Matrix Blog

Archive for November, 2008

[Under Contract] But I’m Not Buyin’ It

November 26, 2008 | 2:05 pm | |

The real estate contract is a hot topic today. In declining housing markets, it is not uncommon for a buyer to have second thoughts, rational or not. I heard of an example recently where an exasperated buyer called the broker with a solid contract to exclaim (paraphrasing): “Dammit, the co-op board approved my purchase!”

When the deal is signed, both parties are bound in good faith to see the transaction all the way through.

The implied covenant of good faith and fair dealing between parties to a contract embraces a pledge that “neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract”

In New York State, that’s now become a matter of semantics.

The New York Court of Appeals ruled today that lawyers can disapprove of a client’s real estate contract for any reason within the three-day attorney review period.

And the court ruled that it’s not bad faith, even if the lawyer simply nixes the deal because a client wanted to back out, Newsday reports.

Here’s the wording in the ruling:

We therefore hold that where a real estate contract contains an attorney approval contingency providing that the contract is “subject to” or “contingent upon” attorney approval within a specified time period and no further limitations on approval appear in the contract’s language, an attorney for either party may timely disapprove the contract for any reason or for no stated reason.

I always thought that the attorneys were involved to advise on legal aspects of the deal, not to provide a way to circumvent good faith intentions established at the time of signing. I think this actually places the attorneys in an awkward position.

Apparently, I have a lot to learn.

This Just In: Thanksgiving is tomorrow. Happiness will ensue.

[Value Snapshot] A Strict Shift In The Deal Dynamic

November 26, 2008 | 12:54 am | |

Ok, I am on an appraisal-related commentary binge lately. But thats to be expected when the lending system is in upheaval and the appraisal industry was the enabler of the misguided/unethical application of risk. Some of it was the appraisal industry’s fault for capitulating to pressure, while an equally large portion of blame goes to lenders who applied the pressure.

There has been a shift in the deal dynamic as evidenced in this recent article: Suddenly, Stricter Appraisals by Lisa Prevost in the New York Times.

“A house is only worth what the bank says,” said Terry Hastings, a partner at Hamilton Mortgage, in Ridgefield. “It’s not worth what the buyer says anymore.”

Spoken like a mortgage broker. One of the reason so many mortgage brokers have gone under in the past year has been their inability to find “good appraisers.” I continue to be amazed that most people think banks call their appraisers in and tell them to be “more conservative.”

It’s all about underwriting these days. Banks are actually reading reports now (I kid you not).

Mortgage lenders determined to stave off additional losses are demanding more thorough home appraisals and carefully reviewing valuation figures. If an appraisal is deemed too thin on supporting data, lenders may reduce the loan amount for the property, or not make the loan at all.

If lenders aren’t comfortable with the appraisal or the data is too thin, the underwriter simply raises the LTV.

Lower-than-expected bank appraisals are indeed sending some buyers and sellers back to the bargaining table for another go-round, said Rosamond A. Koether, a lawyer with Cohen & Wolf, in Westport. But in her experience, the tougher appraisal standards are more often an obstacle for homeowners hoping to restructure debt by refinancing.

If buyers and sellers willing re-negotiate the deal because of a low appraisal. Guess what? That’s market value.

What’s interesting about the article, is the mention of the greater difficulty in refinancing and the appraisal. That’s because of two reasons. First, there is not a flesh out transaction to observe between a buyer and seller to create value credibility. Secondly, the property owner is more likely to estimate their property value based on what they need, rather than what it is worth. The orientation is skewed after years of simply asking what they needed and getting it (or more).

Many lenders are requiring “comps” sales of comparable properties used to help determine a home’s value no more than 60 to 90 days old, and within a mile of the property being appraised.

While that’s a reasonable and fair request in a changing market, there are fewer sales in many housing markets today and meeting these suddenly stricter expectations is not possible, which essentially leads to a deal being killed.

One of the items that was not mentioned in the article is the blame the appraiser gets for a deal falling through. Often times, a bank or mortgage broker will tell the borrower that the appraiser “killed” the deal or presented something that prevented the deal from happening. A very sleazy practice to say the least.

The biggest problem in lending today is the fact that while they are more strict with underwriting, they haven’t done a thing to improve the quality of the appraisers they hire. They are still focused on low cost appraisals, bang ’em out. Given the mortgage market upheaval…it’s amazing.

“It used to be banks would call and the first question they would ask was, ‘How familiar are you with a particular area?'” he said. “Now, that conversation starts with, ‘What’s the lowest fee you can offer and what’s your fastest turnaround time?'”

In the state of this housing market, the word “strict” needs to be appraised for it’s relativity.

Aside: This stuff is all very interesting, but how does this trade group track this specific data? Enquiring minds want to know.

[Getting Graphic] National Economic Indicators: Pictures Tell $700B Words

November 26, 2008 | 12:24 am | |

Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related chart(s).

Here’s a slew of easy to understand charts from the Federal Reserve Bank of New York on the key national economic indicators that relate to housing such as consumption, housing starts and sales, employment, oil, consumer confidence, GDP and others. They tell a consistent story.

My favorites are below (here are all of them/expanded in size):


Bailing Out Mets Fans, Appraising Opening Day At US Treasury Field

November 24, 2008 | 11:55 pm |


I’ve discussed the curse of stadium naming. The new Citi Field stadium name is in danger of going Enron on us. After all, the naming rights are only a paltry $400M and the Sunday’s Citi bailout was $326B.

For the past few years (for security reasons?) appraisers have been required to provide private financial information to Citi in order to consider whether the appraiser was solvent enough to work for them. Appraisers I know fought tooth and nail against this. In our case, we had been working for them for more than 20 years and now they want to know how much money we make? In other words, they wouldn’t want an appraiser to go under during the middle of a $400 appraisal assignment. It would be (apply sarcastic tone here) devastating to the entire financial system I would think.

The irony here is amazing given Citi’s need for a bailout.

Don’t get me wrong, we work for other areas of Citi which are sophisticated and professional. I am simply fed up with the “efficiency” theory of banking as it applies to backroom operations of large retail banks. They have lost their way. Incidentally, nothing has changed in this regard since the credit crunch began in the summer of 2007.

A few months ago, Citigroup’s retail banking appraisal group based in Missouri put my appraisal firm out to pasture (demoted to backup) in favor of appraisal management companies (those big national companies known for high speed, low costs and virtually zero quality (aka “army of form fillers”) aka AMCs and high volume appraisal shops/factories.

Of course, Citigroup gets a bailout.


Here’s a sampling of our former clients who are national banks that went with appraisal management company factories and ended up getting into financial trouble.

  • Citigroup – went with AMCs
  • Washington Mutual – Residential mortgage lending gone – went with AMCs – NY AG tried to sue them for collusion with eAppraisIT to pressure appraisers (an AMC)
  • Countrywide – absorbed by Bank of America – lots of litigation in the future
  • US Trust Company – went with AMCs – such a disaster they actually came back to their appraisers only to be purchased by Bank of America and then we were dumped again
  • Bank of America – went with AMCs – rumors that it was such a bad experience, returning to appraisers
  • Wachovia – created their own AMC, Bought by PNC.



Not really. Like the stadium naming deal, the shift to an AMC symbolizes the point when a mortgage lender goes too far and loses touch with it’s understanding of risk. The corporate culture loses the ability to understand the importance of assessing the value of the collateral to which they are lending. Common sense evaporates.

For the most part, the individual review appraisers that worked at these lenders were professional and competent and could see the issue at hand, but they just didn’t have the political weight, so to speak.

Hopefully those institutional politics will be crushed by the time we reach seventh inning stretch (at US Treasury Field).

This just in: Tiger Woods now needs to rustle up lunch money.

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[In The Media] A1 For NYT & NY Mag’s Best Photo Shoot Ever

November 24, 2008 | 12:21 am | | Public |

Well this weekend was pretty decent:

Not much accomplished if measured in productivity, yet it was still a good weekend (even though my kids didn’t like the chocolate pudding).

[RE-Cap] TARP, BARF, Loathing, Coupons And A Hot Potato

November 23, 2008 | 10:25 pm | |

It’s been a while since I linked out to bloggers whom I follow and admire. A large scale hat tip, so to speak. I also throw in news items and other tidbits that make me want to curl my cap.

This week’s theme: Change we can sort of believe in.

Political Fear and Loathing on Wall Street [XBroker]

The Option ARM Non-Bomb? [Infectious Greed]

From TARP to BARF [Curious Capitalist]

FDIC coupons [WallStreetJackass]

Love, Jobs & 401(k)s [NYT]

When couples split, the home is a hot potato [Miami Herald]

Failing Home Economics [NYT]

Word A Day: exurb [A.Word.A.Day]

Just doing my job [Seth’s Blog]

Rich Cut Back on Payments to Mistresses [Wealth Report]

Yuppie insurance [Free Exchange]

They Are Still Selling This Stuff? [Blown Mortgage]


[It’s Freezing Out There] Housing Indexes Take A Back Seat

November 22, 2008 | 1:43 am | |

One of my favorite online columns at the Wall Street Journal is “The Numbers Guy” – by Carl Bialik. He tackles the foggy issue of housing indexes this week, which have entered the mainstream conversation over the past few years. (My firm was nearly acquired by one of the firms in the piece before I pulled the plug as the financial markets began to crack. Phew!)

In “Only One Person Knows a Home’s Value: Its Buyer: House-Price Index Readings Can Be Inflated, Built on Shaky Foundations and Far From the Right Neighborhood“, Carl makes the case that:

The one point of widespread agreement in the real-estate industry is that there is no single accurate index of home prices. They are all over the map, cover different sets of homes and may exclude parts of the country or be unduly influenced by the mix of homes sold in a given month.

The S&P/Case-Shiller Index is perhaps the best known housing benchmark and was the first major index to the space. One of it’s authors, professor Bob Shiller, is well known for his bestselling book. As a result, it has become the index most often cited in the media and perhaps most subject to attack by competitors, and by various segments of the housing industry who don’t like the sharp declines it has been reporting.

The real irony here is that CSI and others were created to enable the sale of financial instruments so that investors can better manage risk or simply follow the US housing market in aggregate….not for individual consumers to track their local housing markets in real time, given the lengthy delay in some of the index reporting schedules (CSI releases September data next Tuesday).

Yet in one of the weakest housing markets in years, significant trading activity appears to remain elusive in this business space and their application is expanding into the consumer space.

But the indexes may be leading everyone astray. Just as respondents to election surveys are meant to stand in for the broader electorate, the homes being sold need to represent all homes. The problem is, producers of these price measures aren’t sure that sale prices reflect the values of houses not on the market.

Carl’s column does thrash the indexes quite a bit, but in their defense, their day will certainly come as data collection gets better and faster, and markets for these products evolve as investors begin to understand them. I suspect this will occur at the point where Wall Street is able to reinvent itself.

Its going to be interesting to see how long acceptance is going to take to achieve. I suspect it will be measured in years.

After all, it’s freezing out there.


[NY Times Topics: Housing] 11-19-08: Regulators Awaken!

November 20, 2008 | 1:56 am | |

The New York Times asked me to provide insight and share research and reports I come across (excluding my own) that may help inform readers on the topic of housing. In other words, blog a little for the New York Times.

As a New York Times “online contributor”, I get a byline which is beyond neat.

Here is my latest handywork:

The Federal Housing Finance Agency: Regulators Awaken!

It was my first semi-snarky piece for them and from the feedback, I wasn’t sure they were going to run it, so I posted a similar story here on Matrix. To their credit they ran it with my byline. Happiness ensued.

Suggested bookmark: New York Times Topics: Housing

[FHFA /OFHEO] On A Mission, With Bear Oversight

November 19, 2008 | 4:38 pm | |

I have been particularly impressed with the way that the newly created Federal Housing Finance Agency has been keeping us informed on what they have been doing to help with the housing market since the credit crunch began in the summer of 2007.

Organized, neat, outspoken, timely. You only have to read the FHFA mission statement to understand what they are all about:

Promote a stable and liquid mortgage market, affordable housing and community investment through safety and soundness oversight of Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

Sounds like a necessary regulatory agency to me.

The FHFA’s predecessor, Office of Federal Housing Enterprise Oversight (OFHEO) was also responsible for regulatory oversight during the Fannie Mae accounting scandal and the collapse of the GSEs leading to their bailout in September 2008, had a remarkably similar mission statement as FHFA’s.

OFHEO has an important and compelling mission

to promote housing and a strong national housing finance system by ensuring the safety and soundness of Fannie Mae and Freddie Mac.

Before the global credit crunch and US housing market decline, where was the actual oversight of Fannie Mae and Freddie Mac? Today the new institution replacing the old one is run by the same person (whom I find to be quite well-spoken) and their new web site is nearly identical to the old one yet the mission has now expanded to include the Federal Home Loan Banks.

The implication of promoting liquidity in the revised mission statement isn’t a new concept since that was one of the primary reasons for the existence of Fannie Mae and Freddie Mac in the first place. And OFHEO’s advocacy of affordable housing seemed to morph from low income housing to simply making housing finance costs cheaper.

Still, I have higher hopes for all federal regulators going forward now that they have been lulled from hibernation.

After all, there’s a bear out there.

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Pirate Theory Of Credit Crunch Aversion

November 19, 2008 | 1:03 am | |

It started with Tom Friedman’s McDonald’s Theory of War:

No country with a McDonald’s outlet, the theory contends, has ever gone to war with another.

which was based on the premise that countries with an educated middle class that would sustain a McDonald’s are less likely to go to war…this theory held since 1996 until Georgia and Russia fought this past summer. Perhaps, they needed more happy meals?

Dan Gross brings us the Starbucks theory of international economics: >The higher the concentration of expensive, nautically themed, faux-Italian-branded Frappuccino joints in a country’s financial capital, the more likely the country is to have suffered catastrophic financial losses. Gross contends that Starbucks fueled the housing boom as “The Seattle-based coffee chain followed new housing developments into the suburbs and exurbs, where its outlets became pit stops for real-estate brokers and their clients. It also carpet-bombed the business districts of large cities, especially the financial centers, with nearly 200 in Manhattan alone.” Incidentally, the company is named for Captain Ahab’s first mate – Starbuck in Moby-Dick.

Well I’ve got my own (admittedly very thin, but please give it to me, I’ve never had an economic theory before) economic theory/correlation/indicator: Pirate theory of credit crunch aversion:

It’s been exactly two months since Talk Like A Pirate Day and apparently pirates are dominating the high seas (well, it pays better than fishing).

My pirate theory goes like this:

[Take a look at the ICC Commercial Crime Services Piracy Map for 2008.]

Piracy (the boarding of ships to steal their cargo) originates from countries that didn’t participate in the credit market run-up – namely participate in the proliferation of faulty mortgage securities that wreaked havoc on much of the global financial system. According to recent news, poor countries with limited financial sophistication tend to be the source of much the pirate activity.

(the map shows the locations of the activity, not the source)

What does this all mean? Well for starters, pirates are not likely eating at McDonald’s for lunch while sipping a mocha frappuccino grande with enough whipped cream to be esthetically pleasing, after boarding a container ship full of tanks and guns.

And they don’t have a 2/28 subprime ARM with a 2% teaser rate about to reset to a fully indexed rate of 11% with a significant pre-payment penalty. They merely get paid the ransom for the crew or get shot.

And of course, Somalian coffee served at Starbucks is quite good.

UPDATE: Infectious Greed: Somali Pirates and TARP

UPDATE2: Freakonomics: Spreading the Pirate Booty Around


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[Housing Our Amenities] Conspicuous Consumption Is Dead

November 18, 2008 | 2:00 am | |

we just don’t know it yet…

I think my use of the phrase “pet spas and on-site sommeliers” has made the rounds long enough and others like it over the past several years to be put to rest…please.

As housing and consumers benefited from the era of easy credit, the surplus of new development entering the housing market necessitated more creative marketing to differentiate the vast array of product under the now tired “lifestyle” moniker. (cliche alert: Location 3x, Lifestyle)

The Conspicuous consumption goes out of style article in Sunday’s International Herald Tribune (or Friday’s New York Times’ In Hard Times, No More Fancy Pants) confirmed what I had been observing for the past few months as the credit crunch bore down on all of our lives.

The US economy is faltering under a significant global financial crisis. A new presidential administration/party is taking over the reigns.

Individuals seeking the biggest and the best will probably do so with less fanfare. Housing demand will likely be re-defined by the marketing shift to austerity.

Times have changed and we don’t have the luxury of asking “Wassup!” of someone without regretting we asked. Speaking of bailouts (c’mon, you were thinking about it), here’s a prime example of how GM continues to miss the market: “My Hybrid Is Bigger Than Your Hybrid.


[Government Bailout Leviathan] Short Huge, Brutish, Nasty

November 17, 2008 | 12:21 am | |

In many ways, the free market financial/mortgage system, without regulatory oversight could be described as Nasty, brutish and short:

Nasty, brutish and short aren’t a firm of particularly unpleasant lawyers but a quotation from Thomas Hobbes’ Leviathan, or the matter, forme, and power of a commonwealth, ecclesiasticall and civill, 1651. The fuller quotation of this phrase is even less appealing – “solitary, poor, nasty, brutish, and short”. Hobbes described the natural state of mankind (the state pertaining before a central government is formed) as a “warre of every man against every man”.

I was struck by a recent case of massive number numbness that was inflicted upon me when I saw the Fannie and Freddie losses for the 3rd quarter:

Fannie Mae: ($29B)
Freddie Mac: ($25B)

For perspective, Fannie Mae and Freddie Mac each averaged a $2B loss per quarter in the preceding three quarters. The GSEs were bailed out in early-September and represented the last 3 weeks of 3Q. I know the Freddie loss just reported included a $14B non-cash charge so it lost about $12B cash-wise.

The current administration is leaving still advocating free markets, which a disconnected concept when compared to the situation we find ourselves with – day late and a few trillion short. Dismal Scientist calls it right.

I remember when President Bush decided to call a summit 3 weeks ago, during a crisis which needed daily attention:

The first decision I had to make was who was coming to the meeting. And obviously I decided that we ought to have the G20 nations, as opposed to the G8 or the G13.

hmmm…what flavor of free market thinking will work going forward that didn’t work before?

One of the things we did, we spent time talking about the actions that we have taken. The United States has taken some extraordinary measures. Those of you who have followed my career know that I’m a free market person — until you’re told that if you don’t take decisive measures then it’s conceivable that our country could go into a depression greater than the Great Depressions. So my administration has taken significant measures to deal with a credit crisis. And then we worked with Congress to deal with the credit crisis, as well.

Call me crazy, but how about simple common sense oversight? Despite the actions of the administration, I find that Congress is finally starting to make some sense.

Here’s a series of plans to fix housing summarized by Capital Commerce.

What worries me about much of this is that government has a hard time “thinking big” which should not be confused with “spending big.” Evidence of this is found with Treasury’s foreclosure plan versus FDIC’s Blair. Bair wants to think big.

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