[Mr. Drysdale]

I’m very familiar with Crest at Del Mar. The complex has a water pressure problem from having to push water from El Camino Real up the hill into the complex and units (hence all the burst water pipes here) and there are settling issues as well, again hence the bursting pipes.

The complex has also had problem with the subsidized/low income housing project next door (across from the new police sub-station) with the kids from that project jumping the pool fence at Crest at Del Mar, swimming at night and throwing pool furnishings in the pool, etc.

In fact, I also learned by accident from an attorney at a real estate development seminar that there is a lawsuit from those at the end of San Elijah (sp) Court next to Crest at De Mar, who bought condos converted from apartments because they weren’t told about the low income/subsidized housing project next door : (

[Mr. Drysdale]

If you check around on many of the real estate blogs, you’ll find, despite the urban legends some are perpetuating about banks looking to foreclose on borrowers, that this is the last thing any lender wants for completely self-serving reasons. The more REO and/or non-performing loans a bank has on its books, the closer they will get to that magic number (determined by a banking regulator dictated formula) whereby the State or Feds are called in to intercede upon that bank. They can issue an injunction against any more lending activities till that bank gets its house in order, or can simply shut them down.

Banks only foreclose when they have to. If a bank has loans out on properties that are now overencumbered because of market conditions, how does it help the bank to foreclose on those borrowers who are continuing to make timely payments? It doesn’t.

The instances where this has ocurred has been on commercial lines of credit, construction loans, forward commitments, etc., and it’s totally normal on those kinds of loans products because they are essentially conditional commitments to lend, and if the conditions aren’t, or are unlikely to be met, terms get changed, or worse yet, the bank pulls out. Some people, not implying that about anyone on this site, think of banks as government agencies or charitable organizations, instead of businesses seeking to preserve their solvency, keep employees employed and generate a return for stockholders who took risks investing in those institutions. They have to watch out for their interests too : )

[Mr. Drysdale]

This can only happen on commercial property, not residential (1-4 unit properties). Most commercial lenders have covenenants in their loan docs that require you to submit financials, rent rolls, etc., annually on the borrowers, guarantors and collateral, if things look bad, it could constitute a default. If anyone ever read every line in a set of commercial real estate loan documents, it would scare them, but institutional lenders wouldn’t make commercial loans without those assurances. If you want to avoid those kinds of loan covenants, you have to use a private or hard money lender.

[Mr. Drysdale]

Powaseller – Yes, some banks, not mine however, have been very lax in making commercial real estate loans as well. There are some banks that have chosen to accept projected income versus actual income on a property to meet the debt service coverage ratio requirements, in order to be more competitive. And some banks don’t require any secondary source of repayment as long as the numbers on the property alone fall into place, albeit with a little nudging on the part of some lenders (but definitely not mine).

If you’re familiar with the conduit loans that are so popular with commercial real estate owners, read my article at http://sandiegobanker.blogspot.com/
It describes something (the part of the article in bold red) in many commercial real estate markets that I think very few people in the profession are aware of, or think much about.

As you know, commercial real estate is bought based on the cap rate, and California commercial properties have been selling at historically very low cap rates of 4%-6.5% because alternative investments have not been yielding much more. But as interest rates rise, so too will the cap rates investors will come to expect from commercial property. If you bought a commercial property based on a historically low cap rate, what will happen down the road when similar properties like yours sell for cap rates 2-4% higher? How will that affect value? For some, the change in value caused to their property could place them upside down if they had a 90% LTV SBA loan or even a 75% LTV loan, especially if the value when they bought it was based on projected income.

Multi-family cap rates are even more ridiculous and have been driven down by investors buying them up at very low cap rates, not for their income, but to convert them into condos where those investors hope to recoup their returns selling them off as individual units. The problem is that it has created sale comps for others less knowledgable who haven’t figured out those comps have been distorted by the intentions of real estate investors who bought those properties for reasons other than income (i.e, condo conversions).

Commercial real estate will be affected as well by any crash (which to me is an overall drop in values of 30% or more) in residential real estate, it will just take longer because most commercial real estate is valued on a leased fee or income approach basis which is supported by generally strong term leases, versus market value in residential real estate, which is influenced more by other factors. But if things go really bad in the residential market, it will affect the general economy as a whole.

Personally, I think this all started in 2001 when Greenspan caused the Prime rate to drop eleven times in that year alone. It was like throwing gasoline on fire when you consider how many people got burned in the stock market and were primed (no pun intended) for another investment opportunity, which Greenspan went overboard to create for real estate in general.

[Mr. Drysdale]

I’m a commercial lending officer with a major financial institution here in San Diego : )

[Mr. Drysdale]

At the time I didn’t pay much attention to the MBS market. I was a licensed broker and had access to the MLS and was watching the trends. I also called U-Haul (because they had no web site at the time as did no other company that I’m aware of) repeatedly to get quotes that would reveal the net migration patterns out of San Diego and California in general despite what the media and other brokers kept saying about everyone wanting to live here. I also re-read a book I had bought years earlier in college where I majored in Real Estate Finance. The book was called “The Coming Real Estate Crash” by two authors by the names of Cardiff and English. I highly recommend getting it. Even though it’s quite dated (1st published in the early 80’s) it has a section that describes real estate market psychology better than I’ve heard anyone else try to explain it.

I can’t recall the number of Banks that went belly-up, but it was a shocking number and they were all over the USA. The funny thing I remember was that RTC’s Sr. Mgmt., at Home Fed, the RTC Credit Review Committee, was comprised of CEO’s and EVP’s from failed banks in Arizona and elsewhere in Calif. that the RTC had taken down. I also remember there were no S&L’s left in Phoenix at that time because when I was trying to sell houses there for a client in San Diego we were told there were no S&L’s left in Phoenix and the banks just weren’t lending. The mortgage companies had minimum loan amounts that were much higher than the $15,000 & $20,000 my client was selling his Phoenix homes for in 1991 (they were in crappy areas if that’s any consolation). In fact the only people willing to buy the homes were the tenants and my client had to “creatively” manufacture the down payment. He just wanted out at any cost and would have given them away to a charity if the tenants hadn’t bought them

At the time, there was alot of talk at the begining of the crash that the government would step in, but it was all wishful thinking and it won’t happen for many reasons:

The government is too far in the red already

Things have to play out to their “natural” conclusion. It’s all part of the economic cycle of life. The crash has already long been anticipated in numerous other ways. It has to play out normally.

Allowing Uncle Sam to step in and cure or mitigate the crash would create a consumer mindset that would be far more dangerous for our economy. There has to be consequences. Even though bankruptcy allows you to wipe out all your debts, you pay a big price not being able to obtain credit for years, other than maybe credit at more onerous terms.

Your question, why have people forgotten what happened just over a decade ago is one I’d really like to address because the answer says more than you’d think. The only people who “really” understand that period were those “right in the middle of it” like those working at the RTC who sold that REO at firesale prices and those who got financially burned badly. That’s a smaller group than those not part of this group, and even then, many of those never understood what caused the crash in 1989-1995, so what you have is a very small number of people out there who really understand, although I’m extremely impressed about how knowledgable Rich at Piggington and other housing bubble blogs are, and their very public discussion of the facts/data will compact the cycle this time.

The only thing I remind people is that if you don’t have to sell in a bad market, competing with the sale of bank REO, massive inventories on the MLS, etc., you can say your property is worth anything you want based on any amenity of dubious merit, because you’ll only be called on it when you actually have to compete with the market by trying to sell in competition with it. I have vivid memories of many real estate owners during the 1989-1995 period who would argue in the face of actual sale comps all day long. The point I’m making is look at the data only, not statements of subjectivity.

Regarding all the new investors seeking to scoop up deals which will hold up the market…that ocurred last time too, UNTIL the new market psychology kicked in. The emotions of optimism and greed that drove this market through the roof will invert into pessimism and frugality which over time will drive prices through the floor. There is a new emotional mindset already taking place. You can see it in many postings, not just housing bubble blogs, but real estate listings on the classified section of SDREADER.com and others where people who probably don’t consider themselves religious are actually praying for a buyer, yes they used the word praying in their ad. I saw another ad for a Hillcrest property that basically said they were sick of real estate investing. This mood will permeate the market as the market increasingly begins to grind down even slower.

As far as live auctions, they are a strange thing in my opinion and are driven more by emotion than anything else. I’ve been to many of these and am always amazed at how often investors will bid the properties up to market with less assurance than they would get if they had bought in the traditional way through a broker. People just get caught up in the emotion. Some people think “auction” and “good deal” are synonomous. I’ve heard many people brag about the deals they got at auction, but when you comp them out, they simply bought at market, with fewer assurances, which to me makes it a worse deal.

[Mr. Drysdale]

It’s all relative, but it could very well be nationwide. Homes are cheaper elsewhere because average incomes in those areas are much lower. Maybe those homes sold for $50,000 five years ago. Easy credit via no money down, I/O and ADJ. loans will adversely affect those low cost areas too. It will just be proportional to that area’s economic profile. It happened in 1989-1995.

[Mr. Drysdale]

This HAS happened before. I worked as an REO Marketing Analyst for the RTC when they took down Home Fed Bank around 1991. It was the largest bank ever taken down with hundreds of millions in REO. I personally sold bank REO for 20%-30% of what it appraised for just two and three years earlier. Banking regulators don’t give lenders alot of leeway to play the market so to speak, or hold on to get a better price. They HAVE to get those non-performing assets OFF their books. I have lots of stories about those days and I’m convinced this time it will be far worse because back then we didn’t have any of the Geo-Political crises we have now, and because the advent of the internet now facilitates the free flow of information much much faster. Look at all the housing bubble blogs there are with all the reliable data they are providing. It’s almost an avalanch.

I remember telling people in 1989-1990 that the writing was on the wall and nobody listened because there was no publicly available data, and the media, especially newspapers, weren’t going to report it because their largest source of advertising comes from 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. In fact when homeowners increasingly start putting their homes up for sale in the next few weeks to get an early start on the spring home buying season, and they realize how inventories on their local MLS’s have tripled and quadrupled and worse, you’ll see panic set in, especially now that you can monitor home inventories in any metropolitan area on ZipRealty.com and other sites. This will feed the panic. In 1991-1994 (the last time there was a real estate crash), only real estate brokers with access to the MLS were able to see the early signs. Now everyone sees the signs and is blogging about it.

The one thing I’m always amazed to find out is how many borrowers think that when their home goes back to the bank, that’s the end of their problems. What they don’t realize is that if the lender writes off or forgives any debt to them (i.e., short sale, etc.) the former borrower will get a 1099 for the amount of that forgiven debt as though they had received it as income. If they sold their home through a short sale at the begining of the year and they got a 1099 by January 30th of the following year, they not only have to pay taxes on that forgiven debt, but penalties and interest too, because it was due (unless you pay estimated quarterly taxes) at the time the debt was forgiven.

IT WILL GET VERY UGLY “/

[Author]

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