The future of Real Estate. I am loving it! I will be teaching this in my October Class

Recovery From Worst Housing Slump Since 1930s Comes With Angel

By Bob Ivry

May 15 (Bloomberg) — The way out of the worst U.S. housing slump since the 1930s goes through Angel Gutierrez.

Gutierrez buys bad mortgages a dozen at a time for a fraction of their face value from lenders overwhelmed by the highest number of defaults in 23 years. When he goes door to door to negotiate lower payments for homeowners or pay them to move so he can sell the house, he’s speeding up the recovery by establishing a price for the homes and flushing out the least reliable borrowers.

“You buy the mortgage for pennies on the dollar, carry the big stick, tell the homeowner how it’s going to be, then double your money very easily,” Gutierrez said.

Gutierrez and his wife Brenda, based in San Diego, are a two- person shop in an industry that is attracting deep-pocketed investors such as BlackRock Inc., which manages $1.36 trillion in assets. While Gutierrez said he can buy up to $300,000 of bad loans with his own money and has funding sources for about $1 million, New York-based BlackRock plans to raise $2 billion to invest in discount mortgages.

“At this stage of the game they’re playing a very small role, but I expect that that role will accelerate as more people are willing to accept reality,” said Sam Zell, the billionaire real estate investor who’s called “the grave dancer” for buying distressed assets. “The single-family market has to be cleared. No market works unless it clears. If banks can’t clear, they can’t make new loans. Anything you do to keep people who can’t afford it in their houses is another way of delaying the market clearing.”

Eyeballing Properties

In San Diego’s Encanto neighborhood, where median home prices slid 38 percent in March from a year earlier, according to La Jolla, California-based DataQuick Information Systems Inc., Gutierrez, 42, pulled up in front of an L-shaped, one-story stucco house. The grass was tall enough to hide a broken child’s swing in the front yard. A dented Budweiser can lay next to the walkway.

Gutierrez, who was eyeballing the property to see if he wanted to bid on the mortgage, checked the gas meter mounted on the garage. It was spinning, a sign the home was probably occupied.

The homeowner was $365,000 under water after buying the house with no money down in June 2005, according to a spreadsheet listing about 30 loans for sale by a national mortgage servicer that Gutierrez referred to in his truck. If Gutierrez bought the note for 20 cents on the dollar, or $73,000, he could probably get the owner to leave by giving her $5,000 for moving expenses, then sell the home for about $150,000, well below even the neighborhood’s declining market value, he said. That would leave him a profit of about $70,000.

`Buy Cheap, Sell Fast’

“I like the fast nickel,” he said. “You buy them cheap, you sell them fast and you get paid.”

Gutierrez said he didn’t want to buy the house before he owned the mortgage because then he’d have to settle with the company that did own the note. That could be expensive. Negotiating a new mortgage for the homeowner could be tough, too, he said, because most of the lenders he used have gone out of business.

Still, when there was no answer at the front door, Gutierrez slipped a bright orange sheet of paper into the jamb. It gave the homeowner Gutierrez’s phone number to call if he was interested in selling.

“That’s so I can feel them out, see what they’re thinking,” Gutierrez said.

Gutierrez hailed a neighbor two doors down who was unloading groceries from her car. She explained that the woman who lived in the house was probably at work and her children were at school. The woman’s husband and brother were both “nowhere to be found,” she said.

`Bottom Feeder’

“You hear all kinds of stories,” Gutierrez said later.

Gutierrez said he’ll probably offer the homeowner enough cash to pay for a mover and a couple of months in a rented apartment because, he said, many of them want to get out but don’t have the money.

“I’m considered a bottom feeder,” Gutierrez said. “That’s the way bankers see me. They only want the best loans, the loans that are paying. That’s nice, but there’s no money in it.”

Gutierrez has no shortage of defaulting borrowers close to home. One in every 74 homes, or 15,315, in the San Diego area was in the foreclosure process in the first three months of 2008, compared with one in every 194 homes nationally, according to RealtyTrac Inc. Foreclosure filings in the San Diego area rose 252 percent in the first quarter from a year earlier, compared with a 112 percent increase in the U.S., the Irvine, California-based real estate data provider said.

Unsold Homes

The number of unsold new homes on the national market is the highest since 1980, according to the U.S. Census Bureau. More homeowners are late on their monthly payments than at any time in the last 23 years, the Mortgage Bankers Association said.

The number of home loans for sale is rising, said Marshall Whalen, managing member of Stockbridge Capital LLC in Albany, New York, which bought 19 bad, or nonperforming, mortgages from the Federal Deposit Insurance Corp. in March for 38 cents on the dollar.

“We went from seeing a couple deals a quarter to now we’re seeing 20 big deals a quarter,” Whalen said. “You really had to beat the bushes to find product before and now you don’t have to do that.”

Gutierrez said smaller operators like him are getting “knocked out of the game” because of the volume of mortgages that banks want to dump. With Wall Street giants like New York- based BlackRock, Goldman Sachs Group Inc. and Morgan Stanley getting into the business by bidding on thousands of mortgages at a time, Gutierrez said it will be increasingly difficult for “bottom feeders” like himself to make a living.

Getting Squeezed

“The banks want to get rid of the loans, and they want to get rid of them to one company, not 20 or 30 companies,” Gutierrez said. “It makes sense. I would do the same thing.”

A nonperforming loan that went for 70 cents on the dollar two years ago will generally go for about 50 cents today, and 60 cents if payments are still being made, said Jeffrey Kirsch, chief executive officer of Miami-based American Residential Equities LLC, which trades and services mortgages.

Prices will “jump dramatically when bigger players get in and start buying nonperforming loans,” Kirsch said.

BlackRock, the biggest publicly traded U.S. asset manager, announced in March it was backing a new company called Private National Mortgage Acceptance Co. LLC, also known as PennyMac, that will buy mortgages at a discount and renegotiate borrowing terms with homeowners. The Calabasas, California-based company will then service the loans, meaning it will collect monthly payments.

Highfields Capital Management LP, a Boston hedge fund that manages about $10 billion, also has a stake in the new firm.


PennyMac is headed by Stanford Kurland, former president of Countrywide Financial Corp., the largest U.S. home lender and mortgage servicer. Kurland was the one-time heir apparent to Countrywide CEO Angelo Mozilo.

The new company will avoid foreclosing on borrowers, said Mark Suter, PennyMac’s chief portfolio strategy officer. Aside from the social cost of foreclosure — vacant homes are eyesores and magnets for vandals, and they can bring down home values in the area — Suter said it was more expensive to take over ownership of a home than it was to get a borrower to start paying the mortgage again.

“We don’t want to provide a Band-Aid that will fall off,” Suter said in an interview. “We want to create permanent solutions to borrowers to stay in their homes.”

Foreclosure Costs

Foreclosure can cost lenders 35 percent of the value of the home, according to a study by the Association of Community Organizations for Reform Now, or ACORN, a non-profit homeowner advocacy group.

“Banks don’t want to hold on to a nonperforming asset for the length of time it takes to get people out of the house,” said Morris Davis, a real estate professor at the University of Wisconsin in Madison.

Lenders also sell loans so they can avoid the hassle of dealing with problematic borrowers, said Eric Fitzwater, senior analyst with SNL Financial LC in Charlottesville, Virginia.

“There are horror stories of people getting kicked out of their houses and because they were pissed off, totally destroying the house,” Fitzwater said. “Getting 60 cents on the dollar is better than getting nothing.”

On a sunny day last month, Gutierrez knocked on doors in Imperial Beach, an arid, hilly town just south of San Diego. There were three Imperial Beach houses on the spreadsheet provided by the mortgage servicer that was selling them; none of the borrowers had made a payment in months. Gutierrez was “driving” the neighborhood, as he calls it, to determine what he would bid on the pool.

Imperial Beach

In Imperial Beach, 15 homeowners lost their properties to foreclosure in the first three months of 2008, compared with four in the same period last year, according to DataQuick. The town’s population is about 26,000, according to the U.S. Census Bureau. The median single-family resale price in town fell 19 percent in the first quarter compared with a year earlier, DataQuick said.

Gutierrez said that because of the legal fees, he avoids foreclosing except when he has to “clean” the title of liens or other legal judgments. He said he never collects borrowers’ monthly payments because he doesn’t want his life to get too “complicated.”

At a one-story, L-shaped stucco house in Imperial Beach with four-foot-tall rose bushes and an American flag hanging from the garage, 62-year-old Armida Leos answered the door. Her 73-year-old husband, Gilberto, a former U.S. Border Patrol officer, had to quit retirement and get a job as a security guard when their monthly mortgage payments jumped to $3,200 from $2,400, she said.

`We’re Losing It’

“I feel really bad for my husband because he worked his heart out to get us into this house and now we’re losing it,” Leos said.

Gutierrez’s spreadsheet said the Leos family owed $455,000 on their mortgage. Leos said she and her husband spent $50,000 fixing up the house when they moved in three years ago. They had just received notice from San Diego County that their property tax was being reduced because the house had been assessed for $193,000.

Back in his pickup truck, Gutierrez said he was prepared to offer Leos and her husband $5,000 to move out. He made note of the town’s falling home prices and how the house didn’t seem to be that big.

“That’s not a real selling point,” he said.

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