In the current issue of Valuation Magazine, the quarterly publication of The Appraisal Institute, the largest US appraisal trade group, featured me in their membership profile feature called “Face Value.” The article is called “Empire Building: an appraiser in NYC takes on $1 billion conversion venture“. The article covers a venture I am participating in called Condominium Recovery, LLC.
The Appraisal Institute approached me to seek understanding of how I leveraged my appraisal expertise towards a non-traditional use.
Whats great about the article is that I get to use appraisal terminology like “highest and best use” without having to elaborate. Whats great about the venture is I get to work with legendary coop/condo converter, builder and manager Gerald Guterman.
It’s going to be an interesting couple of years.
Tags: Appraisal Institute
The Obama administration has come up with a radically aggressive plan to reduce foreclosure activity which has remained alarmingly high. The key ingredient is to encourage lenders/services to allow more short sales – selling the home for less than the amount of the mortgage without going after the debtor for the shortfall. Mortgage modification plans have not been successful to date.
The New York Times page 1 story today Program Will Pay Homeowners to Sell at a Loss does a masterful job in presenting the program and summarizing the problems of the issue to date, I just wish the title wasn’t so simplistic.
Perhaps I am missing the point, but I feel like this solution has focused on the wrong side of the mortgage default equation. Are servicers going to forgive $200,000 in principal to get $1,000? Are homeowners going to move forward because they get $1,500 (more than the servicer) in relocation fees?
The flood of short sale requests are already overloading many bank’s ability to handle the administration of this crisis – hard to see them able to manage the process any more efficiently.
However, the only way out of this crisis is a solution with principal foregiveness in the equation or people will simply walk away and perhaps the servicer/lender ends up being hurt more. No easy answer I suppose.
Real estate agents will determine property value
One mechanical aspect of this process which demonstrates the administration’s and government in general’s disconnect in the need for neutral analysis of value. Real estate agents, who are paid to sell property, determine the “reserve” price above which the lender/servicer must adhere to.
Under the new federal program, a lender will use real estate agents to determine the value of a home and thus the minimum to accept. This figure will not be shared with the owner, but if an offer comes in that is equal to or higher than this amount, the lender must take it.
Mr. Paul, the Phoenix agent, was skeptical. “In a perfect world, this would work,” he said. “But because estimates of value are inherently subjective, it won’t. The banks don’t want to sell at a discount.”
How about a neutral party in the process? A qualified appraiser? (not the yahoos doing AMC work in high volume). I would assume the agents selecting the number are not allowed to sell the property (huge assumption on my part) but why not have someone who can’t ever sell the property, whose full time job it is to estimate market value, be assigned that task?
The devil is in the details.
RealtyTrac just released its monthly report covering January foreclosure activity.
“January foreclosure numbers are exhibiting a pattern very similar to a year ago: a double-digit percentage jump in December foreclosure activity followed by a 10 percent drop in January,” said James J. Saccacio, chief executive officer of RealtyTrac “If history repeats itself we will see a surge in the numbers over the next few months as lenders foreclose on delinquent loans where neither the existing loan modification programs or the new short sale and deed-in-lieu of foreclosure alternatives works.”
The Sand States remain true to form (Nevada, Arizona, California, Florida)
Nevada’s foreclosure rate remained highest among the states for the 37th straight month. One in every 95 Nevada housing units received a foreclosure filing during the month — more than four times the national average.
Six states account for nearly 60 percent of national total
In other words, the foreclosure rush in December to file by end of year, then subsequent lull in January do not suggest that the foreclosure problem is improving if seasonality has anything to say about it.
The Furman Center for Real Estate and Urban Policy at New York University released a fascinating report on New York foreclosures called: Foreclosed Properties in NYC: A Look at the Last 15 Years.
Here’s a key characteristic of foreclosures in New York state: 54% of properties that received an LP in 2007 had not, by the end of June 2009, been sold or completed the foreclosure process, and had not received an additional LP.
What’s a lis pendens? Recording a lis pendens alerts a potential purchaser or lender that the propertys title is in question, which makes the property less attractive to a buyer or lender. After the notice is filed, anyone who nevertheless purchases the land or property described in the notice takes it subject to the ultimate decision of the lawsuit.
The average time to sell a property with a foreclosure filing in 2009 was substantially longer.
I authored the following article for RealtyTrac which appeared on the cover of their November 2009 subscriber newsletter called Foreclosure News Report. It features a column for guest experts called “My Take.”
When Rick Sharga invited to write the article, he provided the previous issue which featured a great article by Karl Case of the Case Shiller Index and I was sold.
I hope you enjoy it.
Appraisers and Foreclosure Sales Bring Havoc to Housing Markets
By Jonathan Miller
President/CEO of Miller Samuel Inc.
In many ways, the quality of appraisals has fallen as precipitously as many US housing markets over the past year. Just as the need for reliable asset valuation for mortgage lending and disposition has become critical (fewer data points and more distressed assets) the appraisal profession seems less equipped to handle it and users of their services seem more disconnected than ever.
The appraisal watershed moment was May 1, 2009, when the controversial agreement between Fannie Mae and New York State Attorney General Andrew Cuomo, known as the Home Valuation Code of Conduct, became effective and the long neglected and misunderstood appraisal profession finally moved to the front burner. Adopted by federal housing agencies, HVCC, or lovingly referred to by the appraiserati as “Havoc” and has created just that.
During the 2003 to 2007 credit boom, a measure of the disconnect between risk and reward became evident by the proliferation of mortgage brokers in the residential lending process. Wholesale lending boomed over this period, becoming two thirds of the source of loan business for residential mortgage origination. Mortgage brokers were able to select the appraisers for the mortgages that they sent to banks.
Despite the fact that there are reputable mortgage brokers, this relationship is a fundamental flaw in the lending process since the mortgage broker is only paid when and if the loan closes. The same lack of separation existed and still exists between rating agencies and investment banks that aggressively sought out AAA ratings for their mortgage securitization products. Rating agencies acceded to their client’s wishes in the name of generating more revenue.
As evidence of the systemic defect, appraisers who were magically able to appraise a property high enough to make the deal work despite the market value of that locale, thrived in this environment. Lenders were in “don’t ask, don’t tell” mode and they could package and sell off those mortgages to investors who didn’t seem to care about the value of the mortgage collateral either. Banks closed their appraisal review departments nationwide which had served to buffer appraisers from the bank sales functions because appraisal departments were viewed as cost centers.
The residential appraisal profession evolved into an army of “form-fillers” and “deal-enablers” as the insular protection of appraisal professionals was removed. Appraisers were subjected to enormous direct and indirect pressure from bank loan officers and mortgage brokers for results. “No play, no pay” became the silent engine driving large volumes of business to the newly empowered valuation force. The modern residential appraiser became known as the “ten-percenter” because many appraisals reported values of ten percent more than the sales price or borrower’s estimated value. They did this to give the lender more flexibility and were rewarded with more business.
HVCC now prevents mortgage brokers from ordering appraisals for mortgages where the lender plans on selling them to Fannie Mae or Freddie Mac which is a decidedly positive move towards protecting the neutrality of the appraiser. Most benefits of removing the mortgage broker from the appraisal process are lost because HVCC has enabled an unregulated institution known as appraisal management companies to push large volumes of appraisals on those who bid the lowest and turn around the reports the quickest. Stories about of out of market appraisers doing 10-12 assignments in 24 hours are increasingly common. How much market analysis is physical possible with that sort of volume?
After severing relationships with local appraisers by closing in-house appraisal departments and becoming dependent on mortgage brokers for the appraisal, banks have turned to AMC’s for the majority of their appraisal order volume for mortgage lending.
Appraisal management companies are the middlemen in the process, collecting the same or higher fee for an appraisal assignment and finding appraisers who will work for wages as low as half the prevailing market rate who need to complete assignments in one-fifth the typical turnaround time. You can see how this leads to the reduction in reliability.
The appraisal profession therefore remains an important component in the systemic breakdown of the mortgage lending process and is part of the reason why we are seeing 300,000 foreclosures per month.
The National Association of Realtors and The National Association of Home Builders were among the first organizations to notice the growing problem of “low appraisals”. The dramatic deterioration in appraisal quality swung the valuation bias from high to low. The low valuation bias does not refer to declining housing market conditions. Despite mortgage lending being an important part of their business, many banks aren’t thrilled to provide mortgages in declining housing markets with rising unemployment and looming losses in commercial real estate, auto loans, credit cards and others. Low valuations have essentially been encouraged by rewarding those very appraisers with more assignments. Think of the low bias in valuation as informal risk management. The caliber and condition of the appraisal environment had deteriorated so rapidly to the point where it may now be slowing the recovery of the housing market.
One of the criticisms of appraisers today is that they are using comparable sales commonly referred to as “comps” that include foreclosure sales. Are these sales an arm’s length transaction between a fully informed buyer and seller is problematic at best. While this is a valid concern, the problem often pertains to the actual or perceived condition of the foreclosure sales and their respective marketing times.
Often foreclosure properties are inferior in condition to non-foreclosure properties because of the financial distress of the prior owner. The property was likely in disrepair leading up to foreclosure and may contain hidden defects. Banks are managing the properties that they hold but only as a minimum by keeping them from deteriorating in condition.
In many cases, foreclosure sales are marketed more quickly than competing sales. The lender is not interested in being a landlord and wants to recoup the mortgage amount as soon as possible. Often referred to as quicksale value, foreclosure listings can be priced to sell faster than normal marketing times, typically in 60 to 90 days.
The idea that foreclosure sales are priced lower than non-foreclosure properties is usually confused with the disparity in condition and marketing times and those reasons therefore are thought to invalidate them for use as comps by appraisers.
Foreclosure sales can be used as comps but the issue is really more about how those comps are adjusted for their differing amenities.
If two listings in the same neighborhood are essentially identical in physical characteristics like square footage, style, number of bedrooms, and one is a foreclosure property, then the foreclosure listing price will often set the market for that type of property. In many cases, the lower price that foreclosure sales establish are a function of difference in condition or the fact that the bank wishes to sell faster than market conditions will normally allow.
A foreclosure listing competes with non-foreclosure sales and can impact the values of surrounding homes. This becomes a powerful factor in influencing housing trends. If large portion of a neighborhood is comprised of recent closed foreclosure sales and active foreclosure listings, then guess what? That’s the market.
Throw in a form-filler mentality enabled by HVCC and differences such as condition, marketing time, market concentration and trends are often not considered in the appraisal, resulting in inaccurate valuations. As a market phenomenon, the lower caliber of appraisers has unfairly restricted the flow of sales activity, impeding the housing recovery nationwide.
In response to the HVCC backlash, the House Financial Services Committee added an amendment to the Consumer Financial Protection Agency Act HR 3126 on October 21st which among other things, wants all federal agencies to start accepting appraisals ordered through mortgage brokers in order to save the consumer money.
If this amendment is adopted by the US House of Representatives and US Senate and becomes law, its deja vu all over again. The Appraisal Institute, in their rightful obsession with getting rid of HVCC, has erred in viewing such an amendment as a victory for consumers. One of the reasons HVCC was established was in response to the problems created by the relationship between appraisers and mortgage brokers. Unfortunately, by solving one problem, it created other problems and returning to the ways of old is a giant step backwards.
We are in the midst of the greatest credit crunch since the Great Depression and yet few seem to understand the importance of neutral valuation of collateral so banks can make informed lending decisions. Appraisers need to be competent enough to make informed decisions about whether foreclosures sales are properly used comps. For the time being, many are not.
I am coming up for air after the productive and engaging Inman Real Estate Connect conference last week. I got to connect (no surprise there) with a lot of great people connected with real estate and lead three panel discussions on foreclosure related topics.
One of the things I have been following has been the activity on this new Financial Crisis Inquiry Commission or FCIC to those in the (alphabet soup) know.
Aside: kudos to the web designers for all the new dot-gov web sites such as recovery.gov. Simple to read and navigate. Yay!
FCIC.gov is something readers of Matrix should pay attention to.
Not because this effort will result in some sort of punishment for those who strayed from the straight and narrow (its a wide road). Since the financial crisis was a systemic breakdown, I would guess we will see something like this happen again in our lifetime, but hopefully not on the same scale because its human nature.
However, I recommend following this site to observe how the government will systemically explore what happened even though it was an important contributor to the breakdown. Sort of a government introspective while simultaneously protect their turf and save face. All the participants of this endeavor will no longer be in power when the next crisis hits. That’s why regulatory reform is so important.
My hope is something good comes out of the vetting process – it usually does – and we place logical constraints in place to prevent the scale of this sort of breakdown from happening in the future.
If its a slow evening for you, I recommend watching the C-SPAN versions of the January 13-14 hearings and review the associated documents.
Here are some sobering charts presented by the commission.
After moderating 3 foreclosure related panel discussions at the Inman Real Estate Connect conference in New York yesterday, I sat down with Rick Sharga of RealtyTrac (who was one of my panelists) to discuss their foreclosure business and the trends they are observing. I interviewed Rick last fall and always find him to be an endless source of insight and clarity on the distressed asset market. RealtyTrac released their most recent report yesterday so the timing was perfect.
Hint: 2010-2011 = Peak Foreclosure
Check out the podcast
I was listening to the C-SPAN Q&A podcast which was an interview with producers Leslie and Andrew Cockburn on their new independent film called American Casino which chronicles the breakdown of subprime lending via Wall Street. The starting point is subprime mortgage lending in poor neighborhoods of Baltimore.
The foil is Phill Gramm, Chairman of the Senator Finance Committee who in a masterstroke of politcal management, on December 15, 2000 at 7pm, appended a 260 page financial de-regulation bill to an 11,000 page appropriations bill just before the holidays, and because it was in the 11th hour, it was likely few read it and Clinton signed it. The bill exempted the financial instruments used in the credit boom from federal and state regulations – free of any supervision.
Gramm is now Vice Chairman of UBS.
This topic is nothing we haven’t heard before but its focus on Gramm is an interesting angle. I listened to the entire C-SPAN interview and while I enjoyed it, the story feels a bit tardy (although certainly very important because the pain is still playing out).
This systemic breakdown will continue to facsinate many for generations to come – hopefully serve as case study fodder at MBA programs as well.
The film credit pronouces:
“AMERICAN CASINO IS A POWERFUL AND SHOCKING LOOK AT THE SUBPRIME LENDING SCANDAL. IF YOU WANT TO UNDERSTAND HOW THE US FINANCIAL SYSTEM FAILED AND HOW MORTGAGE COMPANIES RIPPED OFF THE POOR, SEE THIS FILM.”
-Joseph Stiglitz, Nobel prize-winning economist
A few days after I heard the podcast, a federal judge threw out the lawsuit by the city of Baltimore against Well Fargo:
ruling that the city could not prove that the bank’s lending practices had resulted in broad damage to poor neighborhoods.
Perhaps a case of bad timing for the film makers? But but still a compelling story.
NAR released their November 2009 Pending Home Sales Index which ended a 9 month string of increases.
The Pending Home Sales Index, a forward-looking indicator based on contracts signed in November, fell 16.0 percent to 96.0 from an upwardly revised 114.3 in October, but is 15.5 percent higher than November 2008 when it was 83.1.
NAR attributes the drop as a pullback during November related to the uncertainty surrounding the extension of the first time home buyers tax credit which expired November 30th. However it was subsequently extended and expanded to include existing home buyers who have until the end of this April to sign a bonafide contract. We may trivialize the tax credit’s success in the NYC metro area because of the higher housing costs relative to $8,000 and $6,500 tax credits respectively but from my discussions with real estate agents around the country, it did appear to trigger a large portion of home sales in 2009.
What does the 16% drop suggest? More weakness to come?
Yes, but not in the coming months (remember this is a seasonally adjusted stat).
It signifies that the US Housing market doesn’t yet have its own set of legs. No credit = drop in sales.
The credit extension ends in April, the Fed begins their pullout from the purchasing of Fannie Mae mortgage paper, perhaps influencing mortgage rates higher.
The combination of high unemployment, rising mortgage rates and the expiring tax credit in the spring, combined with the elixir of rising foreclosures causes by sustained unemployment at high levels suggests housing sales will fall in second half 2009.
Housing in 2010: Stability in the first half, with more concern for the second half.