Fee Simplistic is a regular post by Martin Tessler, whom after 30 years of commercial fee appraiser-related experience, gets to the bottom of real issues by seeing the both the trees and the forest. He has never been accused of being a man of few words and his commentary can’t be inspired on a specific day of the week. In this post, he chews the fat with us about the easy credit syndrome which begs the question: “Do you want fries with that?.” …Jonathan Miller
One of the points that I have been making to my younger colleagues who have been toiling in the appraisal vineyard for the past several years is that the real estate market is local and cyclical. So when one of them announced that they were doing an appraisal on a property undergoing foreclosure I asked if it was their “maiden” foreclosure appraisal to which the answer was “yes”. This was something new as most of their professional experience which is less than a decade they have only observed and experienced an “up” market-the latest euphemism of which is “cap rate compression”. Old fogeys, myself included, used to call it “money chasing deals” but “cap rate compression” is infinitely more seductive if you want some romance with a market that has yet to tank notwithstanding the media’s constant blasting of the bursting “housing bubble”.
What has recently surfaced is the subprime mortgage delinquency rate which has been going up as borrowers are defaulting on the easy credit mortgages that have been a key lending phenomenon the past several years. A startling fact is that 75% of CDO’s or collateralized debt obligation bonds are comprised of subprime mortgage securities. The fact that this represents the lowest credit-rated tranche and thus poses the highest risk should come as no surprise to the bond buyers when defaults occur and losses loom. This has been a turnaround from the heady past several years when the subprime CDO market with its high yield rate enjoyed high buyer demand from domestic and foreign investors. But, as the old saying goes, “you get what you pay for” and thus the lower yielding but higher rated bond tranches are still buffered from this easy credit syndrome which is now practically non-operative in the housing lending market.
All of this leads me to the latest fad of banning “TRANS FATS” (no he is not a pool player from Minnesota). New York City recently banned trans fats in restaurants starting in 2007 to protect the public from clogging its arteries with high cholesterol, life threatening fat. Whether this is going to have an effect on the public health is questionable considering that you can travel to New Jersey or Keokuk, Iowa and enjoy all the chicken-fried steak with white gravy to your heart’s content. Easy credit and subprime lending may be likened to the trans fat bandwagon. The lending world has gorged itself on subprime credit and now it is beginning to pay the price. Currently, it is mainly dyspeptic but who knows if chest pains will develop as we digest the past gorging on satisfying but patently unhealthy goodies.
One final thought as we head off into the new year and maybe the beginning of a new cycle. The Feds have been so punctilious since 1989 with FIRREA and the appraisal process that maybe they should start looking at the vast trans fat syndrome of the lending side. The appraisal process could be likened more to a cardiogram and blood test but the credit and underwriting ah, that is where the true gluttonous culprit lies.
Happy Holidays and Happy New Year.