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Find out how government home loan intervention programs and loan modifications are just pushing the problem down the road. On this episode of The Real Estate Report with Chris Williams you'll learn how you can profit from the housing market reset that is causing an enormous number of distressed properties, REO and short sales.
Hello and welcome to the real estate report with Chris Williams. I am Tony Vignieri, your moderator for the program. Today our topic of discussion is mortgage modification and how they are really pushing the problem down the road. With me always on the show, it is real estate expert Chris Williams, the CEO of Blue Sky Capital in San Diego.
Hi Tony. Thank you so much for moderating today.
Hey Chris. It's always good to hear your insights about what's happening in real estate. For our new listeners to the program, some background on Chris and his real estate investment for Blue Sky Capital. Chris Williams is an expert in real estate investment, finance and syndications. He has handled more than 300 real estate transactions and spent 13 years managing real estate teams. He is the proud recipient of the Prudential's President's Award and he won that award nine years in a row. In 2011, Chris launched Blue Sky Capital, a private equity firm in San Diego that is helping to rebuild neighborhoods through Blue Sky Capital's systematic and disciplined approach to buying and selling distressed real estate. Chris, we touched on this briefly during our last show about mortgage modification programs that really do not work. Why don't they work?
Tony, it is a great question. You think that doing a mortgage loan modification would be a very, very good thing. If not then here's why, simply because they are not real modifications. All these reports that you hear coming from the banks about the number of modifications they have done are simply repayment plans. See Tony, for you and me, if we were to get a modification, here is what we would want. We would want an interest rate that's consistent with today's interest rate, which was somewhere around 4% or less. We'd also want our loan amount to be what the property is or at least more than the property's worth. So, you see the loan modification program that exists today don't address the single biggest villain in the recovery of our real estate market which is negative equity.
So these things just sound good. I know if you are in your home and you are underwater and you are having a trouble and you are looking down the road and you hear about these it is encouraging, but again, they just sound good bank mortgage modification and government intervention.
Yeah, they really do sound good, but at the end of the day, it's just doesn't work. The loans are really modified. They take the payments that were missed they put them on the back and most of the time, are you ready for this -- most of the time, the borrowers payment goes up. Here is the scenario, this is a real scenario. I know someone that was behind on their mortgage, so they did went to do the loan modification. They were behind a year worth of payments. The bank said here is what we do at the modification, we will drop your interest rate by 1% and then we will take your missed payments and you pay us back over five years. Tony, it ended up doubling the monthly payments. Now, give me the logic.
You got a home owner, who can't make the payment, where it is and the banks idea of a modification is to double the payment because they took what was missed and spread that over five years and added this to the normal payment.
Wow, wow. And I've even heard these stories where somebody is working -- communicating with the bank, supplying all the paperwork needed and then a couple of 2-3 months go by and then they call back again and then the bank say, "I don't know, I don't see any of your paperwork here", I mean a lot of crazy things going on.
Indeed. It is not unusual for a person attempting a loan modification to have to send the same information over and over and over again. It's just a terrible system. The banks are not set up for it and frankly, all they does is the lay the inevitable.
And I know you said this before, the important thing here is for these things just to work their way through the system, correct?
That is what important Tony. The real estate market for as long as we can do in real estate here has had one mechanism to take borrowers that aren't making their payments and to move them to the process, its called foreclosure. See, if you had a deal for short sale not many, but some the bulk of the properties all across the country must foreclose. It is the only real mechanism that we have in our economy to set the property back to its real market value and to get good qualified borrowers making payments in there.
So and again, if they're not effective programs and I've read that the numbers had it really, really only a small, small percent are on this where its working. So, all the test to happen to get to this housing reset, correct?
It does indeed and Tony listen, we're a long way off from this being done. RealtyTrac says that there are 11 million mortgages underwater in our country, 11 million.
And there is another 2-1/2 million that have less than 5% equity. So let's call it 13-1/2 million that must work their way to the system. We're only foreclosing on across the country a million or less a year. At our current rate, it will take 13 years just to move through all the upside down mortgages. So, you realize, 13 years in out of million years for 13 million mortgages.
Wow. Wow. And again, that means if you know we've heard the terms distressed homes and for people that aren't familiar with that, explain the terminology again.
What is a distressed home? What we're calling a distressed home is this, a distressed home, it doesn't mean the house itself is distressed, it really means that the borrowers or the owners of the property are in financial distress. So, there's lot of things that cause financial distress. Let's face it, in 2008, when our economy went over the edge of a cliff, a lot of people lost their jobs and with that job loss, people had to tap into their savings to try to maintain their lifestyle. They had to tap in to their savings to try to keep that house afloat and so a distressed home is somewhere now or someone is missing their payments. There is attempting a loan modification. They might be attempting a short sale or they have given up entirely and their house is just waiting to go to foreclosure, which by the way can take a long time in California, the average time for a bank to be able to foreclose is 18 months and that's usually after the home owner has not made payments for anywhere from a year to a year and a half before that. So, if you didn't ask home owners here in California often are in their homes for three years making no payments before they moved out.
Wow three years. Three years.
And again, this process of getting the distressed homes through the system -- of course, Blue Sky Capital is helping with that process helping to rebuild neighborhood, but explained again the process that you used, I mentioned it in the beginning of the show, you know a systematic and disciplined approach to buying and selling distressed real estate, but explain that whole process of Blue Sky Capital does.
Well the Blue Sky Capital is here really helping everyone across the board and here's what I mean. We are part of the solution, for investors that want to tap into this enormous opportunity and make some money with their money. We are also part of a solution, Tony, because we are one house at a time. Rebuilding neighborhood here in San Diego and Southern California. So here's what it looks like for us. We are knocking on doors. We're talking to home owners that we know we are behind on their mortgage payments asking them if they would like to sell their house and we will buy it. We also have realtors all throughout Southern California look into properties for us and when they have the right one, they bring it to us and we look to buy it. What we also do Tony is we are at the daily foreclosure auctions after going to a very regular detailed systematic approach like you mentioned and we are buying this properties at the foreclosure auction as the bank brings in the foreclosure.
And this is again something Blue Sky Capital specializes in and I wanted to make a note of something I saw in the local paper here and I am sure it's in the papers all across the country. It's the people that come into town and say make money through foreclosures and it's easy to do. It's a bit more complicated than that I mean you know as you are indicated, it has to be a system that is disciplined to make sure you do everything right, correct?
It really does. There are a lot of people -- everybody's talking about buying foreclosures, right. Everyone is talking about it, but very few people are really doing it and here's why, it is an enormous job. Tony, get this. On average everyday five days a week you are doing the business day, 12,000 properties are scheduled to foreclose everyday in San Diego.
It's like over 15,000 a year, so imagine this, but out of those 12,000 about 80% postponed and will show up either a week or a month later, so as the number start to pile up, who as the individual investor has the time, energy, and financial resources to track that many properties. What they really don't Tony and that's why we created our systems, that's why we created our business and we created a custom for proprietary tracking software so that we can track literally thousands of properties that are thinking their way to the system and when it's time for them to sell with their cash in hand, ready to buy.
And I think that's the key as you are saying. You are tracking properties. You are not just going in and looking at the property and oh, we could take this up because it's -- what the ending price that you might take it up or it might be different in what the original scenario was in the beginning.
Indeed. However, you know we have very strict criteria Tony and we know we haven't recalled on max pay in our property and how we get to that is really lengthy and a well done process, but once -- when we had our max panel property and this is going to sell higher than that then we just bail out, we will wait for the right deal, we are very patient, we're experts. We know what houses will work and we know what houses won't work.
And again the key is, as you're going in buying the properties, rehabbing them, that helps the neighborhood, that takes that house gets to water back and the grass, the shrubs. It makes it look presentable and helps everybody on the block.
It really does. Whenever we come in and buy a house Tony, after we are done with it. Not only have we stabilized that neighborhood, we've actually increased the values. Statistics say that for every neighborhood that there is a one foreclosure in the neighborhood, it drops the values on average of 10%.
Just because that foreclosure is there. So we take that foreclosure out of the market place and one house at a time, we rebuild their community. Now, back to the topic of the show, the government intervention programs are literally slowing down this process. If the government intervention program weren't there and if the option for a loan modification wasn't there, then these things would be going through foreclosure faster and we as a nation will have a much healthier real estate economy, a real estate market, if this program weren't in place. The program slow things down, the program is do not work and by the way about modification get this, 65% of all the loans that "modify" end of redefaulting.
65% I am going to tell you a little -- I am going to tell you why that is. This loan modifications, which I said aren't real loan modifications. The reason why the banks are willing to do them is not because they're nice people and they might be, but that is not why and it is not because they clear the asset of the book. The majority of modifications happen because the banks have lost the paperwork when they sold the notes back and forth.
And whenever they have borrowers for the loan modification, they get a brand new note signed so that their paperwork is in place, so that when it comes time to foreclose, there is no question that they own that mortgage that they have the right paperwork and that it won't -- this way they won't have to be worried about being challenged in court. So you see if the loan modifications help the bank so that they can ultimately foreclose and 65% of the time they do.
Wow. That's interesting. That's an interesting statistic and certainly a great insight that you are providing. We only have about little over a minute left. Any closing thoughts for the listening audience, if you are one of the people in a home.
Yeah, I certainly do. If you are listening to the show today and you are upside down in your mortgage and the loan modification hasn't worked and it's time for you to move on and call us. Better yet go to our website, go to blueskycapital.com, click on the context of button. We will get right back to you. We'd like to talk to you. We will buy your house. We'll negotiate for the bank -- with the bank -- for you so that we can get a short sale done and we will be part of the solution for you to have a dignified confidential way from out from under this upside down house. Now, the other side if you are an investor, you've got some money that you want to put to work and you want to make it grow. Go to our website. We'll be happy to talk to you as well.
Great. Well, as always, it's good chatting with you again Chris and for our listening audience, thanks for joining on today's real estate report with Chris Williams, around the air weekly to keep you updated and informed about what's happening in real estate today. Have a great real estate day.
It's good to talk.