Critical Conversations: Banking and Finance
Banks wrestle with foreclosures as buyers seek financing
South Florida Business Journal by Kevin Gale, Editor in Chief
Date: Friday, April 13, 2012, 6:00am EDT View photo gallery (2 photos)
Kevin Gale Editor in Chief - South Florida Business Journal
The holy grail of homeownership appears to be over for now, according to our Critical Conversation panelists.
Cash is king, with foreign buyers often leading the way, but the market may be bottoming. Many buyers who experienced foreclosures or short sales may have to wait for a new mortgage.
South Florida could face a pickup in foreclosures after a robo-signing-induced slowdown. Banks have geared up to handle that possibility, so it may be harder for buyers to find bargains.
Amid the turmoil, homebuilders with solid product in great neighborhoods are having success, partly because so few new homes are being built.
The following transcript was edited for clarity and brevity.
Q: Mortgage volume in South Florida in 2010 was down 84 percent from 2005, the peak year. Have banks started to ease mortgage terms? Should they ease the terms?
A: Natascha Tello, chairwoman-elect, Miami Association of Realtors/broker, Keller Williams Realty Partners SW: There is an incredible amount of cash coming into the South Florida market. We have not seen a lot of easing. With FHA, we are seeing an increase in the restrictions, and the fees will be increasing, so it will be a little more challenging to obtain an FHA loan. Convention loans are still lagging behind.
Brad Hunter, chief economist, Metrostudy: I talked to a lot of homebuilders who are clients. Often people are having trouble getting a mortgage loan because of one of the fours F’s: fear, financing, falling home prices and finding a buyer for the other house. These factors are keeping people from buying homes at a faster pace, despite low prices and low mortgage finance rates.
It is difficult to get a mortgage, even if someone has a good credit score and a job. Part of it relates to appraisals. Builders start a new job and there is no comparable sale the appraiser can refer to.
There are the haves and haves-not. The people who have cash can come in and buy a house, so you are seeing a big percentage of the deals being cash. I take that as a negative sign because the rest of the market is not buying.
Roy Oppenheim, co-founder and senior partner, Oppenheim Law: If we try to emulate what we had before the Great Recession, we are doomed. We know the system went awry for lots of systemic reasons. I don’t see the average homeowner coming back into the marketplace in any way, shape or form the way it used to be.
As a society, we have to start realizing whether homeownership is always this holy grail.
Howard Dvorkin, founder, Consolidated Credit Counseling Services: Was it really homeownership when there is no money down? That period of time between 2004 and 2008 was that reality? No.
Hunter: The homeownership rate peaked during the boom at 69 percent. The projections are it will head back to 62 to 64 percent. If you were to take the people who are 90 days or more delinquent in their loans, then we are already at the 62 percent number.
Dvorkin: That’s normal.
Alina Robau, senior VP, head of consumer bank lending, FirstBank Florida: It’s not just about homeownership. My nail lady ended up with six apartments. If I look at my own portfolio, the largest number of foreclosures were people who lost their jobs. There were very few strategic defaults. It was the nail lady who bought on speculation. They thought they were going to get rich in six months.
Oppenheim: Why didn’t the circuit breakers work? The SEC, IRS, Fannie and Freddie? Why could your nail lady buy those six homes?
Dvorkin: It was because of greed.
Oppenheim: Securitization packages were fraudulent at every level. The nail technician was a function of the system.
It is the guy wearing the suits who allowed it to happen on their watch. We are talking about Fannie Mae, Freddie Mac, rating agencies, Congress, the SEC and IRS – where the securities were illegally packaged and were considered flow-through, tax-exempt entities. Big banks have put billions and billions aside to pay these obligations they owed to the IRS.
Hunter: The system failed us, but the question now is: How do we grow from here? How do we get appropriate lending rules? Go back to buying with a loan-to-value that is sensible and not have option ARM loans and no-interest loans and things like that?
Patricia Hayhurst, VP, South East regional residential lending sales manager, Capital Bank: I think this is the best time to lend because the values I believe are at the bottom. The appraisals are now coming in at sales prices and there are comparable sales that are valuable, that aren’t distress sales. When we say 20 percent down, it’s not 20 percent down of an inflated value.
If we are beginning to feel our collateral is the real value, I think we should be easing up. I see Freddie Mac easing up a little bit. When we do a Freddie Mac loan and run it through the loan production system, we are seeing more approvals.
We are having a problem on high-end properties. I’m fighting on one now where there is a $600,000 difference on appraisals.
Tello: It all depends on which lender you are talking about. They have their internal guidelines. To the consumer, the loan is a loan, the bank is a bank. They don’t understand what the exposures are.
SFBJ: Monterra in Cooper City is one of the few places where new homes are being built. They are trying to sell them for $450,000. In nearby neighborhoods, they are $260,000. There is nothing new to compare it to.
A: Barry D. Lapides, associate, Duane Morris LLP: I’ve worked on that community for homebuilders. All the new homes are competing against foreclosures, but there is a value plus for buying a new home compared to a foreclosure that is dilapidated and has not been maintained for six months.
Hayhurst: The market approach on appraisals is lower than the cost approach. You can’t build that house for what it is selling for.
Oppenheim: That shows there is dysfunction in the marketplace.
Hunter: There is still a flow of REO (real estate owned) properties coming out of the banks, and a lot of that is being sold below construction costs.
At Monterra, despite other extremely affordable, cheaply priced housing, people are ponying up. Monterra had 404 housing starts last year. That is the No. 1 community in a six-county area. There were 376 moves into homes. There is no more speculation driving these communities.
Dvorkin: How many of these are cash buyers and people from South America buying with cash?
Hunter: Not in Monterra. There are some communities, such as Artesia in Sunrise, that don’t have a majority, but a fairly significant number, of South American buyers. Other than a few communities – Doral being another one – where there are a lot of international buyers, that’s not the dominant buyer.
What’s happening is the traditional buyer – the end-user who has a good job and has good credit and is able to buy a good new home – doesn’t have many choices of where to go. They can buy from GL Homes, DiVosta Homes, Lennar Homes, the builders at Monterra, the builders in Parkland and a handful of others. Because they now have fewer choices, they are willing to pay to get into these neighborhoods. I think that is a sign of fundamental strength in the market.
Dvorkin: Last week, I was talking to a bank vice president, and he was worried about whether he would qualify for a mortgage on a house. Sixty-five percent of all foreclosures in the state of Florida come through my office. A lot of people are still hurting. A lot of people are still waiting for the savior.
Hunter: After two or three years, if you have a short sale, does it fall off your record?
Dvorkin: Seven years.
Oppenheim: Two years.
Hayhurst: You can get a loan in two years.
Tello: If all your payments were made on time after the short sale.
Hayhurst: You can get a portfolio loan from a bank.
Oppenheim: I represent clients who followed the American dream: establish good credit, get a good mortgage and buy a home. The good credit is what got them into trouble. I think this idea of good credit, especially for young people, is a disaster. The idea of building up credit on a credit card is poison.
Enrique A. Villaronga, senior VP and residential lending department manager, TotalBank: We are very fortunate that we were not in the residential department [during the boom.] We started the residential department when I started working there. The last three years, we have been building up our residential portfolio.
Fannie has tightened up. You used to be able to get 50 percent on debt to income. Now you don’t get anything beyond 45.
Robau: The problem is regulatory, and then we get into the realm of subprime lending, and then we are scrutinized beyond recognition.
Q: How important is mortgage availability to the home and condo sales market? Some candidates say the government should get out of the mortgage business with respect to Fannie Mae, Freddie Mac and the FHA. Would that be helpful or harmful to the lending market today?
A: Hunter: If it happens anytime soon, it would be disastrous to the housing market while we are still struggling to recover. It is the quintessential example of closing the barn door after all the horses have escaped. If some of these guarantees and supports are removed, it will just prolong the suffering that is left now. As Fed Chairman Ben Bernanke and others are saying, we need a recovery in the housing market to get a recovery in the economy at large.
Oppenheim: How can you say privatize gain and socialize loss? That’s not the model in other parts of world. You can’t socialize your losses and continue to pay massive bonuses on the backs of us taxpayers.
Hunter: That may be, but that’s an issue we can address after the crisis.
Tello: At the end of the day, it is a timely restructuring that has to happen – not today, not tomorrow, but over time.
Hayhurst: We have to do something about the VA loans. We have all these people coming back. They have to find a way to put money in this program and find them jobs.
Hunter: There’s a 17 percent unemployment rate with returning vets.
Q: From a banking perspective, why is it important to sell to Fannie and Freddie, instead of keeping them on the books for 30 years at low rates?
A:Villaronga: We don’t want to have to hold these things as long-term paper. We are at a historical low, at 4 percent, but long term, you know they are going back. Maybe a bank could hold 5 percent of what they sell to Fannie and Freddie. To do away with Fannie and Freddie and put it at 20 percent down would worsen our economy.
Robau: I do agree with you with the greed and all that. Right now you would not come to work with me for the same rate for 30 years. So, having said that –
Oppenheim: If you paid me in gold, I would.
Robau: – the bottom line is it would dramatically increase the interest rates, and housing would become less affordable almost immediately.
Q: Should regulators allow lenders to offer subprime mortgages for people with damaged credit after foreclosures and short sales? Is that so dangerous that we should stay away from that?
A:Lapides: You are talking about institutions vs. hard money loans, which have 50 percent down and their interest rates are a bit higher. You are having government instead of the market taking care of the problem. I am having a lot of my clients saying: “I can’t afford a traditional loan. Where do I go?”
Robau: The difference, though, is I’m part of a community bank. As well as looking at guy who had a [pick-a-payment mortgage] skyrocket and his taxes went up; maybe he has good credit and never missed a payment. We are looking at it the old-fashioned way. He is not going to get the 3.875 he would get at Fannie Mae. They may take a 5/1 ARM. [A 5/1 adjustable-rate mortgage has a fixed rate for five years, then adjusts once a year later on.]
If you had a strategic default because you made a bad deal, you are not going to get a deal from bankers.
Oppenheim: The big banks are not going after deficiencies. Most of the time, we are getting deficiencies waived and banks are paying $20,000 to $50,000 bonus deals.
In two years, there will be a bank to lend to them to get a new house. I have done foreclosure defense for people in 2009, and they are buying homes now.
Lapides: I’m not seeing deficiency waivers unless it is part of a loan modification package and they have to submit financials. I’m not seeing big payments pay for keys to the home.
Oppenheim: The $25 billion settlement with the five largest mortgage lenders included $17 billion in incentives for lenders to waive.
Tello: We’re not seeing many people jumping back in the marketplace. They are going to rent or stay with family until they can settle their situation.
A bigger blemish is if they overleveraged their primary residence to do other deals and they have to short-sell their primary residence. If you are a person going through this, it takes some time to recover.
Dvorkin: What about the moral hazard? You have two people. They bought houses in the same neighborhood. They paid the same amount. Their kids go to the same school. One guy is making his payments and the other person is not making his payments. People have to pay their obligations.
Hayhurst: One of the things that contributed to that situation is unemployment.
Dvorkin: I agree with you, but there are people taking advantage of the system.
Oppenheim: Moral hazard is the biggest problem. Bondholders were bailed out, and AIG’s counterparts. [Goldman Sachs got $12.9 billion.] Had there not been moral hazard at the top, you wouldn’t have had to deal with moral hazard.
Dvorkin: Let’s burn flags.
Q: Are HARP and HAMP effective tools to modify mortgages? Why have lenders underutilized them so far?
A:Dvorkin: Part of it is people are trying to get their hands around it. Consumers hearing about it on the news aren’t the ones that need it.
Hunter: Modifying through a lower mortgage rate doesn’t help the guy who is upside-down on his house by $100,000.
Lapides: One of my jobs is to contact opposing counsel and explain HAMP. A lot of times, it is dropping the rate to 2 or 2.25 percent short term. I’m seeing a $250,000 loan have a $300- or $400-a-month drop.
Oppenheim: But a rational human being is not going to pay interest on a value they no longer have, such as a $300,000 house now worth $150,000. Even if you are paying 2 percent, you are paying 2 percent on a house that is now worth $150,000. The equation is: Can I rent a house across the street more cheaply? It is pure business.
Hunter: If there is no penalty for not honoring my obligations, I’ll just strategically default, too.
Dvorkin: I’m seeing a lot of retirees that just can’t handle it, with their medication costs going up and their pension benefits disappearing. What they counted on to retire is not there. The morals of the society are changing – and not for the better.
Robau: One of the problems with HAMP is it wasn’t applicable to investment properties. We are not participating in HAMP because we only started participating with Fannie a few years ago. [HAMP only is applicable to loans before 2009.] Basically, we are individualizing situations. Even with a no-income loan, they have to show income and assets and an ability to repay. Sometimes it is a three-year plan; sometimes it’s a five-year plan. Sometimes it has even been a little longer. The idea is to not take the property back, get out of the real estate business.
Oppenheim: When the bank takes the property back, they are bad neighbors. They don’t take care of the properties and values go down. The “Project X” parties that are occurring now are in bank-owned properties that have been abandoned. [“Project X” is a movie about teens who throw a wild party.]
Lapides: There are private buyers that want to buy these pools of properties. The problem is setting up a national system to manage these properties. We are starting to see loans come into default from 2008 and 2009. It will probably be 2014 until the foreclosure court system is stabilized. You are talking about 2020 before we are seeing a stabilization in the market.
Q: How will the national mortgage settlement impact the pace of mortgage modifications and completed foreclosures?
A:Dvorkin: I think it’s good for people who desperately need the help; it is probably their last lifeline. We are guiding clients toward that program. It’s a significant program. Foreclosures for the most part stopped when [Plantation foreclosure attorney David] Stern went down. I think there is going to be a tremendous volume in the next 12 months.
Oppenheim: Banks stopped because of robo-signings. Large banks didn’t want to create an environment of ill will. The minute the agreement went through, foreclosures went up by almost 20 percent. Banks know foreclosure is not the best process.
Lapides: My clients [which don’t include the five big lenders that are part of the national settlement] are expecting more claims against banks for failing to modify mortgages. Whether they are frivolous or not I don’t know.
Oppenheim: The settlement will definitely increase short sales, and maybe increase modifications.
Lapides: My clients have stepped back and seen how they get their complaints verified. It’s a much slower process now. Banks are dotting their I’s and crossing their T’s.
Tello: Now we are going to see some of that come through the system.
Oppenheim: Many of the loans were not properly securitized or placed in the trust in a timely fashion. That is going to be the 900-pound gorilla in the room. New York Attorney General Eric Schneiderman’s working group, the SEC, the IRS, as well as the Justice Department are looking at criminal and civil penalties, improper representations to investors and the government when these mortgages were packaged into these securitized trusts and put into 401(k)s and retirement accounts all over the world. That is one of the circuit breakers that didn’t occur.
Lapides: Borrowers are not going to get their houses for free. If there was an issue of standing, it just has to be refiled and you start over.
Oppenheim: In some occasions, you may have a statute of limitation.
Q: Does the significant shadow inventory In Florida create a threat to the real estate market because these distressed homes must eventually be brought to market?
A: Hayhurst: Because there are a lot of modifications actually working now and the values and the new lending are improving, I don’t think there is as huge a shadow inventory as predicted.
Tello: One of the things we are seeing is the amount of REO inventory is in the hands of the lenders and is not on the market. A lot of 90-day delinquent homeowners will short-sell. Files are being rechecked for REOs, and then those properties come on the market. A lot of what’s been [listed for sale] in last 60 days is occupied by tenants. A lot of these were investor-owned properties, and they have lease laws we need to adhere to. By the time we see the inventory come in the market, it will not come in the flood we might have anticipated.
Our real estate market has buyers. There is pent-up demand: move-up buyers, move-down buyers, people getting divorced and people having kids.
Hunter: The properties that are held by the banks now are going to be released in the market, perhaps 20 percent more than the number released in the market last year. A lot of that supply is being bought by foreign flight capital investors and end-users. So, those units are being absorbed, but at still depressed prices. Prices are starting to move up, both on the resale side and the new side, despite what’s going on.
The question is whether we’ll continue to get the upswing in prices to the same degree, or whether that will moderate somewhat.
Going back to the new homebuilders: The builders that have those “A” locations close to jobs and services are able to find traction and raise prices because there is that still relatively small group of people who want to buy a new home.
Lapides: You are getting a clean homeowner or condo association. A lot of these old communities had a lot of speculators. They stop paying assessments to the condo associations and homeowner associations. You have a lot of deficiencies where the common areas are not being maintained.
Dvorkin: I’ve bought a lot of foreclosures. Banks are getting smarter. They are not giving away properties. I am seeing a lot more resistance than I did 12 months ago.
Robau: Their inventory is down.
Tello: Supply is down and demand has increased. Now, it goes on the market and we have 20 offers in 24 hours.
Lapides: If a title company is handling an acquisition, they have to make sure the previous lender did the title correctly. Some buyers are just getting title reports.
Villaronga: We have a strong parent company, and we are not giving away property. We would rather hold it for a year or two. We have very, very little inventory. We have some very nice properties in nice areas.
Lapides: Warren Buffett was recently talking about buying in bulk. You need to have the management system in place to manage properties.
Q: Why are many banks refusing to take over properties and pay association dues on them? Is that hurting property values in communities?
A: Oppenheim: I think the larger banks have a history of being very poor homeowners and managers, with some breaking into my clients’ homes when they don’t have possession. Then we found out they gave bad instructions to a locksmith or a manager.
Robau: We are being held hostage for fees greater than we legally have to pay. We have an infrastructure in place where we pay our association fees. At least on a monthly basis, those properties are reviewed. If they are single-family homes, they are, several times a month, mowing the lawn and taking care of the pool.
Hayhurst: Banks use to have one person doing special assets, but now it’s a department.
Tello: We have seen an increase in the lenders wanting to maintain the properties and wanting to take care of them. Some clients want weekly photos – showing the water is on, the electricity is on – with time stamps.
Oppenheim: I would anticipate there being bulk sales. I don’t think the process of banks having special asset groups being the constructs to get us out. I don’t think we are going to see the values go up. We are not going to see any more increases. Enrique is not going to get market value for five years.
Villaronga: Just because property is in a REO, we are not going to give it away.
Robau: I think what we are seeing now is we are past that “oh, my God” stage. We are staying truer to the market value, as defined in this new economy.