| There have been numerous articles and books written | | | | lending every day and have plenty of funds available". |
| on the theories or reasons behind the residential real | | | | Publicly available data on lending, current underwriting |
| estate bubble and its bursting in 2006, which led to | | | | requirements, and government issued guidelines give a |
| what will likely be remembered as the Great | | | | totally different answer. The truth is banks do not have |
| Recession. I can add that I am not one of the parties | | | | sufficient reserves to make enough loans. |
| that share the blame. I was living in Europe from 1994 - | | | | Since banks are not lending, hard money lenders and |
| 2007 and did not even own real estate in the US | | | | private mortgage lenders (like my company) cannot |
| during most of that time period! Chalk that up to luck, | | | | even meet 20% of the investor demand for loans, |
| not prescience. | | | | despite charging annual rates of 12-18%. If plenty of |
| I would like to focus on what can be done to get out | | | | mortgage money is available, why do I get daily |
| of this mess. The answer is surprisingly simple, although | | | | requests, far exceeding our capacity, for Private |
| as so many things in life that are simple, it will not be so | | | | Mortgage Loans, Transactional Funding, Seller |
| easy to implement due to the number of banks and | | | | Financing, Contracts for Deed, and our Lease-to-Own |
| organizations involved. They need to change or | | | | program? Trust me, it is neither because of my good |
| eliminate the policies, guidelines, and artificial barriers | | | | looks, nor because I offer rates below government |
| these organizations created to stop the free market | | | | subsidized bank loans. |
| from correcting the situation. | | | | Many people believe that demand for real estate is |
| The easiest way to understand the solution, is to | | | | low, and that is depressing the market. The opposite is |
| realize that a bank's balance sheet is far stronger | | | | true in many markets. In the Phoenix market, sales in |
| when it has a performing mortgage loan, rather than a | | | | 2009 and so far in 2010 were on par with the peak |
| bank owned (REO) property on its books. A REO | | | | years of 2004-2006. Pending sales are now at levels |
| property is in reality a liability to the bank, inhibiting its | | | | that make those earlier years look like slow periods. |
| ability to borrow and lend. A performing mortgage loan | | | | Incidentally, during the peak years the Town of |
| is an asset that can be sold in the secondary market, | | | | Buckeye, where I live, was the fastest growing housing |
| or used to borrow against to make more loans. The | | | | market in the US. By 2008 the bubble burst and about |
| situation is similar when a bank has a performing | | | | 90% of the properties for sale were distressed sales. |
| mortgage loan (even at a lower face value), rather | | | | Like the rest of the Phoenix market, sales now |
| than having a non-performing loan that exceeds the | | | | exceed the peak years, and I have prospective |
| value of the real estate backing it. | | | | buyers asking for our financing help daily since they |
| In the simplest terms, the solution is for the banking | | | | can't get bank financing. |
| industry to use some of the same strategies as real | | | | The solution to the real estate and mortgage crises is |
| estate investors currently use since bank loans are not | | | | simple, and it is not new and stronger regulation. To the |
| available. Investors whose livelihood depends on the | | | | contrary, the more the government meddles the |
| returns they earn on their invested capital, do not wait | | | | worse things will likely get. The banking industry, and I |
| until a buyer comes along with the ability to get | | | | include the mother hens in FHA, Fannie Mae, and |
| financing. With few mortgage loans being made, there | | | | Freddie Mac along with the banks, need to eliminate |
| are very few such buyers. The investors package | | | | the self inflicted policies they imposed and barriers they |
| financing in with the property sale to have a | | | | constructed after the real estate market collapsed. |
| competitive advantage. The only step the banking | | | | These policies are analogous to locking the doors once |
| industry took in this direction over the last year was | | | | all the horses escaped. |
| their proposal to allow former owners to stay in their | | | | I recently submitted a number of purchase contracts |
| homes as renters. The banking industry lacks property | | | | on bank owned (REO) and short sale properties (with |
| management skills, so they picked the worst strategy | | | | non-performing loans). So to those that say there is no |
| to try. The banking industry needs to focus on | | | | demand - I am ready and willing to buy hundreds of |
| providing financing to sell the homes, not to get into the | | | | properties that meet my cash flow requirements, if the |
| rental business. | | | | financing is available. There are another 100 investors |
| I have been working on this solution for 18 months and | | | | like me in the Phoenix area flocking to the auctions, |
| so many naysayers told me it could not be done, that I | | | | bidding on REO listings and on short sales. If financing |
| initially believed them. Fortunately I heard about a | | | | were available, prices would be rising even faster than |
| gentleman across the country that had been working | | | | the 13% year-over-year increase we saw in April. That |
| on the same concept. He had sufficient success | | | | was not a misprint; Phoenix area prices rose 13% |
| acquiring bank owned properties from small local | | | | since April 2009! |
| banks, that he started holding seminars on the topic. He | | | | Here are a few of the barriers to mortgage financing: |
| coined the phrase "Bank Seller Financing" and pitches it | | | | - REO properties require high reserves, inhibiting lending, |
| as a great way to acquire properties. He appropriately | | | | - non-performing loans require accruals and reserves, |
| cautioned that this was not a phrase that would get a | | | | further inhibiting lending, |
| positive reception within the banking industry, since | | | | - bank REO, short sale and mortgage modification |
| "seller financing" was viewed as competition by | | | | departments are understaffed, |
| mortgage lenders. I am indebted to Michael P. Watson | | | | - lending departments have policies to inhibit financing |
| and his seminar for rebuilding my determination to | | | | the sale of their own bank's REO's and short sales |
| expand this simple solution to resolve a massive | | | | (notice the Catch-22), |
| problem - the US housing market crisis. | | | | - most mortgage loans help the bank selling the REO |
| Let me summarize the US residential real estate | | | | more than the one issuing the new loan (not a great |
| market issues, as if there was a US real estate | | | | incentive for issuing new loans), |
| market. In reality there are many sub-markets with | | | | - few investors and homeowners have FICO credit |
| varying degrees of these problems and opportunities. | | | | scores exceeding 720 (the new underwriting norm), |
| Detroit, Cleveland and Buffalo (where I was born & | | | | - individual investors, even those at the top of the |
| raised) are very different real estate markets than Las | | | | Forbes 400 list are restricted to 10 mortgage loans in |
| Vegas, Los Angeles, Phoenix (where now I live and | | | | their name, regardless of assets, net worth and |
| invest), or most metro areas in Florida. The key issues | | | | income, |
| are: | | | | - entities whether corporations or LLCs, as most |
| - property values have declined, in some markets | | | | investment funds are structured, cannot get mortgage |
| precipitously, | | | | loans regardless of their assets, profitability or book |
| - many homes are now below their mortgaged value, | | | | value, since those loans cannot be sold on the |
| and far below their "market value" during the bubble, | | | | secondary market, |
| - banks have too many properties they own due to | | | | - bank executives are not aware of the conflicting |
| foreclosure, | | | | policies they have put in place, |
| - banks are faced with many non-performing loans | | | | - too many separate governmental organizations |
| and the prospect of even more foreclosures, | | | | regulate and "try to fix" the mortgage and banking |
| - some counties (like Maricopa County where I invest) | | | | industries, and |
| are sending out ridiculously low assessments for 2011 | | | | - there is intense pressure from the US Treasury for |
| and scaring more homeowners into turning their keys | | | | banks to buy T-Bills to finance the deficit. |
| over to their lenders, and | | | | To me it is very obvious from this list - banks do not |
| - with the current high unemployment rate the majority | | | | have the money to lend due to their weakened |
| of people believe that real estate prices will continue to | | | | balance sheets and reserve requirements. When |
| decline, despite evidence to the contrary. | | | | distressed homeowners face this same dilemma, they |
| As a case in point, I was shocked when investors at a | | | | reach into the bag of tricks investors use, selling their |
| recent meeting of the Arizona Real Estate Investors | | | | homes with seller financing, on a lease-to-own |
| Association (AZREIA) were polled about whether they | | | | contract, contract for deed, or even turning over the |
| believed housing prices would fall further, are near | | | | deed "subject to" the investor taking over the |
| bottom, or are rising. Approximately 75% felt they | | | | payments. |
| would decline, 14% said it was at or near bottom, and | | | | Banking industry, meet the enemy - look in the mirror. It |
| 1% (including me) felt they were rising. All of those | | | | is time to heal thyself by implementing the TACT |
| investors have access to the same very detailed | | | | (Toxic Asset Conversion and Transfer) Program. |
| market data, so I was shocked how differently we | | | | Learn from and work with real estate investors and |
| each filter that data based on what the media and the | | | | buyers to sell off your REO and short sale properties. |
| gurus are saying. | | | | You will strengthen your balance sheets and income |
| Back to the issues, there is one key issue which is | | | | statements, property values will continue to rise, fewer |
| both the crux of the problem, and the crux of the | | | | people will hand over their keys, and the real estate |
| solution. There is not enough money available to make | | | | market will return to normal. This can be done in |
| mortgage loans to meet demand. Ask your friendly | | | | months, not in decades. For more detailed description |
| bank executive if money is available for mortgages | | | | of the TACT Program review other articles in this |
| and they will give you the party line - "yes, we are | | | | series. |