Wells Fargo pays $3.25 billion in 4th quarter for mortgage regulatory investigations and sales practices

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2017 has been quite a year for Wells Fargo, as it continued to face fallout from its massive fake accounts scandal.

Several states, including California, Ohio and New Mexico, rose up against the bank, banning it from doing business with their governments.

But the fake accounts scandal wasn’t the only malpractice discovered at the bank. In October 2017, The Financial Industry Regulatory Authority ordered Wells Fargo Clearing Services and Wells Fargo Advisors Financial Network to pay more than $3.4 million in restitution to affected customers over faulty sales practices.

The bank has also taken steps to improve its business over the year, including getting rid of its sales incentives, which were blamed for causing the original scandal, changing up its leadership for its compliance team with a new chief compliance officer, who will start in January 2018, and even announcing a new CEO.

Now, the bank’s fourth quarter earnings show Wells Fargo paid a total of $3.25 billion in pre-tax expenses for litigation accruals on a variety of matters including mortgage-related regulatory investigations, sales practices and other consumer-related matters. A majority of this expense was not tax deductible.

The bank’s noninterest income surpassed that of the third quarter at $9.7 billion, up from $9.4 billion, however this income was partially offset by a decrease in mortgage banking.

Mortgage banking noninterest income was $928 million in the fourth quarter, down from $1 billion in the third quarter. Residential mortgage loan originations were $53 billion in the fourth quarter, down from $59 billion in the third quarter.

Mortgage servicing also continues to decrease. Mortgage servicing income was $262 million in the fourth quarter, down from $309 million in the third quarter.

Overall, the bank made $88.4 billion in revenue in 2017, up from $88.3 billion in 2016. Net income increased 4%, or $1.8 billion to $49.6 billion for the year.

During the fourth quarter, revenue increased slightly to $22.1 billion, up from $21.8 billion in the third quarter and $21.6 billion in the fourth quarter of 2016.

The net income increased to $6.15 billion, up from $4.54 billion in the third quarter and $5.27 billion in the fourth quarter 2016.

This is diluted earnings per common share of $1.16, up from $0.83 per share in the third quarter and $0.96 per share in the fourth quarter the previous year.

Source: Housingwire.com/Shutterstock.com

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2018 Sacramento Residential Real Estate Predictions

Last year saw rising prices in Sacramento-area real estate as buyers competed for a tight supply of homes for sale.

What will 2018 hold? The Sacramento Bee asked three experts in different fields of real estate to help predict market conditions in the coming year.

Ryan Lundquist is an appraiser who tracks housing trends on his Sacramento Appraisal Blog. Pat Shea is president of Lyon Real Estate, the region’s largest brokerage. And Dean Wehrli is senior vice president for John Burns Real Estate Consulting in Sacramento, advising builders and investors on industry trends.

Lundquist: Prices have been trending upward since 2012. Last year they went up again by 8 to 9 percent. That’s pretty consistent with the past few years, the way the market’s behaved. We have a market trying to figure out, “What does normal look like?”

Shea: I’m predicting 5 percent price appreciation in 2018. With the restrictions on inventory and tax changes, I think there’s some uncertainty. That’s why I’m taking a more moderate position.

Wehrli: Home prices will go up. We have at least a couple of years of appreciation ahead.

Q: Where are we in the current housing cycle? How much longer will the upswing last? Is it a good or bad time to buy or sell?

Lundquist: The first and most important thing I’d say is, “My crystal ball is broken.” When I ask people who bought in 2012, “Did you buy at the bottom of the market on purpose,” they almost all say, “Nope, I just got lucky.” Buying a home has so much to do with lifestyle. It’s not just an investment. Are you comfortable with the mortgage payment, and does this house make sense with your lifestyle? There’s no guarantee of what will happen in the future. I would advise someone (thinking of buying or selling) to be cautious. It feels like we’re closer to the top of the cycle than we are to the bottom, but it’s a guess about whether or how long home values will increase.

Shea: I think we have more runway in the housing market. There are more buyers willing to buy because the employment numbers are so solid. New construction is getting more traction. Interest rates will stay low this year. Absent something significant happening on the national or international level, the (upswing) should continue through 2018 and 2019.

Wehrli: Typically our housing cycles are six or seven years (which we’re nearing). But I think we’re in for a comparatively longer housing cycle. We have legs left in this cycle.

Q: Are we in another housing bubble?

Lundquist: As prices increase, it’s only natural to have those conversations. I’ve heard more and more talk this year (about a potential housing bubble). With Bitcoin being in a very clear bubble, it provides a natural platform to parlay that into real estate. If you compare the numbers now and in 2005, you see the price metrics are getting pretty close. If we have a normal year of appreciation, by the end of the year we’d be pricewise right about where we were at the top (of the market in 2005). It’s only natural for people to see that. But we’ve had a lot of inflation for the past 10 years. It’s such a different market today than in 2005. We don’t have the ticking time bomb of variable-rate mortgages. Back then lenders were giving money to anyone with a pulse.

Shea: In my opinion, the answer is “no” because the previous housing bubble was fueled by bad loans. This time around, there’s much more conservative financing, the interest rates are so low and the appreciation (has been steadily trending upward). There’s no way people are going to lose these houses, especially with rents going up. You could rent for more than the mortgage payment. The housing market is built on a tremendously strong foundation.

Wehrli: I don’t think we’re in a housing bubble or anything approaching that. The 2012-13 appreciation was really rapid. The market caught up. The appreciation (since then) hasn’t been extravagant. It’s sustainable, and it’s not completely out of whack with incomes, as it was in 2004-05. The supply is constrained. There’s not easy credit or ginned-up demand. I don’t see any of those things in the current market at all.

Q: Is there any relief in sight for the Sacramento region’s tight housing market? Will the supply of resale homes and new housing increase significantly in 2018?

Lundquist: A shortage of housing plays a huge role in the market being competitive. I hope inventory improves slightly this year. It’s just going to take time. Unless something happens that we don’t expect, it’s just going to be a longer ride to see that play out. More new construction of single-family homes and apartments would help. It’s not just all on the builders. Cities and counties need to cooperate and have a building-friendly environment. That’s really the big solution to the housing crisis. We need more units, and those units have to be built.

Shea: I don’t see any significant relief. Just enough keeps coming on the market to sustain us. That’s a composite of individual decisions to move up, move down or move out of the market. Plus marriages, divorces, life changes always happen to people.

Wehrli: I don’t see that alleviating. We still are in an undersupplied market. Where undersupply is greatest is in the entry level. The new home market has a hard time servicing that sector (because of rising construction costs). I don’t see what the factor would be to release more supply onto the market. Single-family rental investors came here in a big way and bought up the supply (of low-priced homes in 2011 and 2012) that would have percolated into the resale market by now. That supply is not coming back into the for-sale sector soon, if ever.

Q: How will the Bay Area’s economy influence Sacramento home values, whether it continues booming, or, as some suggest, hits a downturn?

Lundquist: I think what happens in the Bay Area can impact our market to a certain extent, but I don’t think Bay Area home values are the main driver for Sacramento. If we have tech money coming in, and there’s a tech bubble, that would remove buyers from our market, particularly those with cash or looking for an investment. But I don’t think that’s the number one driving factor in our market.

Shea: Sacramento’s connectivity to the Bay Area is getting deeper and deeper. More Baby Boomers are going to come this way (to retire) and more young people, as they decide to start families, will find Sacramento an attractive place.

Wehrli: If Silicon Valley (were to slow down), it would have a marginal impact in Sacramento. There are some submarkets with newer housing – Elk Grove, North Natomas, West Sacramento – and upscale markets like El Dorado Hills that could be affected. But it’s not going to have a huge impact on Sacramento. We’d feel it but not in a major way. The Sacramento market is driven internally.

The Sacramento Bee

Catching up with the Times.

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They may be a little late to the game, but John McManus, publisher of BuilderOnLine.com, is betting home builders are about to get a dose of digital reality.  McManus, reporting from the Consumer Electronics Show (CES) currently underway in Las Vegas says the digital age has already transformed the purchase of goods and services; the National Retail Federation says 174 million Americans shopped both on-line and in stores between Thanksgiving Day and Cyber Monday, and 51 million shopped only in stores. But 58 million confined their shopping to their mobile phone, PC, or laptop.  Last Friday’s jobs report would have met the most cautious of analysts’ estimates for 161,000 new jobs were it not for a loss of 20,000 in the retail sector.

Those figures are, in essence, a payoff for the billions of dollars stores, even those that also have a brick and mortar presence, have invested in making on-line shopping a comfortable and rewarding experience for consumers. But so far, McManus says, residential development and home building have been shielded from the intensity and pace of change that has taken place in other consumer market places.  Now those changes are coming, and at unnerving speed.

He describes three areas where technology will be quickly changing residential building operations.  The first, and the most dramatic use of technology, is a new model marketing newly constructed homes.  Big builders are trying to drive down costs to bring more affordable homes to market.  One area of focus is the buying experience itself, and the resources builders currently spend on it. This includes building model home parks and sales and design centers to be the retail, consumer-facing dimension of their operations.

McManus suggests channeling a big chunk of those resources, he says 75 percent, into “technology and data-enabled virtual experiences” for consumers.   He quotes a discussion with a CEO of one of the major home builders he met at the CES who said building only one model home at each residential development, rather than four, changes the game economically. “What we’re investing in building, maintaining, warehousing, merchandising those models in all of our communities, we could instead develop rich experience with augmented and virtual reality tools.  It’s time for us to catch up to the rest of the way consumer businesses go to market, instead of doing this the antiquated, far more expensive way that we’ve been doing.”

So, McManus says, look for a sea-change in production home building, with model and design center investments diverting into technology-enabled buying experiences. He gives no specifics, but we envision standing in a builder’s lone model home, a center entrance colonial perhaps, and using a virtual reality device, tour each of his other three home designs.  Or, with a methodology already in use by one quartz counter manufacturer, scanning a room in the model then test driving various trims and finishes.

There are few digital or real-world markets that don’t depend on some form of customer ratings or reviews, and McManus expects technology will soon deliver this for homebuilders as well.  One new entry is the provision of a star rating for energy and water usage performance and, perhaps within months, we will see introduction of a standardized rating and review system for builders.

Another change underway is less dependent on technology than a result of it; specifically, the shift to on-line consumerism mentioned above.  This “Amazon-ing of America,” as he calls it, is having a profound impact on traditional shopping malls.  Builders are looking at failing and abandoned ones as so much real estate, ripe for repurposing.  The generally good locations they inhabit give them a new future as “higher-density, mixed use, attainably-priced complexes perfectly situated for many metro area’s housing-starved workforce populations.”

JANN SWANSON, Mortgage News Daily

Jan 10 2018, 12:16PM

Natomas is Best-Selling, Nationally

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Two Sacramento region residential master plans are among the top-selling nationally for 2017.

A list of the top 50 master plans by sales in the U.S. will be released this week, but both Westpark in Roseville and Westshore in North Natomas are expected to be on it.

Dean Wehrli, a senior vice president at the Sacramento office of John Burns Real Estate Consulting, which compiled the rankings, said both plans reflect current trends in new communities.

“They provide the alternative to private outdoor space,” he said, with homes in both projects featuring relatively small yards, but parks nearby. The high cost of land pushes builders to make projects denser, he said, while many of the buyers are young families who are used to a more urban living experience.

Combined, those two factors create what’s called an emerging homebuilding trend of “surban” communities that are in suburban locations but developed more like urban ones, Wehrli said.

Westpark, by Westpark Communities, is a 1,500-acre development in west Roseville planned for more than 4,500 homes. Westshore, in the northwest corner of Sacramento’s North Natomas area, is a residential development by K Hovnanian Homes, Lennar Corp. and Taylor Morrison.

Wehrli said such developments are popular not just because of the homes, but also because of the communities. Not only are there parks nearby, but distances are walkable. “You have to provide people with things to do,” he said, adding it’s becoming standard for such developments to have features such as a nearby public square, amphitheater, “town center” commercial area and amenities for pets such as a dog park.

Over the next few years, new developments in the Folsom Plan Area, south of Highway 50, are likely to emerge as popular master plans, Wehrli said. But there’s also concern that not enough new master plans are in the development pipeline, setting up the possibility of a lot shortage within the next few years, he said.

“There’s just not enough communities close to market where a builder can go in with a finished lot,” he said. Lenders are leery about financing such projects when they may face a seven-year cycle from conception to being ready to build, he added.

By Ben van der Meer  –  Staff Writer, S.B.J.

Possibility of New Jobs and Development Coming To Natomas

natomas development screenshot 2017-12-15 17.03.37.pngSacramento City Council voted Tuesday night to approve an agreement with health insurance company Centene Corp. that could bring thousands of new jobs to the city.

The agreement will now go to Centene’s (NYSE: CNC) board of directors for approval.

City officials announced the agreement on Nov. 17. Under the deal, Centene is eligible for an incentive package of up to $13.5 million in exchange for creating 5,000 jobs in Sacramento.

“The focus of our incentive plan represents a strong commitment to drawing high wage jobs to Sacramento,” Councilmember Angelique Ashby told the Business Journal. “While the site is in Natomas, the magnitude of such a large employer choosing Sacramento is far reaching and a big win for the entire region.”

St. Louis-based Centene offers health plans for participants in government programs, including Medicare, Medicaid and state health insurance exchanges set up under the Affordable Care Act. The company is benefitting from the growth of such programs, with 2016 revenue rising 78 percent to $40.6 billion and net income growing 58 percent to $562 million. Centene’sshare price has risen 70 percent over the past year.

To capture the full incentive package, the company will need to create 5,000 jobs in Sacramento, with 1,500 guaranteed net new jobs — i.e., jobs that are not simply relocated from other areas in the region. For every 1,000 jobs created by Centene in Sacramento, the city will pay the company $2.7 million, or $9,000 per net new employee for up to 300 employees.

To keep the incentive payments, Centene must begin hiring by 2022 and retain the net new employees for at least two years.

The incentives will come from the city’s Innovation and Growth Fund. The City Council voted to set aside $5.4 million from the fund, which will cover part of the incentive package—for up to 2,000 jobs created. The city will continue to set aside funds as Centene meets its hiring benchmarks.

“Directly incentivizing jobs should be a new tool to grow and diversify our economy,” assistant city manager John Dangberg said in a presentation to the City Council

While the agreement does not specify a site for the new headquarters, city officials have said it will be located within a designated area of Natomas.

Representatives of several regional organizations spoke in support of the agreement, including the Sacramento Metro Chamber of Commerce, the Power Inn Alliance, the Natomas Chamber of Commerce and the Greater Sacramento Urban League.

“I’m in total support of this,” said Cassandra Jennings, president of the Greater Sacramento Urban League. “These jobs are great for our community and the people who live here.”

She said that the Urban League has previously partnered with Centene on several programs, including a 600-student, anti-bullying program held at the Sacramento Convention Center.

Barry Broome, CEO of the Greater Sacramento Economic Council, told the City Council that Centene’s regional headquarters would rejuvenate the Natomas area.

 

“This will activate the redevelopment of Sleep Train (Arena). This will catalyze the Railyards,” Broome said. “It continues to add to our reputation as a world leader in health care.”

Greater Sacramento has been pursuing Centene for more than two years to locate a major facility in Sacramento. The economic development organization brought the opportunity to city officials in early 2017.

The city decided to offer an employment incentive agreement over other options — such as tax credits or abatements —in part because Centene had already received a $7 million tax credit last December from the Governor’s Office of Business and Economic Development. The earn the tax credit, the company would have to create 1,500 new jobs in Sacramento.

The jobs created by Centene must meet certain criteria in order to be eligible for the incentives. The average annual salary of the new jobs must be at least 125 percent of the average annual salary in Sacramento County. The median annual salary of the new jobs must be at least 120 percent of the median salary in Sacramento County. To keep the incentive payments, Centene must retain the net new employees for at least two years. The company must begin hiring by 2022.

The new jobs will primarily be nursing, accounting and technology positions, according to city officials.

Source: Sacramento Business Journal

Freedom Point Plaza – Roseville

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A mixed-use project being developed in Roseville might have less overall space, but more of it dedicated to restaurants.

Developers for the project near Topgolf, southwest of where Washington Boulevard meets Highway 65, will request those changes at a city planning commission meeting on Thursday.

The changes would increase the square footage of restaurants in the development by 5,475 square feet, including one new drive-thru restaurant, according to a city staff report. Another 9,625 square feet of retail space would be eliminated, with the net development total reduced by 4,150 square feet.

Those changes would also reduce the number of buildings in the Freedom Point Plaza development from 17 to 14, and result in 16,674 square feet of restaurants overall.

Other components of the development, such as 211 hotel rooms and more than 100,000 square feet of office space, would remain the same as the city originally approved in 2016.

Borges Architectural Group Inc. is listed at the applicant for the changes. A member of that firm said work on the project is scheduled to get underway next year, but referred further inquiries to the developer, who did not return a call for comment.

Gallelli Real Estate is the brokerage for the development, which has an online leasing flier showing a Residence Inn by Marriott and a Home2 Suites by Hilton as the two hotels.

Source: Sacramento Business Journal

Keepin’ it in the Family.

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Question. We are retired and have two children older than 21. We have some investment properties we do not want to sell at this time. However, we do not want to continue to be involved in the rental aspect of these properties and would like to know what alternatives we have in solving our problem.

Answer. You could consider hiring your children to be the property managers and pay them a fee for their services. This may relieve some of the property management burden which you are facing. And of course you can always hire a professional property manager to relieve you of the day-to-day operational burdens of ownership.

You might also want to consider gifting a portion of the property each year to each of your children. Under the tax laws, an individual may exclude from the total amount of gift subject to tax the first $14,000 in value of gifts to each donee during a calendar year. For several years, the tax stayed the same, but the IRS recently announced that as of January, 2018, it will be increased to $15,000.

Thus, next year, you and your wife can give gifts of $30,000 ($15,000 each) to each of your children, and then (depending on whether this amount will be increased) another $30,000 to each of your children the following years. And, assuming that Congress does not change these tax laws, this could go on for ever on a yearly basis.

The gift does not have to be in the form of cash. It could also be property or a portion of your property.

Let us assume that you both own one rental property worth $300,000. If my math is correct, a total of $30,000 is the equivalent of 1/10th of the property. You can deed to each of your children 1/10th of the property this year, and then another 1/10th of the property to each child next year — depending on the then-current market value of the property.

Under this approach, by deeding a portion of the property each year to your children, they obtain the tax benefits, if any, on their portion of the property, and they can also collect their proportionate percentage of the rents.

Unfortunately, your children’s basis for tax purposes will be the same as your basis in the property. When a person gives a gift, the tax basis of the giver becomes the tax basis of the receiver. Accordingly, depending on how and what the kids do with the property, they may have tax consequences when they ultimately sell. If you have significantly depreciated the property over the past several years, then your children’s basis will also be significantly reduced. This can be a problem, since when they sell the property, they will have to pay a large capital gains.

However, If they purchased the property from you, their basis would be their cost. But you would have to pay capital gains tax on your profit.

You could, of course, wait until you both die, in which case your children would inherit the property at the stepped-up basis, which is the market value on the date of your death. However, this requires probate proceedings in most cases, which can be complicated, time-consuming and expensive.

In many jurisdictions throughout the United States, if there is a transfer of property between parent and child, the county and state will impose no transfer or recordation tax. All you would have to pay is the nominal fee for actually recording the deed among the Land Records in the county or city where the property is located.

Many people have indicated they would prefer not to transfer the property, but rather just give a gift letter to the children indicating that a portion of the property has been transferred to them.

I cannot recommend this approach, since you have not physically conveyed legal title to your children. The IRS may want to challenge this approach. Thus, in my opinion, it makes greater sense to actually physically convey a portion of the property to your children each and every year, if this is the approach you intend to take.

The advantages are simple. Your children will gradually become the owners of your property, and will be able to take whatever tax benefits may be available for their interest in that property.

However, the disadvantages must also be explored. First, by actually deeding property to your children, you both have no more interest in that portion of the conveyed property.

If, down the road, you face the need for cash, you no longer own that portion of the property, and thus do not have any control over it.

Second, you are giving up your right to a percentage of the rental income stream. This means you are going to receive less cash from the rental property than you were getting while you owned the entire property.

As I have indicated, there are serious and complicated tax issues that must be explored, and thus you should check with your own tax advisor before finalizing any arrangement with your children. You could also consider doing a like-kind (tax-free) exchange, and swap your current rental property for other investment property which will not take as much personal involvement of your time. For example, if you find some rural land which has long-term future appreciation value, you certainly have the right to exchange your current rental property for that land.

But Congress is trying to pass a major tax reform law, and tax-free exchanges may be on the chopping block. So if that’s of interest, talk to your attorney immediately to get the ball rolling.

Author: 

Author of the weekly Housing Counsel column with The Washington Post for nearly 30 years, Benny Kass is the senior partner with the Washington, DC law firm of Kass, Mitek & Kass, PLLC and a specialist in such real estate legal areas as commercial and residential financing, closings, foreclosures and workouts.

Mr. Kass is a Charter Member of the College of Community Association Attorneys, and has written extensively about community association issues. In addition, he is a life member of the National Conference of Commissioners on Uniform State Laws. In this capacity, he has been involved in the development of almost all of the Commission’s real estate laws, including the Uniform Common Interest Ownership Act which has been adopted in many states.