Seven Predictions for 2020: The Rat Pack Edition

Earlier this year, Sunny and I made her third (my second) move across this great country of ours in three years, landing in Las Vegas. I have to say, so far, we’re quite in love with this city. Most of you only know Las Vegas from The Strip… which is unfortunate. It’s quite like judging New Orleans from Bourbon Street.

Fact is, the weather is fantastic… except for a few months in the year… but I can say that about just about every major city not in California. I mean, ever spent a summer in Houston or Orlando? What about a winter in Chicago or New York? The local communities here are growing fast, the economy is no longer 100% reliant on tourism, and the people are very, very nice.

So, Viva Las Vegas! Let the outsiders still know it as Lost Wages, but some of us who live here know that the city is not the casinos, and the casinos are not the city.

This year’s Seven Predictions, then, will have the musical theme of the classic Las Vegas act, the Rat Pack, in honor of my new hometown. As far as the predictions themselves, well, you know the deal by now: guaranteed wrong, or your money back!

Without further ado, then, here are the Notorious ROB Seven Predictions for 2020.

https://youtu.be/2j8Vo_wakbI

1. Realogy Files Strategic Bankruptcy

Let’s talk about Realogy. It has had a terrible, horrible, no good, very bad 2019. From the start of the year, it has lost almost 1/3 of its stock value, from about $15 per share to $10 as of this writing. To be fair, that’s a big increase from when Realogy stock price hit $4.48 a share in September.

But lost in all the doom and gloom is the fact that Realogy remains one of the (if not the) most powerful companies in residential real estate. It has the #1 or #2 brokerage company in the NRT; it has the largest collection of top brands in RFG; it has a very large title operation in TRG, and it has a very large mortgage operation in joint venture with Guaranteed Rate. It recently sold off its Cartus relocation business for $400 million, but retained the Cartus Affinity business.

As Ryan Schneier, Realogy’s CEO, says over and over again, no one in the industry has Realogy’s size and scale.

Realogy is also profitable with $245 million in EBITDA in Q3 (although it lost money on a net income basis due to a $180 million non-cash impairment charge), and it has strong cash flows: $174 million in free cash flow in Q3. It has top notch talent across the board. Ryan Schneider remains one of my favorite leaders in real estate (even if the feeling might not be mutual given how I like to point out Realogy’s problems) and he’s surrounded by top notch executives with deep and wide experience.

This remains a great company with great people, great assets, great capabilities, and great resources. So what’s the problem with Realogy?

As I see it, it’s simple: Realogy is carrying an albatross around its neck in the form of $3.3 billion in net debt as of its Q3 earnings report. Very little of that debt is Realogy’s fault. Most of it was incurred back in 2007 when the private equity fund Apollo Global Management took Realogy private in a leveraged buyout, borrowing $6 billion. It’s kind of amazing that Realogy is still alive, actually. You can read this brief history from the NY Times to get a sense of what was happening in the early 2010s.

So what we have is a pretty healthy company, financially speaking, with strong cash flows, a giant footprint, strong leadership team, making moves… but burdened with enormous debt that it did not incur. That debt limits Realogy’s ability to make major investments or major acquisitions.

Strategic bankruptcy makes a ton of sense, in particular if Realogy can manage a pre-packaged Chapter 11 filing.

Without getting into too much detail, which would force me to break out my old Bankruptcy Law textbooks, the idea is to win approval from at least half of its creditors (holding 2/3 of the debt), put together a Chapter 11 reorganization plan, then file for bankruptcy, get the plan approved quickly by the judge, and emerge out of bankruptcy with a much reduced debt burden as well as certain other operational advantages. For example, in bankruptcy, you can break costly leases, which is what Kmart did in 2002 to buy a lot more time. Optimizing office space something that Charlotte Simonelli, CFO, mentioned in the last earnings call as a cost-saving measure.

What if Realogy could reduce its debt burden to say $1.5 billion? Screw over some of the creditors (like say, Apollo Global Management, which bought billions of Realogy debt back in the day), and convert many of the bondholders into shareholders? Sure, that dilutes current shareholders, but it could put the company in a far stronger financial position for future growth. A lot of existing shareholders might be okay with that kind of a pre-arranged scenario.

Plus, you find language in the Realogy SEC filings that says its various debts have covenants written into them that do things like restricting Realogy’s ability to make investments or acquisitions, merge or consolidate with other companies, transfer or sell assets, etc. and so on. I’m sure there are important exceptions and so on, and none of us really know what Realogy can and cannot do because of those covenants.

But we do know that such covenants can be renegotiated, particularly in a Chapter 11 reorganization, especially if it’s a prepackaged strategic situation. Could that let Schneider and crew fight without one hand tied behind their backs? Maybe.

Given all of the above, and given that these predictions are sure to be wrong, or your money back, I’ll go ahead and predict that Realogy will engage in some legal-financial wizardry in 2020 to set itself up for longterm success.

2. Regulatory Tsunami Hits Real Estate

Even before the explosive expose of racial steering and discriminatory practices on Long Island by REALTORS hit the scene, which I wrote about here, the government was already investigating the real estate industry.

Well, turn that dial up to 11 in the aftermath of that debacle in New York.

Already, we have Governor Cuomo of NY announcing an investigation and more regulation:

Governor Andrew M. Cuomo today directed the Division of Human Rights, the Division of Homes and Community Renewal and Department of State to launch a joint investigation into reports of widespread discrimination among real estate agents on Long Island. On November 17, Newsday reported the results of an undercover investigation into housing discrimination on Long Island. The probe’s deeply troubling findings include evidence suggesting real estate agents on Long Island engage in discriminatory conduct with disturbing frequency—including imposing unequal conditions and steering clients toward certain neighborhoods depending on their perceived race or ethnicity.

The Attorney General of New York announced an investigation by the Civil Rights Division:

New York Attorney General Letitia James (D) will investigate allegations of housing discrimination on Long Island following a Newsday report alleging numerous fair housing violations by brokering firms.

Two state legislators who cover much of Long Island have asked Ben Carson, the Secretary of HUD, to investigate:

U.S. Reps. Kathleen Rice and Thomas Suozzi will call on U.S. Housing and Urban Development Secretary Ben Carson to investigate evidence of unequal treatment of minorities by real estate agents on Long Island — as reported in an extensive Newsday investigation, the Democratic lawmakers’ offices said Monday.

I don’t imagine Dr. Carson will turn them down, do you?

But they’re not going to just wait, because the New York Senate has already scheduled hearings (which happened as I’m writing this).

I can do more Googling and post more results of politicians from both parties decrying racial discrimination and steering, but I think you get the idea.

Here’s the thing: don’t believe for a moment that this reaction from politicians and the authorities will be limited to New York. Politicians in other states will get into the action in their own states, even if there wasn’t an expose there because the issue is so juicy politically. Furthermore, there is little doubt that this will become an issue in the 2020 Presidential election races.

In case you missed it, Kamala Harris dropped out of the race on December 3rd. The remaining candidates for the Democratic nomination are scrambling to pickup her supporters, particularly in the African-American and Latino communities where Harris was strongest. Is there any chance that this issue doesn’t rise to the top of the list of issues to talk to black and Latino voters if you are Elizabeth Warren or Pete Buttigieg?

And if the Democratic field is all agitating for more government action to stop racial discrimination, is there some chance that Donald Trump, who is already not particularly strong on race issues, doesn’t get ahead of that train and start directing HUD and DOJ to take action? Not in my book.

So, once all of the investigations and hearings are done — and if you’re new to the way that government does things, such investigations and hearings never end with, “We didn’t discover any problems for the government to get involved in” — we will see a veritable tsunami of new regulations hit the real estate industry.

It’s going to happen; the only question is how wide, how deep, and how extensive they will be. More regulations are coming in 2020.

3. Compass Implodes

Over at Inman News, Brad Inman predicts that Compass will file a S-1 to go public in 2020. I don’t see that happening, at all. Instead, I see Compass slowly imploding in 2020.

First of all, we have the giant sinkhole of suck that is WeWork. Compass isn’t WeWork, and Robert Reffkin, a genuinely good guy and a charismatic leader, is no Adam Neumann mired in scandal. But the WeWork problem isn’t WeWork; it’s Softbank.

Since Compass’s lofty valuation is supported almost entirely by Softbank’s investment, and Softbank is kind of the laughing stock on Wall Street these days, it seems extremely unlikely that any other investor would be giving Compass anything like that kind of valuation.

Yes, I realize that Compass has already said that it has other investors, like the Qatar Investment Authority and Dragoneer Investment Group, and that it’s nothing like WeWork. Fine, but it feels like Qataris treat dollars the way the rest of us would treat used napkins, and Dragoneer guys are probably going, “Oh shit!” I think Compass knows it’s not getting a $6.4 billion valuation from any new investors in any kind of an IPO scenario in the near future.

Instead, there are signs that the collapse of Softbank’s credibility has slammed the brakes on all of its investments, and Compass is no exception. In the memo sent to employees, reported on by The Real Deal (among others), CFO Kristen Ankerbrandt talked about a “culture of frugality:”

Unlike WeWork, Compass has not been accused of egregious self-dealing and abuses of corporate governance. The brokerage touts a culture of frugality: In Ankerbrandt’s October memo she noted that she signs off on any expense above $1,000.

“Everybody flies coach here,” Ankerbrandt told TRD. “That’s in the DNA of the organization because we’re really here to deliver value for our agents first and foremost.”

That culture of frugality appears to be having an impact on recruiting of top producing agents.

The Real Deal reported:

[Compass] expanded from 37 to 122 markets last year, and spent lavishly to lure brokers with high commission splits and massive sign-on bonuses — some as high as $100,000.

Reffkin said those perks are shrinking as the firm establishes itself in markets. (A company spokesperson said the firm paid sign-on bonuses to less than 5 percent of agents.) And after investing heavily in acquisitions in recent years, he noted, Compass stopped entering new markets in January and is now deepening its presence in existing locations.

Turns out, Reffkin isn’t the only person who noted that those perks and massive signing bonuses are shrinking. In its Q3 earnings call, Ryan Schneider of Realogy said that competitive pressures from one unnamed company that could only be Compass had dropped off:

Let me now turn to the biggest question that we’ve been getting recently, which is what is happening in the competitive environment? As we told you earlier this year the competitive intensity in agent recruiting and retention took a large step-up in Q4 2018 and continued through this past summer with August 2019 being one of the most intense months in the last two years.

This challenge has really been all financial disruption from one competitor not the technology disruption that grabs headlines. But then something happened in September. Investors seemed to start caring about profitability and it started to show up in the competitive environment. In both September and October we saw a substantial decline in agent recruiting intensity both year-over-year and compared with the summer of 2019 from our most intense competitor.

Second, Compass has a key strategic initiative that just took a ball peen hammer to the forehead. At the end of Kristen Ankerbrandt’s memo, she writes, “Stay focused and let’s make the flywheel spin!”

Flywheel? Where have we heard that before? Well, Reffkin mentioned it in this interview, saying, “Our core flywheel is an inventory-based flywheel.”

But this post by Michael Quinn of Compass True North lays it out:

Let’s start with Sellers and Agents, who bring in our Inventory (real estate properties to buy, rent or sell). Having more Inventory gives buyers more options to explore, creating a better Buyer Experience. A great Buyer Experience leads to greater demand, increasing Buyer Traffic on Compass’ applications and products. The more Buyer Traffic we get, the more Sellers and Agents we attract due to the demand for Compass’ inventory. As we get more Sellers and Agents, we are able to increase our Inventory– spinning the Flywheel.

What’s missing from this description, and from Reffkin’s interview, is the word “exclusive.” Because inventory in the MLS doesn’t bring buyer traffic or buyer experience since everybody else has it too. It requires exclusive inventory to bring buyers and get the flywheel going.

Well, NAR’s new “Clear Cooperation” MLS Policy 8.0 took a sledgehammer to the most advantageous exclusive inventory strategies, like Coming Soon which is coming soon for weeks at a time. Compass and and likely will explore options using office exclusives, but that doesn’t allow for the kind of public marketing that Coming Soon did. And it is nowhere a given that such office exclusives strategies are going to be allowed in many an MLS.

Plus, with the Long Island situation spawning hearings and investigations left and right, I’m not particularly sanguine about an office exclusive inventory strategy surviving Senate hearings and HUD investigations.

Remove the “exclusive” from the flywheel, and what you have in Compass is exactly what Realogy, HomeServices of America, RE/MAX, and Keller Williams have… except those companies have magnitudes larger agent count, inventory count, buyer traffic, and the like.

Now, Compass can figure out an exclusive inventory strategy that gets around the various prohibitions working in concert with other major brokerages who want to do the same (see below.) But that’s going to take time and it isn’t clear that Compass will have the time.

Third, this is all rumor and hearsay and not to be relied upon… but I am hearing from a number of friends who are brokers and agents on the street that Compass agents are not renewing their contracts.

What I’m hearing is that more and more agents are choosing not to re-up with Compass once their initial term is up and they’re in no danger of having to pay back all of those signing bonuses and marketing support payments and such. They’re choosing to see who else is out there willing to dangle big checks and perks.

Given the slowdown in Compass’s recruiting… ah… intensity… it seems like a fair bet that Compass will be going through some attrition in 2020.

So, my prediction is that Compass not only does not go public in 2020, but that it actually starts to implode as some of its top agents choose to entertain other free agency offers once their two year terms expire, while the exclusive inventory flywheel at the core of their strategy gets slowed down dramatically.

But… life goes on. This ol’ world will keep on turning. Just remember the good times.

4. The Era of Office Exclusives Begins

As I have argued in these pages before, the MLS Clear Cooperation Policy (MLS Policy 8.0, or “Ocho” as some have named it) contains a giant loophole at its heart: the office exclusive.

And if you read the rest of that post (along with many others I’ve written on the topic), you know that the point of these exclusive inventory strategies is not to do double-ended deals or whatever, but to create a flywheel of exclusive inventory –> exclusive buyers –> recruiting and retention advantage –> better financials.

We already know that Compass has protested strongly, threatening litigation in at least one instance. We know that smaller companies like Assist-2-Sell are pissed off about it and begging the federal regulators to step in. You know what we don’t know? What the real big boys and players think about it.

Specifically, I’m thinking of Howard Hanna which has launched its Find It First initiative in Ohio, and then expanded it to Pennsylvania and Western New York due to the success it has had. Here’s how the program is described on the Howard Hanna blog:

The Find It First™ program allows Howard Hanna agents to market a seller’s home for sale exclusively on HowardHanna.com before it hits the open market.  The company’s website has close to two million visitors every month.  Ohio is the first area where the company is offering the Find it First™ experience to consumers.

“Find it First™ is another great way we help our customers Move Faster!” said Hanna. “Before it’s listed anywhere else, buyers can Find it First™ on HowardHanna.com/FindItFirst.  We are giving back localized control to our sellers.  Buyers coming to HowardHanna.com will see new Find it First™ listings as soon they are entered online by our agents, and before they are posted on other real estate portals such as Zillow.”

In my mind there is literally zero chance that Howard Hanna looks at Ocho and says, “Well, guess we have to fold up this highly successful program! Shutter the windows, everybody — we’re done here!”

And then there is Realogy, still the most important brokerage in the country. It launched Exclusive Look for its Coldwell Banker-branded NRT offices earlier this year:

Coldwell Banker Real Estate, announced today the beta launch of Exclusive Look. Exclusive Look is an in-network marketing tool for coming soon listings that empowers Coldwell Banker® affiliated agents to share and search for listings before they are placed in the Multiple Listing Service (MLS) or other public sites.

This is not just a small little test; Ryan Schneider mentioned it specifically in his Q3 earnings call:

In Q3 we launched Exclusive Look a new marketing product available to all of our 47,000 Coldwell Banker owned brokerage agents share and search new listings before they are available to the broader market via public websites. Given the size and scale of our business this is a unique competitive advantage. Exclusive Look should be national by the end of the year and expanded to our Coldwell Banker franchisees and their approximately 40,000 domestic agents in 2020.

Again, I think there is zero chance that Realogy simply abandons Exclusive Look now that 8.0 has been passed.

And of course, as I’ve said all along, once Realogy gets into it, everybody else of any size has to follow suit just to keep up. So I fully expect HomeServices of America, Keller Williams, RE/MAX, eXp Realty, and a whole host of smaller-yet-large companies (think HomeSmart, Realty One Group, etc.) to follow suit.

Despite Ocho, and despite potential investigation/intervention by government authorities, I think these enormous and important companies figure out how to take advantage of the Office Exclusives loophole loop-tunnel.

I can think of a number of ways that these large and important companies might do such a thing. I’ve outlined at least one way in my previous post.

But suppose NAR and the MLSs throw up roadblocks and barriers to those ways. What then?

Well… these companies are big enough to think about creating their own MLS, aren’t they? In fact, I’ve heard that Howard Hanna owns at least part of a couple of MLSs. In fact, they could create that dream of many a broker and agent: a national MLS that has nothing to do with REALTOR Associations.

“Well, they’d never do that and lose access to the current MLS!” True… but hey, have you heard of this thing called MLS of Choice? It’s a couple of rules that REALTOR-owned MLSs  have  to follow.

If the smart and experienced executives at the most important brokerage companies in the industry can’t figure out how to work that to their advantage… well, then I suppose they deserve whatever is coming to them. But I think they do figure it out and put together a series of initiatives that allows them to pursue exclusive inventory strategies.

Because all of these companies want to live, not merely survive. They won’t give up the dream of exclusive inventory that keeps them alive.

So, 2020 will be the beginning of the era of office exclusives as the largest and most important companies in real estate decide, “I gotta be me.”

5. Massive Three Way Merger: Opendoor, Redfin, Move

There will be a precedent-setting mega deal in 2020 in which NewsCorp engineers a complex three-way marriage between its online real estate property, Move (which owns Realtor.com), and the two leaders of their respective areas: Opendoor in iBuyer, and Redfin in brokerage.

NewsCorp suffered a 7% decline in revenue and 38% decline in profits in the last quarter (which is Q1/2020 for their fiscal year). In the prepared remarks, the CEO Robert Thomson mentioned that they were looking at selling off its News America Marketing and Unruly ad tech businesses.

Now, Thomson was very upbeat about Move, which operates REALTOR.com:

Based on the most recent comScore data, realtor’s.com traffic is clearly going significantly faster than that of our nearest competitor. In addition, we are pleased with the ongoing integration of Opcity, a business that is helping realtor.com become even more connected to consumers and to REALTORS who are provided with higher quality refined leads that we expect to monetize in adjacencies such as mortgages.

Of course he’s going to say that, but the NewsCorp Q1/2020 (their fiscal year) earnings report contains this:

Digital Real Estate Services

Revenues in the quarter declined $21 million, or 7%, compared to the prior year, of which foreign currency fluctuations had a negative impact of $10 million, or 3%. Segment EBITDA in the quarter declined $23 million, or 22%, compared to the prior year, primarily due to lower revenues, higher costs associated with the acquisition of and continued investment in Opcity and the $5 million negative impact from foreign currency fluctuations. Adjusted Revenues and Adjusted Segment EBITDA declined 5% and 2%, respectively.

…

Move’s revenues in the quarter increased 4% to $123 million from $118 million in the prior year, primarily due to 11% growth in its real estate revenues, partially offset by lower revenues from software and services. The increase in real estate revenues, which represent 80% of total Move revenues, reflects the acquisition of Opcity, growth in audience and higher lead volume. Realtor.com® continued to migrate leads from its Connections Plus product to its performance-based Opcity product, as it further evolves and scales its platform. Based on Move’s internal data, average monthly unique users of realtor.com®’s web and mobile sites for the fiscal first quarter grew 18% year-over-year to approximately 71 million, with mobile representing more than half of all unique users.

So… calling out Opcity as a main reason for losing money on the Digital Real Estate segment seems to balance out the positives in the earnings call… but that’s me.

At the same time, Opendoor has some interesting issues as well. As a Softbank portfolio company, it too is tainted by the collapse of WeWork. As with Compass, it hardly matters that Opendoor is not WeWork and Eric Wu is not Adam Neumann. If Opendoor was planning an IPO in 2020, it might need to pause and rethink that.

Furthermore, and far more important strategically, Opendoor knows that it has a major competitive disadvantage compared to its arch-rival, Zillow: CAC, or Customer Acquisition Cost. Plainly put, Zillow spends next to nothing on marketing Zillow Offers, because it owns the real estate category online: over 196 million monthly uniques, which means basically everybody who is looking for a house either starts on Zillow or ends up there.

That command of consumer eyeballs gives Zillow a huge advantage over Opendoor that it simply cannot overcome. In such a thin-margin business like iBuyer, having to spend 2-300 bps on marketing that your competitor doesn’t is a big deal.

So Opendoor teamed up with Redfin earlier this year. In the announcement, Opendoor CEO Eric Wu said, “Redfin and Opendoor are bringing together the reach of the most visited online brokerage with the scale of the largest iBuyer service to deliver a comprehensive service for more customers.”

The reach of the most visited online brokerage was 35.6 million average monthly uniques at the end of Q3. That’s 18% of Zillow’s 196 million. Now, Realtor.com was at 71 million. Even assuming some overlap, combine the two and we’re at 100 million or so — more than halfway to Zillow’s 196 million.

What about Redfin? Why would they agree to such a thing?

For starters, Opcity might be a pain in the P&L for NewsCorp, but it augments Redfin’s own Partner program very nicely. As a full-blown brokerage with over ten years of sending referrals to other real estate agents with nary a peep of complaint from other brokers and agents, there is a real fit there between the two.

Second, Redfin’s own revenues and profits scale with traffic. Adding Realtor.com’s 71 million or so could only help. Granted, if Redfin is the only brokerage to receive leads from Realtor.com’s traffic, that could be a political problem. However, Opcity is already charging a referral fee for leads; does it matter to a Coldwell Banker agent whether she is paying 35% to Opcity/Move or to Redfin? I’m not sure. I do know she doesn’t mind paying 35% to a KW agent or someone from RE/MAX though.

Third, NewsCorp’s core business is in media properties like Dow Jones (which owns the Wall Street Journal). Since one of Redfin’s strategic goals is to become known to consumers as a real estate brokerage, wouldn’t partnering with a major media company in some fashion in the course of the three-way merger be an attractive proposition? I think so.

Finally, Opendoor has a brokerage. In fact, Opendoor is a brokerage in all of its markets. In light of that, Opendoor acquired Open Listings, a small brokerage based in L.A. in 2018. Here’s a description of Open Listings:

Los Angeles-based Open Listings launched in 2015 out of Y Combinator with the mission of making buying a home simple and more affordable. The company developed a proprietary self-service platform that puts the buyer in control of the entire process from search to offer-creation to close. Customers use Open Listings to manage the process and are connected with on-demand agents as needed and receive cost savings of up to 50 percent of the agent commission. Open Listings has 45 full-time employees and currently operates throughout California, Seattle, Chicago, Austin, and Dallas-Fort Worth. Backed by notable investors such as Matrix Partners, Initialized Capital, Alexis Ohanian and Joe Montana, to date Open Listings has refunded over $8M to customers who have purchased over $1B in homes on the platform.

Huh. Mission of making buying a home simple and more affordable, eh? 45 full-time employees? Refunded money to customers? Doesn’t that sound like a smaller version of Redfin? If the goal is to create an “end-to-end marketplace for buying, selling and trading-in homes,” wouldn’t an Opendoor-Redfin marriage make the most sense?

I think so. Which is why I’m predicting — sure to be wrong, or your money back! — that these three will get married in 2020 in a mega-deal.

Now that’s three coins in a fountain thrown by hopeful lovers….

6. President Trump Nominates Tracy Kasper as HUD Secretary

In May of this year, President Trump spoke at the NAR Legislative Meetings & Trade Expo, commonly called the Midyear Meetings. It was an unscripted speech, with classic Donald Trump flourishes and tics, and it was well-received by the audience (though one suspects that most Democrat REALTORS were probably not in attendance.)

He told lots of rambling stories, patted himself on the back, and all in all, it was what you expect from a speech to an interest group. Kinda boring, actually.

But there was something rather interesting in the speech. During the speech, he mentioned Tracy Kasper, NAR’s Vice President of Advocacy, by name seven times. Here they are:

Vice President Tracy Kasper. Vice President. I just met Tracy. Great family. Thank you, Tracy, and your entire team for everything that you do to support realtors around the country. I guess that includes me.

…

But, you know, the environmental stuff was very tough. It was getting worse and worse every year. And I actually had this beautiful piece of land — 216 acres — and I was going to do something with it, and then I decided to do this. I’m glad I did this, because I can help more people. But, Tracy, they had a little area where water would sort of form when it rained.

…

We have almost 160 million people working. And many of those people are going to go out and buy a house. Right, Tracy? They’re going to use you as the broker. They’re going to call — “Tracy, I want to buy a house. And I won’t pay you 6 percent, Tracy. I won’t.” “I’ll pay you 1 percent.” I was famous for that. [Audience boos]

It seems obvious that President Trump was quite taken by Tracy Kasper. It must have been some meeting backstage before the speech, since he said he had just met her.

Note that he name-checked Bob Goldberg, CEO of NAR, only three times.

Trump began the speech by thanking Ben Carson, current HUD Secretary, but noted that Dr. Carson knew nothing about real estate when he was named to the post.

When I put him in charge of HUD — first of all, he’s a very smart guy, very adaptable. I said, “Ben, what do you know about real estate?” “Not much.” “How would you like to head HUD?” And you know what? Within a — it didn’t take you long, did it, Ben? And he got some of the smartest people in the business, and they’re doing a great job.

2020 is, of course, a Presidential Election year. Trump will be running for another term. His pollsters know that he’s weak with women, particularly professional suburban women. Plus, Dr. Carson is far better suited to be Surgeon General or running Health & Human Services.

It makes sense to nominate an accomplished woman who is not a DC insider to the post, and it makes sense to nominate someone who knows a thing or two about real estate. She wouldn’t have the learning curve that a brain surgeon had.

So who better than the Vice President of Advocacy for NAR he was so taken with in May?

Take it to the bank. Tracy Kasper is our next Secretary of Housing and Urban Development as Trump tells her, “Come fly with me!”

7. Zillow Ignites a Revolution in Mortgage

My VIP readers have already read my thoughts on what Zillow’s endgame is with its pivot to becoming a market maker that happens to run the largest portal in real estate: mortgages. Since it’s Christmas time, let me post much of what I’ve written there as a gift to my non-VIP readers as a way of a prediction sure to be wrong.

First, note that I have always thought that iBuyer is a mortgage play, not a real estate play.

In 2016, as brokers and agents were starting to panic about how iBuyers were going to take their clients away, I wrote that they don’t need to worry. I thought Opendoor was going for a piece of the trillions of dollars in revenues from some $1,744 trillion in “interest-earning, all loans and leases, gross, secured by real estate, single family residential mortgages” rather than a piece of the $70 billion or so in real estate commissions.

Now, how would iBuyers go about getting a piece of that action? In a phrase, seller financing.

Seller Financing

Banks have to worry about their depositors and FDIC and various banking regulations. Zillow and Opendoor do not. The Federal Reserve has to worry about major money-center banks and their stability; I don’t think the Fed worries about large corporations that have no depositors and are not actual banks.

It appears entirely feasible that Opendoor and Zillow could actually underwrite QM (Qualified Mortgage) loans since the requirements there are fairly minimal: no negative amortization or IO-only loans, no more than 30 years in length, limits on points and fees, fully-amortizing, and total monthly DTI of 43%.

Speed and Convenience Advantage

The advantage of seller financing, of course, is that as long as the minimal ATR requirements are met, the Loan Originators are registered and in compliance with all of the compensation rules, and some other fairly minimal TILA disclosure rules are met, the iBuyers can use their own underwriting standards that are (a) simpler, and (b) more relaxed than a traditional lender (particularly a bank) would use. Plus, the iBuyers have one gigantic advantage: appraisal.

Quicken Loans with its Rocket Mortgage uses technology to speed up the pre-approval with a rate lock guarantee, and then it goes into the traditional 30-45 days process to actually close the loan. A big chunk of that time is because of the requirement for an appraisal. Every third-party lender has to verify that the property is actually adequate security for the mortgage.

An iBuyer selling its own house and using its own money does not, because it has done the appraisal already at the purchase step, and already knows the condition of the property because it owns the house and because it has renovated that property itself. Again, if the iBuyer was wrong about the value of the property… it lost its own money on a foreclosure. No third parties, and certainly no bank depositors, were harmed.

And since the iBuyer can use its own underwriting standards for its own capital on its own property….

It does not seem crazy to me to think that an iBuyer could go from application to closing in a matter of days, not weeks. They’re already promising to buy a home from a seller in 48 hours with cash on the table; why not put cash on the table for the buyer/borrower in 48 hours?

Imagine being able to find the house you want, apply for a loan online (Rocket Mortgage style), and then have it approved and closed in 48 hours. It’s a mind-blowing thought for anybody who has ever applied for a mortgage, especially in recent years.

Non-QM Loans?

But what makes this whole scenario even more interesting is the idea that Zillow might be able to make the kind of loans that other lenders either can’t or won’t.

Think about the legions of 1099 workers, like real estate agents and gig-economy workers, who have the financial wherewithal to make mortgage payments… if only they could get a loan. What about those who have a bankruptcy filing four years ago, but are back on track for the past 24 months? Are traditional lenders going to take a risk on them? Maybe, maybe not. But Zillow can. Maybe the DTI ratio is over the 43% that QM mortgages require, but Zillow feels comfortable doing business with them, at a higher interest rate.

The phrase these days for these kinds of loans is “non-QM” instead of “subprime” because many of these loans are anything but subprime. There are no NINJA loans, no stated income loans, etc. Many of these are high quality fully-amortizing loans, but for creditworthy borrowers who have non-standard situations, such as business owners.

Now… given all of that, isn’t it all kinds of interesting that the new head of Zillow Home Loans is one Rian Furey? Who is Rian Furey? From the press release:

Most recently, Furey served as Chief Operating Officer of Impac Mortgage. He previously held roles as Chief Administrative Officer of LoanDepot and Chief Operating Officer of LendingTree Loans. He also has extensive capital markets experience as Vice President of Capital Markets of Discover Home Loans and Chief Operating Officer of Greenlight Loans. Furey began his career as a financial analyst and also worked for GE Commercial Finance.

Impac Mortgage… where do I know that name from?

Oh, that’s right! One of the largest non-QM lenders in the country!

The Revolution in Mortgage

So… I’m predicting that Zillow ignites a revolution in mortgage in 2020 by offering some suite of immensely compelling products, both QM and non-QM but leaning heavily towards the latter.

I think these products could be non-QM loans targeted to the rising group of gig-economy workers who will have a difficult time with the traditional underwriting process. Huge untapped market there.

They could be strictly standard QM loans that are Fannie/Freddie conforming… except they will close in 3 days instead of 45 days. They could be “push button, magic happens” in a way that makes Quicken Loans Rocket Mortgage look less like a rocket and more like a horse-drawn buggy.

They might be something we haven’t even thought of, although the phrase “trade-in” keeps appearing in the marketing copy of iBuyers everywhere. Except the Zillow trade-in will come with a discounted mortgage loan (or discounted purchase price) that is able to back up the dream of trading in one’s house as easily as trading in one’s car.

Whatever happens, fact is that Zillow could ignite a revolution in mortgages and I think they do in 2020. Because the goal of Zillow 2.0 is to make the entire experience of buying and selling a house nice n’ easy. It’s gonna be so easy. Because nice n’ easy does it every time.

Final Thoughts

There you have it, my seven predictions for 2020 that are certain to be wrong. But I hope you had as much fun reading them as I did writing them. The greater hope, of course, is that these predictions — as wrong as they’re likely to be — sparks some thinking, some creative breakthrough, and some different ways of looking at things. I know they did for me.

So with that, let me bid you adieu from my new hometown of Las Vegas… and a closing song that isn’t from the Rat Pack but one that we all know and love.

-rsh