Tuesday, November 17, 2009
What's going to happen to local real estate prices in 2010? We discuss the latest on the local real estate market with broker Matt Battiata, and talk about the wave of foreclosures that's expected to happen next year.
MAUREEN CAVANAUGH (Host): I'm Maureen Cavanaugh and you're listening to These Days on KPBS. Last week, the chief economist for the National Association of Realtors told about 20,000 members meeting here in San Diego that housing prices and the pace of sales will pick up next year. Unfortunately, not all real estate experts agree with that.
We first spoke earlier this year with local real estate broker Matt Battiata, CEO of the Battiata Real Estate Group, as he headed to Washington, D.C. to talk to lawmakers about the real estate market. Now, he's headed back to the nation's capitol to try to get his suggestions heard again. And welcome back to the show, Matt.
MATT BATTIATA (CEO, Battiata Real Estate Group): Thank you. Thanks for having me.
CAVANAUGH: I want to invite our listeners to join this conversation. Do you think conditions are ripe for a rebound in the San Diego housing market next year? Well, what would you like Matt to tell lawmakers in Washington to help get real estate moving again? Give us a call with your questions and comments about real estate in San Diego. The number is 1-888-895-5727, that’s 1-888-895-KPBS. So, Matt, why are you going back to Washington, D.C.? What’s the purpose of your trip?
BATTIATA: Well, as you mentioned, I went a year ago, almost to the day, I went last January, and at the time the message that I brought to the House and the Senate was I knew there was a new administration, obviously, I knew they were going to be drafting new legislation to help stem the tide of foreclosures, and I went representing, at the time, over 500 Southern California homeowners who were trying to avoid foreclosure. And my message, I had some specific recommendations but the bottom line was that whatever they drafted, they had to put some teeth in it. In other words, I knew—everyone knew—they were going to bail the banks out but they had to make specific recommendations, in other words tell the banks that they had to do certain things because if they made it voluntary, what I told them at the time is, I pretty much guarantee the banks are not going to do it. And at the time they said, you know, we are going to make it voluntary, it’s a free market, we can’t tell the banks what to do. I said, well, you’re giving them billions of dollars, I think you can tell them what to do. If they don’t want to listen to you, they can not take the money. But, unfortunately, they did basically make it voluntary. I mean, the Obama plan was a great plan but it was voluntary and what’s happened in the past year is the banks have really just, in my opinion, they’ve just gone through the motions because they needed to do that to get the bailout money and the reality is they have no interest in modifying people’s loans to any meaningful degree. And what’s happened is the free market has pretty much taken its course and we’ve seen lots and lots of foreclosures. We haven’t really seen them yet in San Diego because we’ve had four foreclosure moratoriums and the purpose of those moratoriums, four in a row, the last one ended in September, the purpose of those was to give the banks – ostensibly give the banks time to help homeowners avoid foreclosure. What’s happened is, it’s just been this giant limbo period and so now we sit here in November of 2009 and we have a absolute deluge of foreclosures that are coming because what the banks have done is just go through the motions. They haven’t modified loans to any real degree and so we have a tremendous number of people here in San Diego County who haven’t gotten any help from the banks and now, unfortunately, they’re going to go to foreclosure.
CAVANAUGH: Explain to us what a foreclosure moratorium actually is. Obviously, it stops foreclosures from going through but where in the process are people? What does it actually stop?
BATTIATA: Well, it stops the bank from filing a trustee sale so these are – You know, I get calls on a daily basis from people who haven’t, you know, made a payment in a year or, in some cases, in two years, literally. And they have been, in a lot of cases, they’re not making payments because, guess what, their bank told them that if you don’t, you know, if you continue to make your payments we’re not going to help you. So if you want us to modify your loan—it does sound ridiculous, of course—but they say you need to stop making your payments or else we’re not going to help you. So the people say, okay, I’ll stop making my payments. Now there’s a lot of people that simply couldn’t afford to make their payments but there’s also a lot of people that, you know, proactively said, well, if they tell me I need to stop making my payments, I’m going to stop making them. And so now here they sit a year or longer later and they’re in default and now they can’t make up the deficiency. You know, they’re $30, $40, $50,000 in arrears and they’re on a one-way path either to, you know, worse case a foreclosure or, hopefully, a short sale. But, you know, because it’s better for their circumstances. But the problem is we have, you know, now they, you know, they refer to it as kind of the pig and the python. We have this huge, huge, huge number of people that are about to go to foreclosure and that’s coming in the first quarter of 2010. And, unfortunately, that’s why we’re not at a bottom. You know, if – what all these moratoriums have done, unfortunately, in reality, is they’ve prolonged the agony. They’ve made this take much, much longer. All these foreclosures would have gone through the system and that’s why, for example, you know, the article – a couple of articles that have been in the news recently saying there’s been a slight uptick in the median price, well, that’s because our inventory is artificially low right now in San Diego County.
CAVANAUGH: I want to get to that. First, I want to remind our listeners we are taking your call. I’m speaking with Matt Battiata. He is CEO of Battiata Real Estate Group. He’s headed back to Washington to take to lawmakers in a couple of weeks. And we’re inviting your comments and your questions about San Diego real estate at 1-888-895-5727. So, Matt, you went to Washington last year, told them what you thought was a good idea, they didn’t do it, what are you going to tell them this time?
BATTIATA: Well, I’m going to give them slightly different recommendations. Last year the big issue, Barney Frank, who’s chair of the House Finance Committee, his big issue was he wanted to do principle reductions, so go around and just reduce people’s balances. And that’s not really on the docket this time around but the main issue is I’m going there to tell them, look, this is what the banks are doing and, more importantly, this is what the banks are not doing. And so it’s really the same message: You need to make the banks follow through on what you’re telling them to do, and you cannot make it voluntary. And another part of this is, you know, in San Diego County, the majority of the transactions occurring right now are short sales. We’ve got short sales, we’ve got not that many foreclosures on the market, although they are coming. The reason there’s so many short sales is because so many people are upside down, they don’t have equity. The banks have, for whatever reason, been unwilling to hire enough staff, enough negotiators, to handle the flow of short sales. That makes a short sale that could take, you know, 30 or 60 days take six months or longer. And so that’s one of the things, is the government, again, these banks all have been given billions of dollars in taxpayer money, the government needs to force them to hire the amount of staff that they need to handle the overflow. Chase Bank, as an example, has over 300,000 homes just waiting, just short sales waiting to be assigned to negotiators. The negotiators are working on files they got in May.
CAVANAUGH: Well, what kind of reaction do you get when you go there and you speak with one of our representatives. I mean, you know, you – they are in Washington and they’re working on figuring out how to get the economy going and how to do these loan modifications and you go there as a person who’s actually in the trenches…
CAVANAUGH: …and you’re dealing with it. How are you received?
BATTIATA: You know, it depends on the representative. But they, you know, they receive you very thoughtfully and they listen to what you have to say and, you know, depending – again, depending on who you’re speaking with, they, you know, they want to help. Some of them have the attitude that, you know, depending on which side of the aisle that they’re on, some of them have the attitude that, you know what, government shouldn’t be involved and, frankly, those people never should’ve bought those homes if they couldn’t afford them and we’re just going to let the free market, you know, go where it’s going to go. And what I’ve told them is, listen, we’re not talking about a few first-time buyers who did 100% financing. We’re talking about an area where, on average, the market is down, you know, in the better areas maybe only 30% and in the worst areas, for example, east county, the south bay, you know, certain areas where you had a lot of first time buyers, you’re talking as much as 50, 60, and 70%. You could’ve been an – You know, a lot of these people were responsible buyers. They put 20% down or more, and they’re still upside down. So it’s not a situation of, gee, we just had a few people that should’ve never bought these homes or we had a few speculators, it’s really a much broader, deeper problem.
CAVANAUGH: We are taking your phone calls about San Diego real estate, 1-888-895-5727. Let’s go to the phones right now. Brad is calling from San Diego. Good morning, Brad, and welcome to These Days.
BRAD (Caller, San Diego): Thank you. Thank you for taking my call. I was just wanting to call to, one, express a little frustration, two, to perhaps get some advice. I have a loan. I bought a home seven years ago, was not my first home. The interest – the loan I have is a fixed rate for a certain number of years and then it goes to adjustable. So with rates the way they are, I was hoping to try to get the loan converted to a fixed rate and I called up my lender, which is GMAC, and asked them if there’s any possible way that the loan could be switched to a fixed rate, 30-year loan just to avoid the time, trouble, and financial hassle of having to go through the refinance program or having to get the house refied. And they said there was absolutely no way to do it. Which, of course, a refi costs three to four thousand dollars. The part that’s frustrating for me is, you know, I pay an additional principle every month. I’ve got a 790-plus credit rating and the lender is unwilling to do anything for me other than a typical refi. And hearing what you said about the lenders, the only way they would make a modification is if you stop paying your loan just, you know, frustrates me beyond belief. So I just wanted to pose that to you and see if you have any recommendations for me or see if there’s anything that might be changing in the future that would allow me to convert that loan.
CAVANAUGH: Thank you, Brad, thanks a lot.
BATTIATA: Well, that’s, you know, it’s – he’s a textbook example of what’s going on. And I wanted to ask him before he hung up whether he still has equity in the property. It sounds like he might. If, you know, Brad, if you do have equity, I would, you know, yes, first of all, you can do – it’s possible you could do a zero-cost refi but, you know what, even if it costs you a little bit of money, it a lot of cases that can be tacked onto your loan balance, and so I would – You know, rates are extremely low right now, and I would highly recommend that you refi it. You know, a lot of people are in Brad’s situation but because prices have dropped so much, they don’t have any equity. And that’s part of my recommendations to the House and the Senate that I’m going to bring to D.C. is to allow homeowners who are upside down to refinance to current interest rates. And when they do that, they will become – their loan will become a recourse loan, which mean they have skin in the game. The problem for a lot of people right now, they don’t want to get out of there, they don’t want to do a short sale, they don’t want to go to foreclosure, they just want to refinance their rates, which might be high, down to current interest rates but they can’t do it because their home won’t appraise and they don’t have equity. All they would have to do, their balance would stay the same, it wouldn’t cost the government any money, all they would need to – the banks would need to do is allow them to refi just as if they had equity to current interest rates. Their balance wouldn’t go down at all, and then they would become a recourse loan. And that would be huge and it wouldn’t cost the banks. That’s a big part of what I recommended a year ago and what I’m going to reiterate this year.
CAVANAUGH: And in your opinion, that would save a lot of people perhaps potential foreclosures.
BATTIATA: Of course, because, you know, you have people from – Let’s say Brad is in that situation, doesn’t have equity, his loan is going to adjust and his loan may very likely – his payment may go up to a dollar amount that he can’t afford. Now if they would just let him refinance to a rate where anybody else could refi to right now, he could stay in the property.
BATTIATA: But instead, you know, refis, the bank very commonly says, you know what, go jump in a lake, we can’t do anything to help you. And then guess what, he has no choice. He says, well, guess what I’m going to have to do, I’m going to have to do a short sale or, worst case, go to foreclosure.
CAVANAUGH: Let’s take another call. Renee is calling from Oceanside. Good morning, Renee, and welcome to These Days.
RENEE (Caller, Oceanside): Hi.
RENEE: I’m trying to – Hi. And I’m working with Mr. Battiata now actually on a project for our condo and we were in a situation where we’d been paying our mortgage on time every month, but the APR rose to such a degree that even with a renter in the unit, we just didn’t have any luck to use – to fill the full amount. So we decided our best option was to short sale. The issue is that the first offer we got was $119,000 and it was last appraised, you know, at the high point about $340,000.
RENEE: We bought it for $129,000, a recent offer was $110,000 and it’s just shocking to me that we were really good about making our payments. We went to the mortgage company and we said couldn’t we negotiate, and there was just no room for it for them. So instead they’re willing to take almost $200,000 less or, you know, something like that from a complete stranger with no good history with them and it just makes no good business sense. And I really don’t understand the power that these banks have over, you know, the vast majority of American citizens in this regard, that the government is so unwilling to make really strict demands of these companies.
CAVANAUGH: Well, thank you for the call, Renee. Thanks very much for calling in. You know, Renee’s story makes me think about the numbers that we’re seeing about sales picking up but are they sales like that where distressed properties are on the market?
BATTIATA: Yeah, most – Yeah, because most – the only people that, I mean, with exceptions, of course, but in general most of what’s on the market right now is either – already been – a REO, so it’s owned by the bank, or it’s a short sale. And, yeah, there are deals out there, relatively speaking, but, you know, Renee’s comment is – everybody feels that way. It drives – And real estate agents feel that way. It’s maddening to have to deal with these banks who – where it doesn’t make any sense, the decisions they make. You know, if you were a shareholder in any of these banks, Chase, Bank of America, etcetera, it drives – it would, you know, these are the dumbest decisions you could imagine. They’re costing the banks billions of dollars and, of course, taxpayers billions of dollars because it’s our money at this point. And yet there doesn’t seem to be any, you know, sense of reason or logic and that’s, again, it drives everyone crazy and it makes everyone feel like, you know, who’s driving the bus on this thing? And, again, that’s a huge – you know, that frustration that Renee just voiced is a big part of what I’m going to bring to Capitol Hill next month.
CAVANAUGH: Now, I know, Matt, you don’t like to be sort of like the voice of doom but…
BATTIATA: No, I don’t.
CAVANAUGH: …but there are some really sort of optimistic stories that we’ve been seeing in the newspaper lately about the real estate market. I mentioned, for instance, that there was the National Association of Realtors Convention here in San Diego last week. The chief economist said things are going to pick up next year. A local – you know, we see news reports where, you know, the market has bottomed out and we’ve got a slight rebound going. Do you also see that? Or are you more cautious?
BATTIATA: Well, I – You know, the National Association of Realtors, the chief economist, for years and years, I mean, they’ve just, in my opinion, lost more and more credibility because it makes no sense. You know, the example I always give is if you had a stockbroker, would you want your stockbroker to just tell you, you know, everything’s a thumbs up and go ahead and buy that stock? Or would you want him to tell you the truth? So, you know, here in San Diego – Now, again, just like they say on those NAR commercials, every market is different, and to talk about the national market is like talking about the national – you know, the median temperature in the United States yesterday was 60 degrees. Well, if you’re in Death Valley or you’re in Minot, North Dakota, it doesn’t really matter to you that the median temperature was 60 degrees. So you can’t really talk about the national market with any real sense of accuracy. But here in San Diego County, unfortunately, we’re not at the bottom. It doesn’t mean that if you’re a first-time buyer and you want to go out and buy a home and you don’t want to rent anymore that you shouldn’t do it, but let’s just be – let’s just talk about reality. We’re not at the bottom. In my opinion, we’re at least two – we’re probably two years from the bottom and the reason is because there’s a tremendous number of foreclosures that’s still left to hit the market.
CAVANAUGH: And what about the shadow inventory? Is that the same as foreclosures?
BATTIATA: No, there’s two. First of all, the shadow inventory are the homes that the banks have already foreclosed on but are sitting on. And they’re doing that to cook their books because they’re trying to make themselves look more solvent than they actually are. So we have the shadow inventory and there’s supposedly a huge number that are going to hit. We don’t really know accurate numbers, or at least I don’t. But we also have all these people that, again, have not been – the shadow inventory are homes they’ve already taken back. The bigger number is people that have not been foreclosed on yet because of the foreclosure moratoriums. And so the reason that you’re seeing, you know, news reports saying, hey, the median price went up by .75% last month, etcetera, is because our inventory right now is artificially low. You’ve only got people on the market who are – you know, who have to sell and you’ve got a tremendous number of homes that haven’t hit the market yet. And that’s, unfortunately, going to change in 2010. You know, in 2009, I said 2009’s going to be the year of the short sale. And I believe—I hope—2010 is the year of the short sale as well because if not, it’s going to be the year of the foreclosure, which is much, much worse.
CAVANAUGH: And why the first quarter of 2010 do you see all these foreclosures coming?
BATTIATA: Because the last foreclosure moratorium ended in September.
BATTIATA: And it takes a while. You know, the banks – there’s a legal proceedings that the banks have to go to to foreclose on a property. And then once they do that, you know, they’ve got a property that, in many cases, has been vacant for a long time, all the landscaping’s dead, the interior’s probably been, in some cases, has been vandalized. And they have to do just what you and I would do if we were putting a property on the market, they have to get it ready for sale. They have to assign it to an agent. And that, especially when you’re a big, big bank that’s already overwhelmed, it takes a long time. So from September, you know, when this foreclosure moratorium, the last one ended, the banks start filing all the legal paperwork they have to file to take these properties back, it does take a few months and then they have to process it through their system. And that’s why it’ll take until the first quarter of 2010 for those to hit the market.
CAVANAUGH: Let’s take another phone call. Chris is calling from Mira Mesa. Good morning, Chris, and welcome to These Days.
CHRIS (Caller, Mira Mesa): Hi, good morning. First, let me just say I find this fascinating. I’m really glad you put this show on. I think there’s just so many people that need this information. Second, my question mainly is you mentioned something about like in one of the previous callers if he could refinance even if he was upside down that it would then become a recourse loan. I was wondering if you could go into detail what recourse versus non-recourse means because I’m pretty sure after refinancing I’m now in a recourse loan.
BATTIATA: Sure. Yeah, a recourse versus non – if you have a purchase money loan in California, now it can be a first – you can have a first and a second but as long as it’s a loan that you got when you bought the property, that is considered a non-recourse loan, which means if you do a short sale or, worst case, you go to foreclosure, your lender cannot go after you for the deficiency. So as an example, let’s say, you know, you owe $500,000 and the bank forecloses and they get $300, well there’s a $200,000 deficiency that the bank lost in that transaction. If you have a non-recourse loan, a purchase money loan, they cannot pursue the deficiency. If you have a recourse loan—a recourse loan means you refinance it. It doesn’t – you may not have ever taken cash out but all you had to have done is refinanced it, once you refinanced the loan, it’s considered a recourse loan and what that means is if, you know, let’s say the bank forecloses and you have a first and a second, as an example. Your second can go after you for—and in many cases will go after you for—the deficiency. That’s why a short sale makes – is much, much better for a seller in that situation. Well, it’s better for a lot of reasons but the main reason is that in a short sale, you can negotiate with the bank to settle the debt. It’s called a full and final satisfaction, which, if you have a recourse loan, needs to be a part of a short sale because in that case the bank agrees to settle the debt, which means they can’t go after you, there’s no deficiency judgment, you’re not signing a promissory note, it’s just a done deal and you walk away. And it’s really important for anyone out there who’s going to do a short sale, if you have a recourse loan, that you make sure that you get that verbiage when you do a short sale because there’s a difference between a full and final satisfaction and a lien release. A lot of lenders will say on a short sale, okay, you know what, we’ll go ahead and release the lien but what they’re not saying is, but by the way, a month after you close we’re going to be in touch because you still owe us the difference. You need a full and final satisfaction on a short sale when you have a recourse loan.
CAVANAUGH: Let’s get another call in. Joe is calling from San Carlos. Good morning, Joe. Welcome to These Days.
JOE (Caller, San Carlos): Good morning, guys. Thanks for taking my call. I started my modification way back in February. It was WaMu at that point. And received, you know, like applications for modification packages, filled those out and sent those packages back not only once but four times.
JOE: It’s now, you know, like mid-November and the bank still doesn’t know what happened to my modification application. And, you know, like Chase has taken over WaMu and the applications are coming from either Colorado, Los Angeles or Florida. And none of these departments, when I call them, know anything about it. And so my question is what the hell is going on with them?
CAVANAUGH: Joe, thank you for the call.
BATTIATA: Joe, I thought that was going to be the question at the end of that. Exactly. You know, that’s – we’re laughing about it but it’s a really serious problem. And most—I shouldn’t say most—all of the large banks are like that and it’s a nightmare. They’ve lost – What they’ve done is, they’ve lost your paperwork. You know, you’ve sent it in multiple times, which is very common. And the answer is they’re just totally overwhelmed. Now the question is, are they really that inept or is there something more diabolical going on, which is a strong possibility because we’ve been at this for a few years now.
CAVANAUGH: What would be the financial incentive? Would there be any incentive for banks to behave in this way deliberately?
BATTIATA: Yeah, because the banks make their money from interest. And so they have no interest in modifying people’s loans and I think they have an attitude that, gee, if word gets out that anybody who wants to can just pick up the phone and call us up and we’ll lower their interest rate, they’re going to – everyone’s going to do it. So if we make it extremely difficult and we hide under the guise of, gee, we just don’t have enough people to handle this – this big – we just don’t know how to do it and we’re not set up to do it, then people will think, boy, this is – it’s a lost cause and we’re not going to bother. You know, if you would’ve talked to me a year ago, I would’ve said, well, the banks just can’t handle the – you know, they’re just overwhelmed, there’s too many people. It’s starting to get to the point where you look at it and say, you know, how could any organization be this disorganized? And why – Again, like I said, with short sales, why wouldn’t they hire enough people to handle it? They lose a fortune when they foreclose on these homes versus doing a short sale. They pay a loss mitigation negotiator maybe $30,000 a year. Even with payroll and every other thing that they have to cover for an employee, it must cost them fifty grand a year to have that employee. That employee could do 200 short sales or loan mods a year. That would save the bank, you know, $10 million. It doesn’t make any sense and that’s a big part of my recommendations when I go to Capitol Hill is make them, even though it’s – it would be in their best interest, make them do it. And beyond that, I don’t know. Maybe there’s – The other thing is they might have – I think in a lot of cases, they have insurance on these loans and, guess what, it makes more sense to them, to their bottom line, to foreclose instead of modify on people’s loans or doing a short sale.
CAVANAUGH: We are out of time. I want to thank you so much, Matt. And I want to wish you good luck in Washington.
BATTIATA: Thank you very much.
CAVANAUGH: I’ve been speaking with Matt Battiata. He is CEO of the Battiata Real Estate Group. And I want to tell everyone whose calls we couldn’t take on the air, please post your comments. We’re taking them online, KPBS.org/TheseDays. Stay with us. These Days continues in just a few moments.