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No Place Like Home

Author: Carleton Prince
September, 2009 Issue

NorthBay biz takes a look at the North Bay housing market and finds local companies, in the face of hovering regulators and uncertain risks, gaining more confidence each day.

We live in a special place. If you don’t believe it, just listen to how we talk about ourselves. The tourism folks in Sonoma County say that their geography, economy, and culture are so diverse that “county” isn’t really sufficient—they’re actually more like a “country.”

Napa County has even grander ambitions. What’s bigger than a country? A continent? A hemisphere? A planet?! No, no, much too terrestrial. Napa County describes itself as “heaven.”

Marin County, on the other hand, finds even celestial perfection a little too down-to-earth, so it says it’s “just a little out there.” You know, like the truth on “The X-Files.”

If we peel back the veneer of convention and visitors bureau promotion, however, what do we find underneath? Has the economic tsunami somehow parted its waters leaving the North Bay high and dry and safe and sunny?
In short, no. It’s a mess out there. And nowhere is that reflected more than in the real estate industry. According to RealtyTrac, which tracks foreclosures all over the country, Marin County as of July 2009 had 1,342 “distressed” properties (meaning in some state of financial trouble, from defaulting on a loan payment to being owned by the bank or on the auction block), while Sonoma County had 4,953 and Napa County had 1,365. Nevertheless, compared to the rest of the country, those numbers barely make the charts. The foreclosure rate for the entire San Francisco metropolitan statistical area recently ranked only 80th out of the 100 largest metro areas, and the North Bay was only a small part of that because Sonoma, Napa and Marin counties all started with meager foreclosure rates.

Philip Bruce Raful has been a state-certified professional appraiser for more than 15 years and a Marin County resident for 21 years. In September 2009, he wrote a Marin Voice piece in the Marin Independent Journal claiming we’re all victims of our own bad press: All we read is gloom and doom, because all everybody sees is the “big picture.” But the small picture, he argues, is what counts. And when you segment out the “pockets” of foreclosures, the real estate picture is much brighter.

As Raful points out, the median home price in Novato dropped from $706,250 in the first half of 2008 to $535,000 in the first half of 2009. Yet those numbers are skewed by the fact that 55 percent of 2009 home sales in the area were foreclosures or “short sales,” which drove down the aggregated numbers. If you look at the upper end of the market, homes above about $800,000, prices remained pretty stable in Novato during that same period.

The real problem, he says, is “there’s no such thing as ‘the market.’” What your property is worth does depend on where it is, but also on “what it is, what its condition is and what the amenities are compared to other homes in your same market segment.”

Here’s where it gets ugly. Determining that value is no longer as simple as it was. In 2007, when housing prices in the United States started to decline, Andrew Cuomo, attorney general of the state of New York, filed a suit against a division of First American called eAppraiseIT that, he alleged, was inflating appraisals on behalf of its client, Washington Mutual. As part of the suit, Cuomo threatened to subpoena executives from Fannie Mae and Freddie Mac.

Now as you may know, Fannie Mae (officially the Federal National Mortgage Association) and Freddie Mac (officially the Federal Home Loan Mortgage Corporation) are Government Sponsored Enterprises (GSEs) that were set up to facilitate the mortgage market by guaranteeing to buy loans that met certain standards from lenders. These GSEs weren’t the only players in the secondary market game. Some banks also bought loans, and, like the GSEs, bundled them into pools, cut them into “tranches” of various levels of risk, and sold them as Mortgage Backed Securities (MBSs) on Wall Street.

You know how that worked out. Bear Stearns is gone, IndyMac is gone, Countrywide has disappeared inside Bank of America, and every other secondary market investor is gone—except for Fannie and Freddie.

Problem is, in their eagerness to put people into homes, Fannie and Freddie were buying loans that probably shouldn’t have been made in the first place. And when Cuomo threatened to subpoena the executives of Fannie and Freddie to grill them about their appraisal practices, the GSEs decided the better part of valor was to settle. Part of that settlement involved the creation of the Home Valuation Code of Conduct (HVCC), which stipulates that banks and appraisers needed a “middleman” to prevent them from colluding.

The HVCC went into force just this past May, when the GSEs officially started buying loans only from lenders that used disinterested third parties for appraisals. To meet this standard, a new industry has formed: appraisal management companies (AMCs). These organizations hire appraisers to do what individual professional appraisers used to do. The result: A lender can no longer choose the appraiser it wants. It has to go through an AMC if it wants the loan to be bought by Fannie or Freddie. And the way the lenders choose the AMC is by cost, so the low-price bidder gets the job.

For what it’s worth

The advent of the AMC has had a huge negative impact on the perceived value of real estate in the North Bay. David Devlin, a 29-year veteran of the mortgage business in the North Bay and a mortgage consultant with All California Mortgage in Larkspur, tells the story of a client who’d agreed to purchase a home in the Rockridge area of Oakland.

Devlin’s client was a physician with stellar credit. The price of the home was $950,000, considered very fair by the seller’s realtor, who had two decades of experience in the Rockridge area and knew what local values were. The doctor should have been a shoe-in for the loan. But when the lender went to the appraisal management company, they sent out an appraiser from Santa Clara, who didn’t know Rockridge from Temescal, and came back with an appraisal of $750,000. “So the deal fell through because the bank wouldn’t finance it,” says Delvin. “My client is out $500 for the appraisal, he doesn’t have the house he wanted to buy, and the seller is still stuck with the house he wanted to sell. The whole industry has been turned upside down!”

It’s this kind of thing that’s pulling the entire market down. “The real frustration,” says Raful, “is that these appraisal management companies aren’t regulated and don’t have to be licensed. There are even cases when appraisers who lost their state license to practice as independent professionals have opened an appraisal management company.” And because AMCs are for-profit companies that take 40 to 60 percent of the appraisal fee, they tend to hire inexpensive, inexperienced or otherwise inappropriate appraisers.

“This used to be a volume-oriented business driven by the secondary market,” says Devlin. “Underwriters used to get fired if they didn’t approve enough loans to keep the pipeline filled. Now they get fired if every loan they approve isn’t perfect. Consequently, it’s much more difficult for buyers to get approved for mortgages.”

Now the only secondary market is Fannie Mae and Freddie Mac. And with the HVCC—along with the subprime meltdown, the credit crunch, the bank failures, rising unemployment and so on—decision making has slowed to a molasses pace. “Wells Fargo used to underwrite a loan in two days,” relates Devlin. “Now lenders in general are taking longer to underwrite loans because of the quality control issues attached to each mortgage.”

And residential real estate isn’t the only area hurt by the bad news and indecisiveness. Commercial projects are also suffering.

The Wright path

Wright Contracting, Inc. has been in business in the North Bay since 1953, and there isn’t a part of our local commercial landscape it hasn’t touched. The stunning 18th-century château-style Domaine Carneros winery between Napa and Sonoma is a perfect example of Wright’s standard of quality. The same goes for Cakebread Cellars and more than 70 other wineries. Not to mention the Petaluma Coast Guard training facility in Petaluma, Windsor High School, the Santa Rosa Junior College library, Santa Rosa Memorial Hospital, the Spreckels Performing Arts Center, the Napa Valley Opera House, Mendocino College, the student housing complex at Sonoma State University—and the list goes on. But even for a company of Wright’s stature, the economy is making business tough.

“Since October 2008, we’ve had three projects postponed and/or possibly cancelled,” says President Mark Davis, who’s been with the company for more than 20 years. “These projects were under contract, all permitted and ready to go. And now they’re on hold.” Either the timing wasn’t right, the market changed or the financial picture became cloudy.

So Wright’s business plan has changed to accommodate this new reality. “It used to be that 80 to 85 percent of our business was negotiated private projects. Now that’s down to about 60 percent, but we’re spending 80 to 85 percent of our time bidding public projects in hopes of winning about 20 percent of those bids. The whole process is different, the timelines are different and the level of competition is much different,” says Davis. Where Wright used to see maybe four or five competitors bidding jobs, “now there are 20 to 25 companies,” he says, “and they’re no longer from just around here, they’re from all over the state—that’s how competitive and tough it is out there.”

But Wright’s diversity is also its advantage in this competitive environment. “We can do any type of construction. And since we’re both general contractors and construction managers, we’re more flexible and can go where the work is needed.” But, Davis adds, the preference is to remain in the North Bay. “We like to say we don’t cross bridges. We prefer to stay within one hour of Santa Rosa if possible. Local management means local quality control, use of local subcontractors and suppliers, so we try and do all our jobs locally unless a repeat client makes a special request or the building climate dictates otherwise.”

Are things getting better? “Yes,” Mark smiles. “We’re starting to get a few more inquiries, more calls, we’re having more meetings. It’s a trickle, but it’s starting to move.”

“People are waiting for the economy to clarify itself,” says Catherine Munson, CEO of LVPMarin Realtors in San Rafael. Munson has been in North Bay real estate for more than 40 years, as both a realtor for residential and commercial properties and as a developer, and is one of only 8,500 people in the country to have earned the Certified Commercial Investment Manager (CCIM) designation. But, she says, the wait-and-see mindset is a natural reaction to “a general disease that built upon itself.” It was a “fever” that largely infected the residential real estate market, “but now the commercial market.”

“Everybody was involved,” she says, “lenders, sellers, buyers, brokers, the secondary market. It was like free money, and there’s no end to the creative new ways people will come up with to get free money.”

It’s all different now, she says. “Now banks are back to basing their business on the one very simple principle that so many had forgotten: Can you pay the money back? Generally, loans aren’t made if there’s not the probability of repayment.”

So as the pendulum swings out, so it shall swing back. Some reactions may have gone too far—such as the onerous HVCC, which is actually harming the very consumers it was designed to protect while weakening the underwriting processes it’s supposed to strengthen. Even now, the National Association of Realtors is mounting an information campaign in Washington to expose the significant inequities in this law.

But the market seems to be righting itself. Sanity is returning, and common sense is again ruling the day and guiding financial decisions. Banks are still slow to lend, even though they have plenty of money, because regulators are hovering and the risks are uncertain—but confidence is returning. The real estate market in the North Bay remains solid and is on track to again resume a healthy and sustainable pace of growth.

Which means, in the end, that the convention and visitors bureaus are still right. We do live in a special place.



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