How Do You Move Buyers AND Sellers Off the Fence?

The key to marketing is not so much the how as it is the how often.  The problem though is content: what are you bringing of value each time you touch your client?  We currently have a tremendous opportunity.  The recent rate drops by the Fed have been severe and there are a number of possible outcomes.  I have discussed them before and Option 3 was more fully explored by Dan Green.  But they can be a great source for marketing material that raises your perceived expertise.  More importantly, this information can be used to move buyers AND sellers off the fence.  How is that possible?  Follow the bouncing ball of fiduciary obligation:

Outcome 1: The cost of money drops enough to bring buyers back to the table.  This leads to a window of relative parity in supply and demand.  BENEFIT: both buyer and seller benefit by acting now. 

Outcome 2: People view the rate drop as confirmation that economic problems are worse than originally imagined and pull back.  This decreases demand over time and housing prices continue to fall.  BENEFIT: seller benefits by acting now.

Outcome 3: Rate drop could be too much, setting off an inflationary cycle that the Fed has dreaded for some time.  Affordability drops over time due to the higher cost of money.  BENEFIT: buyer benefits by acting now.

As you can see, each option lends itself to someone acting immediately and here is the key point: we do not have a crystal ball.  The market is going to move (it always does) and it is going to benefit one group over another.  We might hope it moves in a specific way.  We might even expect it to move in a specific way.  But we do not know.  It is this acknowledgement that gives us the edge in helping both our buyers and our sellers act now.

An agent’s fiduciary obligation is to look out for their client’s best interest.  It should go without saying that all options be explained.  But when discussing a clients’ home, their best interest is usually aligned with their safest one and that means minimizing risk is more important than maximizing reward.  Now look at the following two conversations:

Conversation with seller: “Mr. and Mrs. Seller, after reviewing these outcomes, I believe we should focus on #2 and act now.  If we are wrong, the downside is you sold for less than you might have had we waited.  But if we are right and do not act, you may not sell your house at all.  By comparison, the latter is far worse to your financial position.”

Conversation with buyer: “Mr. and Mrs. Buyer, after reviewing these outcomes, I believe we should focus on #3 and act now.  If we are wrong, the downside is you paid a little more for your dream home than you might have had we waited.  But if we are right and do not act, you may never get into your home.  By comparison, the latter is far worse to your financial position.”

Now the clients are impressed with your expertise (which leads to referrals); of much greater importance, however, you looked out for the best interests of both your buyers and your sellers.  Icing on the cake: you are moving twice as many clients off the fence and into action.

Filed under: LIFE THAT POPs, REALTORS , Fed, inflation, REALTORS, recession, Success

Read about the Fed in the Shower

The Fed went ahead and lowered the overnight rate another half point today.  Hard to imagine this being a good move in the long run.  I commented last week about the possible inflationary pressures of this decision and I was going to comment again today regarding their decision.  But there is no need when you can read Dan Green over at Mortgage Reports summarize this so succinctly.  Once you visualize The Fool in the Shower, it is all very clear.

 After you read this one start talking to your clients.  The more info you as Realtors can bring to the table the more expertise you are seen to have and the more referrals you will gather.  Buyers sitting on the sidelines need to take a good long look at what rates are going to do if (when) Dan is right.

Filed under: LENDERS, POLITICAL & ECONOMIC FOLLY, REALTORS , Fed, inflation, recession

Countrywide, Wall Street and Animal House

There is a great scene toward the end of the movie Animal House.  The Deltas have decided to wreak havoc on the Faber College Homecoming parade.  The grandstand has been destroyed, floats are running amok, people are fleeing for their very lives and there is chaos in the streets.  One of the ROTC members who has been charged with maintaining public safety (played, I believe, by Kevin Bacon in his on-screen debut) stands still amidst the whirlwind of activity that envelops him and screams at the top of his lungs: “Remain Calm!  All is Well!!”  The absolute lunacy of his reality is made hilarious by his sheer conviction.  I am amazed every time I see it.  I feel that way lately as I watch Wall Street react to Countrywide, almost imperceptibly screaming “Remain Calm! All is Well!!”

I was more than a little confused by Wall Street’s reaction to Countrywide’s pronouncements last October regarding a profitable 4th quarter.  I wrote about it then and I guess I am writing again with a childish “told you so.”  Countrywide is underestimating their financial obligations in my humble opinion and it seems rather obvious to even the casual observer.  But as I have pointed out, main stream media is missing the real problem as well.  In a world of doom and gloom I am loathe to admit it, but these players are not doom and gloomy enough.  That is all well and good because their misjudgments serve them and it is easy for us to follow the ball when we follow the money.  More difficult to follow, however, is Wall Street’s desire to play along.

Today Countrywide announced that they were in fact unprofitable in the fourth quarter (which must have come as a bit of a shock to those that bid their stock up last quarter) .  This was in direct contradiction to their public estimates.  It now seems even more reasonable to conclude that Countrywide’s set asides are woefully inadequate, yet their stock today was… up.  “Remain Calm!  All is Well!!”

Filed under: LENDERS, POLITICAL & ECONOMIC FOLLY , Countrywide, Wall Street

If

If you can keep your head when all about you
Are losing theirs and blaming it on you.
If you can trust yourself when all men doubt you,
But make allowance for their doubting too;
If you can wait and not be tired by waiting,
Or being lied about, don’t deal in lies,
Or being hated, don’t give way to hating,
And yet don’t look too good, Nor talk too wise.If you can dream-and not make dreams your master;
If you can think-and not make thoughts your aim;
If you can meet with Triumph and Disaster
And treat those two imposters just the same.
If you can bear to hear the truth you’ve spoken
Twisted by knaves to make a trap for fools,
Or watch the things you gave your life to, broken,
And stoop and build ‘em up with worn out tools.If you can make one heap of all your winnings
And risk it on one turn of pitch-and-toss,
And lose, and start again at your beginnings
And never breathe a word about your loss.
If you can force your heart and nerve and sinew
To serve your turn long after they are gone,
And so hold on when there is nothing in you
Except the Will which says to them: “Hold On!”If you can talk with crowds and keep your virtue,
Or walk with kings-nor lose the common touch;
If neither foes nor loving friends can hurt you,
If all men count with you, but none too much.
If you can fill the unforgiving minute
With sixty seconds’ worth of distance run,
Yours is the earth and everything that’s in it,
And-which is more-you’ll be a man, my son!
Rudyard Kipling

Filed under: LIFE THAT POPs , Success

Some Borrowers are Made Like Sausage

Over the weekend I enjoyed a lively debate regarding the couple that is suing their Real Estate agent in Carlsbad.  Brian Brady wrote a humerous post and it generated a lot of comments.  The idea that I walk away with on so many of these issues is this: what ever happened to personal responsibility.  We are all so up in arms over the housing mess and we automatically blame the lenders.  I am just as guilty.  As a matter of fact, one of the reasons I stopped blogging for a while was my disgust with the mortgage industry.  But the main reason I stopped blogging: my disgust with the average borrower that had no interest in hearing the truth!  Before concentrating on coaching real estate agents I was  a very active lender and one of the leading proponents of Transparent Lending.  (If you are unsure what that is you can search my site or Google it and you will have loads of reading material.)  Yet the more I explained to people the more loans I lost.  I guess it is a lot like the old joke about everyone liking sausage but no one wants to know what goes in them.  My clients did not want to hear how the industry really worked and how I was going to save them money in the long run.  They were interested in the quick deal with the made-up interest rates and fancy web sites.  They wanted to know how much home they could buy, not afford.  They came equipped with no knowledge of yield spread but a thorough understanding of ‘stated income’.  In short, I saw an awful lot of borrowers that brought the current problems on themselves.

 Please do not misunderstand.  There are a lot of unscrupulous lenders out there and I have written about some of the most eggregious I have seen.  I am just saying that I think, every now and then, we need to acknowledge the borrowers that lied about their income, throwing caution to the wind and stop pointing the finger solely at the lenders.

Filed under: BUYERS, INVESTORS, LENDERS, REALTORS, SELLERS , foreclosures, responsibility, stated income

60 Minutes Has No Clothes

I ran into a former coach of mine at the gym this morning.  He was a mentor of sorts to me and had a big impact on my life during my formative years.  He knows that I am involved with the real estate and mortgage industry and brought up the 60 Minutes piece that aired last night.  Now I make a dutiful habit of not watching this program, as I find that most of their stories contain what you might call a “slant” to them.  But because this man, whom I respect, had watched it and found it disheartening I thought I would check it out.  Herewith, comments on the king of News Magazines… from the peanut gallery:

The story was called “House of Cards” and it was hosted by Steve Kroft – a nice enough man.  His report was definitely more balanced than I had expected and a lot more balanced than I am used to seeing in the mainstream media.  I do wish, however, I could be there to interject some questions when they create these vignettes.  It starts off with the standard bit about lenders making terrible loans and greedy Wall Street investors buying them up and implies that this whole debacle has been “done to us”, but by now I am used to hearing such pablum.  They introduce the main area of the story’s interest as Stockton, CA, which became extremely popular for people that were priced out of the Bay Area and Silicone Valley.  Of course, this leads me to wonder how much worse it must be in those two areas if Stockton was hit so hard.  This is not addressed and I doubt the answer would have fit neatly with the show’s point.  We then hear that half of the homes in foreclosure received sub-prime loans and this is blamed on the ludicrously lax lending standards at the time.  Again, I am led to ask just how ludicrous they were since the other half of foreclosures were apparently made by the more stringently underwritten lenders rather than the bad, bad sub-prime people.  I guess that is information for another story.  Mr. Kroft went on to cover the same, tired explanations:

• ‘Stated income loans were out of control’. – Yes, stated income may be the leading cause of the problem, but not because lenders just accepted any number you wrote down.  Most lenders independently checked stated income against accepted averages within the borrowers’ industry – using such sites as salary.com – and many stated income loans were denied because the income was not reasonable.  The reason stated income loans are the leading cause of the current mess is because borrowers LIED about their personal income while keeping the numbers within reasonable limits.  You can lie to the lender all you like, but you can only lie to yourself for so long.
• Lenders “didn’t keep their dicey loans” in their own portfolios but rather sold them off to Wall Street. – This implies some type of nefarious intent when in fact this is how the vast majority of loans are made.  If the loan was not sold to Wall St, there would be no further cash to make new loans.
• Best explanation of all: these purchases were predicated on home values going up, which they did for a long time but then the bubble burst. – So in effect the people getting hurt are generally the “last in”.  This is not unique to real estate.  Any investment will eventually drop in its cyclical journey.  On Wall St. there is a saying: “the market moves to hurt the most people.”  Which is the contrarian way of saying that by definition the market must move and it must move away from the most pressure.  So also by definition the last in will be the ones that are hurt.  Many before them, however, made out just fine on their investment.  Is the implication of this line of reasoning that no one should ride the wave when an investment is increasing in value?  Do not jump in because someone has to be the last aboard?  That type of thinking would cost a lot more money in lost potential gains than is being lost to foreclosure in my opinion
• One last note: Mr. Kroft was careful to point out that there are currently 4200 homes in foreclosure in Stockton, but gave us no frame of reference with which to understand this.  To wit: how many homes are there in Stockton?  In San Diego, for instance, the number of foreclosures is .006 of the entire housing stock (that is 6/10 of 1%).  While depressing to those going through it, certainly not a staggering number on the community as a whole.

There were other aspects of the story and it was more balanced than I may be alluding to here, but my point remains the same.  When your clients see this type of report, Realtors have an absolute obligation to question it and look between the lines.  The job of the Realtor is to advise their clients on all aspects of the real estate market and sometimes that means crying out “The emperor has no clothes.”

Filed under: LENDERS, POLITICAL & ECONOMIC FOLLY, REALTORS , foreclosures, press, REALTORS

How to Avoid Drowning as a Realtor

adapted from a speech given to Realtors January 17, 2008

Last week I suggested our theme be “A Great 2008“, but we need to remember that more than just attitude is needed.  This is the time to talk about skills and confidence as well.  I often note that being a Realtor is similar to racing a triathlon: it is an endurance event, not a sprint.

To become a better runner is relatively straight forward: run more.  The same can be said for the bike.  While there are techniques and drills that will certainly help, the thing you can do that will have the most impact is bike more.  Swimming, on the other hand, is a bit counter-intuitive.  When you come back to swimming and you want to improve, more is not better.  Water is much denser than air so it magnifies mistakes in technique or mechanics.  If you want to improve your swimming you back down on the yardage and do more technique work, more drills.  If you simply swim more you only become a poor swimmer that can swim for a long time.

The last few years of real estate have been a lot like running.  If you wanted to earn more money you simply worked more hours.  But last year the market began to change.  It became more resistant and problems of technique or mechanics were magnified.  Now is the time to back down some of the hours (I know how counter-intuitive that sounds) and work on your skills: dialogues, drip campaigns, marketing systems and so on.

In a triathlon a good swimmer will do well some of the time, and a good cyclist will do well some of the time and a good runner will do well some of the time.  But those that quickly recognize and react to transitions are the ones who consistantly find their way to the winner’s podium.

Filed under: REALTORS , REALTORS, Success, Triathlon

Countrywide Set Asides

The following is an email sent 10/26/2007 to some of my Realtor clients. Their is no attachment to this post (not sure how to do that yet!) but I believe all the salient information is included.  Again, I am posting these now because I am fairly sure I will want to reference them at a later date. 

Attached is a rather interesting article regarding Countrywide.  I am including some thoughts here and I want to make it clear that I am not picking on any one lender and especially not on Countrywide.  I do believe Countrywide can be instructive, however, as to what is happening now and what is to come.  As Countrywide goes, so goes the industry.  I have also included an attachment from a previous email regarding loan resets. According to the article, “Countywide lost $1.2 billion in the third quarter… Countrywide’s first quarterly loss in 25 years.  Yet its shares soared Friday after the nation’s largest mortgage lender said it expects to be profitable this quarter and next year”.   Now I do not pretend to know as much as the asset managers that watch these stocks and I certainly do not know what the future holds.  I hope Countrywide is accurate in their predictions and that the soaring shares which greeted the news are warranted.  I am, however, painfully aware of the market’s relatively myopic view; rarely looking further than the party streamers amidst any cause for celebration.  I must say that I am a bit perplexed by Wall Street’s jubilation and Countrywide’s rosy assessment.  Let’s take a closer look at the numbers.

• According to the New York Times (Countrywide to Help Restructure Loans 10/24/2007) Countrywide services approximately $1.46 trillion in loans.
• In the Mortgage Reset Table attached we can see the total loans resetting (not just Countrywide)
  • $153 billion in loans reset in the 3^rd quarter
  • $165 billion in loans are resetting in the 4^th quarter
  • $278 billion in loans are resetting in the 1^st quarter of ‘08
  • $233 billion in loans are resetting in the 2^nd quarter of ‘08 

Now, even though the above numbers are for all lenders, let’s assume that most lenders will be looking at a similar ratio of reset increases. While we are on the subject, let’s assume that everything else will hold constant (including the assumption that Countrywide’s percentage of defaults going forward will remain similar to what it is now).  We will see later why holding everything else constant may give us a rosier picture of Countrywide’s health than merited, but let’s give the benefit of the doubt. In the attached article we see that “Countrywide reserved $934 million for bad loans in the third quarter… (and) moved about $12 billion in nonconforming loans to its held-for-investment portfolio after having to take a write-down on them”.  This was against the 3^rd quarter reset number of $153 billion.  Yet going forward we see “the company took a $690 million impairment charge for home-equity and subprime loan residuals in anticipation of future credit losses”.  This is against a fourth quarter where we expect to see an 8% increase in the number of resets.  Let’s give that one to Countrywide as a part of their aggressive reaction to the credit crunch and massive downsizing.  Going forward a little further, however, we are looking at first and second quarter ’08 reset increases of 82% and 52% respectively.  That is a three quarter total of $676 billion in resets against $350 billion for the first three quarters of ’07; a 190% increase, yet Countrywide is decreasing their set aside by 26%!   Now let’s take a closer look at our assumption that everything else will remain constant.  It is widely accepted that the loan resets for the first three quarters were primarily comprised of sub-prime loans.  The upcoming resets, however, are predominately ARMs and option arms which went to more main-stream credit risks.  We have documented previously where Countrywide Chairman and Chief Executive Angelo Mozilo has proclaimed the limited exposure Countrywide has to the sub prime market.  It would seem reasonable then, to assume that their exposure to the upcoming resets will be even greater than what has been seen thus far.  Leaving out the entire discussion of Countrywide’s exposure to the option arms that made up a majority of their portfolio and you can still see my utter consternation when it comes to Countrywide’s outlook and the stock market’s acceptance of that outlook.

I have said before that I hope I am wrong.  Others certainly believe so.  Bank of America essentially bet that Countrywide stock would be over $18/share two years from now when they “bought” a portion of the company.  Of course the stock was trading close to $18 at the time and is now down to around $15/share even after the exciting news about Countrywide’s vastly improved future.  I am not in any way going to suggest that in-house optimism is anything but genuine, or that some of Countrywide’s insiders found “dumping” stock at $13/share to be less enjoyable than when it was $18/share… but I am concerned about Countrywide’s future.  It bears repeating: as Countrywide goes, so goes the industry. 

Filed under: LENDERS, POLITICAL & ECONOMIC FOLLY , Countrywide, option arms

Option Arms: Iceberg Dead Ahead

The next couple of posts are a bit dated, but they reference events going on in the real estate mortgage market that I am sure I will point to later.

 

Adapted from a speech given August, 2007 

There has been a lot of discussion in the press lately regarding the mortgage industry and the increase in foreclosures.  I am here today with a good news/bad news type of report.  The good news is that the actual stats are not nearly as bad as the press would have you believe.  The bad news is that it is going to get much worse.  The sub-prime issue is only what we currently see; the real problem, Option Arms, lurks just below the surface – and it is the size of Countrywide and Washington Mutual plus many more.  The US Mortgage ship Titanic be warned: “Iceberg dead ahead!”

 Here is the concept in a nutshell: Virtually all lenders use accrual based accounting (as do virtually all corporations of any business type).  Standard practice in this type of accounting is to book accounts receivable even though you have not actually received the cash.  This is, as I said, standard practice.  But what do you think might happen when this accounting standard is practiced by a lender such as Countrywide or Washington Mutual; lenders with a tremendous amount of option arms on their books?  These lenders are booking the expected income (which is to say the interest income) from all of their loans.  Yet with option arms there is a percentage of customers (in some cases I suspect a very large percentage) that are paying only the minimum payment.  “OK”, says the lender, “we are not receiving the income right now, but we will eventually”.  Which is fine until you look at the mortgage reset tables and recognize the vast number of loans that will be going into foreclosure in the near future.  To the degree that these loans are option arms the lenders will have to go back and remove the interest income they booked but did not receive and will now never receive.  This often results in a process on Wall Street called “restating your earnings”.  If you are curious how Wall Street views companies that restate their earnings, ask the people over at New Century Mortgage… oh, that’s right; you can’t.  They had to declare bankruptcy about 48 hours after they restated theirs.

Filed under: LENDERS, POLITICAL & ECONOMIC FOLLY , Countrywide, option arms

The Press becomes the Vaccine

At the beginning of the year, I predicted here that the newspapers would start printing stories that will actually help us.  Their headlines up to now have been less than kind to the real estate market, the real estate profession and especially the real estate mortgage profession.  One might suggest that their blatant hyperbole and lack of perspective bears some responsibility for the state of affairs as they stand (I know I have suggested it…).  So you can imagine my surprise at seeing the front page of yesterday’s Union Tribune.  I was genuinely excited by what they reported.  So helpful was it (once you read the entire article and work through the same old spin) that I suggest we take a copy to every client we can contact.

First and foremost, we can show them the layout, which so clearly reveals the Tribune’s true intent that there is no longer plausible deniability.  Across the top of the paper in bold, over-sized headline font it reads:

Foreclosures up 353%

in S.D. County in 2007

           

Another article, in the right column, above the fold has a headline in standard font which reads:

Fed slices

key rate

to calm

markets

Now I ask you, based on these headlines, which of these articles does the Union Tribune expect – even demand –you read?  The foreclosure article, of course; yet is that even news?  They have reported on this “story” ad nauseam.  There is nothing new here and very little that could be called news.  Down in that smaller column, however, is a HUGE story.  The Fed dropped their key rate a stunning three quarters of one point; “the biggest one day reduction… on record” according to the article itself.  Not only that, but it was undertaken during an emergency meeting, called at night, on a national holiday!  This is truly historic news, with the potential for massive impact on the economy, yet in our newspaper it plays second fiddle to any story where they get to use the word foreclosure.

Within the headline story there is cause for celebration, but you have to look for it.  I have gone through and done the math and here are the talking points I would raise with my clients:

• The numbers look horrific when posted in big letters across the top of the paper, but in reality we are talking about six-tenths of one percent  (.006) of homeowners in San Diego County that are in foreclosure.  Granted, this is up from the four-tenths of one percent  (.004) previous record and if it is happening to you it is a very large problem, but overall?  Six-tenths of one percent is hardly an economic problem for the community.  It merits mention somewhere in the business section… or possibly as a human interest story in the local section.
• Between 2000 and 2005 the home values have doubled in San Diego County.  From the high two years ago the values have come down 17%.  That translates into a 66% return on your investment, which is an annual return of approximately 8% on your money… and that is only if you bought at the bottom and sold at the bottom!  If you sold previous to this year your return was higher, in some cases substantially.
• The rate of foreclosures in San Diego County was only 62% of that in the state of California.  San Diego is once again leading the way.  If you want to invest your money, this is the place to do it.
• Finally, the rate of default notices, which is a precursor to foreclosure, was up only 128% or roughly 1/3 the rate of actual foreclosure.  This should signal a significant drop in coming foreclosures, even acknowledging the fact that a higher percentage of those receiving a Notice of Default end up in foreclosure.

Overall, this article, even with its intentionally misleading graphics and promise of depression inducing gloom, delivers some much needed good news.  We just have to know where to look.  Then we need to take responsibility as professionals and show our clients.  I end with this thought:

Within every problem there lies an opportunity; the more difficult the problem, the more rewarding the opportunity.

Filed under: BUYERS, POLITICAL & ECONOMIC FOLLY, REALTORS, SELLERS , The Press