Jason Hartman talks about the amount of house flipping that’s in the market right now and what that means to the real estate market. Later in the show he brings on Chris Mason, mortgage broker, to discuss the current mortgage market, lending standards and whether or not we’re seeing another bubble.
Then Jason talks with Chris Mason, mortgage broker, about what is happening in the mortgage market today, lending standards, and whether we’re in danger of seeing another bubble burst.
I really need to thank you and Sarah for being there for me, you guys could have easily said, This isn’t my problem. This is your problem. Your lack of due diligence is entirely your fault. And not done anything at all. But you guys have been there for me every step of the way. You responded on voxer at 342 in the morning, I know, it might have been 642 depending on where you were, but honestly, who works at that time. So just the fact that you guys were there for me. I appreciate it so much.
Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11. states had hundreds of tenants and been involved in thousands of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day. You really can do it. And now here’s your host, Jason Hartman with the complete solution for real estate investors.
Jason Hartman 1:21
Welcome to Episode 1347. And greetings from a beautiful Ritz Carlton Hotel here in Florida. I tell you how Florida is just paradise. You can probably hear the wind and the water fountain outside. I’ll come inside, because it’s a little noisy out there. Thanks for joining me today. We’ve got a few things to talk about. We’re going to talk a little bit about mortgages. I interviewed a new mortgage representative today. think you’ll be interested in what he has to say, some insights on the mortgage market there. But first, if you want to do something kind fun and funny. Do this. ask Siri or ask Alexa. Alexa is the one I asked most recently asked Alexa, for the definition of Trump derangement syndrome. Yes, TBS Trump derangement arrangement syndrome. It’s pretty entertaining. And you’ll see that a lot of people have this. So it’s a disease affecting, or I should say afflicting at least half the population of the United States. Let’s check it out. I think you’ll get a laugh out of that. Anyway, this is Episode 1347. Before we get to our mortgage update, wow, home flipping home flipping ain’t what it used to be. That is for sure. In fact, that’s probably an understatement. It’s an understatement. It is way down, way down. Way down. What Down. In fact, it is nearing a seven year low. Now, you know, we’ve had Darren Bloomquist on the show several times. And he has spoken at our meet the masters of income property event, which by the way, we’re about to announce a date and location for the 2020 venue. So stay tuned for that. It’s coming right up coming right up around the corner, not today. But soon enough. He’s with Adam data solutions. And they are out with a report that says, in the third quarter of 2019, home flipping was down to the second lowest point since 2011. Now, you might recall, since I’ve been doing this way too long, and way longer than all my other competitors, especially the fake ones that say they’ve been doing it since 2004. I actually was doing this in 2004. For real, but there’s a few people out there who say they were. And they weren’t? Actually not a few. I definitely know of one. Okay, so back in 2011, you might recall that financing was incredibly difficult to get for home flippers. And as part of the financial regulation, there was just a slew of new things, including not the least of which including Dodd Frank, Dodd Frankenstein, which really impeded business in the US, in terms of real estate and I think slowed the economic recovery substantially, but it is what it is. These regulators, hey, they don’t understand the real world. They sit there in their ivory tower, insulated from all things real. They pass laws and make rules the rest of us little people in the hoi polloi have to follow. So all of these regulations made it very difficult for companies and entrepreneur. And individuals just, you know, Baba with a pickup truck who wanted to flip a house made it very difficult for him to do it because they had all sorts of rules like that you had to wait a certain amount of time for property was purchased in foreclosure. What was that rule? You had to wait like 90 days before you could flip it and then more time before you could flip it again, right? And this was to like, just slow the whole machine down. And admittedly, you know, like many of these laws, I’ll give them credit that many of them do have good intentions, but intentions, meeting reality where the rubber hits the road. Oftentimes do not work out they do not work out. Check this out. According to the report. 56,566 single family homes and condos were flipped in the third quarter of 2019. So here we got a country of about 320 million plus people now and 50 6000 Well, if you round off correctly, 57,000 single family homes and condos were flipped in the third quarter of 2019. But that was down, get this You ready? It was down 12.9% from the previous quarter, and down 6.8% from a year ago, these marked these drops were the largest quarterly and annual drops since 2014. Now, there’s a few different time periods to keep in mind here, right? Because initially, we talked about how it was down from 2011. Okay, the second lowest point, but another point here in 2014. They’re also mentioning their report. So this activity, definitely declining, return on investment was down as well. Look, that’s how the supply chain works. It’s how can capitalism works. If the seller of the property who’s selling it to you the turnkey investor can’t make money, hey, they’re not going to do the deal. And then you’re not going to have anything to buy. So that’s a problem. As the supply chain gets constricted, as these margins get constricted, there are fewer people doing it, right? Because people do things for incentive. This is pretty significant. And look, I’ve been complaining to you for years, and you’ve been complaining to me, so I’m just complaining back, right? It’s a circular complaint cycle, right? Where we’re all complaining. That inventory is down. There’s not enough properties to buy. There’s not enough out there. What am I going to do? What am I going to do? Well, here’s what you’re going to do. This is prime advice. Are you ready? You are going to reluctantly but still realistic. You are going to accept reality. And that reality is that inventory is tight. And properties are more expensive. It is simply the law of supply and demand. But in accepting that reality, you’ll be okay in the long run. And here’s why. Remember, as I’ve mentioned to you throughout the years, prices always precede rents, rents always lag prices. So give it a couple years, get your properties get this incredibly good financing, incredibly good financing. And you get to lock up the rate for three decades. But your renter only gets to lock it up for one year at a time.
Jason Hartman 8:47
Little arbitrage there right little arbitrage and your renter will see increases over the years and If you can increase that rent by three, or hopefully even 4% annually now you know how that works. One of my concepts, I teach the three dimensions of real estate, when interest rates are very low, and housing affordability is pretty reasonable, then you’re not going to be able to raise rents as much. But when you get into the cycle, where the rates are up, and the prices are up, right, when you have both of those factors at the same time, you’re going to find that you have this magic thing. A magic to word thing. Do you know what that magic thing is? It’s almost as magical as this beautiful ocean view from the Ritz Carlton Hotel. Wow, it’s gorgeous. Hey, by the way, maybe it meet the masters. I will share my secret on getting hotel upgrades. Yes, I tend to be very good at that. I wish I could do it with airlines. I occasionally do it with rental cars, but hotels I do it often. And I succeed often, because I am in this gorgeous suite. I’ve got two bathrooms, and two big rooms and two balconies, and a beautiful view. Did I pay for that? I just paid the regular price of regular Ritz Carlton room, which ain’t cheap. But hey, that’s why we work hard and invest in real estate. But the upgrade was free. Yes, free, free free. So maybe I’ll share my magic secret. Meet the masters. So be sure you come anyway. Well, we’ll announce a where you can get your tickets for that soon. And all the details. Okay. So the great thing about the three dimensions of real estate is that you get to do that arbitrage, right, you get to lock in your cost. Of course, you’ll have some maintenance and repair costs, but that’s fairly minor. You get to lock in your cost of borrowing, right, that’s the biggest expense that mortgage, you get to lock that in for three decades. aids population keeps increasing, prices keep going up. And when that turn in the market comes, which ultimately will, where you see higher rates, lower affordability, although affordability You know, it ain’t great right now, it’s not not that bad, but it’s not that good either. You will have the magic two words. And you know what those magic two words are? They are the magic two words that the most successful companies on earth have. And I’m going to use one example because I use some of their products and I liked them pretty well. In fact, I think they’re one of the more honorable tech companies. You don’t hear me complain about them very much. I complain about Google and Facebook, and their disgusting abuses of power, even Amazon. But apple. Yeah, Apple i think is a little bit cleaner, not perfect. Slowing down the iPhone performance when they released the new version. That was pretty sleazy. But they’re not bad. Anyway, what do they have that you want? As a landlord, they have this magic thing, pricing power. For double p pricing power. As a landlord, you innately have pricing power, because you have a scarce commodity real estate, you have a commodity, everybody in the world needs shelter, and you rent it to them. But when you get into a time, where there are certain spots throughout that three decade long, beautiful mortgage you have, where you really, really have pricing power, and you can really, really command higher rents through the law of supply and demand. It is a great thing. So you’re going to have to take that risk in advance. And I know the inventory is constricted, the prices aren’t as low as they used to be. We all got spoiled. The You were way too good. Back in 2009 1011 1213 1415 1617 18 and 19, little more expensive. Maybe in 2020 21. There’ll be even more expensive, who knows? And you’ll be saying, The Reluctant investors lament saying you wish you would have purchased back then just like he says in that poem that he wish he would have purchased everything. But he thought it was so overpriced in 1977. Yes, yes. That’s what happens when you have a scarce commodity that everybody needs real estate. It’s a beautiful thing. And actually,
Jason Hartman 13:38
that’s an overall view of the market. But we’ve got some pretty good inventory now. I’m happy to say go check it out at Jason Hartman, calm talk to our investment counselors. We’ve got some good brand new construction inventory too. As you can see the flippers the home flippers, their inventory is definitely constructed and dried up a bit. But we have both resale flip properties and new construction properties as well. Alright, without further ado, let’s get to our guest. Let’s talk a little bit about the mortgage market. It’s my pleasure to welcome Chris Mason. He is an independent mortgage broker. He’s located in California, my old home state. I met him online, and he shared some really interesting thoughts about the mortgage market about the increased loan limits that we’ve talked about recently on the show. And I asked him to come on the show for his insights into some of these things. And I think you’ll find them valuable, Chris, welcome. How you doing? I’m doing good. How are you? Good, good. It’s good to have you on so you know, I guess the big news is that that Fannie Mae Freddie Mac loan limits went up to a base amount they increased by about $100,000 I guess in the last two years, maybe a base loan limit now 510,000. But in the more expensive markets, like where you’re located, they can go up to I believe about seven
Jason Hartman 15:02
Hundred and $65,000 150% of base, I think is the formula. And that’s correct. In addition to this FHA loan limits have increased and FHA reverse mortgage, something we don’t talk about too much. loan limits have also increased. So kind of three areas, we’re seeing this additional flow of capital available to borrowers. What do you think that’s going to mean to the real estate market? What tends to happen is prices get home prices specifically, at least Myra gets sticky about that price that results in that loan limit. Does that make sense? Yes, it makes sense. And one of the things we want to just distinguish for the listeners to is this is the loan amount, not the purchase price. So for example, if someone was buying if they wanted to get that maximum $510,000 loan, they might be putting 10 or 20% down, so you’d add you know, 51,000 or $102,000 to that And that would be the price of the house, I actually have a cheat sheet right in front of my desk, those are all the time that has their relationship. So for areas that are not high cost of living, so most United States, you know that first time homebuyer 45% down, they can do a maximum conforming loan at a purchase price of 537 537,000. If they’ve got 10%, down to they can go up to 567,015%. Down, they can go up to 600,000. And what you’ll find is that as you cross each increment, your buyer pool shrinks, because the people that are trying to go beyond that, no longer be able to Fannie Mae or Freddie Mac modeski what’s called a jumbo loan, which has more stringent underwriting criteria does shrinking your buyer pool. So you can go right up to those limits, with you know, the market as the free market doing its thing and you’re not we’re not gonna be able to sell for that price and how fast this that and the other, but as you hit those thresholds, what you’re gonna find is your buyer pool starts to shrink. So you start to get into the sort of a diminishing marginal return niche. Does that make sense? Yeah, makes perfect sense. And for investors, they’re going to be putting 20% down And of course, hopefully, they’re not buying properties this expensive because the rent to value ratios ain’t never going to work. But, you know, if you want to be more speculative, sometimes that works. So that’s interesting. Now, you know, in terms of the overall climate out there, you said when I just kind of casually asked you how business is and you said it’s a banner year, how much of your businesses refinance business and how much is purchased business. Overall, the industry this year leaned a lot more towards refinance than normal because what happened is 2018 Richard is a seven year high and then in 2019, rated a three year low. So basically, over this last summer just passed, everyone that bought a house in 2018 did or should have refinanced over this summer or even right now. Still a good time. My personal production is about 20% refinance. 80% purchase that’s unusual. Most people chase the easy money of the year, trying to see if it’s awesome, the easy money of what just caught on people into refinances, I don’t find it very satisfying. Logic do? Right, right, sort of easier to get the refi business. And you know, I owned a couple of mortgage companies over the years. And I tell you, those refi guys, when rates are low, you get very envious of all the money they’re making. It’s like they’re printing money, but their business is extremely volatile. Because the reifies are a complete numbers game, you know, it’s just simply does it make sense to refi or not? Whereas purchases have a more consistent flow of business? Right? I agree with that. And I think the only way to build a sustainable mortgage business is to purchase focus, because I know you cannot have your livelihood and your ability, your table dependent on the nation of Wall Street, which is all you’re doing if you’re trying to fix everything every time. Right, right. As my listeners will know, I’m no fan of Wall Street, that’s for sure. But it does determine a lot. No question about it. You know, you know what’s been interesting to me, Chris, is this talk about a new credit crisis. Yeah, and you know, the FICO score system seems rather flawed to me. Is that a popular
Jason Hartman 19:07
notion? Would you agree with that? Or do you disagree? What do you think about the FICO scoring model? Is that really a good criteria for borrowers, I think it leaves a lot to be desired, I would actually tend to agree with you I’m so I’m in the San Francisco Bay Area. So a lot of what goes on here is centered around software. dicho scores are an algorithm. And software people understand algorithms because they do that for a living and people around software people kind of by osmosis start to understand it. So my average FICO score is 766, which makes me pretty useless metric, because everyone’s in the best category, not the average is that the average person would actually be alone. So you either have like a 766, or you have like potato. So there’s not a whole lot in the middle, which is kind of interested in I don’t think that’s how it supposed to work. And again, granted my bias is towards the Bay Area environment, which is where Silicon Valley is located, which means a lot of software people. Right, right. And we have a lot of clients up in Silicon Valley as well that are purchasing properties around the country and Building investment portfolios. So that’s a very high credit score 766. Obviously, that’s surprisingly good. But among those buyers, you know, if you do 100 or 1000 loans, and those borrowers have an average 766 FICO score, which is phenomenal. Still, some of them will default eventually, right in the next five years, you know, we hit a recession, there are some layoffs, whatever, maybe strategic defaults, they’re not all going to repay those loans. So the question is, what’s the difference? Like you said, if they’re all in that high tier category, how does the lender put in any risk premium for those loans? They just don’t. Right. Yeah, I mean, there are still adjustments for for example, down payment is one that we see a lot for single family house and everyone knows the standard investment property jump in is 25%. You can actually go as low as 20 or 15% down and those are higher response and your interest rate will of course, take a bump. But that is the sort of difference. You see us You’re still adjusting for downpayment. Mm hmm. Yeah, no question about that. And the less skin in the game, the more risky the loan. And when we certainly saw that through the Great Recession, no question about it. So about the FICO scoring system, though, you know, assuming that it’s not 766, you talked about, like, one of the things you wrote in, in this post was an $800,000 home listed in Oakland, California, which by the way years ago used to be a cheap area. It’s not anymore. As of now they can get that loan with 5% down on a 645 go score, is that correct? Just know that that is technically correct. It’s not going to be this interest rate or anything else, but it is what it is you can take into your house. And the average FICO score for people that actually receive mortgages nationwide, by the way is closer to 700 or 706, depending on your source. Okay, so there’s there’s a good barometer to give some comparison. But the most startling thing you said next was the debt to income ratio. Show, they can have a debt to get income ratio. It sounds like a 49.99%. And no reserves. In other words, money in the bank is required. It seems to me like maybe we’re getting a little too liberal again with this financing, or am I wrong? So it’s been like that for a lot of years. That’s actually not a new thing. The loan limit has changed. So before it was, whatever it used to be, and it was the previous summer so that does go up every year late November, early December. They look at the average sales prices across the nation, generate new new loan limits accordingly. But that 5% down with a dti not quite a 50%. That’s actually been around for a quite a long time. And what you will see is when you run the automated underwriting system if you do have that person that does literally have 640 FICO score, no reserves 49.99% dti 5% down they may not be true but the automated underwriting system it’s a case by case basis the software looks fatality this area makes a yes no decision. But there’s no hard stuff. There’s no automatic of your I’ve been down before, you know, hard stuff like that. And of course, dti is that debt to income ratio we were just talking about. Do you think another recession is coming around the corner? Are we you know, what are your thoughts on that just the general economy because it relates a lot to how we are lending on properties at least last time around it did got way out of hand. And the criteria was just two lakhs and then post Great Recession, I think the lenders over corrected and now they’re largely moving back into balance again, and of course here we’re talking more about homeowners, homebuyers owner occupied properties, then we are investment properties. But
Jason Hartman 23:40
this all relates to the entire banking system and the entire real estate market. And that’s why it’s important to to discuss even even for investors that are buying $140,000 houses in in the Midwest. So there were a couple things in there. The first one is recession right around the corner. You know if I knew the answer to that you and I wouldn’t be talking to Wall Street charging warm Budget $5,000 an hour for my time, right? I don’t know free sessions coming. I don’t know any more than you. And that’s the question accurately necklines we can predict the future. Why are you talking to me? Why are you charging $1,000 an hour to request? Well, question I was asked, I think we can say it is coming. It’s only when everything is cyclical. So yesterday, Wilson, David intercessions is true, and he will someday be there boom cycle and they’ll be in the recession. Yes, that is true. One thing in terms of how conservative or liberal lending is lending right now, it’s still more conservative than ever was in the past. One difference is in 2006, you might have had a loan that looks like it’s a 36% dti. You’re like electrically low respond, and then all that sort of stuff. But then the problem with that is, that’s 36% DCI according to stated income, so what’s the real DT? I have no idea. So we talked about 49% DGI. In the current era era in 2009, going to 2018 going to 2020. That’s actually a real number based on really conservative underwriting principles. For example, you know, self employed, you’re generally going to be self employed for two years before that. can be considered at all. And I’ll give you a ridiculous example. Because usually ridiculous examples help us understand what’s really going on. I had a doctor who had a three year contract for an Israeli company that was selling medical devices, United States, and they only had a very few people in the United States doing this. They didn’t want to set up payroll system, HR department and United States. So doctor had a three year $20,000 a month guaranteed income in the contract. All you have to do is keep having a pulse and he’s 20 grand a month, there is no ambiguity. The contract is Morris qualified income was zero dollars, because it just so happens that he was on 1099 and not w two. Okay, if you told me that, you know, that your writing is getting crazy to all it takes and tell me why couldn’t that doctor get a normal day? 36 low? Right, I should have been able to write right. And so the qualifying criteria, the underwriting is much more verified now than it was in the past. Yeah, so you might be skeptical of for national DGI but it’s a real for the next MBTI it’s not 36 on paper, but in reality, it’s 76 or something absurd like Right, right, right. And so you don’t have the liar’s loans the way we used to, are any loans available that are interest only? Or is that come? I mean, negative amortization is a thing of the past, I’m pretty sure. But what about interest only? Are those available at all? Or Yeah, so that’s what’s in the non qm bucket of loans. And two stands for qualified mortgage, which means to check every single box you can think of from CFPB. To Dodd Frank, you know, all this stuff. And if it is a qualified mortgage, the lender is more protected in the case of a lawsuit. If it is a non qualified mortgage, wherever it is expressed is that the lender loses the presumption of innocence load of boxes, you have to check to the qualified mortgage, it has to be a fully amortized loan with a maximum of 30 years, which means issues like I said, whereas a non qualified mortgage, they’re not trying to check those boxes. They’re not claiming but it’s a paper type loans. So those loans can be interest only for the first 10 years for example, those Okay, so what you’re talking about Chris is interesting because it’s kind of the background of the mortgage business. And I think it’s important for for consumers to understand this, when you’re saying the qualified mortgage, the QM mortgage is where you check the boxes that it’s Dodd Frank compliant, for example, and Dodd Frank is this, you know, 2300 ish page bill that’s extremely complicated. And Bernie Frank and Chris Dodd, you know, where the main proponents of it and, you know, we all remember this coming out of the Great Recession, mostly. And when it’s a qm mortgage, you say the lender has some insurance. What you mean is when they sell that loan off into the secondary market, whether or not they’re going to have a buyback risk, right? Is that what you’re referring to?
Jason Hartman 27:37
Not quite so what you’re talking about is whether or not it conforms to Fannie Mae guidelines on Fannie Mae loans or qualified mortgages, not on qualified mortgages extending it looks like every reckoning every scores, right? And we’re not a rectangle square. Mm hmm. Perfect. Okay, so generally speaking, this is a qualified mortgage. That just means that you know, if someone Sue’s you or alleges predatory lending the course not going to start by throwing at you thinking you’re doing some shady, they’re going to start by saying directing good data the onus will be on potentially the person suing you to demonstrate that you were not asking to say that you did this fraudulent thing or you lied about this realize that it was a non qualified mortgage, like your, your position in that courtroom in the eyes of the courtroom is going to be more dis advantageous. The second you can walk in there much so much more risky if the lender is ever pulled into court. Right? Correct graph. So a standard qm agency more more An example would be a standing a 30 year fixed or an FHA three and a half percent down three fixed whatever the case would be in other loans that are not agency. They’re not backed by Sandy J. But they’re still qualified mortgages. They’re still terms of more than 30 years, they’re still documented income, they’re still you know, have normal dti restrictions and all that stuff. You just can’t sell to Fannie Mae, which means you might portfolio that loan on your books. But to make things more complicated, that exists on the nonhuman side as well, there are people that will do a non qm loan portfolio but most hard money loans are examples of that. You follow? Yep. Yep. Yeah, I’m a hard money lender. So I I’m definitely not doing qm loans, and there’s Another bucket of non Jew among the ones that you mentioned earlier, there are institutions doing these non qm loans that have found people on wall street that will buy that loan. So it’s not gonna bite a wall street guy. Do you have any stats or a sense of how much of the market is qualified and how much is non qualified? I don’t have a statistic or I don’t know the source that should exist, but just my feeling from doing over 90% are going to be qualified. They’re actually Okay, we kind of lost you. So I’m just going to repeat that for you that your sense of it is 90% or more are qualified mortgages. So that’s the vast majority of the market obviously. Good stuff, Chris. give out your website and tell people where they can find you. Gemma is 158469211 and my website is www dot East Bay’s mortgage broker com that’s East Bay’s with an S at the end of their possessiveness phase, mortgage broker, calm, good stuff. So East Bay’s mortgage broker down calm. Chris Mason. Thanks for joining us today. Thank you so much for listening. Please be sure to subscribe so that you don’t miss any episodes. Be sure to check out the show’s specific website and our general website Hartman. Mediacom for appropriate disclaimers and Terms of Service. Remember that guest opinions are their own. And if you require specific legal or tax advice, or advice and any other specialized area, please consult an appropriate professional. And we also very much appreciate you reviewing the show. Please go to iTunes or Stitcher Radio or whatever platform you’re using and write a review for the show we would very much appreciate that. And be sure to make it official and subscribe so you do not miss any episodes. We look forward to seeing you on the next episode.