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Archive for February, 2008

[Curbed] Three Cents Worth: Marketing Time = Time To Market

February 28, 2008 | 6:44 pm | | Charts |

With all the announcements by Fannie and Freddie, the talking points memo by Fannie for Cuomo, appraiser pressure and clearinghouse discussions, it was definitely a relief to provide my Three Cents Worth as a post on Curbed. This week I felt the urge to look at days on market and listing discount market indicators rather than watch the grass grow looking to get a deal on lawnmowers.

To view Three Cents Worth: Marketing Time = Time To Market

Check out previous Three Cents Worth posts.

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Appraisers Are Front And Center

February 28, 2008 | 3:03 pm |

The appraisal profession has been front and center in the discussions between NYS Attorney General Cuomo and the GSE’s. Hopefully there will be some sort of resolution soon. Here are some recent posts about the latest developments:

There will be a lot more appraisal commentary on Matrix to come over the next few weeks as this situation unfolds. This is a seminal moment in our profession so it is a real shame that we do not have a meaningful way to show our collective voice.

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[Talking Points] The National Appraisal Clearinghouse

February 28, 2008 | 1:29 pm | | Public |

I am hopeful that the severe losses announced by Fannie Mae and Freddie Mac over the past 24 hours will stimulate some sort of shake up in the mortgage industry to prevent what happened over the past several years to not happen again.

$3.6B here, $2.5B there,
soon or later its real money

I have been a long time proponent of the lending process to be open and honest about actually knowing how much the collateral is worth that mortgages are issued against. If the value is in the property, then whats the problem? It’s an underwriting decision, not a valuation placement whether to make the deal when guidelines are strayed from. Appraisers are to simply report what is happening in the market and move on to the next assignment as a disinterested third party.

It’s all about appraiser neutrality – thats essential to maintain credibility of values.

Sharon Lynch at Bloomberg News in her article Fannie Proposes Ban on Lenders’ In-House Appraisers presented my thoughts on the current problem:

About three quarters of residential mortgage appraisals are arranged through brokers who only get paid if a loan closes, Miller said today in a phone interview. He called the practice “laughable” because it creates a financial incentive for mortgage brokers to push appraisers toward higher valuations. Higher appraisals also mean more homeowners qualify to refinance their homes and take cash out, he said.

and broke the story about the placement of a Fannie Mae talking points memo on the American Banker web site yesterday which lays out the key points in the negotiation with NYS AG Cuomo.

“It would be a monumental change because it would require a shift in the way that the lending industry does business,” said Jonathan Miller, chief executive officer of Manhattan-based appraisal company Miller Samuel Inc. and a longtime proponent of creating a firewall between residential appraisers and mortgage originators. “I think it would be tremendous.”

I fretted in an earlier post that the large losses would slow down progress for reform, simply because any reform would slow down transaction activity until the lending industry adjusted to them and that would hurt the GSE’s near term financial performance.

Here is the text of the talking points memo (items in bold appeared in bold in the original memo):


In November, 2007, the New York Attorney General’s Office sued First American (and its subsidiary, eAppraiseIT) for allegedly inflating the appraised values of homes.

The lawsuit is part of a broader investigation into alleged fraudulent practices in the mortgage industry, specifically related to appraisal practices.

Fannie Mae wishes to cooperate with the New York AG’s investigation and, as part of a cooperation agreement, will likely agree to a number of items, the most significant being:

  1. Requiring as part of our reps and warrants, and as a precondition of the sale of any mortgage to Fannie Mae, that the lenders or brokers do not have and did not utilize either in house appraisers to conduct the subject property appraisal NOR do they have any wholly owned subsidiary or other subordinate entity that performs appraisals.
  2. Requiring as part of our reps and warrants, and as a precondition of the sale of any mortgage to Fannie Mae, that LENDERS not rely on appraisals provided by brokers, either for purchase transactions or refinancing transactions. This would, in effect, require lenders to always secure their own appraisal of any property purchased through a broker.
  3. A CLEARINGHOUSE of appraiser information, conduct and activity will be established.
    a. All lenders will be required to provide post-purchase copies of appraisal documents to the Clearinghouse.
    b. It will be an independent entity with an executive and board of directors (no Fannie Mae employee involved).
    c. It will staff a hotline for industry and consumer complaints.
    d. It will provide annual reporting publicly.
  4. These requirements will go into effect for loans acquired by Fannie Mae after September 1, 2008.

In my next post, I am going to expand on what I think the ramifications of this are. Of course, the big assumption is whether this deal will even happen.

UPDATE: Catch the comments on Mortgage News Daily about this post.


[The Hall Monitor] The Pendulum Swing From City to Suburb – is Swinging Back

February 28, 2008 | 12:01 am | Columns |

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.

This week Todd suggests we park our cars on the lawn because you can’t fight progress. …Jonathan Miller

With all its faults, you’ve just got to love the internet, Google in particular! I wanted to know how many cars there were in the United States in the early 20th century as opposed to how many there are now and to juxtapose this with the changes in population over the same time period. A Google search brought me to an article published in the New York Times entitled “How Many Can Buy Cars?

“Everybody who drives an automobile, or has tried to find a vacant space in which to park one, and every pedestrian who is daily obliged to dodge automobiles, or to wait on the endless stream of them to pass, so that he may cross a busy street every one of these persons, or nearly everybody must have asked himself at some time:

What is going to happen when there are several times as many automobiles as there are now? How many automobiles are there going to be in this country, anyhow? Where are we going to put them all?”

The article that posed these questions was published in The Times on August 28, 1921, and the somewhat less than prescient sub-heading to the story read “Country’s Limits in the Use of Automobiles Not Far Off, According to Expert”. “Indeed it appears doubtful if there will ever be even twice as many cars in use as there are today. The point of saturation is probably only a few years ahead.”

The Times may, or may not, ultimately be vindicated with regard to their recent story suggesting an “improper” relationship between John McCain and a female lobbyist. But as to the question of the future of the automobile, it seems clear they missed the boat on that one back in 1921.

According to the article, there were nine million (9,000,000) cars on the road for a population of one hundred and five million (105,000,000) in 1920 – one car for every twelve people. The population has nearly tripled, to 300,000,000 people in the United States, but the number of cars has multiplied by a factor of twenty-five to 228,000,000, according to The World Fact Book. This breaks down to one car for every 1.3 people.

What got me thinking about cars and people was an article in the on-line version of The Atlantic, written by Christopher B. Leinberger entitled The Next Slum? The writer argues that “The subprime crisis is just the tip of the iceberg. Fundamental changes in American life may turn today’s McMansions into tomorrow’s tenements.”

He notes, “In most metropolitan areas, only 5 to 10 percent of the housing stock is located in walkable urban places. Yet recent consumer research by Jonathan Levine of the University of Michigan and Lawrence Frank of the University of British Columbia suggests that roughly one in three homeowners would prefer to live in these types of places. In one study, for instance, Levine and his colleagues asked more than 1,600 mostly suburban residents of the Atlanta and Boston metro areas to hypothetically trade off typical suburban amenities (such as large living spaces) against typical urban ones (like living within walking distance of retail districts). All in all, they found that only about a third of the people surveyed solidly preferred traditional suburban lifestyles, featuring large houses and lots of driving. Another third, roughly, had mixed feelings. The final third wanted to live in mixed-use, walkable urban areas-but most had no way to do so at an affordable price. Over time, as urban and faux-urban building continues, that will change.”

The automobile industry was a necessary precursor to the creation of the post WWII suburban landscape. And although The New York Times was wrong its 1921 predictions, they did pose questions which are today more relevant than ever: “What is going to happen when there are several times as many automobiles as there are now? How many automobiles are there going to be in this country, anyhow? Where are we going to put them all?” It is perhaps ironic that the very industry whose growth played a pivotal role in the success of the suburbs, at the expense of cities, will now be a driving force in the ultimate demise of many of them.

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[Sounding Bored] Apparently Credit Cards Are Not As Good As Cash

February 27, 2008 | 11:45 pm | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. This week I charge at the latest credit problem.

Last fall, my appraisal firm was engaged for consulting services in a litigation by an attorney representing one of the parties in the action. A formal engagement letter with the terms was signed and returned to us. The retainer was paid by the client using their American Express card. Over the next few months, the services were rendered and there was constant dialog with the client. They provided access to the property as well as information and documentation.

We delivered the report and received feedback that our services were complete and the client was satisfied. We were then was asked to provide additional services by the client in the same matter and we submitted a new proposal.

About two weeks later we were contacted by American Express saying the cardholder questioned the initial charge from the past fall and the removed the amount (a substantial fee) from our AMEX account. Apparently credit card companies are only required to send via US Mail in order to provide an opportunity for the vendor to contest the complaint. A non-response indicates the vendor is not fighting the contested fee and the cardmember gets their money back.

We never got their mail notice, and therefore never responded (they are not required to send via certified or overnight mail) so our fee was removed from our AMEX account. We noticed the account debit when we got our monthly statement. The fee was significant and we had received no notice, so we called AMEX in a panic.

The AMEX people were very nice but my first contact gave me the clear impression that because the attorney had signed the engagement letter, and then asked his client to call in the fee using a credit card, so we were not protected.

I was taken aback because the client had interacted with us for months and had called in the card number to us. It smelled like fraud if we were to lose our compensation for our efforts this way.

In order to contest the action, I was told to send a letter to AMEX and they would decide whether the fee was reasonably taken from the cardmember. That sounded pretty ominous to me. It would take 2-3 weeks for us to get a decision.

About 2 weeks later we received a notice via US mail (glad we actually got it) that AMEX had returned our fee to the account. Game over, money returned.

This experience was pretty distasteful since 4 months had passed since we were originally engaged and paid.

Apparently credit cards are not as good as cash.


UPDATE: AMEX was contacted by the cardholder again who simply submitted the same documents and said they protest the charges. These were the same documents that we submitted already that prove that the cardholder was simply trying to get out of paying for services they had already authorized. AMEX called me and I explained again what the situation was. They agreed that this was unfair to us and indicated that the case was closed and we would retain our fee. What a nightmare.

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As Fannie And Freddie Hemorage, Little Incentive To Reform?

February 27, 2008 | 11:29 am | |

Before the champagne bottles could be uncorked by appraisers who felt vindicated by the potential agreement to be reached where Fannie Mae and Freddie Mac would agree to only buy loans from lenders who took some logical precautions on the valuation of the collateral (install the protections for competent appraisers, by creating firewalls), I think we all need to consider what the incentive for change their approach to lending would require, and its made me more skeptical after a good nights sleep.

Both GSE’s are likely to show reduced earnings throughout 2008 because of the rise in default rates. Their stock prices have fallen by more than half since last summer.

As of December, 2.2% of all prime mortgages were at least 60 days past due, up from 1.5% a year earlier, and the highest level since 1998, according to First American CoreLogic. More than one-fifth of subprime loans were 60 days or more past due. A check of delinquency rates for large, high-quality mortgages shows that “credit quality is now deteriorating sharply even for prime mortgages,” Morgan Stanley analyst Kenneth Posner wrote in a recent research note reiterating a negative outlook on Fannie. Delinquency and foreclosure rates for jumbo loans in December were more than double the previous January.

So if their don’t ask, don’t tell mentality still exists (avoiding focusing on the problem of realistically estimating the value of collateral pledged against mortgages by lenders), why would the GSEs want to place additional burdens on the lending industry right now which would slow down sales activity?

They need the flow of new mortgages through their pipeline to boost potential revenues don’t they? Investors seem to be more likely to buy conforming paper than jumbo paper these days but as new problems come to light, that sense of safety with the GSE’s could vanish too.

I suspect that NY AG Cuomo is going to have to play hard ball to get this deal done with Fannie and Freddie. His office has been impressive on this front and gets what the problem. From the news coverage yesterday, it sounds like negotiations have been ongoing for a long time (probably due to their scope of suggested change) and there will be future litigation if it doesn’t happen.

There probably needs to be the same actions from other state AG offices to turn this ship around. AG’s in Ohio, Colorado, Massachusetts and Georgia have been particularly active on dealing with the appraisal situation but not in the national context like New York has.

If investors can’t feel comfortable with appraised values as they relate to mortgages, the perceived risk level goes off the chart. Let’s start dealing with common sense and reality and break away from past practices. If an appraiser can’t perform their valuation without pressure to hit the needed number, the credit markets are not going to get comfortable with the risk/value relationship in mortgage lending.

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Debt Addiction (Means) Never Having (The Means) To Pay It Off

February 27, 2008 | 10:40 am | |

In light of the trend of homeowners to walk-away from their houses, because somehow they got the idea that debt increased their purchasing power…

BofA CEO Kenneth Lewis:

As a result, there is a new class of homeowners in name only. Because these people never put up much of their own money, they don’t act like owners, committed to their property for the long haul. They behave more like renters, ducking out of an onerous lease in the midst of a housing slump.

As seen on

Suburbs Are The Next Slum

February 27, 2008 | 10:29 am |

In the widely email distributed article this week from The Atlantic (and what’s up with the Atlantic these days? an even better read.): The Next Slum? Christopher Leinberger suggests that the problems of the inner city may work their way into the suburbs.

Thats a logical argument given the trend toward new urbanism …city’s rule, suburbs drool, as they say.

Crime and vacant properties seem to be on the rise in suburbia but I think that phenomenon is attributable to the rise in foreclosure rates due to subprime and credit problems. Many houses were built for people who egenrally couldn’t afford them or they were very vulnerable to an up tick in mortgage rates. Take Stockton, CA for example.

Arthur C. Nelson, director of the Metropolitan Institute at Virginia Tech, has looked carefully at trends in American demographics, construction, house prices, and consumer preferences. In 2006, using recent consumer research, housing supply data, and population growth rates, he modeled future demand for various types of housing. The results were bracing: Nelson forecasts a likely surplus of 22 million large-lot homes (houses built on a sixth of an acre or more) by 2025—that’s roughly 40 percent of the large-lot homes in existence today.

However, I would think builders would adapt to the change in demand. I am not entirely sold on the logic presented since the lack of demand for McMansions would drop their value and bring more demand. Nelson appears to be suggesting a nation full of empty homes.

In the past decade, as cities have gentrified, the suburbs have continued to grow at a breakneck pace. Atlanta’s sprawl has extended nearly to Chattanooga; Fort Worth and Dallas have merged; and Los Angeles has swung a leg over the 10,000-foot San Gabriel Mountains into the Mojave Desert. Some experts expect conventional suburbs to continue to sprawl ever outward. Yet today, American metropolitan residential patterns and cultural preferences are mirror opposites of those in the 1940s. Most Americans now live in single-family suburban houses that are segregated from work, shopping, and entertainment; but it is urban life, almost exclusively, that is culturally associated with excitement, freedom, and diverse daily life. And as in the 1940s, the real-estate market has begun to react.

However, the idea that urban centers could see more home price appreciation than the exurbs or even the suburbs over the next few decades is plausible. It’s already occurring.


Cuomo Makes Progress In Appraisal Disconnect Problem

February 26, 2008 | 9:11 am | |

New York State Attorney General Cuomo is close to striking a deal with the two mortgage GSE’s Fannie Mae and Freddie Mac to instill some separation between the quality and sales function of banks that do business with them. Although this was initiated by New York, the deal would have ramifications for all lenders of conforming loan products that sell their mortgage paper.

Its not a done deal yet but its being reported as “close” by the Wall Street Journal’s Amir Efrati in this morning’s article Deal Nears to Curb Home-Appraisal Abuse. Here’s my contribution:

Jonathan J. Miller, a veteran New York appraiser and longtime critic of industry practices, said the proposed deal “sounds like a promising step, and that Mr. Cuomo’s office is addressing some of the key problems that appraisers have had to deal with and that have led to the disconnect between value and risk in the mortgage markets.” He estimates that home values are overvalued nationwide by at least 10% because of inflated appraisals.

My 10% estimation is very conservative and was based on my New York area experience and interactions with colleagues across the country.

Reuters and American Banker have also issued stories on the negotiations.

The deal proposes the following actions by Fannie and Freddie:

  • They will not do business with lenders that use in-house appraisers.
  • They will not buy mortgages from lenders that who use appraisals from wholly owned subsidiaries. (I believe this would apply to Landsafe, Countrywide’s Appraisal Management company).
  • Require lenders not to use appraisals arranged by individual mortgage brokers.
  • Create a clearinghouse for appraiser information and provide reports to the public.

Note: I will be updating this post throughout the day – the ramifications are huge

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Crains New York Business Economic Spotlight Chart – February 2008

February 25, 2008 | 12:01 am | | Charts |

I have had the pleasure of providing a monthly chart for the Economic Spotlight section of Crain’s New York Business magazine since September 2003. Here is the latest, which appears in the current issue of Crain’s New York Business.

Source: Crain’s New York Business

Go here for a complete archive of my Crains’s New York Economic Spotlight charts that have been published. They are organized by year.


[Reuters Housing Summit] Concentrated Real Estate Snippets

February 21, 2008 | 10:34 pm | Public |

I was invited to participate in the Reuters Housing Summit this week (which happened to be during my vacation and how cool is it to talk about housing when you are taking time off from work?) It was quite an interesting experience – I thoroughly enjoyed it. Each participant gets grilled for an hour by Reuters senior editors and reporters. I felt I needed another twenty four hours to address all the housing issues of the day, but alas, it was my vacation. The interviews were recorded and snippets were released as audio files.

Check out:the summit blog for more interviews and the housing section of the Reuters site.

And to continue with the shakey market theme (supposedly) our satellite was intentionally shot down and an earthquake struck northwestern Nevada.

In other words, a good week for a vacation.

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[Riding The Bus] For Closure Of Optimism

February 19, 2008 | 11:02 pm | |

As I sit an look at how we got here, its apparent to me that no one really has a clue about how we got here in the housing market. Its a “cover my you know what” scenario now, but its really our nature to look on the bright side while its happening and the dark side after its over.

Unbridled optimism got us here.

The Dark Side of Optimism [Salon] via Naked Capitalism: Why looking on the bright side keeps us from thinking critically,” management consultant Susan Webber argues yes. In her view, “the financial and business communities dismissed all the warnings” about the housing meltdown/credit crunch bearing down upon them because they wilfully adhered to an always-sunny-side-up view of life.

Ok back to reality…

Foreclosed homes that sit vacant are sometimes a better option for homeless because the utilities are still running.

“Many homeless people see the foreclosure crisis as an opportunity to find low-cost housing (FREE!) with some privacy,” Brian Davis, director of the Northeast Ohio Coalition for the Homeless, said in the summary of the latest census of homeless sleeping outside in downtown Cleveland.

That’s not the optimism I was expecting.

Daniel Gross in his Moneybox Column on Slate explores the proposed restrictions on foreclosures. He argues that these actions simply delay the inevitable process of “price discovery“, a process where the market determines a price based on supply and demand.

In other words, the optimism that got the mortgage industry and borrowers in trouble has carried through to the political process, whose optimism will delay getting out of this quagmire.

The carnage in subprime loans has led to a spate of foreclosures. When banks or investors take over properties, they recoup whatever they can by placing it on the market quickly and accepting any reasonable offer.

Foreclosure also has the effect of hastening price discovery on the mortgages on those homes, and on the bonds backing them. Here, again, the impact can be devastating to those who bought the assets with a great deal of leverage. Hedge funds and other institutions sitting on the depreciating debt either had to put up more collateral to maintain their leveraged positions, or dump the assets to raise cash. Bond insurers must increase reserves to prepare for defaults of the bonds they insured. And if the bond insurers fail, the financial firms that purchased insurance from them will have to take their own write-downs.

Optimism is met with an equal and opposite reaction: Pessimism.

Banks are blacklisting condo projects to minimize their damage. Major lenders have created blacklists. This seems like a prudent decision…avoid certain projects to avoid issuing a high risk mortgage. But doesn’t this accomplish exactly opposite by poisoning a local market delaying its recovery and placing performing assets in the market at higher risk?

Warning to developers: this will make it extremely difficult for most buyers to come to close on Miami’s newest buildings.

Unbridled pessimism brings unforseen risks just like optimism does by inserting external forces that fight the natural order of supply and demand.

Of course, there is another way to deal with our natural housing optimism: take a bus and get a boxed lunch on a foreclosure tour.

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