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Hugh Bromma Bloomberg TV Interview on the State of the Housing Market

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07-02-2008

Date June 18, 2008

Station Bloomberg National
Location Network
Program Evening Edition

BETTY LIU, host: So, Hugh, the mortgage applications data considered a volatile gage, but what does it tell you where the US is this housing slump?

Mr. HUGH BROMMA (CEO, Entrust Group): Well the--the applications are to be differentiated from the actual loans that are being made. And those particular criteria have a huge impact on whether or not individuals are actually able to acquire homes.

LIU: Well, the mortgage applications I see are there, but what--but what about the qualification requirement are getting stricter? So is this where the mortgage...

Mr. BROMMA: Yeah that--

LIU ...crisis delaying the recovery on housing?

Mr. BROMMA: Yeah, that’s the big one. Right now the average FICO score, in other words a score of credit, has risen to 666 on average. And most people aren’t able to do that, which of course provides opportunities for private lenders who are more equity based as opposed to looking at the credit score of individuals to be in a market that they can lend to those consumers that are interested in acquiring homes.

LIU: So how are your customers taking this all in? Are they still holding a fair bit of cash, or starting to use some of that money to buy homes and foreclosure?

Mr. BROMMA: Well, the--they are in fact starting to buy some of those foreclosures and some of the bargains. And we’ve seen those people who have been in cash are beginning to spend their money. Although it’s going to be a while before we really see the bottom of the market in the United States, people are starting to see that there are some opportunities there on the longer term basis that will cash flow for them. So we’re seeing quite a bit of that happening even at present.

LIU: So do you see clients steadily increasing their exposure to residential properties versus other assets in your portfolio? Because I gather you got about 60 percent of your assets in residential properties and the others in other forms of assets?

Mr. BROMMA: That’s right. What--the way that it divides up is that about 33 percent or half of the 66 percent is in real property. The other half of that is composed of loans, primarily mortgage loans, second deeds of trust, those kinds of things. The final part of the portfolio consists of about 20 percent cash and the rest is in private placements that look more toward commercial property, small strip centers and those kinds of things. And we’ve seen quite a bit of activity in all of those markets as the prices go down in selected areas.

LIU: But then you’ve got the Fed posturing for tighter rates as rising food and fuel prices worsen the inflationary pressures in the US economy. Isn’t that going to delay the housing recovery for much longer?

Mr. BROMMA: I think you’re absolutely right, and what we’re starting to observe is that because of the rising fuel prices and other demographic factors, that people are buying closer to where their job is and that people are beginning to also look at telecommuting as alternatives. So we’re, I believe, beginning to see a real societal shift in terms of how people work, where they work, and where they live. And I think we’re going to be in for a big change in America. Fuel prices in the United States really are relatively inexpensive compared to Europe and a lot of the rest of the world. Because here it’s only $4 a gallon, which although it seems high for Americans, for those of us who have paid $8, equivalent of a gallon, that’s relatively a bargain.

LIU: So what you’re saying is that you’re now finding that more are starting to move away from the suburbs and live closer to the cities where they’re more accessible to public transport.

Mr. BROMMA: That’s right. We’re hearing that. And with that in mind, I think we’re going to see some infrastructural changes that are going to be required to be able to deal with all of these people who are working in cities and the people who are working in the suburbs may be moving closer in the city over the next decade or so.

LIU: Yeah, but what if the Fed raises rates in the fourth quarter or the early part of next year? How long do you think that will delay the housing recovery?

Mr. BROMMA: I think that the Fed is going to raise rates simply because of the inflationary pressures. They will be going on this particular track for some period of time. It’s a big balancing act, because even though we’re in a recession now, how deep is that recession going to be, and how’s that going to be balanced against the inflationary pressures? So yes, it will delay the housing recovery, but again, that’s a balancing act. And I believe you had a previous guest that looked at having real estate recovery at--in 2009, at the end of 2009. My view is that it’s actually about three years out to be balanced to where it was two years ago when prices fell, when you consider the decrease in value of the assets in real estate as well as the inflationary pressures that are going to continue on as well as cost of living, fuel, and those kinds of things.

LIU: Hugh, thank you so much for your views. Good to talk to you.

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