short sale” to go through in attempting to buy one. Many times foreclosures are properties that were short sales that didn’t get approved and went to trustee sale. For the patient buyer, sometimes they can then buy it as a foreclosure if the short sale process didn’t pan out.