Matrix Blog

Archive for May, 2012

[The BBQ Interview] Rick Sharga of Carrington Mortgage Holdings – “Why is REO Volume Down?”

May 30, 2012 | 3:24 pm | nytlogo |

I was looking for guidance/insight on the issue of future REO volume because I had anticipated a faster pickup in REO volume once the state AG agreement was signed with the major servicers (ie being held back after robo signing scandal) but that is yet the case.

One of the most knowledgeable people in the business and a good friend (as well as an expert in the field of the BBQ) is Rick Sharga, Executive Vice President of Carrington Mortgage Holdings so I traded emails with him, compiled it and received a great overview of the topic:


Miller: Most pundits are looking at all the price metrics saying things are improving and inventory is low. To me it feels like there is an essential component not being factored in and that is foreclosure shadow. Am I overly concerned about it? I thought we were looking at several years of heavy volume. In fact S&P says 48 months of heavy REO volume.

Sharga: I break REO into two distinct phases: activity and inventory. Both have been falling. Inventory levels have been falling largely because of an unexpected drop-off in activity levels. That drop-off has slowed down the pipeline of new REO inventory, and the market has gradually been whittling away at the existing inventory. We seem to have reached a plateau of about 500,000 REO sales a year, and the question of how long it will take to clear the market is a good one. I don’t think we’ve peaked yet in terms of inventory (LPS believes that REO inventory levels will peak in 2015, and they may be right, based on how many seriously delinquent loans there are, and how long it takes to execute a foreclosure).


Miller: But why is volume down?

Sharga: The activity levels being down is a bit of a surprise, but in hindsight probably shouldn’t be. There are several factors at play here. First, from a positive perspective, we’re seeing dramatic increases in short sales. That’s a good trend for everybody – lenders lose less, buyers get a good deal, borrowers take less of a credit hit, properties don’t deteriorate as much and prices don’t drop as far. Every short sale essentially means one less REO, so they’re definitely a factor to consider.

Second, we’re (finally) starting to see some sales of non-performing loans (NPLs) by the major lenders; we’ve purchased two portfolios worth between $150-250 million in the last few months. Those sales at the very least delay REO actions while the notes are being transferred. Then, in cases such as ours where our mortgage servicing unit starts contacting the delinquent borrowers, a lot of loans are modified and taken out of foreclosure. Those that can’t be modified are typically offered the option of a short sale. So foreclosure actions actually are reduced by NPL sales.

Third, the long-awaited AG settlement has had a bit of an unintended consequence in this area. While we anticipated – and have seen – the return of foreclosure processing in some of the judicial states where the engines had seized up during the AG negotiations, we’ve also seen an unexpected drop in activity in the non-judicial states. Part of this is due to the terms of the settlement. The five largest servicers have agreed to write off about $20 billion in principal balance on their delinquent loans. A high percentage of these loans are in the Southwest, in non-judicial states like CA and NV. These states also had some of the largest price declines from peak to trough. The servicers have financial incentives to meet their $20 billion amount as quickly as possible (one servicer, for example, is believed to have a “dollar for dollar” incentive on anything it writes down this year). So, the quickest way to meet the write down requirement is to target delinquent loans in the Western non-judicial states. “Dual tracking” is now illegal. Therefore, it makes sense for the servicers to halt foreclosure actions on these properties and see if the borrowers qualify for the write downs. How big is this? BofA announced that it had already made offers to 200,000 borrowers. The huge drop off in REO activity in these states won’t be offset by increases in the judicial states; even though they’re starting to execute foreclosures again, it will take time to unclog the system in those states and get through the processes.

Finally, some of this is localized (Nevada has some new laws that make it difficult to execute a foreclosure without the original mortgage note); and some of it is due to pending Federal programs (HAMP Tier 2 is scheduled to launch next month, which will require servicers to see which of their previously un-modified loans will qualify for the latest government program).


Miller: What about that shadow inventory we’ve all been hearing about, and the several million seriously delinquent loans not yet in foreclosure?

Sharga: It probably means that fewer of them will make it through to REO status, and that the ones that do will get there in a very measured, controlled manner. This makes the LPS scenario believable: all those delinquent loans gradually working their way through the foreclosure process over the next 2-3 years but not creating a flood of REO inventory; peaking sometime in 2015, and falling pretty dramatically after that.


Miller: This is very helpful, thanks. Another important topic of the day is BBQing. Any sage advice for a novice?

Sharga: Always remember my “never fails,” three step grilling mantra:
1. Buy the best food you can find
2. Use 100% hardwood chunk coal
3. Stay out of the way and try your best not to screw anything up

Tags: , ,


[Three Cents Worth NY #192] Summer Listing Levels May Heat Fall

May 30, 2012 | 11:49 am | curbed | Charts |

It’s time to share my Three Cents Worth (3CW) on Curbed NY, at the intersection of neighborhood and real estate in the capitol of the world. And I’m simply here to take measurements.

Read yesterday’s 3CW post on @CurbedNY:

After a nice extended holiday weekend that traditionally marks the summer housing market, combined with all the chatter/concern about low inventory, I thought I’d look at listing levels over the past several years. I compared the level of active listing inventory (red line) around the Memorial Day weekend (red column) and its trough just before Labor Day (green arrow).


[click to expand]


Tags:


Best Real Estate “For Sale” Sign Ever

May 30, 2012 | 11:26 am |

Getting to the point in Knoxville, TN.

Tags:


Sweet! “Making The Donuts” (A Housing Market Theory)

May 30, 2012 | 9:43 am | bloomberg_news_logo |

Years ago, there was a Dunkin’ Donuts commercial with the catch phrase “got time to make the donuts” which has remained one of my regular phrases.

For the past few months I’ve talked a lot about housing markets with “a hole in the middle” in my speaking engagements. I’ve been surprised at the volume of in-person feedback on “Donuts” just from my Bloomberg TV appearance with Deirde Bolton a few weeks ago including a senior bank executive at a board meeting I was presenting, a WSJ editor and reporter and others.

For lack of a better description, many housing markets, especially along the coastal US, are like a donut (NYC’s version is more of a bagel than a donut – thicker but not as sweet). Incidentally, I made donuts at the bakery in college so I’m obviously more than qualified to use this weak analogy.

The “hole in the middle” pattern is something I’ve been observing in the various housing markets I follow or dabble in – i.e. Manhattan, Westchester, Hamptons, Brooklyn, Miami, SF, DC, to name a few. I’m not defining it by a specific price but the middle is more like the segment just above the middle in these markets. It’s placement is specific to the price structure of each market.

It goes like this:

  • Strength at the entry-level – due to record low mortgage rates and pricey rental market;
  • Strength at the upper end – less dependent on irrational lending standards with limited places to invest, foreign buyers, wealthy domestic buyers; but
  • Weakness (a hole) in the middle – relative to the top and the bottom.

The “donut housing economy” is holding back consumers from trading up in an orderly fashion. i.e. from the low to middle of the market, from middle to high (or the reverse).

By describing the middle as a “hole” I don’t see the middle as a stark barren wasteland (i.e. w/o sprinkles). I’m simply observing that it’s weaker relative to the top and bottom…for now.


[Three Cents Worth NY #191] Manhattan Rentals Are Quicker Picker Upper

May 29, 2012 | 12:12 pm | curbed | Charts |

It’s time to share my Three Cents Worth (3CW) on Curbed NY, at the intersection of neighborhood and real estate in the capitol of the world. And I’m simply here to take measurements.

I was in such a hurry for Memorial Day weekend to come, I neglected to post this last week. Look for a new 3CW post later today.

Read last week’s 3CW post on Curbed New York:

I’m probably dating myself with the title reference to an old Bounty Paper Towel commercial tag line, but who cares, this is Curbed and they’ll absorb all spills. Since everyone seems to be talking about the strength of the rental market, I thought I’d take a look at the absorption rates of the sales and rental markets over the past 5 years. I could go back more than 10-years with the sales market but my rental listing data is currently only compiled back to 2007.


[click to expand]


Tags: ,


[NAR] Existing Home Sales Continue to Edge Higher +10% Y-O-Y

May 22, 2012 | 2:21 pm | bloomberg_news_logo |

NAR’s Existing Home Sales numbers continue to edge higher. In this chart I annualize the non-seasonally adjusted and seasonally adjusted results. Think there isn’t seasonality in housing sales?

Here’s a good summary by Peter Coy at Bloomberg Businessweek.

No doubt a big reason was the improvement in affordability. The interest rate on a 30-year fixed-rate mortgage has continued falling since the period covered by the NAR report, portending better times ahead. Freddie Mac (FMCC), the mortgage-buying giant, says the rate was 3.79 percent in the week ended May 17, the lowest since it began keeping records in 1971. The Realtors’s index of affordability hit a record high in the January-March quarter. It factors in sales prices of existing homes, mortgage rates, and household income, which is slowly strengthening as the labor market improves.

And here’s a trend on inventory and absorption (months supply). Inventory continues to slide (not seasonally adjusted).


Tags: , , , ,


[Vortex] Did We Get There? The Promise of Licensing Appraisers

May 22, 2012 | 11:32 am |

Every so often, a Matrix reader submits something they feel very strongly about it and bravely enter the Vortex where I post it.

Guest Columnist: Cecil Simon

Cecil has been a New York general state certified appraiser since 1992. He takes a look at the intersection of professional education and licensing. He’s weighed in here before. Like me, Cecil was an appraiser before the licensing law in 1989 and in fact wrote Congress about this matter as early as 1986.

Admittedly this is super appraiser wonkiness, but it’s worth the read.

-Jonathan Miller



May 12, 2012

Did we get there? the promise of Licensing Appraisers.

How technically prepared are Certified General Appraisers? A recent editorial by Henry H. Harrison in his Real Estate Valuation Magazine, suggested the answer is not very well. In fact, Mr. Harrison even challenged readers to provide evidence that Certified General Appraisers did not make at least 80% of their living writing residential work.

I believe he is correct on the preparation issue, and incorrect on what Certified General Appraisers do in the industry. Most Certified General Appraisers have now become the workhorses for fee shops run by designated appraisers, working as independent contractors at low rates and without benefits. This was by design, and the education and experience requirements set by the Appraisal Qualifications Board in the early 1990s, later amended in 2008, bears me out.

It is now generally accepted that the requirements for General Certification set in 1991 were deplorable, although Harrison and other in his group did not think so when I first wrote to him in 1993. The 2008 fix with the addition of a course in Highest and Best Use and Market Analysis, and one in Report Writing was a plus, but the remaining content was just a split of two former lower level courses into some 120-140 hours. The final product was three hundred classroom hours, more than were required for the MAI in 1990, yet these were junior courses.

FIRREA had a specific mandate. That mandate required that the education and experience required for General Certification be such, that a person with those qualifications would be able to appraise any property without regard to value in a Federal related transaction. That is a high standard, which was well known to the Chairman and members of the Board from 1991 to 2004, yet they did otherwise. The reasons often given in support of the lower standards were the use of the term minimal education required, that States could add to the basic core, and that Certification requirements were intended as a beginning. But the mandate certainly does not imply that.

Basic appraisal education requires only six courses, seven if you add the new Quantitative Analysis course, which is a plus. The seven courses are Appraisal Principles and Procedures, Highest and Best Use and Market Analysis, Land Valuation and the Cost Approach, Direct Sales Comparison Approach, Income Approach, Quantitative Analysis, and Case Study and Report Writing. These names can be applied to Residential and General [Vortex] Did we get there? the promise of Licensing Appraisers.

Certification courses with different content, and all that is currently listed by the Appraisal Institute as Level 1 and 2 and required for their MAI designation can be covered in those seven courses. Hours can be assigned based on the content to be covered.

The seven basic courses plus four years of experience, and the State Exam, is more than adequate to lay the groundwork for Certification as well as any designation. It should be noted that the six courses used prior to 1990 for the MAI, and the four used for the SREA (101, 102, 201, 202), were all taught in less than three hundred hours. These courses produced some of the best educators and practitioners currently working in the industry, including Mr. Harrison. Even Universities that grant Undergraduate and Graduate Degrees in Real Estate offer only one or two courses in Valuation.

I took the trouble to review the education requirements for all of the original members of the Foundation that deal specifically with Real Property interest. The Appraisal Institute of Canada arguably has the best program, and the Appraisal Institute is the only one with Advanced Courses. Some startling facts also come to mind. The education requirements for the MAI designation have increased from 267 hours in 1990 to 482 in 2008, an increase of 215 hours, all without any change in the theory and methodology of valuing real property. The only industry change during that period was the use of software that makes database searches and data analysis easier. In fact, one group, The American Society of Appraisers could not even remember when they last hosted a basic course.

I believe that The Appraisal Institute is the best professional association representing appraisers and the leader in the industry, but its continued creation of advanced courses in order to create the illusion that its members and candidates are better prepared than Certified Appraisers is a farce. The same seven courses could easily serve as the core education requirements for candidates as well as General Certification. Additional requirements for designations can be added. The MAI designation is a highly recognized brand, and could be granted based on work experience and peer review. Downgrading the education requirements for Certification is a dumb idea, and it is clear that The Appraisal Subcommittee fell down on its mandate to monitor and review the practices and activities of the Foundation.

There are a few good textbooks out there on Appraising Real Property, and I place The Appraisal of Real Estate, published by the Appraisal Institute at the top of that heap. Now I would hope that any State that puts its imprimatur on the qualifications of any individual to call that person a Certified General Appraiser, expects that they have covered the content of that text from cover to cover. That was the intent of FIRREA. But it appears that by separating the content into General and Advanced sections, both the Appraisal Institute and the Appraisal Qualifications Board that it has controlled since 1989 seems not to think so. This difference in education is the centerpiece of Harrison’s thesis.

The Qualifications Board should simply set the education requirement as successful completion of a course in the seven areas and forget hours, and if a rigorous State exam is made part of the process, then The Appraisal Institute will be sure to include much of what it now calls advanced content in those seven courses.

On the issue of college education, professional associations may find this a plus, and hopefully the appraiser has written enough college papers to be able to write properly, but degrees in most disciplines will not make you a better market analyst.

The answer to my original question is yes and no. We now have a mechanism to punish bad apples, although better enforcement is needed, but the standards for education, experience and testing did not.

C M. Simon.

Tags: , , , , ,


A Twitter Shout-out from Valuation Review on their 10th Anniversary

May 21, 2012 | 3:30 pm | Public |

Here’s the Editor’s page in a recent copy of Valuation Review, an essential publication for real estate appraisers by October Research. I’ve been subscribing since nearly the beginning when it was called something else. Always relevant good reading for an industry besieged by bad information.

And more importantly, take notice of my twitter shout-out . Fun!


[click to expand]

Tags: , ,


[Brookings] How We’re Doing Index – May 2012

May 21, 2012 | 2:30 pm |

Sort of like the sparklines feature in Excel – It provides a quick snapshot of where we are economically right now.

Tags:


[Vortex] ‘Sustainability’ of Property Values [Part I of Trilogy]

May 21, 2012 | 12:08 pm |

A good friend of mine, Mark Stockton of Valuations Unlimited, LLC, has developed a powerful research tool to aid in valuation. Mark is a sharp unassuming guy who has sold technology to Wall Street before. Here is a simple overview. It addresses the significant elements of the technology. It’s not an AVM and better yet…it actually works! At least it worked when I tested it on my house in CT (a 200 year old 3 story Salt Box) and on a number of my friends’ and relatives’ properties in various parts of the US.

His technology develops the replacement cost, market analysis, land residual analysis, assessment analysis, sale price index and rental analysis and allows the user to weight the applicability of each approach.

He’s got several very interested parties at this point. As Mark has told me: “We certainly need to make decision makers aware that there is at least one solution available that can help them make better decisions and monitor their investments over time.”

He’s entered the vortex on Matrix (he wrote a guest post). It’s about a different kind of “sustainability”. A good read.


Sustainability of Property Values
By Mark L. Stockton
May 16, 2012

There has been a lot of discussion in recent months about the need to reengineer the appraisal process. There is no denying the fact that the process as it currently exists is antiquated and inadequate. Methodology is purely subjective; there is a lack of adequate analytics.

These deficiencies can be corrected. Comprehensive analytics are available to those who would demand them. Much of the subjectivity can be replaced by objective processes that will support reasonable value conclusions. However, fixing the means by which value conclusions are developed addresses only part of the problem. Those conclusions must be examined for sustainability in order to be used to make prudent lending and investing decisions.

A friend recently lost her home. She purchased it new in May of 2002 for $234,500, and at the time the price was reasonable when compared to the other 1,000+ newly constructed homes in the immediate area. I have not seen the appraisal that was done at purchase, but I imagine the value conclusion was reasonable in light of the fact that there were so many similar homes in the subdivision that were selling at the same time. There is little doubt that the appraised value was extremely close to the contract price of $234,500.

I cannot deny that the appraised value of the property in May of 2002 was – and should have been – approximately $234,500. What I can say with authority is that the appraised value at the time of purchase was unsustainable.

There are meaningful relationships in real estate markets just as there are in other markets (stocks, commodities, etc.) that must be monitored to support prudent lending and investing decisions. For example, we know there is a relationship between rents and sale prices that should be considered. From a lender’s perspective, if a buyer should have difficulty paying the mortgage, it would be comforting to know the home would bring in enough income in the form of rents to pay its own way.

There is another important relationship that has been long overlooked, and that helps us understand the sustainability of property values. It is the relationship between the market value of a home and its depreciated replacement cost (RCNLD). There is an old (often forgotten) adage that no prudent buyer would pay substantially more for a home than the cost to rebuild it on a similar site. This concept was once recognized by the appraisal industry and acknowledged in the cost approach to value. There was a time, not long ago, when appraisers had to provide commentary to support any cost approach in which the site value represented an excessive portion of the overall value. It was recognized at the time that a large disparity between the value of the improvements (depreciated replacement value) and the value conclusion (the market estimate derived from the cost approach) could be indicative of an unsustainable market value. History has, in fact, shown us that when the gap between RCNLD and sale price in traditional housing markets grows beyond 120%, market values are approaching unsustainable levels. When that ratio reaches 130%, we can be certain that a correction in home prices is imminent.

When my friend purchased her house in 2002, the ratio between RCNLD and home prices (Market Experience Ratio©, or MER©) in the immediate area was 135%. Her home and the neighboring homes were being built and sold at the high point of what would become known as the housing bubble. For those of us who watch relationships closely and have developed a means of monitoring them on both a broad scale and granular basis, this was obvious. Each time this occurs, as it has on several occasions in the past 30 years, market prices respond by declining to a level that more closely approximates depreciated replacement cost. The current MER for homes in the area of my friend’s house is 106%. The ratio is still declining slowly, but prices have reached reasonably sustainable levels.

Here’s the bad news. My friend was able to secure a 100% loan in 2002, with payments structured to start off small and increase over time as her income and her equity grew. Ecstatic at the prospect of being able to own a brand new home with no down payment, she was unaware of danger that lay ahead. So too was her lender, apparently. She can be forgiven; she was not, and is not, what is sometimes referred to as a “sophisticated investor”. How can an average consumer be expected to understand market dynamics and complex financial dealings? Isn’t that why they rely on professionals?

The lender, however, should have known better. What happened to real estate markets nationwide a few years thereafter was not an anomaly. It has happened often in the past, and it will happen again in the future. Every time investment dollars become more abundant and credit restrictions relax, you can bet this same scenario will play out in real estate markets across the country.

About a year ago, my friend lost her job. She was forced to confront the fact that she was unemployed and would have to compete with tens of thousands of other unemployed individuals for a position that would probably pay less than her old job – if she could find employment at all. The value of her home had declined by more than 12% in the decade since she had made her purchase. Instead of building equity, she was “under-water” on her mortgage. Recently, her home was foreclosed and she found herself in a position that is all too common today. While not homeless, she is facing bankruptcy and the attendant emotional and financial difficulties that are inevitable.

If the proper tools and analytics had been available to the lender in 2002, chances are things would have turned out better for all parties. It is reasonable to assume that the lender, recognizing the instability in the housing market, would have modified its lending practices and terms offered to borrowers would have become more restrictive. In fact, there is a high probability that the instability would have never reached such extremes; lenders might have acted promptly and prudently to insure that sustainability was protected, and their subsequent losses might have been significantly reduced.

My friend might not have qualified for a loan at all, and would have perhaps been forced to continue renting until she accumulated a suitable down payment. If and when she was ready to make a purchase, she might have had to settle for a “starter home” rather than opting to buy her dream house. These, by the way, are not bad things. Until recently, this was regarded as the appropriate path to home ownership in America.

So here’s the message. Prudent lending and investing must be based on more than just accurate appraised values. Values must be scrutinized for their sustainability as well. As my friend and her lender discovered, an accurate value for a home yesterday might vary substantially from an accurate value for the same home today. That does not make either value conclusion less accurate, but it does reveal that markets fluctuate and values must be viewed within the context of current market trends and long term sustainability.

If your valuation professional cannot provide you with both a reasonably accurate value conclusion, supported by industry standard analytics, and a reasonable measure of sustainability, you need a solution that does.



Tags: ,