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Credit, Finance, Mortgage, Rates

The Apple Peeled – Ask the Experts: Market Dynamics with Jonathan Miller

February 12, 2019 | 11:54 am | | Articles |

Over the years, I have bantered with the Espinal Adler Team (Marie Espinal and Jeff Adler) at Douglas Elliman Real Estate about the market which has been invaluable for on the ground intel. And we’ve become friends. When Jeff and Marie asked me to be formally interviewed for their blog “The Apple Peeled” I was happy to do so, especially because I could veer off the road into issues about the current mortgage and appraisal process. This “The Apple Peeled” blog post: Ask the Experts: Market Dynamics with Jonathan Miller was distilled from the 90-minute conversation (I could have gone on for 5 hours) I had with their team.

I hope you find that this apple was fully peeled:


Jonathan Miller’s Market Outlook

The number of units sold in Manhattan in 2018 was down by more than 14 percent compared to the previous year. The brokerage industry tends to be very linear in its perception of the market, so many believe when the market is rising, it will rise forever. And, in-turn, when the market falls, it will fall forever. That approach can lead to overreaction.

The 10-year Challenge (2009 vs. 2019)

Some analysts are even comparing the current cycle to the last downturn and the housing bubble in 2009, but Miller outlined quite a few differences between then and now.

In 2009, the average discount from listing was 10.2%. In 2018 the discount was 5.2%. In ’09, Miller said sellers were anchored to the “pre-Lehman, pre-financial crisis asking prices” and had to travel farther on price to meet a buyer. (Miller measures listing discount by the percent difference between the contract price and the price that the property was listed for sale at the time of contract – not when it was first listed). The most recent asking price is “really the moment the property entered the market,” he said.

Miller said there are more buyers today compared to 2009, but those buyers are “very jaded about what value is.” Meanwhile, sellers are anchored to another market completely, he said.

The change in tax laws in 2018 and a several-month stretch that saw mortgage rates rise before recently dropping close to previous levels had both buyers and sellers re-calibrating what value is. That process can take time.

“If a seller overprices a listing, it takes them up to 2 years to de-anchor from what their price was without thinking that they left money on the table,” Miller said. “The disconnect between buyers and sellers is measured by lower sales volume.”

Starter Segment vs. High-End Luxury

For the last two years, Miller has said that the NYC market is softer at the top and tighter as you move lower in price.

Overall inventory is up by about 17%, with a significant amount of supply coming from the studio and 1-bedroom market. Studio inventory is up 21% percent.

“The pace of the starter market is still the fastest of all segments,” Miller said. “It’s just not as detached as it was because now you have more supply.”

Interest Rates and Their Impact

Typically, rates rise when the economy is strong. The low rates we’re seeing today understate the strength of the current economy, according to Miller. “That’s the disconnect.” In the long run, interest rates do not impact price trends. Mortgage rates have trended lower for three decades, Miller said, but housing prices have fluctuated up and down during that same lengthy stretch.

Mortgage rates weren’t wildly different in ’09 compared to today. In a recent report, Miller stated that an adjustable rate mortgage rate averaged 4.38% in 2009 and was at 3.98% using the same metrics in 2018.

Miller said that real estate investors should stop trying to perfectly time the market (both with rate and supply vs. demand). Perfect timing is a concept that was born out of the housing bubble, he said, when investors viewed housing as a highly liquid stock, instead of in its proper context. “(Real estate) is more of a long-term asset.”

In-Depth Look at the State of Appraisals

“There was nothing learned from the bad behavior of a decade ago,” Miller said, reminding himself of a Mark Twain quote. “History doesn’t repeat itself, but sometimes it rhymes,” Jonathan Miller recited. Miller, President and CEO of real estate appraisal and consulting firm Miller Samuel Inc., said federal regulators are acting irresponsibly in their effort to reduce and perhaps even eliminate the need for an appraisal as part of an overall effort to erase “friction points” that slow-down the mortgage application process.

Miller said the regulators were more concerned with collecting fees than they were with protecting the American consumer. He likened the subtle de-regulation to the housing bubble of a decade ago, pointing out that regulators were getting paid by the failing investment banks they were rating back then. Now, he said, regulators and both Fannie Mae and Freddie Mac are getting paid whenever loan volume passes through those agencies. (Fannie Mae and Freddie Mac are Government sponsored enterprises that purchase mortgages from banks and mortgage companies in an effort to create liquidity so that lenders have the capacity to lend to more homebuyers).

The Office of the Comptroller of the Currency (OCC), The Board of Governors for the Federal Reserve System, and the Federal Deposit Insurance Corporation (FDIC) proposed a rule to amend the agencies regulations requiring appraisals for certain real estate related transactions. The proposed rule would increase the threshold level at, or below which appraisals would not be required for residential real estate-related transactions from $250,000 to $400,000.

In response to our request for comment, spokespeople for the FDIC, the OCC, and The Federal Reserve said they do not comment on proposed rules during the rulemaking process.

Mortgage volume has trended lower despite rates falling steadily since the housing bubble, because lenders don’t want to take on risk, Miller said. “They’re in the fetal position. Banks are afraid of their own shadow.”

The tremendous amount of regulation implemented since Dodd Frank has led to mortgage lenders filling Fannie and Freddie’s portfolios with low-risk “pristine” mortgage bundles. But with rates so low, margins are so compressed, regulators need to stimulate volume to make money, according to Miller. “I think (Fannie and Freddie) are emboldened to take more risk.”

The push for fewer mandatory appraisals isn’t the only thing that has hurt the appraisal industry since the Dodd Frank Act was passed in 2010. The evolution of the mortgage industry’s use of the Appraisal Management Company (AMC) has led to a collapse in quality of appraisals ordered by banks, Miller said. He described the AMC as an institutional middle man that takes more than 50 cents on the dollar away from the professional appraisers who do the actual work.

“It’s like a Hollywood actor paying their agent 60% instead of 10%,” Miller said. “The mortgage industry is trying to widgetize the appraiser.”

The AMC is supposed to act as a communication barrier between the appraiser and the loan officer or mortgage broker, to thwart undue pressure to bring appraised values in at specific numbers. But according to Miller, the AMCs are under the same types of pressure that an individual appraiser might face. Some AMCs receive hundreds of thousands of dollars every month by way of appraisal orders placed by big banks. At least at the sales level, the banks apply pressure to the AMC to not “kill deals,” said Miller, who has testified in several class action lawsuits against AMCs.

In many instances, Miller and his firm were hired to do sample reviews of appraisals that came through AMCs. Often, the AMC would utilize appraisers in the market that would always “hit the number,” Miller said. A lot of those appraisers were ignoring valid comps, sometimes from directly across the street that were virtually the same as the subject property. “The AMC encouraged it because they were getting the work,” he said.

Appraisers are pushing back and there are already signs that AMCs were beginning to crumble, Miller said. Quality appraisers are turning away bank work when they know the order is coming in through an AMC because they’re not happy working for less than they deserve and because they’ve been reduced to “form-fillers,” Miller said.


The Apple Peeled Blog, February 12, 2019

Espinal Adler Team at Douglas Elliman Real Estate

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Yahoo Finance TV 12-4-2018 – Toll Brothers & Banking Conditions in Real Estate

December 5, 2018 | 11:15 am | | TV, Videos |


I was invited by Julie Hyman at Yahoo Finance TV for a discussion on the weakening luxury housing market and some other topics of interest. I’ve known her for years, after a long run at Bloomberg TV, and am excited about her new opportunity at Yahoo.

When I arrived at the studio, the stock market was being battered (down by over 400 points at the time of this broadcast) by the conflicting interpretations of the recent US/China tariff talks and the results Toll Brothers analyst call. It was exciting to be there during the perfect storm. The conversation shifted from what I was invited to cover, to the developing news story.

Yahoo is ramping up live coverage in early 2019 via 100% internet. Judging by their super cool/huge studio and throngs of people working there, Verizon seems very serious about their investment.

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Bloomberg Markets TV: September 11, 2018, Looking back at 9/11 and the Financial Crisis

September 11, 2018 | 8:39 pm | | Milestones |


I had a nice reflective discussion with Scarlet Fu and Caroline Hyde, reflecting on two milestones in New York City – 9/11 and the financial crisis.

Miller Samuel CEO Says Credit Conditions Haven’t Normalized Since Lehman
September 11th, 2018, 3:48 PM EDT
Jonathan Miller, president and chief executive officer of Miller Samuel Inc., takes a look at the state of the U.S. housing market 10 years after the financial crisis of 2008. He speaks with Bloomberg’s Caroline Hyde and Scarlet Fu on “Bloomberg Markets: The Close.” (Source: Bloomberg)

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Doubling Down On Appraisers as ‘Lone Wolves’ – Valuation Review

March 23, 2017 | 7:29 am | | Articles |

Note: I have been a subscriber of Valuation Review and it’s predecessor for years. It provides a wide perspective on the appraisal industry and I’ve always got something out of it. Over the past few years, I’ve noticed that the voices in the magazine seemed to be skewing more and more towards national level AMC executives. I suspect the PR departments of these firms make their top executives readily accessible washing out the voices of individual appraisers. So I sent the editor a note offering another perspective with links to my content. He was immediately interested in getting another voice so he interviewed me.

From the Wednesday, March 22, 2017, Valuation Review Article:  CEO suggests appraisal industry comprised of ‘lone wolves’.

CEO suggests appraisal industry comprised of ‘lone wolves’

Reasonable compensation, lender and AMC issues are constantly on the mind of the appraiser. When things aren’t falling into place, the process of assigning blame kicks into high gear with appraisers continuing to look for guidance.

“That’s the problem in that there really isn’t any leadership for appraisers to follow. The false narrative of an appraisal shortage continues to be pushed by AMCs, unfairly tarnishing the image of individual appraisers,” Miller Samuel Inc. President and CEO Jonathan Miller told Valuation Review. “When an industry takes a 50 percent pay cut overnight, good people leave or struggle to hang on and weaker players are attracted-which equals problems. But is it the fault of the remaining individual appraisers?

“AMCs are at a seminal moment,” Miller added. “In what other industry does the company managing the talent get about the same compensation as the talent them? An agent representing a Hollywood actor isn’t going to get $1 million if their client is receiving that same amount for a movie role. It is a broken model.”

Like many in the appraisal profession, Miller strongly believes that there is not a shortage of appraisers. In fact, he more than challenges one reason for such a shortage is that too many burdensome regulations are being placed upon appraisers.

“There is a shortage of appraisers willing to work for 50 cents on the dollar,” Miller said. “The AMC model has hit a wall. AMCs have run out of new people willing to work for 50 cents on the dollar. Sadly, consumers think appraisers are getting the appraisal fee stated in their mortgage documents. They aren’t and typically the appraiser receives as little as 50 percent of it.

“The Appraisal Institute says there is a shortage of appraisers and seem to be championing the AMC concept but appraisers don’t understand why,” Miller added. “I’m not against AMCs; rather, I’m against the execution of business by the AMCs. They treat appraisers as a commodity rather than a professional service.”

For the rest of the story, visit here.

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Banks Make Regulations Onerous By Over-Interpreting Them

March 8, 2017 | 11:52 am | | Investigative |

Some people are their own worst enemy. And that old saying also applies to financial institutions.

With all the talk about revisiting, gutting or eliminating Dodd-Frank, a significant part of the problem with mortgage appraisal related lending actually exists within the bank risk management themselves. Their over-interpretation of what the regulations require gives outsiders the impression that appraiser related regulations or standards are more onerous than they actually are.

Fannie Mae Allows Trainee Inspections Without Their Supervisory Appraiser
One of the biggest issues today is the lack of mentoring by experienced appraisers because it is not financially feasible under current lending practice. Both banks and AMCs – who act as a bank’s agent – generally do not allow trainees to inspect a property without a licensed or certified appraiser alongside. So in an era where AMCs control as much as 90% of mortgage appraisal work, the lenders are requiring AMCs to require something the GSEs (the party buy their mortgage paper) do not require. This risk aversion is residual from housing bubble collapse. Mortgage lenders today, subjected to low rates and a very narrow rate spread, remain irrationally averse to risk.

However, their underwriting risk management is effectively destroying the future quality of appraisals that will be done on their collateral because the new wave of appraisers is essentially only book-smart without real world context (mentoring). Experienced appraisers can not afford to invest the time to inspect the property with the trainee (in addition to their own inspections) for the multi-year experience period before the appraiser is certified after already taking a 30% to 50% overnight pay cut from AMCs.

From the Fannie Mae Seller’s Guide Update – 2017-01 page 2.

Reporting “Material Failures” to State Boards
In reference to appraisal oversight, let’s consider how banks determine whether an appraiser is reported to their state licensing board.

Dodd-Frank says the following in 12 CFR 226.42(g)(1). Whereby a lender has to report an appraiser for…[bold, my emphasis]

(g) Mandatory reporting—(1) Reporting required. Any covered person that reasonably believes an appraiser has not complied with the Uniform Standards of Professional Appraisal Practice or ethical or professional requirements for appraisers under applicable state or federal statutes or regulations shall refer the matter to the appropriate state agency if the failure to comply is material. For purposes of this paragraph (g)(1), a failure to comply is material if it is likely to significantly affect the value assigned to the consumer’s principal dwelling.

When the CFPB was asked what they meant by a “material failure” – the following table shows the difference between material and non-material.  So how much is a material failure? A value off by 2%, 10% or 30%?

And by the way, the third option for reporting a material failure seems absurd although I suppose it has to be said – Who is dumb enough to admit that they accepted the assignment because they knew they would “make the deal” happen. The obvious lack of a definitive paper trail in such a situation makes this very hard to prove.

I’ve always had a problem with setting rigid rules in considering the concept of appraisal oversight. With valuation expertise, how does a state agency apply hard rules to value opinions, comp selection and adjustments, etc.? There needs to be a great deal of latitude for regulators and an “I’ll know it when I see it” approach should be allowed.

Separating gross negligence from negligence

Here is the rule.

“Performing an appraisal in a grossly negligent manner, in violation of a rule under USPAP.”

While subjective, it represents a very severe extreme to which an appraisal would be reported to a state board. The rule goes on to say…

“Accepting an appraisal assignment on the condition that the appraiser will report a value equal to or greater than the purchase price for the consumer’s principal dwelling, is in violation of a rule under USPAP.”

But big national mortgage companies today like Wells Fargo and others are reporting appraisals to state boards where the value is not supported. ie weak comps, unreasonable adjustments, etc. Reports with those issues may, in fact, be negligent but do not fall under the definition of gross negligence. Let’s not wreck an appraisers career because they missed some better comps. Once these reports are referred to the state, the state must investigate. It opens up the appraiser to more risk of unintended consequences. Think of a scenario where a cop pulls over a driver for a missing taillight and learns that the driver doesn’t have his wallet with him.

Gross negligence requires a much higher test than applying it to an appraiser who is just being stupid.

It is defined as:

Gross negligence is a conscious and voluntary disregard of the need to use reasonable care, which is likely to cause foreseeable grave injury or harm to persons, property, or both. It is conduct that is extreme when compared with ordinary Negligence, which is a mere failure to exercise reasonable care.

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Contrarians React to Quicken Loans Rocket Mortgage Outrage

February 16, 2016 | 2:30 pm | Favorites |

During the Super Bowl advertising blitz, the most controversial advertisement seemed to be (no, not Mountain Dew’s PuppyMonkeyBaby) Quicken Loans RocketMortgage Super Bowl Ad: What We Were Thinking

David Stevens, CEO of the Mortgage Bankers Association was annoyed at the public outrage.

Even the Urban Institute’s Laurie Goodman who is another voice of reason, writes a blog post on Why Rocket Mortgage won’t start another housing crisis.

I am one of those who were angry after seeing the QL commercials that aired before the Super Bowl and my disbelief continued after watching the Super Bowl ad. I lived the insanity and the QL commercial was completely tone deaf and gave me great concern about repeating mistakes in the past. In fact I was so concerned that I made the QL Super Bowl commercial the cornerstone of last week’s Housing Note: Rockets Engineered to Amaze Housing: What was Quicken Loans Thinking?

A week later my view on the ad hasn’t changed and in all due respect to Laurie and David, I think they missed the forest for the trees (there’s a digital v. paper pun somewhere). I’ll explain by going through their own points:

  • Borrowers can give lenders easier access to bank information – this is one of those wiz bang promises we always see with new technology (assuming this product is new technology). But I don’t think anyone is arguing to keep the process arduous.
  • Approvals might be less prone to human error. – Sure, that’s entirely possible although this argument is like saying if there was less air pollution we might all feel better. We would have to assume that borrower data entry is better and it matches up to official documents like tax returns and pay stubs – something that was not a lender concern in the last cycle.
  • Automation may ease tight credit. That’s another one of those wiz bang assumptions that any technology gain – automation is better – remove humans and the process gets easier (again, we don’t understand what the details are of this wiz bang new technology). EZ Pass scanning technology on the highway is far better for toll collecting but it took a few decades to perfect. The mortgage lending process is full of judgments that need to be made and common sense has been removed from the mortgage underwriting process so it can be completed with checkboxes. I contend that automation will NOT ease credit any time soon because automation means a series of lending rules and it will take years to iron out. It may even delay credit normalization as lenders are reluctant to fully trust it. Plus lending continues to remain tight because of bad decisions made in the past and a weak outlook for the future (30 year fixed is below the level just before the December Fed rate hike), not because the process needs to be more efficient. Mortgage origination volume has fallen nearly every year since 2006 so I can’t see lack of automation as holding back the normalization of credit.
  • Digital lending is here to stay. No one is really arguing against digital lending per se. The future across most industries is digital and that transition can be good and bad. The mortgage process is much more digitized than it was a decade ago so disagreeing with the Rocket Mortgage message doesn’t make someone anti-digital.
  • Make a complex process easier for qualified buyers. Of course! If that is what is actually being delivered. It’s a black box and the consumer is getting their information from a commercial that conveys dated message. If David gave a speech in a 1970s era polyester suit with bellbottoms, would his current information leave the audience with a current market impression?

The real reason for the pushback on this rocket thing is not because we are anti-digital, anti-efficiency, anti-credit easing, anti-automation or anti-polyester bellbottoms. The pushback comes from the messenger being the second largest mortgage lender in the U.S. who marketed their product seemingly devoid of any understanding of the housing bubble, which after all, was really a credit bubble.

And it becomes even more clear to me as an appraiser, looking at their complete reliance on appraisal management companies and how awfully unreliable that post-financial crisis industry really is at estimating collateral, that their judgment is flawed in the long run.

The same sort of promises and expectations were made during the run up of Countrywide Mortgage. We are nearly 9 years down the road from the 2007 implosion of American Home Mortgage and those 2 Bear Stearns mortgage hedge funds and yet economically, the world is still in the hangover stage.

I don’t really believe that QL’s Rocket Mortgage product will bring down the world’s economy as we saw with financial engineering in the last cycle. But it is a concern and unbelievable that this was the messaging they chose to go with. As Mark Twain said (paraphrased) “History doesn’t repeat itself but sometimes it rhymes.”

Please watch that commercial again.

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Bloomberg TV’s Surveillance on 12-31-2015

December 31, 2015 | 8:00 pm | |

On the last day of 2015 I was invited to guest host for the 6am hour on Bloomberg TV’s Surveillance with Mike McKee, Vonnie Quinn & Erik Schatzker. I was paired with Michael Holland, Chairman at Holland & Co. I’ve never met him before but really enjoyed his insights on the stock market.

The first segment was largely stock market talk which was out of my bailiwick but in the second segment I got to articulate my views on the New York City super luxury market. Today’s Max Frankel New York Times editorial was brought up – “Make Them Pay For Views” – which I thought was a ridiculous premise – despite the legendary author.

bloomberg-segment-12-31-2015-1

And a second segment talking about professional services used for acquiring assets.

bloomberg-segment-12-31-2015-2

After the hour was up, I ran over to Bloomberg Radio’s Surveillance with Mike McKee (at 33 minute mark) [Listen to clip]

Gotta go. The Spartans are playing in the Cotton Bowl now.

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Podcast: My Port Authority of NY & NJ Interview on Regional Housing Market

September 24, 2015 | 12:16 pm | | Podcasts |

panynj-header

A few days ago I was interviewed by Christopher Eshleman at the Port Authority of New York & New Jersey. He works for Alexander Heil who is the chief economist and publishes a lot of great regional economic insights. Although this is a new effort, this was their first podcast conducted outside of the institution so I am deeply appreciative of the opportunity to share my views.

Christopher is a sharp guy and kept the conversation interesting (I even inserted a Jerry Seinfeld joke). It’s about a half an hour.

Check it out.

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[VIDEO] Boomberg Radio/TV ‘Surveillance’ 9-21-15

September 21, 2015 | 11:45 am | | Radio |

I was set to speak in studio with Tom Keene and Pimm Fox but had a commuting snafu and had to call in. It was a great opportunity to show a picture of me as a 15 year old. Love these guys. The best. The Bloomberg Television/Radio are clearly pros and handled the last minute change with ease.

We talked about lots of housing markets and the distortion being created by credit conditions.

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[Video] Yahoo! Finance w/Lauren Lyster 7-6-2015

July 6, 2015 | 2:11 pm | | TV, Videos |

Lauren Lyster put together an interesting piece called: $100 million listings?! Pros explain why this real estate market is hot, but not a bubble that explores the disconnect between this development boom and the housing bubble last decade.

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[Video] NYC Home Shuffle: Housing has been taken over by finance

July 6, 2015 | 12:52 pm | | TV, Videos |

A few months ago I was approached by film students Clàudia Prat & Eric French to speak to the housing market as part of a larger project called “What is Home?” series.

I’m a big fan of documentaries and this is worth watching.

Their effort was called: NYC Home Shuffle (5:51 minutes):

Part of a global trend, New York City’s homes become a commodity: an investment instead of a right. Yet a global movement responds.
By Clàudia Prat & Eric French
whatishome.nyc // May 2015

NYC Home Shuffle from Studio 20 on Vimeo.

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Bloomberg View Column: Want a House? Good Luck With the Down Payment

June 25, 2015 | 10:56 pm | | Charts |

BVlogo

Read my latest Bloomberg View column Want a House? Good Luck With the Down Payment. This post also went #1 on the Bloomberg Terminal and on the public facing BloombergView.com site for 2 days. Super crazy.

down payment chart

Here’s an excerpt…

Saving for a down payment has long been a big challenge for anyone who wants to buy a home. And it got harder after the financial crisis, as lenders insisted on down payments of 20 percent or more for conventional mortgages, which make up the bulk of the market…

[read more]


My Bloomberg View Column Directory

My Bloomberg View RSS feed.

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