March 2011 Denver, Coolorado Realtor Rally Econ Conf Notes

Highlights:

• David Stevens – Commissioner, FHA / HUD. He talks about changes that are coming to FHA/ Fannie / Freddie loans, which are 90%+ of the mortgages made in the US. He’s very enthusiastic about the future of the real estate industry… we will get past this bad cycle.
• Patty Silverstein- local economist. Economic indicators have improved in Denver in the last year, and will likely continue to improve over 2011. But not at a fast rate.
• Tim Sandos – Very senior executive at Wells Fargo and past President Hispanic Real Estate Professionals. It has been hard for short sale owners to re-do their mortgages… and that might not get a lot better. But the macroeconomic indicators are improving nicely, and it’s a great environment for first time buyers.
• Jed Smith – Economist, National Association of Realtors. We seem to be at the bottom, and we’ll have a long, slow (slow!) recovery.
• David Baker – First Bank, President and COO. What will happen with “Shadow inventory” and the condo market.
• Why do lenders turn down short sales – and have them sell for less as REO?
• What can be done to make short sales get processed faster?
• John Hickenlooper, Governor. Lots of great news longer term.

  
Greg Moss – 9 News – Moderator

David Stevens – Commissioner, FHA / HUD

• Lots of experience in housing
• On list of top 50 more powerful in Real Estate in US
• Was president of Long + Foster, a top five RE brokerage, on east coast (16,000 Realtors)

 
Depression parallels to today

• Lots of references in media to Great Depression. Is our current experience really that bad?
• Daughter says she will rent for rest of her life – really?
• 1931, President of Chase Bank: “at the time, I called on US to reduce debt to cure depresson”
  • Experts at the time (1930’s)… consumer confidence was the biggest issue
  • Just like today
• The debate can scare people – that there will never be a recovery. That just is not true.

Market cycles

• When he got in biz he did a lot of wraps. Interest rates for mortgages were 18%
• At the time, everything thought it was the end of the real estate industry
• No one thought that in 1995, 2000, or 2005.
• Markets go up and down.

Economy

• Lost 700,000 jobs / month at time Obama came into office
• Wisdom in 2008 was use home as piggy bank, cash out cash and finance lavish lifestyle
• This industry has a trust deficit with America consumers… we have shown we cannot self-police
• So the pendulum will likely swing too far, and we’ll have too much regulation for at least half a generation
• Might have more renters than we should for a while as a result… which leads to less stabile neighborhoods, unfortunately

Freddie / Fannie / VA / FHA

• Supports 90%+ of mortgages in US
• We need to get government out of supporting every mortgage.
• FHA: When he became commissioner at HUD… thought it would be challenging
• Had to tell Congress that HUD didn’t have enough reserves, as required by law. Congress wasn’t happy. Congress knee-jerk reaction was pull back… which of course would slow down housing market even further.
• Shut down Taylor Beene + Whittaker.
• Changed insurance premiums for FHA loans… rising again on 4/13/11.
• Unpopular, but better than having Congress shut down FHA… where would first time buyers get loans? Downpayment is the single biggest barrier to home ownership.
• FHA is much more financially strong today than one or two years ago.
• 80% of FHA is first time buyers. Lots of minority buyers.

New white paper – future of housing financing

• Future of GSE. Key points
  • Shrink government role in housing finance
  • Need to get private capital to take over
  • Wind down Fannie Mae and Freddie Mac… private gain, social (taxpayer) losses
• Loan limits … expire in October 2011.
  • Should go back to prior levels
  • This will not help the upper end of the market
  • There is financing available for “wealthy” borrowers of luxe homes…
  • Government, he thinks, does not have a role here
• Consumer protection
  • Dodd-Frank bill does a lot of this, too.
  • Unhappy with short sale process? It could be streamlined!
• Make sure targeted, transparent support for affordable housing
  • Without support, there will be unequal access to home ownership
  • Sounds great as a sound bite; really hard to implement
  • Not everyone should own a home. But people who are qualified need help, he thinks.
• Long term options
  • 3 alternatives
  • Deleted
    • No guarantee from government
    • Broader guarantees than current
  • What they did present – FHA exists in all versions; still offers low down payment loans
    • Realtors represent the American Dream.
    • 1. Private capital offers guarantee
    • 2. Government guarantee only in time of crisis (e.g., 2008)
      • Fed about trillion +/- mortgage bonds in 2009-2010, which kept mortgage rates artificially low for a long period… helped the RE market
    • 3. FHA + another guarantee structure… FHA for working class / middle class
      • Just outside of the current income range for current FHA guidelines

He is very optimistic about future

• Too much REO inventory, but everything else looks great
• Housing starts at record lows
• Will see record # of REO coming to market over next 18 months… not a lot of NEW foreclosure starts… just need to work off what is already in the pipeline.
• Demographics on our side
  • Generation Y / Millennials / Echo Boomer
  • 80 MM people, born 1977 – 1997
  • 14-34 years old today (20111)
• Gen X
  • 44 MM people… Echo’s are almost 2x
• Gen Y
  • Tech savvy
  • Good work ethic
  • Very, very diverse
  • Will sustain housing market for a long time
  • Be ready for the needs of this new market segment.
• In the short term, we have scared the daylights out of the Gen Y group.
  • It will take some time to get the trust back
  • “I will rent forever” will eventually change… but it will take some time.

Panelists

• Patty Silverstein – Economic analysis firm
• Tim Sandos – Wells Fargo… “diverse segments” division; was President CAHREP in past
• Jed Smith – Economist, NAR. 20 years studying US real estate
• David Baker – First Bank, President / COO… 28 years…

What do you think of the economy?

• Patty
  • How to move economy forward?
  • Book “Art of Racing in the Rain”… how to stick to goals? From point of view of dog.
  • “The car goes where the eyes go” or …you get what you manage and pay attention to
  • Stats
    • US unemployment rate 9.3%; Colorado is 8.8%
    • Expected to come down very slowly in 2011
    • Colorado lost 106K jobs in ’09; lost 40K jobs in ’10; will be +22K jobs in ‘11
    • We are on the right track!!!!
  • Key industries? Job growth? 2010 job growth change
    • Energy (especially clean energy) +7%
    • Almost all others declined
  • Consumers are 70% of economy.
    • Population +17% from 2000-2010
    • Denver +16%
  • Consumer confidence
    • US and Colorado about the same, 60 score
    • Mountain states used to be more optimistic that US average… not lately
  • Income
    • Growing! Not much.
    • Confidence is partially “how wealthy we feel”
    • 53% of households have retirement accounts; 18% have stocks
    • Also confidence… “how much is my home worth?”
    • Home prices up a little in 2010… not sure that will stick in 2011
  • Retail sales
    • Some light growth in 2010 and 2011 in Colorado after devastation in 2009 / 2008.
    • Less reliance on credit cards… at least for now… how long will the lesson stick?
  • Cycles in RE
    • Harder than it should be to get loans
    • She thinks Colorado home sales will increase from 2010 to 2011. I am not sure.
  • Foreclosures
    • CO delinquent loans and REO are outperforming US average
    • We’re 42^nd (1 = most REO; 50 = least REO) among US states
    • Why stability in prices? Less REO certainly helps!
  • New housing starts
    • Almost none.
    • This helps to absorb the inventory of existing homes on the market
    • Thinks that 2011 will be up a little from 2010 housing starts
    • Still at 1/3 traditional level of housing starts
• Tim
  • National stats
    • Unemployment 9.2%, down from 10.4%. Big improvement.
    • Denver positioned better than US average
    • Underemployment is more common than usual… for less than they made before
      • Harder to qualify for loan they could have gotten before recession
      • Lots of part time / contract hires
      • Employers are really cautious
  • Re-doing your mortgage when you are in trouble
    • Ability to pay loan is most important to get a loan modification
    • If you make less than you used to…well, that does not help
  • Reduction in pricing … lots of people underwater
    • But… homes are very affordable for first time buyers
    • Cheaper to buy than rent for almost all metros in US
  • Dodd-Frank changes to loan officer comp will greatly change how lending works… and there are lots more changes from this legislation.
• Jed – NAR economist
  • Next year is going to be better
    • He is excited about Generation Y… research shows most will buy, when their confidence comes back
    • Also, growing % population is minority, and they want to own a home, too
    • Realtors need to change to adapt to this
  • Still some dark clouds
    • Price of gasoline
      • Oil will sell for $75 - $90 / barrel in the long run
      • It will sell for what it costs to find / extract new oil
      • Short run it will run higher, of course… it will get better
      • Trading $105 / barrel on 3/7/11
    • Excessive spending
      • Washington is spending too much money too fast
      • “Lets cut deficit… but not just yet”
  • Three key issues… jobs, jobs and jobs.
    • Projected time to
    • 125,000 jobs in a month… if greater, we are keeping up with natural population growth. If less, even though we add jobs we’ll see unemployment get worse
    • Jobs +1.4% and+2.2% in ’11 and ’12… good, not great
  • GDP
    • +2.9% in ’10; +2.7% in ’11; +3.0% in ‘12
    • Reasonable growth
  • # homes sold
    • Modest, modest growth… a few points a year.
    • Some modest growth in prices…mostly stable
  • Headlines sell papers
    • The headlines are horrible. The TV news is awful
    • “Why should I buy now?”
    • Poll by Fannie Mae… 75% think home prices will go up in ’11… didn’t see THAT in the headlines.
    • Good time to buy if you plan to be in the house for a while.
    • There are challenges in the market, and we will rise to them.
  • Realize that the home is not speculation… it’s a home to raise your family.
    • Generation Y is very positive on home ownership… not for the financial reasons, but for raising family and lifestyle.
    • Minority groups like to buy because it shows you have arrived and achieved that American dream. No long term change in behavior.
  • It’s OK to start to feel optimistic.
• David – First Bank President / COO
  • Mortgage Lending is the #1 product at First Bank.
    • 3500 loans in 2010. 2100 loan modifications in 2010.
    • They keep most of their loans on their portfolio. About 12,000 of them. 38 REO.
  • 270 LO… so about a loan / LO per month.
  • His view of housing market
    • Lower end market has traction. High end soft.
    • Appraisers are really conservative.

Has there been enough change in regulation to make sure this RE crash doesn’t happen again?

• Frank-Dodd Act is huge.
  • When there is a crisis, pendulum swings too farm
  • Probably happened here.
  • Long term, things will loosen… and we’ll have another crisis in 20 years…
• Hard to know enough
  • Rule making still in progress
  • “Consumer protection bureau”… seems like a good idea. Will the implementation work well?
  • Does the government have the cash to fund enforcement (e.g., hire people for this new bureau)?
  • Costs to consumers will go up… ultimately they pay for it… could price the marginal buyer of RE out of the market…. Need to be cautious in the implementation.
  • GSE (Fannie / Freddie)… not sure how that will change… have to be really careful.
• NAR…
  • Loose credit got us into this mess.
  • Credit is much too tight now
  • Hard to get it right.
• Patty
  • Credit is a challenge… but reform IS needed

What do the bankers think – is credit too tight?

• “Its tighter than it was”
  • Of course, on a relative basis
  • Secondary markets have shrunk
  • Fewer options, esp: for niche sub-markets
  • Not as many investors for mortgage bonds…
  • I don’t think we’re not too far off
• “Some over-reaction”
  • Not that things have settled down… still tighter
  • Wells Fargo is double underwriting… to really make sure loans can be sold on secondary market. Slows down the process and nearly impossible to “sneak” anything by
  • Independent lenders like 20% down
  • Hard for first time buyers to participate

When will consumer confidence come back?

• Recession doesn’t end until your neighborhood gets a job
• Patty
  • More jobs will help a lot.
  • Colorado is well positioned for long run.
  • Recovery will have two steps forward, one step back. Not all progress every month
  • Overall things are going the right way
  • 20 months into a recovery… “hard to believe”… but it was really bad
  • It’s not going to be party time like 2005 anytime soon.
• Jed
  • Seeing this nationally? Yes, jobs are key.
  • Worries about national deficit and state budgets that are hard to balance (e.g., cutting education in Colorado).
  • Painful decisions on what to fund… that also weighs on consumer confidence.

Why are banks sitting on shadow inventory; when will it be released?

• Patty
  • Really hard to measure
  • In Denver, inventory of homes to sell has declined nicely. Not building ANYTHING.
  • If there are shadow inventory homes in Denver, we probably have buyers
  • Not a problem, probably, in Denver
• Jed
  • 30+ days late… could be 5-6 million of them
  • 1.5 million units / year drop into the market. Total market = 5MM unit sales
  • Doesn’t think % of REO and short sales pace will change.
  • It’s been 35% annually of national sales… for several years… and that will continue
  • The bad news for shadow inventory is already fully factored into the market.
• Tim
  • 3.4 MM units (around 7 months of national inventory) is his guess
  • No bank wants to hold inventory longer than they have to
    • Investor requirements drive this… who owns the mortgage paper?
    • Takes a long time to process… that is driving the delay
    • There is concern about dropping too much inventory all at the same time
  • Don’t want to artificially lower prices
• Dave
  • First Bank is a portfolio lender… if they have a bad loan, they have to eat it
  • Doesn’t want to draw out process. Doesn’t know if market will come back, or when
  • Deals with problems as fast as they can

Condo market has taken a big hit locally – and nationally… anything to stabilize? Only good for investors?

• Dave
  • Condo market has always been more volatile than DSF market.
  • I don’t know that you can change that
• Patty
  • Market is critical, esp: for first time buyers
  • For Boomers (empty nest); is it time to sell my big Highlands Ranch house and get a loft downtown?
  • Lots would like to do this, but “not the right time”
  • Vacancy rates for apartments are low, and will stay low for a while.
  • Gen Y postponing buying are… renters
• Tim
  • Depends on the market. In dense areas (NY, SF), condos will rebound faster
  • Less dense markets (e.g., Iowa), condos will take longer to dig out
• Jed
  • Too many rental units… part of housing speculation
  • Long term, Baby Boomers will buy ‘em, but that will take a while

 Vacancy Rate in Denver

• 2% in 1-4 units… lower than most of US… what will happen next?
• Patty
  • Not sure about national stats, but in Denver… low vacancy
  • We have talked about this for years!

 Why do lenders turn down short sales – and have them sell for less as REO?

• Jed (NAR)
  • Wishful thinking they can do better on pricing
    • Banks want to get max dollar… which is prudent…
    • From Realtor POV it isn’t working, or course
• Tammy – NA
• Dave
  • Consumer has personal liability on loan
  • First Bank doesn’t have a lot of S/S or REO
  • What shape is the borrower really in… if unemployed and no cash… you usually will take a bigger loss later… we’d rather take smaller loss sooner
  • But it is easier for First Bank… since they portfolio the loan and have all the decision rights
• Tim (Wells Fargo)
  • Back office challenge
  • We are usually NOT the lender, we are the servicer of the loan for the investor
  • We, the bank, as a servicer, have to comply with lots of rules and guidelines
    • Every investor has different rules / guidelines
    • No one goes loan by loan… got offer for X… it’s all very automated.
    • This drives more of decision (or lack of decision) than you might expect
  • Now, lots of Federal guidelines… rules of how to interact with consumer
    • We must comply with these guidelines, and that takes lots of time
  • Finally, what precedent are you setting?
    • $500K properties selling for $280K
    • “You did it in FL!”… well, FL is a lot different than CO
    • You are not doing community, the bank, or the investor any favor by taking a huge discount and further depressing prices
  • It’s really difficult
  • “If you were the investor… how would you want the money to be managed”

 What can be done to make short sales get processed faster?

• Tim
  • Wells has hired 17,000 people in last year to work on loss mitigation
    • Our systems were not designed for this tidal wave.
    • Historically, 2-3% of loans are REO
    • Negative am loans are in 35% REO status!
  • It’s a lot like an origination
    • Get a lot of docs
    • Validate / underwrite / make decisions
    • Takes time to gear up; “we hope it is getting better”
  • Loss mitigation group working seven days a week for several years
• Jed (NAR)
  • Realtors wish things would process faster…

Loan modification – reputation is that it is “useless”… what should be done?

• Tim
  • We have modified 2.9 million loans in three years at Wells.
  • You can’t say we are not doing anything.
  • Can we do better? Of course, and we are working on that every day.
  • This might be sentiment for federal loans… which didn’t see same success
  • We are #1 mortgage lender in US. 92% of customers pay on time (versus historical 96%)
• Dave
  • Modified 20% of the loans (performing) in their portfolio
  • “Modification” includes a lot of things
• Patty
  • We are working on uncharted territory – how to fix a market that fell this far
  • Not in defense of program; regulators didn’t have much time for a big problem

John Hickenlooper, Governor

• DBR was first group to endorse him
• We have some difficult choices ahead of us, as a state, financially
  • How do we make it better?
  • Confidence in economy is really important
• Job growth is slow. But he hears a lot of optimism.
  • There is a lag from CEO confidence to hiring. Be patient.
  • CNBC ranks Colorado #3 for “best business”
  • Forbes ranks us #4 for doing business
  • #3 for tech / science
  • CNN ranks us #3 for “smart / tech” jobs
• This will translate to businesses wanting to relocate here
  • And more hiring … of high quality jobs
  • We have lots of talent at reasonable prices… and affordable real estate, too.
• Within the state
  • Budget issues. It is daunting.
  • Having an “honest conversation” to bring budget to reality.
  • 42% budget is K-12 education. Medicare / Medicaid (low income families)… 28%
  • There are not a lot of easy choices.
  • No reserve fund left.
• Cuts…
  • Higher ed, Medicaid… K-12… pretty much everyone took a share.
  • Have assembled a great cabinet of managers
    • Got SVP of IT from Oracle… average age IT system is 16 years at Colorado
    • A lot of room for improvement… she will “make a real dent”
• Wants to re-brand state as “pro-business”
  • Outside media gets it.
  • Disconnect… many people (citizens) don’t think this true; they think Colorado is not pro-biz… this makes it harder to attract jobs
  • Lots of people retired here and love the quality of life.
  • Citizens must be pro-business.
  • Success of small business is what drives the economy (and jobs)
• County by county – working on budget.
  • Need good education system to drive the high tech environment
  • Investment in higher education is highly correlated to future economic growth
  • Lots of economic development work underway…