This post is from the "tell your story" thread a few down. I felt it was one of the most reasoned, honest and well done comments ever left on HP, deserving of its own thread... here's some highlights:
I'm the former RTC REO Marketing Analyst, but prefer to be Anonymous because I know some people are going to become very alarmed and very angry when I discuss what happened the last time.
When I left the RTC at HomeFed Bank in 1991, the RTC was in the process of closing down. It was the tail end of that cycle. While at the RTC, I personally sold bank REO for 20%-30% of what it appraised for just two and three years earlier. Not for 20-30% less, but 20-30% of that real estate's former value from just 2-3 years earlier.
I remember telling people in 1989-1990 that the writing was on the wall and nobody listened because there was no publicly available data (brokers like me knew based on MLS data only available to members) to cite in support of the impending crash, and the media, especially newspapers, weren't going to report it because their largest advertising constituency is Realtors/brokers. With the internet and the info that is available on it, you'll soon see the amount of time it takes for real estate to crash significantly compacted this time. Just look how fast things have turned bad since just before the holiday season started last year.
To those who ask how long to wait and how low will it get, here's my answer. Even though the Internet will compact the time it takes to crash, I still say don't even think about buying for at least another 18 months. Don't be fooled by ocassional news or market conditions that lead you to think things have turned better because that always happens on the way down, just as it does with stocks on companies you know are "Dead Man Walking".
As far as the percentage, don't think in terms of what percentage it will go down relative to the overall market, but what discount you can get on hardship situations, like bank REO. I think you will be able to get property for 20-30% of what it appraised for in 2005. Trust me.
IT WILL GET VERY UGLY
April 17, 2006
An excellent HP post from a former Resolution Trust Corp analyst
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13 comments:
That is excellent insight and I want to thank the author for providing such an unbiased, "inside the scenes" look at what happened.
After listening to the yuppie fools throw out economic fundamentals in 1999 to support ridiculous stock prices it amazes me that less than 5 years later people were happy to do the same again in support of unrealistic home price appreciation.
The friends that I've talked to regarding this just look at me like I'm some kind of fool (at least I put my money where my mouth is) and resume their brainwashed lives. I'm convinved they are purely terrified at what may happen to the local market here but living in denial is much more enjoyable than creating actionable plans.
Does he mean 2005 or 2003?
My Phoenix styrofoam palace doubled in value in 2 years (2003-2005). Let's assume the price would have to first revert to what it was 2 years ago (lose 50% of value), then a 20-30% haircut off that.
However, that would only take the price of houses in Phoenix back down to 2000 levels, at the beginning of the bubble.
Unless you assume a rate of inflation that justifies the current fair value of homes much higher than 2000 levels, that is not exactly a crash but simply reversion to the long-term trend.
For things to get "ugly", I would expect to see prices come below their 2000 values.
Wrong, wrong, wrong, the price of a home in any market, needs to go back to where it was in 2001, there has been no real wage increase, and no real reason for prices to go up at all!
I didn't think 70%-80% reduction was really possible, but now you got my hopes up.
18 months seems too soon. But if a 80% discount lands on my lap, I won't care what year it is.
Everyone at my work believes in the bubble now including the home owners. They think it will correct but that there is no way I can get a 50% discount (or what I originally paid for my old house).
I have a question for the blog author.
Who is owning this highly risky IO and negative amortization loans? The banks usually sell it off to someone...pension funds, hedge funds.
Conforming loans can be sold to Fannie Mae/Freddie Mac, but who would own these risky non-conforming loans?
There may come a time when foreclosures start, the note holders start losing money and they no longer are willing to buy more paper. The funding dries up and only conforming loans are sold...which would put the prices down to the point where people could afford the houses.
So that is a blog entry possibility. WHO OWNS THIS RISKY PAPER?
I was at dinner Saturday with a Smith-Barney adviser and we discussed how they were different. S-B was not overly exposed to the MBSec sector. I asked him where their money market accounts were invested. He got real quiet then real pensive and admitted that much of their interest income was ultimately some form of consumer credit especially mortgages. Kudos for admitting what i obviously knew but if I hadn't pressed him, he might still be spouting the company credo.
Everything this insider says is exactly what I've been saying so of course he's correct. ;-) Seriously, the biggest new problem this time is going to be the speed at which things correct. They weren't prepared for the Mar 2000 tech bubble speed and they won't be prepared for the Jun 2006 housing market speed either. Like generals, federal regulators are always fighting the last war.
Personally I don't think we'll have sorted out the wreckage in only 18 months, I'm thinking 30 months; Fall 2008.
the price of a home in any market, needs to go back to where it was in 2001, there has been no real wage increase, and no real reason for prices to go up at all!
Except inflation.
Usually the homebuilder or some small mortgage company owns the riskiest loans because nobody wants to buy them. They will then sell it off at a big discount to a private group, which is what happened to Centex Financial. I know that GMAC does own many risky auto and home loans. GM still owns 49% of GMAC after selling off 51% to a private group. Washington Mutual also supposedly owns many risky loans
Don't forget Home prices are sticky due to Seller resistance. New Home Prices will be a better indicator of sliding prices. Sellers of existing homes will be chasing the prices down till it's all too late.
I think your timing is rather too soon. I would bet prices of homes will be lower in 5 years time.
SV Geek.
I think there is some confusion in this thread.
REO (from the article) refers to Real Estate Owned divisions of places like the bank or Fannie Mae. These are the properties they are stuck with because of foreclosures - banks don't actually want to own these properties. They are willing to take the loss on the sale. These are the places to get 20-30% on-the-dollar properties eventually, prices should not get this low on the "street," even if they decline.
RTC insider-
I wanted to chime in to the chorus and thank you for the excellent post.
From Former RTC REO Marketing Analyst.
First of all thanks for all the kind comments, which prompted me to post again.
To Anon at Monday, April 17, 2006 11:59:54 AM is EXACTLY CORRECT. That's why I said don't think in terms of what percentage it will go down relative to the overall market, but what discount you can get on hardship situations, like bank REO.
The market overall won't go down to 20-30% of 2005 levels, but there will be tons of REO that you can get at that price, and that's what's important. There will be property owners who claim their properties are worth more than the much lower sale comps sprouting up all around them. Ignore those people. They are insignificant. Those property owners are like ugly women who say they'll never go out with you, when you never showed them any interest in the first place. It just makes them feel better about themselves. Likewise with property owners who say they would never sell at those prices, or that their properties are more desirable, etc.
To Anon at Monday, April 17, 2006 11:02:03 AM. Yes, you are right about seller stickiness, but let them be sticky all they want. You want bank sellers who aren't allowed to be sticky, and when enough of those REO sales occur, those sellers who were sticky will just be confronted with a whole new set of sales comps that are even lower than before. People who are greedy tend to be entitlement-minded. They think good fortune is owed to them, and consequently they tend to hang on to over-inflated asking prices that have long passed and in the end they get wiped out. This is actually good because we shouldn't want these people in the market. A wealthy real estate magnate very recently said that many of the real estate investors in today's market are like inexperienced polo players. They are not only dangerous to themselves, but to everyone around them as well.
To answer Tom DC/VA questions:
1) was the 20-30% of previous value for residential or commerical real estate, or both?
It was on both. I sold a downtown commercial building that was HomeFed Bank REO near 6th and Broadway to one of the buildings tenants who occupied about 30-40% of the space. Their mortgage payment with no down payment was going to be less than the rent they were previously paying for just their space and now they were going to own the entire building. The tenants were two foreigners who couldn't believe the deal they were getting, but that's what we had to sell it for. The RTC had this ridiculous concept called DIV. It stood for Derived Investment Value and was the Bank's book value on the asset plus transaction costs to sell it, which had absolutely no connection to market value of any kind. It made no sense and was the government idiotic way of trying to justify the low prices they were selling REO at.
2) were properties sold individually or in bundles?
Both, but many of the best deals were packaged deals that large Wall Street investment firms were buying.
3) were the properties in a specific region or across the nation?
I sold HomeFed Bank REO that was in Florida, Arizona and California primarily
To ANON at Monday, April 17, 2006 8:06:27 AM about "Who Owns This Risky Paper?" It depends who you ask. I don't think there's an answer that applies consistently. From my experience, mortgage companies tend to sell everything whereas many banks tend to hold some or most of their loan portfolio. Most lenders and banks will happily tell you if you ask.
I said I would post a story involving the RTC and the hypocrisy of bleeding heart secularists. Here it is.
The RTC at HomeFed Bank had so many multi-family REO properties that they decided something good should come out of it, and the great idea they came up with was to offer many of the multi-family REO properties to non-profit organizations who would rent to low-income folks. OK, not a bad idea so far. The RTC had those of us in the REO marketing department attend a seminar they were putting on for those who wanted to acquire apartment properties from the RTC and offer low-income housing as a non-profit organization. The seminar explained how to set up a non-profit, what favorable pricing and terms one could get when buying an RTC apartment building for low-income families, and the rules regulating these low-income projects. So when the day arrived for the seminar, I expected to meet alot of Father Joe Carroll types from Saint Vincent DePaul, but I started noticing alot of people showing up in late model Cadillacs and Mercedes Benzs wearing alot of flashy jewelry, which wasn't what I pictured when the RTC said non-profits. Almost all those who attended spoke of how they wanted to help those less fortunate secure adequate housing at a reasonable cost, and I thought OK, maybe their heart really is in the right place, but as I would soon learn, these folks (of every color) were exactly like Jesse Jackson, just using religion to exploit the poor for their own personal gain and here's how the scam worked. The individuals setting up these non-profits would capitalize them with their own personal funds, which they would lend to the non-profit entity at outrageous rates of interest. In addition, they would secure off-site management contracts between themselves and the non-profit entity and it all worked beautifully, because not only is the income on the property not taxable, but more importantly, the largest expense of real estate ownership, which is taxes, goes away altogether. So these non-profits that held title to these low-income apartment projects could easily service debt at usury rates of interest and also pay exorbitant management fees because not only were the properties acquired with very favorable terms and prices, but they were also given tax-free status as well. Non-profits were never so profitable.
The reason I said bleeding heart secularists is because many of those in attendance whose behavior I witnessed were people with no conscience which is generally not associated with people of faith who believe there are consequences for their actions in the afterlife. These people were bleeding heart pretenders and no different than the Jesse Jacksons of the world who come in all colors.
On a different note.
Also keep in mind that not everybody you really believe is a real estate investment genius, is.
A very smart banker I worked with for a short time once told me something that just blew me away. It was one of those short clever sayings that goes very deep in its implications. That banker said it explained how many high profile real estate moguls like Donald Trump made their fortunes. The saying was as follows: "If you owe a million, you have a problem, if you owe one-hundred million, your bank has a problem"
This is another aspect of leverage, but not quantitative leverage as in no money down, but qualitative leverage, which is only available to a few marquee players. Here's how it works. If you are a marquee property owner whose name adds value to a building like Trump and many others, your building's value will have a premium in excess of the normal market rent it would otherwise command. If you can get bankers to "heavily" finance your properties based on their marquee value, then when the market turns bad, you will have far more leverage with them, than they will have with you, because without your marquee name and association, the building is worth far less. This is how I heard Trump forced his bankers to rewrite his loans on terms that were more favorable to him and at big losses to them. His leverage was to give the property back, without the marquee value of his name, which would have created bigger problems for the bankers, especially considering how big Trumps properties are and what effect they would have on a company's balance sheet as REO. That's what's meant by the second part of the saying.
Hope you all find this interesting.
Mr. Former RTC REO Marketing Analyst,
Thanks again for the detailed post.
It was an entertaining read.
With regard to the hypocrisy of bleeding heart secularists, well I'm not that surprised as greed comes in all shapes and colors. The sheep will always get slaughtered by the blood suckers.
I'm a secular, but I have a conscious.
I like to sleep at night without any guilt.
SV Geek.
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