Part five of “I Survived Real Estate 2008” picks up with Bruce Norris introducing Tommy Williams, president of the National Auctioneers Association and co-founder of Williams and Williams Auction Company. Tommy has been involved in over 10,000 real estate transactions in his very lengthy career.
Tommy starts right away with his solution. Tommy brings to the table an idea he’s been passionate about for many years. Reality in the market place is what it is and there’s no way around it. The entire world sets prices by the auction process and not just real estate.
Instead of having a foreclosure process, Tommy suggests we skip foreclosures all together. The foreclosure process leaves an empty house and starts a very expensive process for the bank. The neighboring homes next door to the foreclosure see house values go down because of blight, the bank goes the a long and expensive process, and the foreclosed consumer leaves with damaged credit.
Tommy suggests a short sale auction hybrid. The consumer about to foreclosure would still be in the home when the auction took place and the home would be handed to someone ready to fill the home and at true market price. After the auction, the foreclosed consumer and the bank would need to deal with the deficiency but at the least the property would never be vacant.
The free market needs to work and the auction process needs to be involved. It would help us get back on track more quickly.
Bruce is the last speaker of the evening and starts talking about the cycles we go through and how we as humans often repeat the same mistakes. Solutions can also be from the past.
Bruce says that when we have a euphoric period there’s an exuberance that gets people in the market that should not be. The last to get in are usually the ones that are least capable. Emotions come into play and typically they cannot afford the home they purchased. This cycle we saw a record number of home owners but maybe we should never have got to such a high number.
Bruce shows a vacancy chart and how it climbed since 1985. Now it’s declining and rightfully so. Bruce thinks about 6% of homes will end up being vacant.
Tightening loan standards are creating issues. Bruce reads an article about lenders tightening programs. It makes it harder for people hard to qualify and refi what the already have which will make it worse.
We now have to deal with the largest foreclosure issue in history. Foreclosures are already at an all time high and will continue. These foreclosures have caused huge price erosions.
Bruce shows the audience a list of 20 homes The Norris Group purchased in the past 45 days through auction or out of the MLS and the huge price hits lenders are taking. On 20 transactions, the banks took a $4.6 million dollar loss. Bruce says he’s worried about the domino effect. Too many people owe more than their property is worth.
Bruce says there are three ways to solve a vacancy. We can tear down houses and create an artificial housing shortage. We can leave it vacant and wait for till household formation catches up with supply. Or, we could make it possible for investors to have financing to hold them.
Four solutions that are needed to get us back on track. The 203k loan program from FHA should be made available to investors. It was available to investors until 1996 and then FHA discontinued because it had done its job of getting rid of foreclosures. FHA doesn’t have a ton of foreclosures because they didn’t make a ton of loans. However, the loan program needs to be made available for investors to expedite the foreclosure problem.
Fannie and Freddie need to increase the number of loans they will give to investors. Both want to open offices in California to help unload inventory more quickly and investors are likely candidates. At the same time, they are cutting back on financing available. Both are in a dire situation. Fannie and Freddie hold a huge amount of the foreclosures.
Option Arms are the next wave and these loans represent 50% of Fannie and Freddie losses. Bruce shows the Option Arm reset chart. The chart shows the expected resets and what’s currently happening now. A huge number of these Option Arm loan holders are making teaser payments. Once the loan balance hits a certain percentage, the loan resets. 90% of the borrowers of these loans made the minimum payment. Many won’t walk until the reset because the payment is cheaper than rent.
The foreclosure process is now taking longer because the banks are so slammed but because of the new regulations as well. The bulk of these are set to land in 2009. The loan amounts were typically more than subprime and the lenders will have to recalculate what they made because of how they were writing things off.
Bruce says a due on sale moratorium would make it possible for investors to buy properties that would undoubtedly become foreclosures, it would allow Realtors and auctioneers to make commission on properties with no equity but favorable financing, allow a consumer to move on with credit intact, and improve liquidity in the system.
In the 1980s, foreclosures exploded but price deterioration wasn’t bad. Assumptions of loans saved the market. When interest rates were 17%, people were able to assume better financing. It saved the system.
Bruce also suggests the 90 day seasoning period on properties to be removed so investors can fix houses and sell them more quickly. More to come next week. Thenorrisgroup.com
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