On Friday, September 22, the Norris Group proudly presented its 10th annual award-winning black tie event I Survived Real Estate. An incredible lineup of industry experts will join Bruce Norris to discuss perplexing industry trends, head-scratching legislation, and opportunities emerging for real estate professionals. All proceeds from the event benefit Make a Wish and St. Jude Children’s Research Hospital. This event would not be possible without the generous help of the following platinum partners: HousingWire, Coach Fullerton, Coldwell Banker Town and Country, PropertyRadar, the Apartment Owners Association, the San Diego Creative Real Estate Investors Association, InvestClub, Las Brisas Escrow, MVT Productions, Inland Empire Real Estate Investment Club, Realty411, and White House Catering. Visit www.isurvivedrealestate.com for event information and tickets.
Episode Highlights
- Who were the first panelists to speak, and how are they involved in the real estate industry?
- What is quantitative uneasing, and how does this effect mortgage rates?
- What did John Burns discuss in his report “Unlocking the Housing Market Recovery?”
- Are we going to see an increase in college debt soon?
- According to David Kittle, where does Ginnie Mae’s portfolio currently stand?
- What is the current market sentiment according to Doug Duncan?
- What is the Mortgage Collaborative, and how was it started?
Episode Notes
This week is Part 3 of our weekly rebroadcast of I Survived Real Estate 2017. Doug Duncan, John Burns, and David Kittle were the first panelists to speak that night. Doug Duncan is Fannie Mae’s senior Vice President and Chief Economist. He is responsible for providing all forecasts and analysis on the economy as well as housing and mortgage markets for Fannie Mae. Duncan also oversees corporate strategy and is responsible for strategic research for external factors and their potential impact on the company and housing industry. He is Fannie Mae’s source for information and analysis on the external business and economic environment. He also studies the implications of changes in the economic environment to the company’s strategy and execution and forecasting for housing activity, demographics, overall activity, and mortgage market activity.
John Burns is the CEO and founder of John Burns Real Estate Consulting. He founded the company to help business executives make informed housing industry investment decisions. He helps them to have the most accurate analysis possible on investments and portfolios. John co-authored Big Shifts Ahead: A Demographic Clarity for Businesses. This book made demographic trends easier to understand, quantify, and anticipate. Bruce recommended it and said it is the silliest $29 investment. Bruce read it in one day with a yellow marker.
David Kittle is the founding partner and president of the Mortgage Collaborative. David is a 40-year veteran of the mortgage lending business, in which he began as a loan officer. Afterwards, he went on to start his own company. He has also served and lead the Mortgage Bankers Association as well as several prominent MBA committees, including their political action committee’s residential board of governors and board of directors from 2004-2010. David has testified 14 times before Congress since 2008.
Bruce began by asking the panel about quantitative uneasing. Bruce asked how they reduce the balance sheet and its likely impact on mortgage rates. Doug Duncan said they called it the great unwind. At present, the Federal Reserve has about $4.5 trillion in their balance sheet, primarily of U.S. Treasury debt and mortgage-backed securities. $1.8 trillion of that is the mortgage-backed securities. This is the first time they have ever owned in modern times anything other than Treasury debt. What they are doing today is when you pay your mortgage off, the mortgage-backed security that is backed by it goes away. This would shrink their portfolio. Today, they are buying enough to keep it constant.
They announced at their last meeting that they are going to stop re-investing that principal. So eventually the amount of money in mortgage-backed securities on their portfolio will shrink and go away. They have not actually said if it will go to zero. It will get small, but there is a possibility they may keep some since they have used it as a tool. What this could mean for interest rates is over the long term, they expect that the spreads between mortgage rates and Treasury rates will get wider by about 25 or 40 basis points. Fannie Mae was given the task of lowering their amount of loans they held, and Bruce wondered where these loans went. Doug said somebody else has to buy them, which in this case would be the Fed. They do not know who will buy them if the Fed does not hold them. This is the uncertainty of the market.
In December 2008, John Burns wrote a 20-page report entitled “Unlocking the Housing Market Recovery.” He talked about how they had gotten into too much debt and there was already widespread wealth destruction, and something needed to be done. Bruce asked John his thoughts on how this was handled and if we have set a precedent going forward that we would implement the same thing. John wrote the paper in December after Liehman Bros. blew up. He talked to everyone he could in D.C. and was blown away by how people don’t listen, look at numbers, or set policy. One of the things that came out of it was the tremendous opportunity to buy single-family rental homes. He tried to talk Fannie, HUD, and others to stop dumping everything on the market since you will just make house prices fall on yourself. Instead, restructure something and keep everybody in the house since it would be better for everybody.
John said we do not know how to manage properties, and capital does not want to do it. John went out and got a lot of capital to do it, and none of them actually did it. However, he did find a new group to handle it, and some lessons were learned here. One positive thing John mentioned was during the RTC debacle, they wrote a white paper on lessons learned. The worst thing that could possibly happen was the government could own banks. There were a lot of big banks that should not have made it through this cycle, and the government learned their lesson that they were better off letting these guys run it and bully them rather than take it over. John is optimistic that there were a lot of lessons learned in this cycle that the government won’t repeat again, particularly regulatory groups.
Bruce asked if he was concerned about any unintended consequences since things were handled differently. In the 90s, they foreclosed on people who didn’t make payments. This time, they said don’t worry about it, and people didn’t make payments for 4-5 years. People had already been asking John what the next downturn would be like; and he thinks the world has changed, specifically in areas like Phoenix. Fifteen years ago, it was considered embarrassing to stop making your mortgage payments and a little bit of a damage on your reputation. Now, it is considered the totally smart thing to do. During the next downturn, the minute people got no equity, their friends will turn to them and ask them why they are paying their mortgage. People are not going to do it and will assume their will be no damage done to them other than a blip on your credit you can clean up in 2-3 years.
Bruce asked if this has cascaded into other debt, namely college debt. There is a phrase in businesses called a service once rendered is rendered worthless. They have a degree, but they have debt. John said a couple of his employees paid over $1,000 a month in student debt. One of them in particular went to a very good school and was 18 when she signed up for it. There were a myriad of things she did not understand, but she was going to a really good school and getting a good degree. It has been ten years since she graduated, and she still struggles with this. You have to put yourself in these people’s shoes as this is the only debt out there from which you cannot get away. It almost seems we structured something and took advantage of a lot of minors. Some of them are now saying they are throwing in the towel. This is when we have a 4 ½% unemployment rate and they all have jobs. John thinks big student defaults is the next big thing we are going to see.
John said he did a white paper on this a while ago, and the home sales volumes in the United States would be about 8% higher right now if we had not seen the run-up in student debt recently. This has happened over the last 15 years, so this is how much it is holding back the market.
Bruce went on next to David Kittle, who verified the rumor that he will be nominated for the next Ginnie Mae President. If that were to come true, it would be a great honor to be considered. It is a tough process and a lot of investigation, so you never know. Bruce congratulated him. In the event it happens, Ginnie Mae’s role in the world of finances has a $1.8 trillion portfolio, the largest behind Fannie Mae. It is even larger than Freddie Mac. This portfolio grew through the Obama presidency. The real estate crisis was about the subprime mortgages, and he will say advocate that they were not bad programs, just made by the wrong people. There are still people with subprime loans who are paying on time, which validates what he just said.
Over the last few years, under the past administration many of the borrowers who had low credit scores went to FHA. Those are in Ginnie Mae pools and performing very well and were written under tighter guidelines. However, if there is any downturn in the economy, that could be problematic. This is why the portfolio grew to be larger than Freddie Mac. FHA was owning up to 50% of the mortgage market for almost 8 years.
Bruce next asked Doug Duncan about his market sentiment report that comes out every month. Bruce asked what the sentiment trend has been year-over-year and what their mood has been. Doug said that over the longer term, starting back in 2010, it has been increasing. Sentiment is about buying a house and not refinancing. They were interested in people’s attitude about buying houses. It started slowly, then accelerated in 2012. It has been an uptrend until the last couple years when it has slowed in the face of increase, although it is still positive. What we are seeing today is the impact of the historically strong house-price appreciation. In inflation-adjusted terms over the last five years, annual house price appreciation has been about four times the long-term average.
What is happening today is when people are asked if it is a good time to buy a house. That number is actually falling, and the primary driver is because of the high prices. When people are asked if it is a good time to sell a house, more are saying yes. The primary reason for this is because of the price appreciation. For the first time, these two lines have crossed. One of the questions asked is if people are confident they will still have their job and make aggressively more money. The confidence level for the buyer is good for their personal situation, but they are wondering if the timing is not so hot. Interest rates are still good, but the price appreciation is an issue.
John made a statement in his book that said, “state taxes and growth policies determine where America lives.” Bruce asked what will be happening over the next decade as far as where people are going to migrate. John said 42% of America lives in the South between Arizona through Florida and the Carolinas. This is where 62% of the growth is going. The question is where you can buy a house affordably, where you can find a job, where the weather is nice, and where there are recruiting companies. In some states, such as Mississippi, they do not have any of these things. This is clearly where the growth is going.
Bruce asked about the policy rate in California since most of his money is invested there. John said his offices are all over the country, and one of the more interesting shifts is they would export people to Nevada and Arizona then stop there. They are all over the country now, particularly in Texas. John’s company does research in Texas, and there are communities where a third of the buyers from California, particularly in Austin, can’t believe how cheap their prices are and how Californians are driving up prices. A $400,000 house is really expensive in Austin; but for somebody in California, it’s 50% off. They love when Californians show up, and now they are promoting the fact that city planners are showing up and they are getting zoning and other issues.
Bruce next asked David Kittle about the Mortgage Collaborative. It talks about being a part of the best and brightest minds in the mortgage business helping small and mid-size lenders compete more effectively. Bruce asked who is considered a big lender, and what do they do to help them compete. David said the big ones would be the big banks, whether you are talking about Wells Fargo or Citi Bank. As of the week of I Survived Real Estate, they had 116 lender members of their company and aggregate production in excess of $205 billion. The average origination volume of their members is around $1 billion and a half a year, some higher than this. It puts about 62 vendor-preferred partners together with 116 lender members, and it levels the playing field.
It is not a new concept. However, what they do is they listen to their lender members, and they ask them to do certain things that help them grow. It is because they listened to their members. They had 38 depositories out of those 116 members, so it is diverse. One of the largest credit unions is part of the Mortgage Collaborative. David talked about its diversity and how it was started 4 ½ years ago right at the right time. He wished he could take credit for it as he was one of the founding partners, but it was really Gary Acosta, who is also one of the co-founders of NAHREP. David’s other partners in this were Jim Park and John Robins. It may have not been David’s idea, but he was very blessed to be asked to be a part of it.
Bruce ended by asking each of them the same question. He asked them about when they look at current lending policies, which is the bigger goal: making sure lending stays conservative or attempting to increase homeownership? John said he thinks they are trying to increase homeownership, but they are going to fail. We have more 90% plus LTV mortgages being made today than ever. There is a real misnomer that credit is tight; the documentation is really tight. If you don’t have the income, that is horrible, but Dodd-Frank said, “Thou shalt not make a loan above 43% debt-to-income ratio.” More than 1/3 of the loans are above that. These are the policies that are being implemented. Bruce said the pile of loans we have has to be the safest we have ever had, although John said it is not.
There is one group in Washington, D.C. that is very prominent and does a lot of analysis back to 2000 and considers 2000 lending normal. These are the guys who have been around for a long time and know that in 2000 we had the loosest lending ever as well as the highest homeownership rate. After that, it got really stupid. Everyone is comparing it to 2000 and saying we are tighter than 2000. However, there was something called the ’92 GSE Act that really pushed homeownership for 8 years before it got stupid. We are lending looser today in terms of LTV risk than we were ever.
Doug Duncan added to this by saying we are a late cycle in this economy. We are under charter pressure to increase access to credit. One of the things you want to ask is if supply is a problem and house price appreciation is accelerating at four times the long-term average and you ease credit, then aren’t you being pro-cyclical to a downturn. You have to be really careful when you ask about credit-using. The basic structure in economics of the portfolio is sound; but at the margin, the people you are going to let in at the end of the cycle would be the first people that would be off. This is something you have to really consider.
The Norris Group would like to thank its gold sponsors for supporting I Survived Real Estate: First Lending Solutions, Guaranteed Rate and Nathan Chabolla, In A Day Development, Inland Valley Association of Realtors, Jennifer Buys Houses, Keller Williams Corona, Keystone CPA, LA South REIA, Michael Ryan, New Western, North San Diego Real Estate Investors, Northern California Real Estate Investors Association, Orange County Investment Club, Pacific Premiere Bank, Pasadena FIBI, Pilot Limousine, RealWealth Network, Rick and LeeAnne Rossiter, the San Jose Real Estate Investors Association, San Francisco Bay Real Estate Networking Summit, Sonoca Properties, South Orange County Real Estate Club, Spinnaker Loans, Think Realty, uDirect IRA Services, Westin South Coast Plaza, Wilson Investment Properties, Inc. See www.isurvivedrealestate.com for event information.
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