Matrix Blog

Archive for July, 2008

Licensing Doesn’t Really Work, But A Necessary Revenue Opportunity

July 31, 2008 | 7:45 pm | |

I think the future holds more licensing requirements in store for real estate professionals. After entering a credit crisis like we are currently experiencing, all professionals connected to the real estate industry may face new licensing or additional requirements.

In an interesting piece written by two economists—Fed visiting scholar Morris Kleiner, of the University of Minnesota, and Richard Todd, vice president of Community Affairs at the Minneapolis Fed called Licentious Behavior:

On the face of it, this makes perfect sense: If incompetent or dishonest brokers have encouraged borrowers to take out loans beyond their means, then targeting these abuses through stricter governmental requirements on brokers should help prevent future problems.

But a recent empirical examination by two Fed econ- omists casts doubt on that solution. In the first compre- hensive assessment of relationships between mortgage broker licensing and market outcomes, the economists find that most regulatory steps appear to have no clear connection to consumer outcomes, but one financial regulation (surety bond and minimum net worth requirements) is consistently related with conditions that seem worse for both brokers and borrowers.

Deja Vu

The appraisal industry faced new licensing requirements in 1991 as a result of the S&L crisis of the late 1980s. Think Vernon Savings & Loan and property values being appraised higher every few hours by appraisers who must have possessed incredibly precise and masterful valuation skills and adequate supporting data (yeah, right).

Appraisers ended up being licensed, waiting in line with other professionals in the testing centers such as pool cleaners and hair stylists.

Appraisers were part of the problem in the current credit crunch as well. Licensing did not prevent bad appraisers from crossing the line then or now. In fact, I would venture to guess that the quality of the average appraiser (not the median) declined sharply after implementation of licensing 17 years ago.

Was it licensing that created the deterioration in quality of appraisers?

No. It was a bigger systemic problem but it did play an unintended role. Licensing of any profession provides a false premise of quality. In this case it was presented to the mortgage industry, but more importantly, allowed a shift in liability to the appraiser who had a freshly painted bullseye on his or her back.

Licensing alone does not promote better quality work.

Quality only gets noticeably better by an incentivized private sector who is enticed through regulation to require better quality reports. It is not enough to say you “can’t do something.”

Is licensing a good thing?

Absolutely. It provides a minimum barrier to entry and a process to allow for the removal of bad appraisers from the business.

Licensing alone won’t improve quality, however. An example would be a town whose police department cracks down on speeders – this alone doesn’t make everyone a better driver, but it does play a role in improving safety. People still get into accidents when they have a drivers license.

A side benefit to municipalities becomes an important revenue opportunity for the licensing bureau, especially with a weakening economy in most of the country. Revenue funds some enforcement for blatant violations, and provides some oversight and regulation. I am fairly certain that a portion of earmarked licensing revenue ends up channeled to other departments, essentially defeating a primary argument for licensing.

What about mortgage brokers?

So for mortgage brokers who are on the verge of being licensed in New York state, with a economic slowdown already being felt, I think it is a long shot that this effort will be defeated.

Will it increase the quality of mortgage brokers in New York state? I doubt it, only on the lower fringe.

I saw first hand the basic financial conflict in their role as commissioned provider of mortgage business, paid only if the loan closed. As in every profession, there are good and bad “professionals.”

All who touch the mortgage should to be licensed, at the very minimum.

[Curbed] Three Cents Worth: Luxury Speaks Volumes About Condos

July 31, 2008 | 6:00 pm | | Charts |

Decided to look at the length, width and height of the market in Three Cents Worth, my left side of the brain attempt for clarity on Curbed. This week I am full of luxury.

Click to view post.

Check out previous Three Cents Worth posts.

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[East End] 2Q 2008 Hamptons/North Fork Market Overview Available For Download

July 30, 2008 | 6:10 pm | | Reports |

The online version of the Prudential Douglas Elliman 2Q 2008 Hamptons/North Fork Market Overview [Miller Samuel] is available for download.

I have been writing various incarnations of the New York regional market report series for Douglas Elliman since 1994.

To build Hamptons/North Fork custom data tables

To view Hamptons/North Fork charts

An excerpt

…The upper price range of the housing market continues to outperform the overall housing market. In each of the past four quarters, the luxury market, defined as the upper ten percent of all sales, saw a higher year over year quarterly increase in median sales price than the overall market. The luxury market increased 10.3% in median sales price and the overall market declined 9.2% in median sales price compared to the same period last year. The market area south of the highway consistently has the highest overall prices as compared to the areas to the north and on either side of the canal. Of the four regions, only south of the highway saw an increase in median sales price of 1% as compared to the prior year quarter…

Download report: 2Q 2008 Hamptons/North Fork Market Overview [pdf]

Who We Are In The Eyes Of The Federal Government

July 30, 2008 | 12:33 am |

Here’s a surprisingly detailed and well written analysis of our appraisal profession by the US Department of Labor.

Good stuff.

Apparently employment opportunities are high.


[Covered Wagons] Roof + Covered = A New Bond Market

July 30, 2008 | 12:23 am |

Ok, now we are getting somewhere, albeit slow as molasses.

Treasury Secretary Paulson is pushing for covered bonds as a financial instrument to create more liquidity for US mortgages.

From my perspective, these are the types of things that have to happen for the US to see our way out of this credit crunch.

Covered bonds are debt securities backed by cash flows from mortgages or public sector loans. They are similar in many ways to asset-backed securities created in securitization, but covered bond assets remain on the issuer’s consolidated balance sheet.

The key here is recourse. In other words, if the bank goes under the bond holder has “recourse.” A basic concept but became obsolete during the securitization hay day because as it turned out, the bond holders had little recourse since the asset was split into so many pieces, it was very difficult to track down the asset.

Covered bonds are big in Europe.

Paulson issued best practices guidance (is that corporate speak or what?) to try to get the market jump started and was joined by FDIC, OTS and OCC as well as Bank of America, Citigroup, JP Morgan Chase, and Wells Fargo (WaMu and B of A have experience in these instruments). I wonder if WaMu didn’t attend because they are simply trying to survive?

Bankers involved in the field reckon that a US covered bond market could ultimately outstrip the roughly €2,000bn European market. However, it faces limitations in the near term due to restrictions placed on the bonds’ treatment by the FDIC, which importantly has oversight of banks if they become insolvent.

For example, the FDIC said banks should be restricted from using covered bonds for more than 4 per cent of their funding in order to avoid depleting the assets available to repay ordinary depositors and other unsecured creditors if a bank failed.

In the US, the cost of issuing covered bonds and the FDIC restrictions mean they could lie low in the pecking order of banks’ funding preferences, at least initially, according to analysts at Citigroup. Funding through Fannie and Freddie or through the Federal Home Loan Banks both appear more attractive for now, the analysts said.

FDIC created an expedited procedure for recourse for bond holders in the spring. Covered bonds are capped at 4% of total liabilities so its not a major fix, but it’s a start.

Here’s a better explanation, in the way that only Felix Salmon can provide.

The investors have to be brought back into the fold.

I repeat:

“Covered” seems to be a synonym for collateralized, but it also has other meanings that may be appropriate in this effort to salvage the housing market. Think of covered wagons, which can be circled in times of crisis. With banks reluctant to lend their own money for mortgages, and the private securitization market quiescent if not dead, the cost of mortgage loans has been rising even as housing prices fall, making a bad situation worse. At best, a covered bond market would provide a cheaper source of financing for banks while reassuring investors that their money is safe.

Essentially investors would buy into a pool of mortgages that would be kept on the balance sheet of the bank that made the loans. These would be high-quality loans, and at the first sign of trouble in the underlying mortgages, those mortgages would be replaced in the mortgage pool. Thus, investors would be assured of repayment unless the underlying mortgages suffered major losses and the issuing bank failed. That might make investors burned by existing mortgage securities more willing to return to the market.

At best, a covered bond market would provide a cheaper source of financing for banks while reassuring investors that their money will be safe. It is highly unusual for the government to take such a major role in getting a market established, but Treasury officials said their action was needed to get more money into housing loans.

Paulson may not be a good public speaker, but he brought something tangible to the table.

And credit for his move is covered. (ok, sorry)

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[Culture Of Debt] Should We Keep Our Fannie Private? Or Go Shopping?

July 29, 2008 | 12:01 am | |

I have been knocking around the concept of whether the GSEs should be become government agencies. It’s a strange predicament for the taxpayer, because of the implied guaranty that was bestowed on the GSEs by the federal government (strangely, to make President Johnson’s Vietnam War budget look more palatable).

That long debated guaranty was made tangible this past week with the housing bill that just passed both sides of Congress. The federal government, since the late 1960s, finally showed the public that the GSEs are too big to fail.

There was an ongoing concern that the GSEs were getting too big

The dilemma for me is the fact that the taxpayers bailed out the GSEs. It could cost nothing, or as much as much as several 100 billion dollars, depending on how the economy and the housing market holds up.

This liability to the taxpayer is a significant financial benefit to the shareholders of GSE stock, perhaps bolstering their share price above where it may have fallen. Take on liability without future reward.

Of course it is also of significant benefit to the taxpayer to keep a key component of the housing market afloat, a lynchpin of our economy.

A short essay by Alice Rivlin of the Brookings Institution, covers this territory in: Do We Want Fannie Mae Public or Private?.

My cynical laissez-faire side says that government could not have managed this situation any better than the private sector did and vice versa. Look at how HUD has played a nominal role in solving this problem. Private sector innovation with actual, real, engaging, competent, regulatory oversight.

Not just government oversight…

Indivuduals need to reconsider placing themselves in harm’s way, financially.

Last week’s Op-Ed article by David Brook’s The Culture of Debt suggests that:

People don’t change when they see the light. They change when they feel the heat.

That Op-Ed piece inspired an hilarious response from a reader (hilarious to me, anyway):

Mr. Brooks does not mention one important reason societies develop good habits or bad ones: Our leaders can have transformative impact.

Franklin D. Roosevelt calmed us down. John F. Kennedy got us to volunteer. Ronald Reagan made us less dependent on government. George W. Bush could have asked us to sacrifice. He didn’t. His post-9/11 advice was to go shopping. Obviously, too many of us did just that.

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[In The Media] Fox Business Network Money For Breakfast 7-25-08

July 28, 2008 | 2:00 pm | | TV, Videos |

Last week I was attending the Inman Real Estate Connect in San Francisco and was contacted by Fox to discuss the latest RealtyTrac foreclosure numbers just released that day and the conversation spilled over into other related topics such as the Housing bill.

The segment was to air live at 7am EST time, 4am in San Francisco, and I had to get there by 3:30am, meaning I got up at 2:45am. Well, sleep is overrated anyway.

Alexis Glick was the host – she’s sharp and thinks at 100mph. Always a pleasure. Here’s her blog post on the segment. She seemed pretty excited about the foreclosure features on

After the segment, I teased my colleague at RealtyTrac, thanking them for giving me content and for giving me a reason to wake up at 2:45am.

What’s particularly interesting about the foreclosure numbers is that 16 of the 20 major metro areas tracked were located in California and Florida. I think that the average consumer thinks half of all sales in their locale are foreclosures which is simply not true, however, it is a serious concern. I keep harping on the lack of activity in the MBS markets and lack of liquidity out there.

All else feels like “cart before the horse.” Until financing is more readily available I find it hard to see much of an end to this mess in the near future.

Here’s the clip

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Inman SF, A Convection Oven Of Information

July 24, 2008 | 12:09 pm | |

I thought I wouldn’t make it there:

Here’s a glass is half empty whining, seeking empathy recap:

  • Drove to JFK, pouring so hard traffic would periodically come to a stop on the expressway
  • JetBlue flight was packed, with warm air blowing like a convection oven at about the halfway mark
  • Two kids, about 3 and 4 years old, screaming, fighting and crying for 6 hours directly behind me, parents oblivious or helpless
  • Two people next to me became fast friends, speaking so loud for 6 hours straight, I couldn’t tune them out with my iPod. I now know their mortgages, financials, plans to divorce, how they met their spouses in intimate detail
  • My tv screen went black halfway into the flight
  • Room wasn’t ready for 2 hours at the hotel
  • Apple store across the street ran out of iPhones 20 minutes before I got there, and were surprisingly rude

Here’s a glass is half full, glad to be here in San Francisco summary:

  • But I made it, alive
  • 65 degrees, sunny (perfect)
  • Met a ton of old friends, long time online friends finally in person
  • Brad Inman can still put on a show
  • Chief Economist at BofA main session gave great, forthright overview
  • Listened to Craig Newmark – quirky and endearing, “Constitution gets used again after the election” discussion (plus, as an added bonus, Craigslist discussion)
  • Hung out with Dustin Luther, saw his terrific presentation at the main conference
  • Winced at hyperinflation talk (1000%, 20 years, without factoring in corrective market forces) but otherwise loved the bull vs bear discussion, and at the end decided I didn’t need to jump off the Golden Gate
  • Couldn’t twitter during the conference, no ATT reception on the main conference and didn’t realize how simple the wireless password was. duh!
  • Went to the Trulia BBQ – on the trolley and spoke at length with the Marker Man who had to turn sideways to fit – best (only) meatballs I have ever had in SF
  • Had dinner with some of the smartest econ bloggers out there – UrbanDigs, Naked Capitalism, Calculated Risk and their better halfs
  • Realized it was about 2:30 am EST and had to end the evening without going to the Curbed party (I know, serious wimp)

Going to cook some more today.

[This Just In] There IS Meaningful Housing News On Comedy Central

July 22, 2008 | 9:04 pm |

You gotta love Jon Stewart of the Daily Show. He is making news more accessible to young people (my kids and, of course, me) by delivering it as entertainment. He’s had some interesting guests on the show to cover the housing market. The housing market situation is so ridiculous, it is a natural fit on this kind of show.

John Stewart: People would come in and say “I don”t have good credit, or a job, and my car has been repossessed and I’d like a house, what do you think?

Lender: Ok

Last night I saw the interview with Richard Bitner who is humping his book, Confessions of a Subprime Lender. I was in a BN a few weeks ago and almost picked it up. I had read the interesting review in Daniel McGuinn’s Newsweek Resident Expert column in the spring but was already OD’ed from subprime talk.

But after hearing the interview last night, and the fact that he speaks with such clarity, I would imagine it’s a fun read. He was a wholesale lender, providing mortgage money to mortgage brokers…and guess what?…underwriting standards eroded.

Looks like another reason to delay reading War & Peace.

See the clip [it starts at 15:00]


[Big Bang Theory Meets Black Hole] Google De-Indexes Matrix

July 22, 2008 | 7:57 pm | |

I think most of us love Google or the idea that we can pretty much query anything at anytime. Two days ago Ray over at Money Blue Book told me this blog, Matrix, was no longer indexed on Google.


I reached out to friends like Chris Miles and Dustin Luther to figured out what to do – it’s never happened before and since I didn’t change anything on the site recently, I didn’t know where to start. We ended up poking around and found advertisements for viagra embedded in my sidebar (WordPress). I’d been hacked!

I went to this page My site’s no longer included in the search results. What happened?

…not much help!

I went to my Google Webmaster Tools page and sent a reconsideration letter (allow 4-6 weeks for changes).

Its the “Guilty Until Proven Innocent” law of the Internet – after all, it is only a series of tubes.

[Fee Simplistic] Reinventing The Appraisal: Should Appraisals Be Subject To Side Effect Regulations As In FDA Prescription Drugs?

July 22, 2008 | 1:38 pm |

Fee Simplistic is a regular post by Martin Tessler, whom after 30 years of commercial fee appraiser-related experience, gets to the bottom of real issues by seeing the both the trees and the forest. He has never been accused of being a man of few words and his commentary can’t be inspired on a specific day of the week.

…Jonathan Miller

Anyone who read the Monday (July 21st) Wall Street Journal could not escape the front page article on Superior Bank and their disastrous subprime lending which eventually ended up in an FDIC takeover. The FDIC operation was even more egregious as they continued the subprime lending while operating the bank until they could find a buyer. During the FDIC operation Superior funded more than 6,700 subprimes with a face amount of over $550 million and then sold most of the loans to another bank. The loan pool was a classic example of the subprime/credit implosion pandemic still spreading globally: lending to unqualified borrowers, lack of or poorly documented income verification and-last but not least-inflated appraisals.

Underpinning the inflated appraisal factor was the brief story of a retired high school teacher in rural Georgia near Athens who fixed up and added to a ramshackle house with a tin roof located next to a trailer park and who refinanced it with Superior in 2001 with a $120,700-20 year mortgage at 10.75% compared to a 7% rate for those with good credit. The bank’s appraisal valued the house at $142,000 and relied on 3 comps that were in “well attended” condition. The comps were located many miles away in neighboring counties and two were located close to the center of Athens where locational factors generated higher property values. Although not a true indication of market value, county records indicated fair market value for assessment purposes at $84,000 with the bank selling it at auction in 2005 after foreclosure for $76,000.

So where does the FDA’s side effects warning listed for all prescription drugs come in for application to appraisals?

  • First: All appraisals should have an EXPIRATION DATE: WARNING: Do not use this appraisal more than __ months after (list valuation date) as market conditions will likely have changed. See your bank or CDO or MBS trustee or contact SOAPBOX.
  • Second: Similar to drug interactions, the location of the comps used to arrive at market value should be highlighted so that their effectiveness can be measured as in: APPRAISAL COMPS INTERACTION: WARNING: The comparables used in this appraisal were located: within walking distance; within the defined neighborhood; within the outlying county; within the SMSA; outside the SMSA;-(choose one of the above). U.S. Government advisories indicate that there is an inverse relationship to the effectiveness of the listed comps and the distance from the subject.
  • Third: PREVIOUS CONTAMINANT INDICATIONS: WARNING: This appraisal was undertaken under TOTAL ANTISEPTIC & CONTAMINANT-FREE conditions. The value indicated has been arrived at independent of any outside contact or interference from a mortgage broker, lender, investment bank, underwriter, rating agency, or other influencing factor. This may or may not apply to the fee or future assignments.

Moral of the Story: Keep Diogenes on the job looking for honest appraisers.

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New Scalable FDIC Web Site Built For Easy Expansion Of Bank Failures

July 21, 2008 | 2:23 pm | |

In an effort to be proactive, the FDIC has created a web site that simply allows a depositor to “select a bank” from a popup list. It seems to be built for maximum scalability.

Expect increased usage over the next few years. Hopefully FDIC won’t actually issue subprime loans in any of lenders:

It turns out that the U.S. government itself was one of the lenders giving out high-interest, subprime mortgages, some of them predatory, according to government documents filed in federal court.

The unusual situation, which is still bedeviling bank regulators, stems from the 2001 seizure by federal officials of Superior Bank FSB, then a national subprime lender based in Hinsdale, Ill. Rather than immediately shuttering or selling Superior, as it normally does with failed banks, the Federal Deposit Insurance Corp. continued to run the bank’s subprime-mortgage business for months as it looked for a buyer. With FDIC people supervising day-to-day operations, Superior funded more than 6,700 new subprime loans worth more than $550 million, according to federal mortgage data.

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