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There is a second and massive wave of foreclosures headed our way. On this episode of The Real Estate Report with Chris Williams, you will find out about what's at the source of this second wave and learn about how you can profit from it.
Hello and welcome to today's show. I am Tony Vignieri, your moderator for the program. Our topic of discussion today is the second wave of foreclosures. Its coming and we're giving you a peek of what's around the corner and how you could be prepared for it whether you're a real estate broker, an investor, a buyer or a seller. Let me start off by introducing you to Chris Williams, the CEO of Blue Sky Capital in San Diego.
Hi Tony. It's great to be on the show with you.
Blue Sky Capital is a real estate investment firm, a private equity company that buys and sells distressed real estate and it's helping to rebuild neighborhoods. Chris is an expert in real estate investment, finance and syndications. He has managed more than 300 real estate transactions and spent 13 years managing real estate teams. He is a proud recipient of the Prudential's President's award and won that award nine years in a row. Chris, is this really the case there's a second wave of foreclosures coming? I thought we are passed the worse. What's going on here?
Well Tony, it really is the case. There is a second and massive wave of foreclosures headed our way. I'll tell you a little about it. On 60 Minutes, a correspondent by the name of Scott Pelley did a really compelling report on this, in fact listeners can find that report at 60minutes.com, just look for the next wave and what Pelley reports is that there is an abyss much deeper than most people thought as it regards mortgages because there's a big second shock headed for the economy. So, they went and did an interview with a guy name Whitney Tilson, who is an investment fund manager and he really made a name with himself with investors and he said that we have seen the greatest asset bubble burst in history. The single biggest piece to that bubble is the US mortgage market and he says were only about halfway through the bursting of that bubble. So, let me tell you what he says. The first loans that defaulted in 2008 when the market collapsed were the subprime loans. Now, a subprime loan is a loan that was made to a borrower that had no credit or low credit and had no compensating asset. They didn't even have to verify their income and I was a subprime borrower of which we gave trillions of dollars of loans to those borrowers. Well, when the market tipped over and did crash in 2008, those borrowers were the first to go with it. So, all the subprime loans defaulted first and those are still working their way through the system. However, with this report on 60 Minute talks about, it talks about that was only the beginning because from 2000 to 2008 with the massive building boom, we saw across all the major metropolitan markets in our country. The financing that went along with it were two types of financing; one is called Alt-A and other is called option ARM loan. Now, on option ARM loan, ARM stands for adjustable rate mortgage.
So, that was a type of loan, Tony, where let's say that you bought a house Tony and you had different pay options. You could pay just the interest or you could pay principal and interest, or you could even pay less than the interest accrued known as a negative amortization loan. (Crosstalk) Tony.
Yeah, right exactly and if I could just interject here, so, it's people holding these other types of loans, the subprime started it, but it's holding these other types of loans that haven't reached those point yet, is that correct?
Well, that's exactly right. Because you see Tony, when these loans were written, they were written at what's called a teaser rate. So, these borrowers will come in and buy a house and their initial teaser rate would you say 2% or 3% interest, but that loan is tied to different indexes around the world. It could be the Libor or it could be Prime, who knows what it is, and at the end of that teaser rate whether it's two years, five years, seven years that rate is gonna adjust according to what the index did. Well, most of these teaser rates were about half of what the actual rate should have been. So predictably, there was actually a trillion dollars in loans that were written during this time period. Most of loans are gonna go up in interest rate when those loans adjust. So imagine Tony, you were in a house that you are paying on a 3% initial rate and the initial rate is gonna go to 4%, 5%, or 6%. How could you handle that payment?
Yeah, hence the difficulty in what's happening with -- still what's happening with the unemployment if a person is having difficulty making their mortgage down and then it goes up that's even an extra burden.
Indeed it is. That's for the people that are really in distress, but you got this whole other group of people that have jobs and can make their payments, but they're so underwater in their homes right upside down. They all way more than its worth that it doesn't make sense for them to keep paying to think about it. If you have $800,000 loan on your property that house is now worth $600,000 and now, your interest rate is gonna go up and your payment might double. Why would you keep making that payment is what the strategic default will say to themselves. So, there is a lot of stress in the market place coming because of these loan resets. Now, if you watch the national news, you know that the Fed has held interests rates down. In fact, they are historically low. The lowest rates we've seen ever. Well, all of has done Tony is that this kicked the problem down the road because rates have to go up. They literally can't go any lower and when those rates go up, all these loans are gonna adjust up and when these loans adjust up, the payments will go up then the borrowers will be confronted with: a. can they afford the payment and b. does it make sense given how upside down they are. So, you think Tony, there is a second and massive wave of foreclosure coming our way and then particularly since the bank just settled with the 50 attorney state generals, so that now they have fewer litigation problems as it regards their foreclosure process and underwriting processes, so we are seeing the banks really crank up foreclosures. In fact, we saw a several 100% increase and then noticed a default filing just this last month alone.
Wow, wow. So, there really isn't a way out of this, this has to work its way through the system, correct?
It does Tony. The consumers are trying loan modifications. Well, that doesn't really work because the loan modifications aren't real modifications. All the banks are doing is taking the past payments putting them on the back of the loan as a balloon payment, so it's not a real modification. It doesn't address the negative equity. The other thing about that is there's some short sales get done, but the short sales are problematic, difficult to get done because the banks have to convince the investors to actually take the discount. So, you see Tony for the past hundred of years plus, we've had a foreclosure system in our market here, in our economy and that's the only real way to set this homes back to real market value and to get real qualified borrowers in there.
I see, so it is kind of why it chugs along just because of that process.
It does indeed and then when you couple that with the government intervention programs, the White house has really great intentions, they want to help the distressed home owners. However, all that actually does is slows down the process of things moving to the foreclosure process, things getting set back to market value and having a real qualified borrowers in the home and frankly, the White house will keep coming out with more and more programs, which will only delay this. We have many years until this has worked its way to the system.
Wow, wow. Of course, we are in San Diego in one of the suburban areas here is an area called Carmel Valley, which you say will be hard hit for foreclosures. Give me a sense of why and what that area is like the type of homes, families living there, income level and why this area you believe will be hit hard?
Sure. I do believe Carmel Valley will get hit hard and here is why. I'll tell you where it sits, its sits in the north county of San Diego. It is frankly some of the most affluent area of San Diego. The median income for Carmel Valley is over $90,000 a year where the median income for the county of San Diego is under $75,000, so it is significantly higher, and the type of person that lives there is the highly educated, employed families. So were have employees there that work at SAIC, they work at Qualcomm, they work at Nokia, they work at Sony, they work at HP, they also work at the big biotech medical firms all throughout the university town centre and the golden triangle. So, that's the type of person that lives there. It also has some of the best schools in San Diego. So, that's the kind of the area. Now, let me tell you why I believe Carmel Valley and the other areas of Southern California just like Carmel Valley are gonna get hit. From 2000 to 2008, there was a very big building boom, the big builders came and Pardee, Williams Lyons Homes, Davis and Construction, Shea Homes. All the big ones came through and built homes, and when they did it, they had in-house lenders that were in the models with the sellers of the homes. So, when the borrowers came in to buy the home, Tony, they had financing already in place when and the financing was zero down (Crosstalk).
Tony, even some of it, it is hard to believe. Some of the financing were actually negative down. In other words, people did not have to pay any of the closing cost because they got worked into the loan.
There was no shortest borrowers that wanted to take advantage of this unbelievable financing opportunity to get into a new house plus, there was a feeding frenzy, you got to get in, you got to get in, you got to get in, your gonna miss it.
Yeah. I remember when there were lines forming just taking it into the home.
Oh! Yeah, yeah, yeah. I was a witness to A Shea Home development over in Carmel Valley that they release six homes, there were 90 people on the lottery inside the model and they drew six names.
I watched that go down, which is the frenzy like that. So Tony, here is the problem though. The majority of people have very little skin on the game and they lost 20% to 30% of equality in their home and they are about to face an increase in interest rate, which means an increase in payment. When you put that together Tony, Carmel Valley and the areas all throughout frankly, the country that are like Carmel Valley, are going to have a very big mortgage shock coming their way and particularly those people are gonna default those homes must foreclose.
I watched that go down, which is the frenzy like that. So Tony, here is the problem though. The majority of people have very little skin on the game and they lost 20% to 30% of equality in their home and they are about to save an increase in interest rate, which means an increase in payment. When you put that together Tony, Carmel Valley and the areas all throughout is frankly the country that are like Carmel Valley are going to have a very big mortgage shock coming their way and predictably those people are gonna default those homes as mass foreclose.
Right and as you said that goes back to what we discussed at the beginning of the program, these other loans that are still out there, where people were okay, but now they are gonna reset and the payments are gonna increase and its gonna make it more difficult.
Indeed, it is. The Fed has said they're holding rates down for 2014. Okay, that means we're not even gonna deal with this until 2014, which is of course two years from now. So Tony, we got a long way to go on this as a result, as frankly, the government intervention on the said programs.
Yup, right. And of course, we only have a couple minutes left Chris, but this whole situation with the housing market is actually what prompted you to start Blue Sky Capital in San Diego. Give me a synopsis of the company.
Yeah, sure. So we're a company at San Diego, a team of real estate experts and we are a little league experts over a 150 times in the last 13 years. This group of people have bought and sold properties, distressed properties of some kind, a flip we call it. So, we went out and we created a company, so that the everyday investor with $50,000-$200,000 can get that money in play in this real estate market for buying and selling a foreclosure, short sales, etc. Because if someone just had a couple of hundred dollars around, that's great they have that money, but they need a team and a system to be able to get it into play into this market, we've created that team and that system.
Got it. And again, isn't this more -- as you are saying, you're buying distressed properties, rehabbing them and then putting them back in the market for families to be able to purchase and move in. Isn't this part of rebuilding neighborhoods and part of the process that needs to happen to reset the market?
Indeed Tony, you know we really believe that we are part of the solution here, we are coming in one house at the time and we are rebuilding San Diego neighborhoods. We think that it's up to us, the company just like us to really be accountable for the health of our real estate market and so that's what we're doing.
That's great. And again, people can learn more about Blue Sky Capital by going to the website. You want to give us the website address again?
Sure. You know you can join us at blueskycapital.com. There is a blog feed there. This radio show will be on there. There is actually a section called real-life case studies, so you can see the deal that we have done and are working on.
That's great, that's wonderful. And it take away from today's program. Again, as Chris said, the second wave of foreclosure that are coming were not through this yet, but it is working its way through the system.
Great. Thanks Chris and thanks for joining us today on the real estate report with Chris Williams. Join us again for our next show. We will discuss how government and bank loan modification programs, as Chris mentioned, are really just pushing the problem down the road. Have a great real estate day. Goodbye everyone.
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