What I learned from “Breakfast with Countrywide”

Almost everyone knows the name “Angelo Mozilo”-he’s the former CEO of Countrywide and he’s been in the news a lot in the last few years, mostly with negative connotations. This morning I  had the opportunity to meet and listen to Andrew Gissinger. It’s likely you haven’t heard his name much, but I think you might in the future, and if you do I suspect it will  be with good connotations. Andrew (he goes by “Drew”), is the new Executive Managing Director and Chief Operating Officer (COO) at Countrywide, and he actually wants to meet the people out there on the front lines everyday and get their feedback on how Countrywide can improve. What a concept! He struck me as approachable, reasonable, fair, willing to critique his own company and clearly understands the entire loan process, from underwriting to the variety of products available; and he had some interesting thoughts on what is happening and will likely happen in the future.  I mention this because I think “no nonsense” people like him will lead us out of the problems that we face in the Real Estate Business and I can only hope that Wells Fargo, Bank of America and the others have similar leadership.

     So what did I learn? Lets start with facts and figures. Everyone wants to know when prices will stop falling-here is what the Countrywide people are looking at:

1. Based on data I will share in a minute, they expect prices nation wide to bottom out at the end of 2009. Further, as prices firm and start to rise, they will not hit January 2007 levels until 2013.

2. The reasons for another 18 months of decline break down to a combination of things that are happening:

   a. Foreclosures are at the highest level seen since 1981.  1 of 9 sales in California today is a foreclosure. This won’t slow until late 2009.

  b. There are about 1.2 million homes for sale in the US that are vacant-this is a huge number of homes that need to be absorbed.

   c. There is an 11 month supply of property for sale vs. 4.5 month supply in July 2005.

   d. There is still a tremendous problem with availability of financing for buyers. Simply stated, there are no investors to buy loans unless they are solid gold credit, lots of money down etc. Until this changes the market won’t have the demand it needs to get these homes absorbed at a rate that would stop prices from falling further. Also, because of this, FHA loans (where the Government is the “investor”), will dominate the next few years-Drew thinks up to 35% of new loans will be FHA.

3.  On the positive side, there are other trends that will ultimately help lead to stability;

   a. Building permits for new construction are at their lowest point in decades. Because of immigration, desire to rebuild/rehab existing properties and desire for new homes, this lack of product will firm up the resale market. This is confirmed by my builder friends that all seem to mention 2011 as when they will focus on building in earnest again. Lack of supply=price stability.

   b. Past housing declines in California have been driven by unemployment and that isn’t happening now. Unemployment is about 5%-higher than the 3.75% of 2000, but nothing like the over 9% of the early 1990’s. People don’t buy homes if they don’t have jobs, but that isn’t the issue. Buyer confidence and availability of finacing are the issues this time (thats me talking, not Drew but I think he would agree). As liquidity opens up and defaults wane, prices will stabilize. According to Coutrywide-that’s late 2009.

   c. Possibly speeding up the process is the unprecedented involvement of our Government-The Fed, Congress and Regulatory agencies. Bottom line-they don’t want foreclosures and further price decline if possible. What they didn’t want to hear 9 months ago, seems to be open to discussion now-anything to keep people in their homes (rate and term modifications, tax breaks for short sales, raising conforming loan amounts, etc) and create quicker stability is on the table.

 So thats what is happening-high rates of default and large inventories of foreclosures driving down prices on one side, lack of new building, no real unemployment problem, lower interest rates and possible Government involvement on the other. A few other opinions I found interesting:

The whole idea that loans coming due and owners couldn’t afford the “reset” hasn’t been nearly the reason for foreclosure that people speculated a few years ago-mostly because the reset rate is at or BELOW in many case what it was before the reset. Not in all cases of course, but as I wrote 2 years ago, far more foreclosures have been created by investors and owners walking away from a bad investment than people that truly can’t afford their “new” rate. For those, Countrywide alone has modified over 60,000 loans.

 The problem of getting “short sales” approved has improved but is still a disaster for many potential buyers and their agents. There are far more short sale listings than there are foreclosures. Unlike the 1990’s though, lenders like Countrywide have sold these loans to literally hundreds of investors. They are the ultimate decision makers on accepting these and it remains trying. Still, the investors-unlike most of 2007-are starting to be more open to resolving deafults with short sales and the response time has clearly improved in most cases.

 There was a lot more shared but these were the high points. It confirmed my feeling that the market today is a lot like 1997-prices are still declining and foreclosures will continue for awhile but there are underlying trends that lead me to think that 1999 (read-stability/appreciation), isn’t that far away-our inventory is down to 1945 homes today from 2500 at the beginning of the year. I’ll keep you informed! 

What the Lower Interest Rates SHOULD do

Unless you have been avoiding the media entirely (which is often not a bad idea), you probably have heard that this week Congress will send to the President for his approval an economic stimulus package. I have no interest in analyzing what this may or may not do except for one aspect-the provisions that will likely lower interest rates for many of my clients. It seems hard to believe that less than a year ago The Fed was worried about inflation and raising the cost of money. In retrospect it seems like it was not the right decision-with higher rates, lenders unwilling to lend for new purchases, rising foreclosures all combining for the worst 6 months in Real Estate (or retail, automotive etc) that many can remember-ever.

This Stimulus Package is an aggressive attempt to stem the negative tide on many levels. Lets focus though on what it can do for you. First, if you have a loan between 417,000 (the current “break even” point for jumbo loans) and 729,950 you will now be able to REFINANCE into a low interest “conforming” loan. Today, for example, you can get a conforming interest rate of under 5.5% with jumbo loans closer to 7%. The goal of course is to help CURRENT homeowners lower the cost of their monthly payment allowing them to stay in their homes (reducing the number of foreclosures) and have extra money each month to spend on consumer items. This is a huge and necessary step but it will only be available for ONE YEAR. If your loan is currently between 417,000 and 729,000 and is over 5.5% then I can direct you to a special 800 number that I have just set up (800-680-8053 xt320) that will update you weekly on rates, changes in lending guidelines and other important facts to take advantage in the next year of this oppurtunity. Secondly, the increase in conforming loan limits is designed to spur home purchases so that buyers can buy more home for less money. This helps areas of higher prices like Santa Clarita where the median price is about $600,000. There is though a big HOWEVER to all of this.

What agents like myself are painfully aware of is how CONSERVATIVE the lenders are now in virtually every aspect of the lending process. First, unless your credit is pristine, it may be difficult to buy or refinance at these new lower rates. Second, because of the soft market, all of LA County is considered declining and as such, the appraisers are asked to basically take current market value and adjust down 5% for the “expected future value”. If you are buying this isn’t too big an issue. If you are trying to refinance however, you may not have the required LTV (loan to value) to refinance-the bank may say you don’t have enough equity to qualify, especially if you are in an area where prices are dropping more than others (See last months blog for those areas). So, if you are starting to get the idea that what should be welcome and easy (refinancing at lower rates because the conforming loan limits went up), may in fact be something the lenders aren’t too excited about-your right.

I was privvy this week to an inter office memo from one such large Mortgage Compnay and it all but said how tough they were going to make the process. As such, I will do everything I can to keep you informed, to help you strategize and ultimately to maximize these important changes to your benefit