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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
Florida.
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
repercussions.
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
going forward.
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
foreclosure process.
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
deserve.
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
worse.
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.
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Denial
(Reuters) - The Obama administration said it found no sign so far of "systemic" home foreclosure troubles that threaten U.S. financial stability, or structural problems that could undermine investments linked to mortgages.
http://www.reuters.com/article/idUSTRE69I54T20101020
And now they can but the broom back in the closet after a successful sweepage under the rug as predicted.
Bookmark that link. It will be fun to read it two years from now.
Yeah, and this jackass Obama has explicitly stated that he wants the US to have a Civilian Defense Force, and there is no sign of such at the moment. But I don't doubt it'll materialize if a situation arises in which the administration could pull it off...
Hitler Youth?
black panthers and, they are immune to prosecution;
there are several here
mention obama and watch'em come like bugs to a light
i would have thought red guards would be the metaphor. black panthers were hardly a tool of government (indeed the government killed many of them).
.
.
Here, let me post a portion of the article, just in case the junker didn't get it.
WASHINGTON (Reuters) – The Obama administration said it found no sign so far of "systemic" home foreclosure troubles that threaten U.S. financial stability, or structural problems that could undermine investments linked to mortgages.
But Housing and Urban Development Secretary Shaun Donovan said a four-month probe of big banks' mortgage practices had discovered "significant variation" in compliance with government rules, and vowed to force changes as needed.
The hubris...the lies. Obama Please!
Eyewash! Eyewash I say! (who put the lye in it?)
No SYSTEMIC trouble that threatens the US financial and housing markets....
The last time a politician said exactly that, and I mean ver-fucking-batim, remember what happened?
Subprime.
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.
And now for this afternoon's "this is going to be our death" brought to you in an un-overly dramatic but overly dramatic way.
I'd imagine if you keep finding things that will bring us/banks/country down one of them will be partially correct at some point. Law of averages is on your side.
Until then, we continue to have very slow, sluggish growth which is likely to continue that way for a long time. No big swings up, no big swings down. Just painfully slow.
LOL. "slow sluggish growth"? What do you call growth? Stagnate RE prices? Rising unemployment? Jobs hemorrhaging overseas? Where's this "growth" you speak of.
There are two sectors growing in our economy: government jobs and health care jobs (taking care of sick old people while Medicare can still pay for them). NOT a good sign.
Here's an interactive graphic of job losses in the U.S. since 2008.
http://online.wsj.com/article/SB10001424052748703946504575470001733933356.html?mod=e2tw
Thanks for the graphic. Seems the losses peaked in 2/10 and we're in a bit of a very slow and sluggish uptrend, just as I stated above.
Better look again. These Keynesian policies are killing a lot of my friends and neighbors. Take a look at construction, manufacturing, retail, business services. No recovery or "growth" in sight. Idle hands are the devil's playground. Watch out for pitchforks.
Listen...there is no reason to respond in a fundamental way to Harry's arguments. His whole game is to somehow make a contribution to the "controlling of expectations" gig. He is a plant to defend status quo.
For example, he keeps talking about "slow and sluggish" or "steady." Of course, as you noted, there is nothing slow about the crumbling of the US economy, and neither is there anything slow about the ramp up in equitites.
He is a fraud. He is an Apple pumper. This should say all you need to know.
Man, you dudes are something else. I don't own AAPL and actually bash it quite often as being faddish. Certainly not a "plant". Just calling it like I see it. There is nothing in the economic data right now to suggest a "crumbling US economy". I just showed you with the aforementioned graphic.
Regarding equities, the "ramp" is nothing more than a swing from the down move earlier in the year. In reality, equities aren't up much on the year. Kind of benign, you know, like the economic growth.
You're okay with me Harry. Funny that a blog with a Fight Club motif has some readers who would prefer to see it turn into an echo chamber.
that's all fine and good, but don't be a contrarian on the basis of just to play devil's advocate. take the blinders off and increase you range of vision. shit is fucked up. There's something to be said when you're the only one in line with cash and everybody is paying with the EBT/SNAP card...and/or they are down to their last 5 bucks and counting every penny of the swipe. and it's October 20th, so no refill till the end of the month. see it all day in the outer boroughs of nyc...and that's supposed to be a money / power center.
depends on which economy you are talking about...step into the real. show me were the average american is showing improvements...here, I'll get you started..atleast the elderly aren't eating dog food..just..quite. yet..see..half full glass...your turn.
Maybe HW just means that the economy is crumbling a little more slowly than expected.
Not a fan of this guy but he makes valid points. Slow, benign growth.
http://finance.yahoo.com/tech-ticker/article/535524/The-Silence-of-the-B...
You have GOT to be kidding....
seems like hw had been absent for a while. is his reappearance a sign of an overly bullish sentiment? someone a few days ago mentioned three month equity cycles as of late. seemed to ring a bell.
How much of our 'growth' is due to: (1) the automakers shutting down in early 2009, therefore requiring an inventory catch-up; (2) a huge burst of borrowed Federal stimulus spending; and (3) a ramp-up in Asia/BRIC spending following hot-money inflows?
I think our government statistics have been dumbed down to virtually guarantee politically favorable 'growth', but the reality is that the divide between have's and have-not's has never been wider. Both across geography (FL homes v. DC homes) and classes/races.
I always appreciate your comments on the other side of the coin, but there is also a slow erosion of the health of our citizenry. It's too bad that a few ticks of GDP are traded for that...
As for real estate, if you have the prime tenant it goes for big dollars. An MSFT-occupied building went for record prices locally. If you have a vacant or class B or less property - there might not be a bid for your property at all...
I wont junk ya HW, If we had not bailed the banks out they would be nomore. I don't see that happing again....
Harry's mostly right. Slow, sluggish but I say steady state is best hope not "growth".
No drivers for growth this time - you tell me where one is. The bubbles have moved out of the real economy and into things like Treasuries. Can't make it on an assembly line, go home, collect a paycheck and buy the kids some new shoes on those things.
As someone pointed out in "The Big Short": Housing prices didn't have to stop growing, they just had to slow down to under 10% for the defaults of CDOs to start occuring. I'm thinking the same principle applies to the "growth-at-all-costs" Economy the Fed wants to ignite.
Really. This is a view that only you and a bunch of paid entertainers on television seem to hold.
If you think you perceive growth somewhere take a closer look and see if ain't instead some intense malinvestment.
P/E for SPG..... 78
P/e for VNO..... 92
'nuff said.
Hey slick--how the hell are you? Loving the REITS, I see.
sweet, deadhead weighing in.
Meeting of the 1 year + club.
Good to see all of you.
Hello good sirs.
I disagree with "the wang." This is Saturn. I think the nationalization option is for real and it will be up to the Federal Government to deal with "dead beat America" because the banks said all along "it's all yours" via securitization. If the Governors of the various states think they can stand in the way of this literal freight train...well, one need only look at the joke NY State's Governors debate was to "get the feel for it." Again, "Zh's finest hour."
Both are very sour. At least we have young gals who know how to use a scope and take out the filth. And then go back and grow food for the people.
http://farmered.com/
Holy shit.. a farm cult.. Quick call CPS.
now that's some fine lookin' country livin' - thanks for posting the link, every picture brings a smile, 'specially those "orchard chickens" !
Nice melons.
....as posted earlier today on a ifferent article, in CA commercial real estate is dead, is being even marked down by the property tax appraisers by large amounts, and is therefore creating job cuts at the local government level.
Commercial loans are a problem for the banks, but they have not gotten the press (yet) that residential has. By the end of the first quarter in 2011 I doubt that statement will still be true.
Just basing my opinion on my own direct experience...I am not an economist, so I am probably incorrect.
If you were an economist, I would suggest you were probably incorrect.
Extending and pretending, the regulators are hoping that one more bubble gets blown...
Thanks for the honest input, Rosie.
When were the economists ever right?
Many REITs punched to 52-week highs today.
Watch them here:
http://clearstation.etrade.com/cgi-bin/bbs?post_id=9466135
never liked the housing stocks and the word is "the fact that they unloaded the problem companies isn't good enough." Granted "Simon Properties knows a wounded beast when it sees one"! I was rooting for their take out of General Growth...twas not to be. One quesiton i have: "how can the NY Fed be a party in a lawsuit against a bank"? That one just blows me away. True "this was the guy who said Ben Bernanke was lying about not monetizing the debt." But a party to a very hot and heavy three way? JP Morgan the man would be proud!
If I hear one more of these psychopathic vampires pleading against moral hazard . . . their sociopathic gall and hypocrisy are astounding!
Here's another good one:
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 deserve.
This twisted fuck would seem to be scorning this notion as cheap politics. Justice is a concept so alien to this type that they can comprehend actions only through their own sociopathic lenses.
Fucking amazing.
Well, if they weren't ... who was?
I totally agree. The Mortgage Bankers Association just walked away from their $79 Million headquarters in Washington, DC as their Pres was lamenting the moral hazard of people walking away from their mortgages. What hypocrisy! Has George Orwell's Animal Farm come to being true? Are all people created equal, but "corporate persons" are more equal than others? What has SCOTUS perpertrated upon us? Why are those black robed bastards given a free ride to fuck over us?
In SoCal, the beaches are where the real holocaust of losses are emerging for the banks in residential. They are going to eat some big mid-tier numbers.....markdowns of 30% so far.
The banks must know the Jimmy Buffett party has been shut down and values must eventually return to 1999 at the SoCal beach. So now the game is about finding a sucker with 20% green to move a prop at a still grossly inflated price. The banks know this sick dog won't be getting well anytime soon.
The premiere issue : too many banks compete to find the next greater fool with that kind of cash as the clock ticks. The median incomes sure won't cut it on the $1M + inventory without the now-dreaded gimmick financing.
www.doctorhousingbubble.com
This guy is talking his book. And hoping the worst doesn't happen. Which it will.
Who's to say the Fed can't continue to prop the REITs up when they run out of corner
Commercial real estate in my neighborhood is going ballistic.
UCLA just paid over $800/SF for a former Blockbuster location and spent a fortune turning it into a Radiology center.
My appraiser showed me 5 other comps where various "mom and pop" office buildings have sold in the $600 to $800/SF range, which is totally insane.
http://www.loopnet.com/Listing/16022570/2200-N-Sepulveda-Boulevard-Manhattan-Beach-CA/
Thanks. Enough said. I turned down $23 per on office space in the heart of Chicago for $20 plus build out. You guys are bubble ish
So why were Moody's saying CRE is down 46.1% since 07?
-~
Jim Richards on king world news talking about mortgage-gate
http://kingworldnews.com/kingworldnews/Broadcast/Entries/2010/10/20_Jim_Rickards.html
"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"
trillions for banksters but not one red cent for people....
"either your rents are going up, your expenses are going down, or your vacancies are going down."
horsecrap. we are in a renterless recovery.
Something that puzzles me, how is it the commercial real estate market can be washed away or covered by the Fed as Andy says, but not the residential one? The Fed can buy commercial real estate backed securities but not residential ones? And why do the banks, as Andy states, have reserves for any eventuality to cover commercial but not residential?
Could it be that it is much more palatable politicaly to bail out banks again for a residential problem and just not mention the commercial side of it?
Ben 1 st saved insurance co and pensions etc who are investors. Money markets too. That was the 1st stick save
So why not save the residential market as well? As Michael Hudson says, why not buy up everything? What's stopping them, why commercial real estate backing and not residential? Anyone know?
Jmac, the majority of commercial mortgages are held with small and regional sized banks. These banks are closing on a near weekly basis by the FDIC; many with avg. assets of $1 billion or so. Many of those loans however were made during the peak of CRE (from 2004-2007) and have 5-7 amortizations, many with clauses to extend for another year or two. As long as the borrower is paying SOMETHING, the loan is deemed 'performing'. My point is, we have not even begun to see the majority of these commercial loans roll over yet, hence their absence from mainstream media. As for the residential side, I believe the securitization market those MBSs was much larger and more pervasive within the largest 20 banks than commercial MBS's.
This is very interesting, but his views on what is happening in the res Fraudclosure process and why, are delusional.
Obama is not doing everything possible to stall Fraudclosures, the court system is going to be so bogged down unraveling this mess, which will make it highly impractical for markets to correct it (measured or not).
Robert Trader------ yes but, medical, UCLA area, out of business. I am sure they are happy with the pull back. Maybe time to expand the freeways---- go Jerry Moon Beam Brown
He talks about really high prices for commercial RE. But didn't I just read a report 2 days ago the commercial RE index just dropped to a new 8 year low?
He's a smart guy but but he's just talking his book & talking nonsense in the process.
Tyler,
General Growth Properties (GGP) received court approval today confirming their plan of reorganization, paying their creditors in FULL and retaining equity for existing shareholders (me), I would appreciate a retraction after all the GGP bashing that went on here for the past 18 months.
I got rich and you look like a tool.
Thanks for taking the time to discuss this, I feel strongly about it and love learning more on this topic.
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