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Archive for December, 2007

Inside Football: Optimistic Contrarian Views On Housing

December 30, 2007 | 8:25 pm |

Ok, I was watching the New York Giants actually beating the New England Patriots last night. I felt a glimmer of hope for humanity and even the housing market by seeing the extra effort being played in a game that means nothing to the Giants playoff spot while the Patriots vied for an undefeated season. Of course the Giants lost and my optimism for the housing (and humanity) market dimmed.

With the housing market weakening in many markets, its easy to pile on with “grim” news. Here are a few attempts at contrarian reporting from sources other than the NAR.

Daniel McGinn at Newsweek provides some optimism in his article: Housing Optimism: Why the year in real estate wasn’t all bad news.

  • Some Numbers Are Strong
  • Things Aren’t Tough All Over
  • Long-Term Owners Are Still Way Ahead
  • Even Pessimists Admit to Uncertainty

Holden Lewis at Bankrate makes a defense of low-doc loans (sort of) by responding to a reader’s optimistic response to his quote: “Limited-doc mortgages exist mostly to allow people to cheat on their taxes” (I wholeheartedly agree with the cheating angle Holden mentions):

  • Lenders sold themselves on convenience
  • Inexperienced underwriters suffered a mental “blue screen of death” when confronted with complex tax returns, because they’re trained to process loans assembly-line style.

Megan McArdle of Atlantic Monthly in her post Who cheated who? she:

  • Questions whether bankers are to blame
  • Believes subprime borrowers will not default en masse
  • Feels we are over reacting and that will cause more problems

Felix Salmon of Seeking Alpha in his post Are Subprime Losses Being Exaggerated? sort of teases us with this title but he’s really questioning the optimistic stance of many:

  • Middle-class homeowners out there suffering under the burden of enormous non-recourse mortgages
  • Its not just losses of subprime mortgages, its industries ranging from homebuilders to diswasher manufacturers

Confused? Join the rest of humanity – you’re not alone.


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Outstanding On Our Soapbox: Taking License With Appraisals

December 29, 2007 | 11:04 pm |

There has been a lot of great content presented by my guest columnists (and, ahem..me) on my other blog Soapbox as of late. Its a pleasure to have their contributions. Admittedly its appraiser-centric content, but isn’t that a big part of the credit crunch? Lack of understanding of mortgage risk and one way its measured is via value of the collateral.


Sounding Bored - My recent post outlines the problems with licensing the appraisal profession (hint: because it doesn’t go far enough) in Deja Vu: How Licensing Killed The Appraisal Industry As We Know It.

The Hall Monitor – Todd uses a tongue in cheek analysis of current appraisal practice and comes up with new rules for us to live by in Let’s Get The PAP Out Of USPAP!.


Fee Simplistic – Marty dissects the credit crunch for us via Tin Pan Alley music in The Paper Moon in the Cardboard Sky; Bewitched, Bothered & Bewildered; Don’t Know Why There’s No Sun Up in the Sky-Stormy Weather: How Tin Pan Alley Can Better Explain the Credit Crunch Than Alan Greenspan

Palumbo on USPAP – Joe speaks to the labyrinth of appraisal guidelines that exist and the problems with loosening the reigns in USPAP 2008: Be Careful What You Wish For.

There will be a quiz on Tuesday…


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[Sounding Bored] Deja Vu: How Licensing Killed The Appraisal Industry As We Know It

December 29, 2007 | 7:08 pm | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. This week I take license with our law.

Ok, admittedly that post title is a bit dramatic and I am not against appraisal licensing at all. However, I do not believe that licensing alone protects the public from bad appraisers. The same concept applies to appraisal designations. Licensing only one tool for the protection of the consumer, investors and financial institutions.

Take a look at this New York Times article of 1990 called Reappraising the Appraisal Industry.

”THE party is over,” said Eugene Albert, a real estate appraiser. ”The binging of the 1980′s is finished.” Mr. Albert was discussing the excesses that characterized the 1980′s real estate market and led to a recent law requiring state certification of real estate appraisers.

”Many of the bad loans made by the banks in the S.&L. disaster were sanctioned by unscrupulous or untrained appraisers,” he said. ”Even some bank lending officers here in the county, in their frenzy to make loans, would call my office and say, ‘I want an X dollar value of this property, can you give it to me?’ Our firm lost business because we wouldn’t cooperate, but there were appraisers that did. And that’s why state certification is important. It will prevent shoddy appraisal practices.

Does this summary sound familiar? Its nearly the same situation as we have today. Appraiser clients pressure appraisers to achieve the needed result.

The real estate correction of the late 1980′s led to appraisal licensing in 1991 which was supposed to fix the problem of inflated appraisals. Yet mandated appraisal licensing made the quality of appraisals worse. Why?

  • A larger unethical element entered the profession because the barrier to entry was actually lowered by licensing. Approved classes, often placeholders for time, and took on the feel of diploma mills making it easy to get qualified.
  • Licensing cut membership in appraisal organizations severely (and I mean severely), which weakened an already weak lobbying presence in Washington DC (compared to NAR, NAHB, MBA and other real estate related trade groups).
  • The growth of mortgage brokers as a source of origination allowed them to select “good appraisers” who were also licensed.
  • Appraisal firms were able to skirt around the spirit of the law by hiring armies of trainees to crank out reports.
  • There was a sense of “job done” by government officials when the law passed that appraisal quality would be better from implementation of the laws.
  • Licensing made it easier to sue competent appraisers falsely, driving up malpractice insurance, placing greater financial pressure on appraisers.

The inability of the profession to communicate the problems with pressure while it was happening was very frustrating to those who recognized it as a serious problem. Very few understood the problem until the subprime mortgage mess became part of the national vocabulary.

What now?

If appraisers are not insulated from pressure, all the laws in the world will not allow them to be honest. Place a hungry person in a grocery store and see how long it takes for them to steal food.

Appraiser licensing alone is not the solution. Licensing is merely a tool to aid government in regulating the profession, primarily as a source of revenue. It doesn’t solve the problem of protecting the public and the financial system from inflated values. Does the public want an appraisal regulator mandate how big of an adjustment should be made for a view?

Now that many housing markets are seeing declining prices, its even more important that appraisers are able to perform their duties free from pressure.

Here are some thoughts in formulating a solution to the problem.

  • Clearly define what appraisal pressure is in legal terms and make it criminal to pressure an appraiser.
  • State appraisal license fees collected should be fully directed to appraisal regulatory departments so they can be fully funded and staffed.
  • Install a Federal regulatory wall between underwriting and sales functions in lending institutions, including mortgage brokers. Anything less than this should be disclosed as a potentially biased collateral valuation. This would affect pricing of mortgage pools.
  • Lending institutions should be required to maintain formal appraisal panels that are reviewed annually for quality by underwriting personnel, not sales personnel.
  • Allow appraisers to file anonymous formal complaints to their state agencies when pressure is applied without fear of retribution (ie whistleblower laws). Those whistleblowers are held to a high standard for proof in order to avoid nuisance actions.

For goodness sakes, let the appraiser be a professional and appraise the property. If the lending industry does not care what the value of the collateral is, then lets do away with the profession or call us something else, like “form-fillers.”

Of course, investors in the secondary markets would continue to be reluctant to buy mortgage paper because they don’t know what they are buying.

Instead of relying exclusively on licensing, lets figure out who, what and why we are appraising.


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Drinking The Mortgage Kool-aid And It Tastes Like Sour Grapes

December 26, 2007 | 1:11 am | fedny |

After a busy day, the house is again quiet, so I had aspirations of figuring out how to set up my new coffee machine and to decide whether to ever wear the gift of green boxer shorts that say “blogworthy” on them.

For some reason, and perhaps it was the excess food of the past days, but it occurred to me just how unbelievably widespread the flaws in the lending universe of the past few years were. I mean, really, really unbelievable.

I have been outspoken on the topic of appraisal pressure for a number of years, from my front line experience as an appraiser. Though not solely for altruistic reasons. Good (=ethical, not financial) appraisers did not thrive during the housing boom. I focused on what turned out to be more lucrative appraisal work outside of the mortgage business and kept the good clients who understood it was actually important to understand what the collateral was worth. It wasn’t sour grapes on my part, but my wide-eyed amazement at the enormity of the problem.

No one seemed to understand the widespread issue of ethics lapses and building instability of the lending industry while it was happening. It seems that everyone drank the kool-aid, with the thought that “everyone wins.”

Now the damage created by the ethical lapse in judgement is pretty clear and its a 4-6 year mess many of us will have to deal with.

Sour grapes summary

  • affordability waned in 2004, causing lenders to loosen the reigns to keep the pipeline flowing.
  • orientation moved from down payment (which I recalled, was a real bear to save for) to monthly payment (falsely characterized as a demographic shift in consumer habits)
  • the bulk of mortgage origination came from mortgage brokers, who were incentivized to generate loan volume from lenders who took a “don’t ask, don’t tell” view on mortgage quality.
  • appraisers became order takers (well, 80% of appraisers are) and had to either sell our soul or get out of the mortgage appraisal business.
  • the sales function gained political clout over the underwriting function of the typical retail bank (revenue vs. cost).
  • consumers and media readily accepted national housing statistics and drank NAR kool-aid every month.
  • real estate surpassed stock market conversations at the backyard bbq.
  • carpenters and nurses were quitting their jobs in droves to flip real estate.
  • developers were opening sales offices in new projects to serve the flippers and mortgage money was as easy to get as a morning newspaper.
  • no doc, “liar loans” were deemed necessary.
  • lenders had no idea that it was illegal and unethical to pressure appraisers to make the number.
  • banks were built on mortgage loan volume.
  • secondary mortgage market investors accepted loan pools purchase with very little understanding of the collateral.
  • NAR and local reports were used to guess loan pool values which were then used to judge portfolio purchase spreads (disconnect between risk and value).
  • foreign investors were one step removed from secondary market investors and had even less understanding of the content of the mortgage pools they were purchasing.
  • mortgages were sliced into varying slivers of risk.
  • no Federal Reserve or any meaningful banking oversight as the disconnect from risk was occurring.
  • mortgage tranches were so complicated that no one really understood what was in them.
  • credit crises became falsely synonymous with subprime.
  • the breadth and scope are termed “temporary” and projected to be behind us within a few months.
  • low mortgage rates are deemed the savior of housing problems but don’t solve the credit crises.
  • GSE’s (Fannie & Freddie) are shaken financially and may have a bunch of subprime under their belts.
  • Greenspan acknowledges that there may have been an overheated asset bubble (housing) but it was really all about shakey financing practices that made housing roar.

Sour grapes are enough to give anyone indigestion.


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Happy Holidays To All, And To All A Good [Night] Matrix

December 25, 2007 | 12:01 am | wsjlogo |

I’d like to wish everyone a wonderful holiday!

One of the more useful applications of Google Earth is to be able to track Santa around the globe.

And for those who need to keep following the real estate market with holiday themes, try these:



New Urbanism: Walking Distance Gets Closer

December 24, 2007 | 6:47 pm | Radio |

Nobody goes there anymore because its too crowded. – Yogi Berra

Gen Xers seem to have a pulled one over on baby boomers, whom are known for their love of driving. Here’s a good public radio broadcast on walk-able urban places.

The Brookings Institute released a study called Footloose and Fancy Free: A Field Survey of Walkable Urban Places in the Top 30 U.S. Metropolitan Areas which dissects 30 cities for their walkability (hat tip to John Mason). This trend goes hand in hand with the housing boom as new urbanism trends pulled people from the suburbs to revitalized downtown centers.

The post-World War II era has witnessed the nearly exclusive building of low density suburbia, here termed “drivable sub-urban” development, as the American metropolitan built environment.. However, over the past 15 years, there has been a gradual shift in how Americans have created their built environment (defined as the real estate, which is generally privately owned, and the infrastructure that supports real estate, majority publicly owned), as demonstrated by the success of the many downtown revitalizations, new urbanism, and transit-oriented development.

There are two types of walk-able places:

  • Regional-serving – areas that provide culture, employment, medical, higher education and other purposes.
  • Local-serving – areas that are residential and provide support services for everyday needs.

Its a fascinating demographic shift that is also correlated with the trend towards green with greater reliance on public transportation and walking.

I wonder if the cooling of the housing market in many locals will slow or stop this change or if it already has its own legs? My sense is that the macro trend will continue to move in this direction.


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[5% Holiday Update] Declining Markets Get Smaller Mortgages

December 24, 2007 | 5:58 pm |

One of the problems with lack of transparency, is that people…errr…don’t know what you are thinking. Just like the fact that I have been weak in my quantity of postings as of late. I can’t explain it, because, well, I got tired of being, uhhhh…transparent. Needless to say, I am again transparent, and even more superficial.

One of the rumors floating around the appraisal/mortgage world for the past few weeks, covers the topic of Fannie Mae’s restriction on loans in markets they designate as declining. It was even suggested that a restriction in one market versus another, suggests redlining. However, I don’t see that correlation.

but i digress…

In a market that is declining, Fannie Mae will have a 5% higher loan to value ratio so instead of requiring 20% down, it might be 25% if the local market is declining. So markets with average mortgage amounts below the $417,000 conforming limit, this could have quite an impact.

>Current home price trends indicate that home values continue to decline in many markets across the country. As a result, and based on our continued monitoring of loan performance, Fannie Mae is reinstating a policy to restrict the maximum loan-to-value (LTV) ratio and combined loan-to-value (CLTV) ratio for properties located within a declining market to five percentage points less than the maximum permitted for the selected mortgage product.

Notice the use of the word reinstating. This is a recurring theme in mortgage lending these days. Its not the introduction of new lending guidelines, its simply the enforcement of existing guidelines.

In theory, the appraiser gets to lead the way in determining declining markets (in sarcastic tone: shocking!, amazing!, incredible!)

>Fannie Mae strongly encourages lenders to use supplemental sources and tools to independently assess current housing trends, unless the appraisal indicates that the subject property is located within a declining market. When the appraisal notes that the subject property is in a declining market, the maximum financing policy must be applied. When the appraisal does not indicate that the subject property is located within a declining market, Fannie Mae strongly urges lenders to implement processes and apply supplemental sources and tools to validate current housing trends and not rely solely on the information reflected in the appraisal.

But the appraisal industry has been neutered so severely by the mortgage brokerage and mortgage lending industry with pressure to “play ball” that I am not confident the appraisal industry is able to have this responsibility in the first place until proper regulatory restrictions protecting appraisers are in place. No more than a small percentage (you know who you are) of appraisers would be brave enough to show a negative time adjustment for fear of losing a client. I hope recent enforcement actions by the NY Attorney General and the SEC will make a difference.

Still, its a prudent and thoughtful first step for Fannie Mae to take. One of the things that drove me crazy in prior periods of market decline, lenders would send out policy notices saying they would not allow negative time adjustments. We would argue back, saying that this was an underwriting issue and it was simply a matter of adjusting the loan to value ratio, not to mandate rose colored glasses and ear plugs for the eyes and ears of the lenders. We either dropped them as a client or they changed their mind.

The byproduct of this action in declining markets will likely be even lower sales volume via stricter credit, placing more price stress in already distressed markets.

I can’t help but see the irony here: the reduction of Fannie Mae’s loan to value criteria in declining markets could actually lead to more foreclosure volume and more exposure for lender’s collateral. But in the long run, its a prudent action.

This restriction in declining markets should never have been lifted in the first place. It is better for the stability of the lending system by re-introducing the concept of risk awareness to lending decisions.

Now thats a concept I think we can risk having.


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[Inman Connect] Where Real Estate Meets Wall Street

December 24, 2007 | 3:59 pm | nytlogo |

Connect NYC ’08

Inman News is presenting its Inman Real Estate Connect conference Wednesday, January 9 – Friday, January 11 at the Marritt Marquis in Manhattan. Through this twice yearly event (San Francisco and NYC), Brad Inman created the “go to” forum for the dissemination and sharing of real estate information and insight. As I have said many times, what distinguishes this conference from most others is that the attendees are decision makers.

Brad is moderating a panel in the general session on Friday, January 11, 9:00 a.m. – 9:45 a.m. that I’ll be participating in called:

NYC: Where Real Estate Meets Wall Street

The New York City real estate market has a special relationship with Wall Street where big bonuses can mean big luxury apartments. But Wall Street is also moving forward with many new investment products that may change the course of property valuation and hedging forever. How is Wall Street doing with these products and will the New York market benefit?


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[Introducing] 3Q 2007 Hamptons/North Fork Market Overview Available For Download

December 23, 2007 | 2:19 pm | delogo | Reports |

Well, its been a long time coming because extracting data from the East End has been the most challenging of all the reports I have done to date, but the Hamptons/North Fork has finally been added to the family of market reports I prepare for Prudential Douglas Elliman.

The PDF version of the 3Q 2007 Hamptons/North Fork Market Overview [Miller Samuel] is available for download. I have been writing various incarnations of this market report series for them since 1994.

In short order (by 4Q), I’ll be adding data tables and charts to the Miller Samuel web site.

An excerpt

…The average sales price of a residential property in the East End was $1,805,104 this quarter, up 32.7% from the prior year quarter average sales price of $1,360,515 and up 8.2% from the prior quarter average sales price of $1,668,657. The median sales price was $882,000, up 23% from the prior year quarter median sales price of $717,340 but slipped 2% from the $900,000 median sales price in the prior quarter. The nearly identical growth in these indicators from the prior year quarter suggests that average sales price was not significantly skewed by the upper end of the market. Listing inventory, however, increased 27.8% from the prior quarter total of 3,501 units to 4,475 units in the current quarter. The tracking of inventory levels for this report began in 2007….In contrast to the rise in price indicators, the number of sales continued to slip. There were 427 sales in the current quarter, down 30.5% from the prior year quarter total of 614 and down 31.6% from the prior quarter total of 624 units. The sharp increase in price levels has likely played a significant role in the diminished number of sales this quarter. This is also consistent with the recent increase in listing inventory…

Download report: 3Q 2007 Hamptons/North Fork Market Overview [pdf]



[The Hall Monitor] Let’s Get The PAP Out Of USPAP!

December 22, 2007 | 7:14 pm |

Todd Huttunen began appraising more than 20 years ago with a few years off in between to pursue a career in cabinet making. He relegated that to hobby status and is currently an appraiser in an assessor’s office. His best friend dubbed him The Hall Monitor because of his rigidity and respect for rules. He offers Soapbox readers tongue-in-groove insight on appraisal issues.

Todd’s suggested changes for USPAP (with tongue in cheek) simply…rules…

…Jonathan Miller

As a fan of “Real Time” with Bill Maher, especially New Rules I think it’s time to rewrite USPAP into something USEFUL. Let’s start by getting rid of the term USPAP and replacing it with something simpler, like New Rules!

New Rule: Use different size fonts and/or typeface.
Let’s face reality. When it comes to writing, most appraisers are somewhat challenged. That’s why most of the report consists of boilerplate identical to that found in every other report. So the first new rule is that the boilerplate must literally be written in fine print and the two or three statements that are actually unique to that report must be oversize. I don’t think it’s fair to ask the user of the appraisal to read something the appraiser himself didn’t proof read before he (electronically) signed the report. The fine print makes it more likely that the client won’t notice the myriad misstatements that appear in the addenda of most every appraisal. Who has not sent out a report, at least once, with the statement “this appraisal is intended for financing purposes only” when in fact it was written to settle an estate? Such oversights as “the client is ABC Bank” rather than “the client is John Q. Public” will more likely be forgiven if they’re only in the fine print. Why? Because, since you didn’t read it when you wrote it, your client shouldn’t have to read it either! After all, your clients are just as busy and stressed out as you are.

New Rule: Fewer words, more pictures.
There are way too many words, especially adjectives, in appraisals and not nearly enough pictures. Think about it words like fair, average, good, modern, updated, or deferred, are totally subjective. So instead of narrative description that doesn’t describe anything, all appraisals will have interior photographs of every room and bathroom in the house. The appraiser’s words should be limited to a caption underneath a photograph, like “kitchen”. Wouldn’t that be easier and more informative than a statement like, “The kitchen, which was renovated in 2006, has cherry wood frame and raised-panel cabinets and black granite counters?”

New Rule: Photographs will be “maximally productive” and not misleading.
Most houses have a front, rear, and two sides to them. With detached houses in suburban neighborhoods, the picture of the front of the house should illustrate – not just the front – but the front and one of the sides of the house. Ideally, the rear photo should illustrate – not just the rear – but the rear and the other side of the house. These days, when so many houses have been expanded to twice their original size and the expansion has been out the back, a front view without the context provided by the elongated side is indeed misleading. Granted, due to site conditions or topography it is not always possible to show two sides of the house with one photo. In that case, take another photo.

New Rule: The “Street Scene” is not supposed to be a picture of the street, and nothing but the street, taken by some schmuck standing on the double-yellow line in the middle of the street!
Everybody knows what pavement looks like. The focal point of the street “scene” photo should be the improvements alongside the street, and not the vanishing point.

New Rule: There must be at least one declarative sentence in every appraisal.
So much appraisal verbiage consists of what the appraiser is not. “The appraiser is not” an expert in environmental contamination, an engineer, a surveyor, etc. For reasons of building self-esteem if nothing else, every appraisal must include a declarative statement. It shouldn’t have anything to do with the appraisal. But it must say something about what the appraiser is, versus what he is not. It can be as simple as “the appraiser is tall.”

As the original USPAP was the result of a collaborative effort, so too should be its successor, “New Rules” and in that spirit I welcome reader’s suggestions.


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