Guest Post: Getting Real About Real Estate
Submitted by David Galland from Casey Reseach
Getting Real About Real Estate
David Galland interviews real estate professional Andy Miller, Miller Frishman Group
In 1990, following the real estate debacle of the 1980s, Andy
Miller co-founded SevoMiller, Inc. The company provided workout
services for major financial institutions throughout the country and
also began buying and developing apartments, retail and office
properties. From its founding to the present, the company’s
acquisitions totaled over 30,000 apartment units, several million
square feet of retail space, and numerous office projects throughout the
country, including the states of Colorado, Arizona, California,
Nevada, Illinois, Texas, Louisiana, Indiana, Oklahoma, Georgia, and
Employing over 500 people, SevoMiller also built, managed,
marketed, leased, and sold commercial real estate for many institutions
and third-party owners across the country. Clients included General
Electric Credit, SunAmerica, and Huntington Bank, as well as many
defunct banks, savings and loans, and private equity groups.
In 1994, Andy and Dave Frishman co-founded Realty Funding Group, a
mortgage and finance company that has acted as a mortgage broker and
mortgage banker for numerous commercial real estate projects across the
U.S. RFG has provided financing for over $1 billion of commercial real
estate. In 1998, Andy founded Rapid Funding, a commercial and
residential hard-money lender that has loaned in excess of $200 million
for land developments, shopping centers, office buildings, and
construction loans on condominium buildings. In addition to sourcing and
servicing real estate loans, Rapid Funding also handled its own
workouts and sales.
Each of these companies founded or co-founded by Andy now operates as part of the Miller Frishman Group.
The following interview with Andy Miller is brought to you by The Casey Report, where readers seek big profits from big trends, and was conducted on Monday, October 11, 2010.
David Galland: Given the importance of real estate to
the economy, it’s not surprising that we get a lot of questions about
the sector. There's a growing awareness of the problems with
mortgage-backed securities and foreclosures, so let’s start there.
What's the buzz in the industry?
Andy Miller: Talking about single family, as opposed to
commercial, the most visible news story is what happens with the "robo
signing" scandal and the foreclosure moratorium.
The short answer is that we don’t know the full implications yet. A lot
will depend on how inclusive this becomes in terms of which lenders
will also adopt this moratorium, in how many states, and for how long?
All those questions have yet to be answered, but as a generic comment,
I'll say this; if what happens results in a concerted effort to impede
or stop or delay foreclosures throughout the country, it's going to
have a very, very big impact. It's going to have an impact in some ways
that are obvious, and some ways that aren’t so obvious.
We believe there are roughly 8 million loans now in some stage of
default or foreclosure. If those 8 million loans are impeded, if the
time that it takes to foreclose is extended, or if state attorney
generals won't let lenders start foreclosures, that will have serious
Paradoxically, because it will reduce the number of foreclosures and
short-sales coming to market, one of the things you may see is the home
market improve slightly over the next three to five months. That may
seem like a blessing to the politicians as it will certainly staunch
some of the negative news headlines out there around foreclosures, but
it doesn’t do you any good because ultimately the price paid for the
short-term abatement in the news cycle could be high.
DG: Okay, so that’s a plus for the political optics of the situation, but what about the flipside?
AM: Well, for starters you have to ask what impact
this will have in the mid to long term on the ability to sell
mortgage-backed securities into the marketplace? If you're an investor
or institution that's already loaded up on a bunch of mortgage-backed
securities and your master servicers or your special servicers are
saying, "We're really stuck in this mire right now where we can't
foreclose or address our defaults," how much more of this paper are you
going to want to buy? I don’t think very much.
Now, the truth is that the Fed is buying a lot of these things, but at
some point in time, it is going to need to divest itself of the
trillions of dollars of mortgage-backed securities, and who's going to
want to buy those, and at what yields? I mean, if you know that with
the swipe of a pen, an attorney general can impose a moratorium or
somehow prohibit you from doing foreclosures, that has to have dire
implications for the future of mortgage-backed securities.
DG: Then there’s the moral hazard.
AM: Absolutely. If you're a hard-working person who has
stayed current on your mortgage even at some hardship to yourself, and
your neighbor who's been living in his home for 12 or 15 months
without making payments comes over to the barbecue on Saturday
afternoon and tells you, "Oh by the way, my foreclosure has been
blocked. It looks like I get to live here another 12 or 18 months
scot-free," does that encourage anybody else to do the same? It's very
hard to know, David, but it doesn’t do the market any good.
As you know, it's my contention that the only thing that's going to fix
this situation is to let the free market deal with the issues so that
prices can settle at their own level. All these machinations to
manipulate foreclosures and/or prices and/or interest rates are only
exacerbating the already bad consequences for the home market.
DG: What should concern investors in all of this?
AM: Frankly, we can’t know yet. There are too many
variables still unsettled. What I would advise is that everybody should
be acutely aware of what's happening right now, and once we really
know how much time this is going to take and what lenders are most
involved, only then will we be able to interpret how bad this is going
to be and what the risks are. But right now it's unknown. It just
doesn’t look very good.
DG: What about commercial real estate?
AM: In contrast with the residential housing market,
on the commercial side everybody has the giggles. I've never seen
anything like it. It's a real paradox, because there’s a very active
commercial market right now with all kinds of money entering the market
and paying ridiculously high prices for assets, and it is almost as if
the crisis never happened. In some cases, meaning some states and some
product types, we are actually seeing commercial real estate prices at
about what they were in '07.
DG: These are people looking to deploy their cash into tangible, productive assets?
AM: Yes. There's a lot of institutional money on the
sidelines earning no yield that is increasingly being deployed. A lot
of this hot money has found its way into commercial real estate. There
are very few individual buyers out there that are actually laying out
their own money to buy product – this is mostly institutional money,
which means the buyers are using other people's money to chase product,
and we see that acutely.
DG: You’ve discussed this point in the past interviews we’ve done in The Casey Report
– that these institutional money managers are often given time limits
during which they have to deploy the money they are entrusted with, or
return it to the investors. And so the buying can become fairly
indiscriminate. Do these chickens come home to roost at some point?
AM: Yes, absolutely. David, the commercial business is
a mess. The fundamentals are not improving. We've talked about this
before, but just to reiterate, you have to start by asking, what
constitutes a recovery in commercial real estate?
Everybody is very convinced right now that we're seeing a recovery. In
commercial real estate, we can be specific in defining what that
actually means. Recovery means one or more of three things are
happening: either your rents are going up, your expenses are going
down, or your vacancies are going down. That's it.
In order for commercial real estate to be in recovery, one or more of
those factors have to be present. That is a recovery. If you measure
each section of the United States, if you look at all the various
product types within those states, those fundamental factors are not
improving, meaning there is no recovery happening. In fact, I would
argue that they’re eroding.
DG: What about the banks? Recently money manager Chris
Whalen made the case that despite being given essentially free money
by the Fed, and lots of it, the big banks are still in deep trouble
over their mortgage portfolios.
AM: The banks have been very fortunate because they’ve
managed to squirrel away a lot of money into their reserves, at least
those institutions that focus on the commercial side. This is not true
on residential. On the commercial side, I think they are very heavily
reserved for a lot of what they see as their problems. Most of the
banks that I come into contact with feel very comfortable that they
have adequate reserves, so that no matter what happens to commercial
real estate, they believe they’re covered.
DG: I guess we'll find out in time if they are.
AM: Yes, we will. Even so, I don’t think commercial is
the big Achilles heel for these institutions right now because of the
manipulations the federal government has undertaken. I think the real
Achilles heel for all these banks, and for bond markets, is going to be
the residential markets. Not to be overly dramatic, but this is a huge
ticking time bomb. Things are getting worse, not better.
In fact, what we see now is that the distress is moving up the scale.
The single-family home markets under $350,000 in a lot of the country
are fairly sound. There is a pick-up in sales activity and lending. But
when you get to the mid and the upper ends of the marketplace, there's
no upward mobility. In other words, people aren’t selling less
expensive houses in order to trade up, which was very much going on in
the housing bubble. In fact, people are having a very difficult time in
the mid and upper ranges selling their homes.
For one reason: it is now very difficult to finance these homes without
a large down payment. We've watched that situation closely and think
that’s going to really exacerbate the problems in the market.
DG: There is a lot of discussion about the problems in
loan origination documents. How serious a problem do you think this
is? One reader wrote in that they know somebody who didn’t even have a
mortgage on his house, but a lender tried to foreclose on it anyway.
Are things really that screwy at this point?
AM: It's certainly problematic, and there was a lot of
sloppiness when these loans were securitized and sold off. Who knows
where the original documents are or what shape they are in? I can tell
you, however, that if you lose an original note and you have to file a
foreclosure, it's not the end of the world. You can have that addressed
by a title company, but it's expensive and it's time consuming. But at
this point we don’t know the extent to which documents are lost, poorly
executed, or don’t exist.
For the time being, Bank of America has put a national moratorium on
foreclosures. In order to understand how big a problem this really is, I
think we have to wait and see who else follows suit, and how long this
will last. If you take this to its nth degree and you assume that the
worst case unfolds, it's bad. It's going to look good in the short run,
but it's really bad for the market, and it's really bad for homeowners
DG: Obama's refusal to sign the bill regarding
electronic notarizations strikes me as being based as much on politics
as anything. After all, ahead of an election, it wouldn’t do to be seen
signing something considered supportive of foreclosures. So the
administration has just kicked the can down the road, past the election.
AM: At this point I would judge every event and every
news story that you see by just one criterion, and that is that the
government is doing everything it can to slow down or impede the
So whether the president signs something or doesn’t sign something, or
says something or doesn’t say something, the intent is to do whatever
it takes to impede or slow down this crisis. If there are losses to
mortgage holders and investors, the politicians will try to turn this to
their advantage by framing it as being that the banks and mortgage
lenders deserve the losses because they’re the cause of this problem.
That's what you're going to see, that's what you're going to hear, and
it's all intended to be a feel-good solution that makes everybody
believe that our government is really looking out for us. Meanwhile,
the SOBs that originated all these mortgages are going to get what they
DG: But ultimately this has to be resolved, that is unless the government is willing to give a bunch of people free houses.
AM: Years ago I said to you that what was happening in
real estate was going to culminate in a big crisis, but that if it
were to happen in a measured way that let the free market do what it
does best, then the crisis would be less intense. But the latest
developments are going to create a lot of intensity and only make things
DG: What about Fannie and Freddie? They were right in
the middle of creating the mortgage mess, and they are at this point de
facto government institutions? Not letting them foreclose would seem
to be setting the stage for another huge loss to taxpayers.
AM: The nice thing about being the federal government
is that you can throw Fannie and Freddie under the bus and suffer no
real consequences, at least not in the short term. For most people,
that will look good.
The important thing for your readers to remember is that these aren’t
solutions that do anything. These are solutions that have optics,
that's all. There's an election coming up. The government wants people
to feel good. They want everybody to feel like our government is really
addressing these problems. They want it to seem to the public like the
government cares. And that's what this is, that's what this is all
about, in my opinion, and I think you're going to see some really very,
very undesirable, unintended consequences.
DG: And on that note, thank you very much for your time. Very interesting, as always.
AM: Happy to help out. Let's talk again soon.