Matrix Blog

Posts Tagged ‘local market knowledge’

Drinking The Mortgage Kool-aid And It Tastes Like Sour Grapes

December 26, 2007 | 1:11 am | |

After a busy day, the house is again quiet, so I had aspirations of figuring out how to set up my new coffee machine and to decide whether to ever wear the gift of green boxer shorts that say “blogworthy” on them.

For some reason, and perhaps it was the excess food of the past days, but it occurred to me just how unbelievably widespread the flaws in the lending universe of the past few years were. I mean, really, really unbelievable.

I have been outspoken on the topic of appraisal pressure for a number of years, from my front line experience as an appraiser. Though not solely for altruistic reasons. Good (=ethical, not financial) appraisers did not thrive during the housing boom. I focused on what turned out to be more lucrative appraisal work outside of the mortgage business and kept the good clients who understood it was actually important to understand what the collateral was worth. It wasn’t sour grapes on my part, but my wide-eyed amazement at the enormity of the problem.

No one seemed to understand the widespread issue of ethics lapses and building instability of the lending industry while it was happening. It seems that everyone drank the kool-aid, with the thought that “everyone wins.”

Now the damage created by the ethical lapse in judgement is pretty clear and its a 4-6 year mess many of us will have to deal with.

Sour grapes summary

  • affordability waned in 2004, causing lenders to loosen the reigns to keep the pipeline flowing.
  • orientation moved from down payment (which I recalled, was a real bear to save for) to monthly payment (falsely characterized as a demographic shift in consumer habits)
  • the bulk of mortgage origination came from mortgage brokers, who were incentivized to generate loan volume from lenders who took a “don’t ask, don’t tell” view on mortgage quality.
  • appraisers became order takers (well, 80% of appraisers are) and had to either sell our soul or get out of the mortgage appraisal business.
  • the sales function gained political clout over the underwriting function of the typical retail bank (revenue vs. cost).
  • consumers and media readily accepted national housing statistics and drank NAR kool-aid every month.
  • real estate surpassed stock market conversations at the backyard bbq.
  • carpenters and nurses were quitting their jobs in droves to flip real estate.
  • developers were opening sales offices in new projects to serve the flippers and mortgage money was as easy to get as a morning newspaper.
  • no doc, “liar loans” were deemed necessary.
  • lenders had no idea that it was illegal and unethical to pressure appraisers to make the number.
  • banks were built on mortgage loan volume.
  • secondary mortgage market investors accepted loan pools purchase with very little understanding of the collateral.
  • NAR and local reports were used to guess loan pool values which were then used to judge portfolio purchase spreads (disconnect between risk and value).
  • foreign investors were one step removed from secondary market investors and had even less understanding of the content of the mortgage pools they were purchasing.
  • mortgages were sliced into varying slivers of risk.
  • no Federal Reserve or any meaningful banking oversight as the disconnect from risk was occurring.
  • mortgage tranches were so complicated that no one really understood what was in them.
  • credit crises became falsely synonymous with subprime.
  • the breadth and scope are termed “temporary” and projected to be behind us within a few months.
  • low mortgage rates are deemed the savior of housing problems but don’t solve the credit crises.
  • GSE’s (Fannie & Freddie) are shaken financially and may have a bunch of subprime under their belts.
  • Greenspan acknowledges that there may have been an overheated asset bubble (housing) but it was really all about shakey financing practices that made housing roar.

Sour grapes are enough to give anyone indigestion.


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[Straight From MacCrate] Remember the Impact of Real Property Taxes on Real Estate Investments and Returns!

August 19, 2007 | 10:00 pm | |

Jim MacCrate, MAI, CRE, ASA, has worn many hats in his career. He taught a number of the appraisal classes I have taken through the Appraisal Institute and I think he is one of the few people who actually understands the “J-Factor.” His wife Judy is an SRA and is an accomplished appraiser in her own right, having managed an appraisal panel for a large lending institution throughout its various mergers for a number of years. I can only imagine the riveting conversations at dinnertime.

As the rest of his colleagues (self included) lounge by the pool at the close of summer, Jim is hard at work thinking about the accuracy and impact of property taxes on real estate investments. His dedication is almost saint-like.
…Jonathan Miller

Just a reminder to investors and appraisers—real property taxes have a major impact on real estate valuation and investment returns and need your accurate analysis. Don’t just call the local assessor for the current real estate taxes and plug the information into a model to calculate the real property’s net operating income. Real property taxes are always volatile because of increasing government expenditures, reassessment upon sale, phased reassessments, elimination of exemptions for improvements, and tax abatement programs.

Why is such detailed analysis important? Most tenants for residential and commercial properties can only afford a specific percent of their gross income for occupancy costs (real estate taxes, rent, insurance and utilities). Once the occupancy costs exceed this percentage and the tenant risks defaulting on the lease, the real estate value can be affected. Your task is to clearly spell out any hypothetical or extraordinary assumptions about the real estate tax estimates.

What can you do to avoid being blind-sided? Start by getting the correct information. Remember real estate brokers do not always do their research. Be cautious if you analyze investments in different geographical locations. In fact, the Uniform Standards of Professional Appraisal Practice (USPAP) states that “Prior to accepting an assignment or entering into an agreement to perform any assignment, an appraiser must properly identify the problem to be addressed and have the knowledge and experience to complete the assignment competently…….” and “Competency applies to factors such as, but not limited to, an appraiser’s familiarity with”:

  • The specific type of property
  • The real estate market
  • The geographic area
  • The correct analytical methods

If you find yourself in an unfamiliar location, such as New York or Miami , investigate not only the supply and demand factors affecting the local real estate market, but also obtain sufficient information to project the real estate taxes over the investment holding period. You may need to affiliate with a qualified local real estate appraiser to develop the stabilized income and expense forecast with the correct real estate tax estimate for your direct capitalization and projected discounted cash flow analysis. Consider the following factors that can impact accurate real estate tax calculations:

  • The equalization rate may not represent the effective equalization rate or the stipulated rate in the municipality.
  • The tax rate may only be declining in the short term if new construction does not continue into the future.
  • The tax rate may increase dramatically with new government expenditures or unforeseen circumstances.
  • Reported exemptions may be inaccurate.
  • Although the property is reassessed on sale, expect a two- or three-year lag until the tax authority incorporates this reassessment.
  • The real property assessments for all the tax comparables may have calculation inaccuracies from programming or human errors.
  • Rental rates may have spiked and the taxing authority has yet to capture this increase in real property values and the assessed value.
  • Property-specific information may be inaccurate and impacts taxes until corrected.
  • Tax assessment changes are phased in over a number of years, while the taxable value increases every year.
  • Tax abatements that generally are phased out over time must be factored into the analysis.

As a final note, do not forget transfer taxes and mortgages taxes that can also affect your returns on real estate investments.

Note: a special thanks to Nancy Reiss of The Write Stuff.

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[Solid Masonry] If You Think A Few Little Boxes Can’t Cause Big Trouble Then You Don’t Know The Half Of It

November 9, 2006 | 11:33 pm | |

[Solid Masonry] If You Think A Few Little Boxes Can’t Cause Big Trouble Then You Don’t Know The Half Of It

John Philip Mason is a residential appraiser with 20 years experience and covers the Hudson Valley region of New York. He’s a good friend and a true professional who believes that all appraisers need to have a macro-economic perspective in order to be effective. This week, he tries to check off the box we got ourselves into in his Solid Masonry column. …Jonathan Miller


Almost everyone now acknowledges the world of real estate is in transition, nationally, regionally and locally. The debate has shifted from is the market cooling off or is it in decline, to how much or how far? I’m not talking about future predictions (I addressed that issue last week), but rather current and recent trends. Of course, a lot depends on who you talk to, how they measure market conditions (i.e. for some it’s no more than sticking a wet finger in the air to see which way the wind is blowing), and which markets we are referring to. These reports indicate everything from nearly flat market trends, all the way to those who say prices have dropped faster than a landslide. For most markets, however, there is little doubt reality lies somewhere in between.

So now that we have this general acceptance of a softer market, many would like to believe the worst has either past, or is not too much further into the future. There is just one little problem. Actually, it’s a problem of six simple questions, offering multiple choice answers of eighteen little boxes, and this set-up is found on the front page of nearly every residential appraisal form. These six questions help describe the neighborhood of the subject property and sound innocuous enough, until you understand how the secondary mortgage market works. Select a box from one of the first two columns, such as “property values” are increasing or stable, and all is well. But be one of the first appraisers to select almost any of the choices in the third column, or worse, several of the choices in the third column, and you’d better watch out. Suddenly you’re a popular guy, and it’s not because the paparazzi just spotted you canoodling with Brittney Spears. (I’ve told you all before this my post and I make the rules, so, if I say it’s me and Brittney canoodling, than so be it. So, where was I?) Oh yeahSuddenly the loan officer, underwriter and just about everyone over at the lending institution knows your name, and it’s mud, as in Mr. Mud.

As we all know (and for those who don’t), the primary purpose of an appraisal is to help lending institutions sell mortgages in the secondary market through Fannie Mae, Freddie Mac and many others. An appraisal can also be utilized to help some institutions meet banking or corporate guidelines for loans they wish to keep in house. Either way, the appraisal offers an independent opinion of the value of an asset, in the context of the market for which it is located, and meeting certain underwriting guidelines increases the marketability of these notes. The loans may then be sold at a profit, allowing the lender to replenish their cash on hand, which allows for more lending, and the cycle goes round and round.

So, here is the problem: almost no one in the secondary market wants to buy mortgages in communities with a large percentage of vacant land (i.e. rural or built up less than 25%), have declining property values, are over-supplied, or have marketing times over 6 months. Think about it. If you ran a mega-billion dollar bank, investment or pension fund, how would you explain your purchase of notes which were soon-to-be under-secured, with increasing risk, at a meager 6.5% rate of return? Suddenly, any such manager with half a brain is going to start turning away from these investment notes. The same can be said for little old ladies, foreign nations, and just about anyone else who thought of mortgage backed securities in American real estate as a safe bet. It may sound alarmist, but we’ve been there and it wasn’t pretty. It started in the residential sectors in the late 1980’s and before long had spilled over into every sector of the real estate market. Case in point, remember when Freddie Mac all but pulled out of the market some 15 years ago? It became a bloodbath for small investment property owners everywhere, especially for those stuck trying to refinance loans that came due.

The sad truth is we may not have seen the worst of it. That is, if appraisers have to start checking any of the “no-no” boxes, then all bets are off on a soft landing. And the way market trends are going, most of us appraisers have already held off too long. If the past downturn in the national real estate market is any indicator of what to expect (and I certainly hope it isn’t), then the problem becomes a trend that is very difficult to reverse. Especially since the federal government doesn’t like to interfere in free market enterprise. So, if you think a few little boxes can’t cause a lot of trouble, then you don’t know the half of it.


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Carnival Of Real Estate Enters The Matrix

September 25, 2006 | 12:01 am | |

As I watched my turn get closer and closer to hosting the Carnival of Real Estate, I thought it was amazing how much great content is being pushed into the public domain every week through the carnival. In fact, carnival participants simply ooze creativity and new ideas. Simply look at last week’s carnival post at BlueRoof.com Blog to get an idea of what I mean.

I started getting post submissions early last week and by Sunday I had a lot of reading to do. Although the carnival hosts are expected to post only their favorites, I thought to myself, how can I do that? So I decided to provide a top ten list and then everyone else. I excluded a few get rich quick posts and those who seemed to be more interested in selling something or extra posts from those who submitted more than one.

I am finding that some of the most active and insightful posts this week have been provided by real estate brokers. Its interesting to me because its been my impression that real estate brokers were somewhat late to blogosphere party as a profession but now they really get it and are rising in numbers quickly.

So its no wonder there was a lot of discussion about Redfin this week. I think that a weaker housing market sort of forces the real estate brokerage community to rethink the status quo. Thats really refreshing and I found myself adding links to my blogroll.

The Matrix Top 10 List

  1. Everybody’s Going Local [Future of Real Estate Marketing]. Joel Burslem provides a very insightful look at the trend toward local web sites to deliver real estate related information.
  2. What Housing Bubble? [The Property Monger] looks closely at population trends.
  3. 16 Words or Less [Agent CEO] reminded me of the axiom less is more. I tend to fail miserably being concise but if someone leaves me a voicemail longer than 16 seconds, I tend to delete it.
  4. Crackdown on Relisting Homes [Altos Research]. Altos crunches the numbers. Relisting is simply wrong.
  5. Kicking the Tires on Housing Futures as a Predictive Tool [True Gotham]. Doug Heddings deals with one of my favorite topics, housing futures.
  6. Google and Zillow [Real Central VA]. Jim Duncan tells us that broker _marketing will become less and less a component of a Realtor’s core competency. Representation will._
  7. Cease and Desist [Real Estate 2.X] gives us a good chuckle and a whole new way to name our blogs.
  8. Dual Agency: Using the Seller’s Agent as Your Buyer’s Agent [Searchlight Crusade] addresses awkwardness and multiple loyalties which are commonplace.
  9. Would the Founding Fathers Have Founded an MLS? [Charlottesville Area Real Estate Blog] concludes that restrictions on listings are better than an open system.
  10. For real estate promotion, the business card form factor is a tiny little workhorse [Bloodhound]. Glenn says its all in the cards.

Here are the rest of the posts submitted in no particular order but are all a good read:

Market discussion (surprisingly quiet this week)

Raising the bar on the real estate brokerage profession:

Broker ethics and “get rich quick” schemes

Mortgages and Refi Strategies

New brokerage business models

Buyer and seller advice

Defies categorization

Thanks to all of those who submitted posts. Great stuff. Don’t forget to check out YoChicago, next week’s host for the Carnival of Real Estate.

Its now 10:30pm EST on Sunday. I’ve got to get some sleep – going to be on CNBC’s Morning Call live at about 10:15am on Monday for 5 minutes with another guest. Should be fun.


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[Commercial Grade] If It’s Thursday, This Must BeCanarsie?

July 27, 2006 | 10:51 am | |

Commercial Grade is a weekly post by John Cicero, MAI who provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. Today John talks about the misuse of the word “expert”.

Disclosure: John is a partner of mine in our commercial real estate valuation concern Miller Cicero, LLC and he is, on Thursdays, one of the smartest guys I know. …Jonathan Miller


I remember going on a job interview many years ago, where the interviewer, the owner of a small fee shop, chewed me out for calling myself “an appraiser” with only two years experience. He snarled that an appraiser is one who gives an “expert opinion” on property value. He scared meI didn’t want to work for him!

Some 20 years later I still vividly recall this interview though, because it recently dawned on me that he was absolutely correct. This business (profession?) is full of state licensed young bucks that appraise a shopping center in one state on Monday, then head hundred of miles away on a Thursday to appraise an office building in a totally different market. Getting paid on a “fee split” basis (time is money!) they race through the market snapping photos of comps that they may have begged off of a local appraiser, then run to town hall to look up the assessments and zoning data.

Experts? Hardly. They are going through the motions of “the appraisal process”, but the majority of these appraisers have neither the experience or market knowledge to render a truly “expert” opinion. I know..I used to be one of themand I can tell you at the end of every assignment I would pray that I didn’t miss anything critical in my market blitz.

The internet has put market data in easy reach of all appraisers..even if they are thousands of miles away. However, there is no substitute for being a real local expert, having the years of experience and intimate knowledge of the local market.


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List-o-Links: Values, Sellers, Rate Hikes

June 19, 2006 | 9:55 am | |

Here’s a container of links that didn’t ship.


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