Matrix Blog

Archive for September, 2005

Oiling The Mortgage Machine

September 29, 2005 | 11:21 pm | |


While the Fed has expressed concern about the risk of inflation by tightening short term rates, there may be a plus side to rising fuel prices at the gas pump [WSJ].

And the winner is? Housing.

Foreign oil producers are investing their excess dollars in the US debt markets which is expected to keep bond yields low, thereby keeping mortgage rates down.

Does this mean we will see housing prices rise at the same torrid pace this year like we have seen over the past few years? Probably not. The supply of housing has been rising and affordability has been tested as lenders pare back on higher risk loan products [Matrix].


Low mortgage rates have become the constant in the housing equation. Now its time to focus our attention on supply.

Mortgages May Now Cost An ARM And A Leg

September 29, 2005 | 10:49 pm | |


A sign that lenders are growing concerned with the housing market, some have raised their requirements [WSJ], especially specialty financing products like option ARMS and interest only mortgages. These moves come as the Federal Reserve has begun to raise concern about rising risk levels in the housing market but has been careful not to upset the housing market [Matrix].

Consumer Reality Distortion, Or Is It?

September 29, 2005 | 7:58 am | |

survey A survey [WSJ] by Royal Bank of Canada’s RBC Capital Markets unit of 1001 consumers found that most owners think their homes will continue to appreciate and the housing boom has not affected their spending patterns.

The results of this survey seems to indicate that consumer perceptions of their spending habits contradicts the Fed’s pronouncement that the consumer is driving the economy through extracting equity from their homes.

The sample was spread across geography, gender and income brackets, to make it representative of the general U.S. population. The survey’s margin of error was plus or minus 3%.

  • Only 10% of homeowners polled said they believe that rising real-estate values had affected their spending.

  • 85% of homeowners surveyed said they had experienced real-estate gains in the past three years

  • 70% saw gains of more than 10% in the past three years

  • 50% had extracted funds through home equity loans

  • 60% expect home values to rise at least 5% annualy for the next 3 years.

  • 3% expect home values to fall over the next 3 years.

  • 60% said rising energy costs were causing them to reign in spending.

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Averaging The Good And The Bad Appraisals: Everyone Loses, But The Loan Closes

September 28, 2005 | 10:12 pm |

About two months ago, one of my staff appraisers purchased a home, went through a reputable national lender and then waited for the loan to be approved. They paid list price and there were two higher offers submitted as backups.

The lender hired and sent their approved appraiser to complete the assignment. The appraiser inspected the 3 story 3,000 square foot house that needed a lot of TLC, completed the appraisal and delivered it to the lender.

That’s when the trouble began

The appraiser came in at about 11% below the purchase price (even though there were 2 backup offers and the property sold in about a week). As it turns out, the appraiser missed about 17% of the house during the inspection. The square footage was significantly different than the amount in public record and the floor plan appeared to be of a different house. The lender provided a copy of the report to my employee. All comps used were verified by my employee and were found to be generally accurate so the issue was really the selection of inappropriate (non-comparable) sales due to the incorrectly calculated size of the house.

My employee and his wife had to agonize through this situation for about 2 months before the lender decided to began to deal with the issue.

The appraisal department of the lender, hoping to keep their “Chinese Wall” in place to keep the appraisal review separate from the loan reps, finally contacted the original appraiser with the flawed report and requested that he review the inaccuracies. Not surprisingly, he said all was in order and he was not going to look at the report any further.

Here’s the problem

The lender’s policy was to average the two appraisals together. This means that the flawed appraisal would be averaged with a second (hopefully) accurate appraisal. This would make sense if the complaint was simply a difference of opinion. However, in this case, the issue was not over a value opinion. The original appraiser missed part of the house he was appraising.

While the lender should not automatically assume that any borrower’s complaints are valid, they should have the ability to get a handle on the major issues without a lengthy delay.

Averaging good and bad appraisals to arrive at a value is unreasonable since the flawed report should not be considered at all. The lower of the sales price and the appraised value were going to be used for this loan, so the borrower is still penalized for the original appraisal.

My employee never lost his cool and kept hammering away at the fact that the good and bad appraisals are being averaged and he kept hoping someone would hear him. I called someone I know, who knew someone at the lender, who knew someone, but ultimately, we do not know if this made any difference.

To give my employee proper credit, he never raised his voice or got personal with the lender. He relentlessly stated the facts orally and in writing, and documented everything. He was resigned to the fact that his seller would get cold feet and one of the other 2 backup offers would take the property.

And the good news

Out of the blue, the lender called and threw out the original appraisal. The mortgage was approved.

Raises the question of fairness

Unlike my appraiser, how can a person who does not understand appraiserspeak and not have access to confirmed data get a fair deal? In this example, the borrowers were appraisers and understood what data to present to the lender and how to interact with them.

Would typical borrowers have the same ability to research and argue the flaws of a report? I doubt it. In the lender’s efforts to separate the sales and underwriting function of a loan, sometimes the chasm is too far between underwriting and sales.

The questions we have are: what took the lender so long to deal with this unfortunate situation and what made them change their minds?

In the end, the lender did the right thing and for that, we can all be thankful. However, my employee plans to file a complaint against the appraiser with the Department of State for negligence after the loan closes and will demand a refund of the appraisal fee simply on principal. We can only hope that the lender will rethink their procedures for approving, reviewing and removing appraisers, so that no one else has to go through this again.

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Market Timers Beware: There Is No Wrong Time To Move

September 28, 2005 | 9:15 pm | |


A recent article by columnist Chet Courier at Bloomberg News asks the question: Is now a good time? Like the stock market, there are people who are convinced that the market is at the top and its now time to sell. Mr. Courier provides a lot of common sense for that question, “Is now a good time to sell?”

Media coverage has been full of get-rich quick stories and seemingly no-lose scenarios.

Yet the costs associated with selling are high and the transaction can be complex. Simply put, real estate is a lot less liquid than stocks. There are a lot of stories and assumptions made about market timers, those that have made fortunes selling at the right moment, but much of that is overblown or exagerated.

Likewise, homeowners could tie themselves in knots trying to decide when the absolute top of the market for their properties will be seen. The best time to sell, or buy, a house may be whenever you are ready to move.

Mortgage Fraud: Reviewing Appraisals Inflated By Millions [part 7 of a series]

September 27, 2005 | 10:32 pm |

Our appraisal firm tends to stay away from wholesale lending other than clients who pay their invoices and do not pressure us. Mortgage brokers tend to hook in with specific appraisal firms that make the deal, especially on cash out refi’s. We are not one of those firms. As a result, lenders tend to gravitate to us to perform desk and field reviews.

Here’s a typical scenario that happened today:

We are asked to review a report for a national lender who like many lenders, has better control over the quality of their retail channel appraisers than their wholesale channel appraisers. High volume mortgage brokers are often able to muscle “their appraiser” in by flooding the lender with high loan volume for short bursts.

The report we reviewed was a condo unit and relevant sales in the building were excluded and adjustments for amenities such as expansive views of the comparables were ignored. The appraiser gridded a listing as the first comparable that had been on the market for 6 months with no activity and yet the estimated market value was much higher than this sale. The other sales used were not comparable. The sales used had significantly superior views or locations and they were as much as 50% larger with token adjustments for square footage differences.

The result?

The estimated market value was overstated by about $2,000,000! Now I’d like to point out that this lender gives us a hard time about not measuring up to their turn time standards. Guess what? This appraisal firm can get the reports in faster than we can.

A while back, I reviewed an appraisal by this same firm that was about $9,000,000 over valued. The report had been shopped around to several lenders.

Lenders and appraisers that see this type of activity have little recourse in our state. We have to disclose our name in public and therefore would be subject to retaliation.

When is Congress, the secondary mortgage market and financial institutions going to figure this out? The end is near and good appraisers will be ready.

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Consumer Confidence Did Not Weather The Hurricane(s)

September 27, 2005 | 10:01 pm |


The Conference Board Consumer Confidence Index falls to its lowest level since October 2003

This survey for September runs through the 20th so it incorporated the effects of Hurricane Katrina and Rita, the spike in gasoline prices and less optimistic job market.

The Consumer Confidence Survey is based on a representative sample of 5,000 U.S. households.

Despite the sharp drop, the Fed is talking about future interest rate hikes [MarketWatch]. Ironically, it would seem that consumer pessimism is better suited for the housing market, rather than a robust economy, by keeping mortgage rates low.

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Something Existing, Something New, Something Old, Something Skewed: New Home Sales Weaken

September 27, 2005 | 8:51 pm |

The US Census Bureau and the US Department of Housing and Urban Development released the New Residential Sales Report for August 2005 [PDF].


Here are the highlights: [MarketWatch]
* The survey represents about 15% of all residential housing sales.
* Sales of new homes fell 9.9% from July 2005
* Sales of new homes increased 6.2% from August 2004

* Listing inventory increased 2.6% from July 2005
* Listing inventory increased 18.0% from August 2004

* A 4.7 month supply of housing at the present rate, up 14.6% from 4.1 months in July 2005
* A 4.7 month supply of housing at the present rate, up 9.3% from 4.3 months in August 2004

* Median sales price was $220,300, up 2.5% from $215,000 in July 2005
* Median sales price was $220,300, up 1% from $218,100 in August 2004


For more charts:
[Calculated Risk]

What does this all mean?

Well, the survey size is small relative to existing home sales but its based on contracts so its closer to actual market conditions right now. Did you know that this survey is not made based on actual sales data but rather it is based on sample surveys?

The report indicates that the national housing market for August weakened with a drop in volume from last month, an expansion of inventory, yet still an increase in prices. Much of the drop was artibuted to the slow down in multi-family housing, namely condominiums and rentals [REJ]. The jump in mortgage rates in July may have been one of the catalysts for the slow down.

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Extreme Housing: Useless Habitat Trivia

September 26, 2005 | 10:15 pm |

Here’s a set of useless housing trivia [San Diego Union-Tribune]


The world’s largest residence is Istana Nurul Palace, the home to the Sultan of Brunei. With more than 200,000 square feet of floor space, including 257 bathrooms, it dwarfs Aaron Spelling’s little 36,500-square-foot shack, which is the largest house in Hollywood.


The smallest house is a wee cottage in Conway, Wales, that measures roughly 6 feet by 10 feet by 8 feet. It’s so tiny that it has no bathroom, and its most modern feature is a faucet!


The most expensive house ever built is the Hearst Castle in San Simeon. It was built for William Randolph Hearst between 1922 and 1939 at a total cost of more than $30 million. In today’s dollars, that’s nearly $276.9 million. That makes the most expensive house sale – the $101.9 million paid in 1997 for a property in London – look like chicken feed.


NCRC: Hitting The Campaign Trail For Responsible Appraisals

September 26, 2005 | 9:48 pm |

The National Community Reinvestment Coalition (NCRC) has initiated a Responsible Appraisals Campaign [NCRC] and has published some of the most direct anti-preditory lending materials I have seen to date.

NCRC was formed in 1990 by national, regional, and local organizations to develop and harness the collective energies of community reinvestment organizations from across the country so as to increase the flow of private capital into traditionally underserved communities.

The focus is primarily on the appraiser, who is commonly pressured to “hit the number.” This web site provides extensive descriptions on predatory lending practices and who the appraiser is typically involved. The documentation seems to place more blame on the lender but there is still plenty left for the appraiser.

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Greenspan In The House: Study Downplays High Risk Financing As Cause Of Rise In Prices

September 26, 2005 | 8:57 pm |


Federal Reserve Chairman Alan Greenspan spoke to the American Bankers Association today [Federal Reserve] and re-visited the topic of housing. He indicated that any decline in home prices would not necessarily be disruptive [MarketWatch].

Some key points from the a new study he co-authored:

  • Owner-occupied homes have risen 9% on average annually.
  • US housing market is a collection of local market loosely connected by mortgage rates, migration and construction capacity.
  • Speculation is largely local, the fees associated with a sale are a formidable barrier.
  • 14% of home purchases are second homes up from 7% in 2000.
  • Less than 5% of all home mortgages have an LTV greater than 90%.
  • The use of piggy-back loans is not strongly correlated with housing appreciation.
  • LTV are lower in states with the highest appreciation rates.

These are interesting points made that seem to belie many of the arguments that high risk financing is causing a housing bubble.


NAR: So What Else Is New? Existing Home Sales Prices And Volume Increase In August

September 26, 2005 | 11:50 am | |

ladders Approximately 85% all residential home sales are existing homes. The large sample size makes the monthly NAR report representative of the country’s housing market as a whole than then new home sale stats released by the US Commerce Department tomorrow. However, existing home sales are based on closings so it lags the current market while new home sales are measured at time of contract.

The housing market has been the main driver of the U.S. economy this decade, accounting for 50 percent of the overall growth and more than half of the private payroll jobs created since 2001, Merrill Lynch said in a report on Aug. 15.

Today the NAR released their existing home sale statistics for August and the sesults were quite robust [Bloomberg]. The number of sales for August increased 2% over the prior month and 7.8% over the prior year suggesting that the rate of existing home sales has increased this summer.

The median sales price of of a US existing home was $220,000, a record. It was up 15.8% from the prior year.

The NAR expects housing demand to continue to increase due to the Hurricane Katrina. The cleanup will provide a drag on the economy keeping mortgage rates low, the primary driver of the current high level of sales volume. Steady job creation, easy access to financing have kept demand high.

The results were somewhat of surprise given the traditionally slow summer months and the concerned positioning the Fed has taken on the housing market this summer. However, these statistics do not reflect the August market due to the delay between contract and closing date.

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