[click to hear presentation by Appraisal Institute President Leslie P. Sellers, MAI, SRA]

In a period with perhaps the most turmoil in the history of the appraisal profession including The Home Valuation Code of Conduct (HVCC), Appraisal Management Companies (AMC) and Financial Reform legislation, the Appraisal Institute is needed now more than ever on behalf of the appraisal industry.

Despite this need for its members, the Appraisal Institute [AI] has decided to leave the Appraisal Foundation [TAF]. The Appraisal Foundation was founded in 1987 by eight major appraisal organizations to help regulate the appraisal profession within the US.

More after the jump…

To show you how bad things got, Fannie Mae is now in the process upgrading their appraisal regulations to reflect more prudent risk management. Part of this upgrade was to begin to insist that appraisers have local market knowledge and to now actually take pictures of the interior of a property being inspected and appraised.

They relied on AVMs, computer-aided valuation tools that are wildly inaccurate. Why not just require an appraiser to click a picture?

In the past, Fannie Mae did not provide requirements concerning lenders making changes to the opinion of market value reflected in the appraisal report. During Fannie Mae’s post-purchase reviews, cases were identified where the lender had reduced the opinion of market value in the appraisal report based upon underwriter judgment, automated valuation models, or other methodology. Therefore, Fannie Mae has updated its appraisal policies to address the practice of lenders changing the appraiser’s opinion of market value and also to provide specific guidance when an appraisal is considered deficient.

It begs the question, what kind of appraiser would NOT take photos inside the property? Would a good appraiser not take hand written notes either? The whole logic here is crazy (nothing like setting yourself up to be sued down the road for correctly saying the home was a wreck when the borrower claims it was renovated).

I got a generic email from a lender yesterday that made this announcement seem like a huge deal. How much does a digital photo cost, remembering the reports are rarely printed these days, being delivered as a pdf or electronically.

Dear Sir or Madam: On Wednesday, September 1st 2010 [NAME REDACTED] will require interior photos that meet new Fannie Mae guidelines. (Fannie Mae Announcement SEL-2010-09).

This will effect any appraisal with an effective date of 9/1/10 or later. The guideline is listed below and also each engagement letter you will receive from SLS.

Interior photographs, which must, at a minimum, include:
– the kitchen;
– all bathrooms;
– main living area;
– examples of physical deterioration, if present; and
– examples of recent updates, such as restoration, remodeling, and renovation, if present

Thank you,

Vendor Relations Team

In Fannie Mae’s Announcement SEL-2010-09 Selling Guide Updates and Additional Guidance on Appraisal-Related Policies they want the appraiser to provide interior photos.

Good grief.

We have been providing interior photos since we were founded in 1986. It’s not like we should have received extra credit for doing that.

Based on my experiences in the 1980s, initial reason for not requiring them was the cost to the appraiser for film, photo processing, etc. in ordert to keep costs down. However my firm went digital in 1998 (12 years ago) and I felt the “no photo required” regulation later came to mean that many lenders and the GSEs didn’t want to know what the interior of the property looked like (aka don’t tell, I won’t ask).

[click to open article]

In the aftermath of federal tax credit for first time buyers and existing homeowners as part of the stimulus program, I newly appreciated one key thing: buyers and sellers modify their behavior to work a tax to their best advantage. The other takeaway is how naive governments tend to be when imposing such a tax – something about not understanding basic economics.

This was reinforced when Sarabeth Sanders of The Real Deal Magazine asked me to look at the impact of the “mansion tax” on housing market behavior.

In my research I found a disproportionate cluster of activity between $975,000 and $999,000.

To arrive at this I parsed all Manhattan residential sales (co-ops, condos, 1-3 family properties) over the past five years into $25,000 segments from $900,000 to $1,100,000 to see if there was a pattern. Of course I have long experienced this first hand in our appraisal company but never showed it empirically. Granted this is a correlation analysis, not causation analysis since it could be some other factor I am not aware of. However I am confident that the tax motivates this price behavior. The seller or buyer often work out some other consideration to keep the price just under $1M.

Six-figure discount Skirting the mansion tax in a buyer’s market [The Real Deal]

The Real Estate Board of New York sent a email yesterday describing the issue:

A draft rule has been issued by the Federal Housing Finance Agency for comment that would create serious problems for Co-op and Condo buyers. The rule would prohibit Fannie Mae from purchasing loans in buildings where there is a Transfer Tax/Flip Tax. We have spoken to Fannie Mae and have been informed that this is not the current policy, but the Regulators have recommended such a rule and on August 12th a draft was issued for public comment. The link below will give you the details of the proposed rule. We have been informed by Fannie that the primary intent of this proposed rule was not to have this apply to all Co-ops and Condos. Their primary intent is to stop developers from imposing 99 year covenants on new homes that require seller’s to kick back a percentage of the sale price of the home to the developer when the home is sold. They are currently reviewing our concerns and will be back to us shortly, hopefully, with revised language that would correct this serious problem.

FHFA Proposes Guidance to Restrict GSEs from Investing in Mortgages with Private Transfer Fee Covenants [FHFA]

The Federal Housing Finance Agency is proposing a guidance for public comment that would restrict Fannie Mae, Freddie Mac and the Federal Home Loan Banks from investing in mortgages with private transfer fee covenants. The guidance would extend to mortgages and securities purchased by the Federal Home Loan Banks or acquired as collateral for advances, and to mortgages and securities purchased or guaranteed by the Enterprises.

Here’s the kicker:

“The private transfer fee covenants appear to run counter to the important mission of the housing GSEs to increase liquidity, affordability and stability in the nation’s housing finance system,” said FHFA Acting Director Edward J. DeMarco. “Encumbering housing transactions with fees that may not be properly disclosed may impede the marketability and the valuation of properties and adversely affect the liquidity of securities backed by mortgages on those properties.”

WRONG assumption when applied to co-ops.

Flip Tax/Transfer Fees ADD value

For an extensive analysis of the value of certain amenities and the relationships between co-ops and condos, take a look at my foray into academia a few years back: The Miller Samuel – New York University joint research paper called The Condominium v. Cooperative Puzzle: An Empirical Analysis of Housing in New York City. The paper was published by the Journal of Legal Studies at the University of Chicago in the summer of 2007.

We found that almost half of all co-op buildings impose a flip tax/transfer fee. More importantly, flip taxes also appear to be value-maximizing. The existence of a flip tax is associated with a 1.9 percent increase in value.

Loss of Flip Tax/Transfer Fees may impair ability for shareholders to obtain financing

It is a key source of revenue after monthly maintenance charge and special assessments so this could impair co-op owners’ ability to obtain mortgage financing since Fannie is focusing on the ability of co-ops to potential finance capital improvements. In addition, that implies higher maintenance charges to cover reserves. Higher monthly charges places downward pressure on prices.

From the letter, it sounds like REBNY is on top of this and FHFA is aware of the issue, but it would be prudent to contact your Congressman.

UPDATE: One other thought – by damaging the co-op market in reducing values, FNMA would essentially damage the collateral of their existing loans and weaken bank’s already weak capitalization ratios, tightening co-op lending even more. A vicious circle. In addition, the default rate on co-ops has always been LOWER than condos and 1-families. What would be the benefit of damaging a large portion of the housing stock in an arbitrary way based on a ruling that really applies to something other than co-ops?

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July Existing-Home Sales Fall as Expected but Prices Rise [NAR]

NAR chief economist, said a soft sales pace likely will continue for a few additional months. “Consumers rationally jumped into the market before the deadline for the home buyer tax credit expired. Since May, after the deadline, contract signings have been notably lower and a pause period for home sales is likely to last through September,” he said. “However, given the rock-bottom mortgage interest rates and historically high housing affordability conditions, the pace of a sales recovery could pick up quickly, provided the economy consistently adds jobs.

Of course unemployment is projected to improve at a snail’s pace.

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Sales Pattern Analysis
In any given period of the year, there is a natural, almost organic flow of activity. The federal tax credit moved activity forward to beat the April 30 tax credit expiration causing sales to rise sharply and stem the trend of price declines. Remove the credit and sales drop sharply, 27.2% M-O-M and 25.5% Y-O-Y.

This volatility may very well net out fewer overall sales when all is said and done than if the stimulus never occurred, now compounded by weakening macro economic conditions.

A tax credit sales recap:

• Provide incentive
• Sales jump, prices stabilize
• Withdraw the incentive
• Sales fall, prices begin to slip

Price Pattern Analysis

Median sales price expanded 0.7% Y-0-Y but not because the market is stronger. Median price expanded simply because the mix of sales shifted higher. You can see this in the following breakdown by price point. The largest decline in number of sales were weighted at the low end since the tax credit comprised a larger percentage of the purchase price and therefore provided more incentive.

Here’s a breakout by region.

[click to query exchange rates]

Foreign consulates in New York City are some of the more valuable sites in the city. In the valuation of single family residences, especially mansions, an alternative use to a single family (as in something priced $5 to $50M) can be a residence for the ambassador to the UN to reside.

Periodically NYC gets a surge in foreign demand when the exchange rate goes haywire. We saw this a few years ago with the “Irish Carpenter” phenomenon. NYC is very proactive with maintaining good relationships with foreign governments because it is an important resource its economy.

However, in facing budgetary shortfalls due to the struggling economy, the city had plans to tax the real estate holdings of foreign missions per the New York Law Journal’s article:

Breaking News: State Department Action Scuttles City Taxation of Foreign Mission

Despite the city’s success in years of litigation, the U.S. Court of Appeals for the Second Circuit said yesterday that the State Department had decided to designate an exemption from property taxes as a “benefit” under the Foreign Missions Act, 22 U.S.C. §4301 for The Permanent Mission of India to the United Nations and as well as the representative of the Mongolian People’s Republic.

A long time revenue drain for hosting the UN in NYC has been the non-payment of parking tickets by diplomats is steeped in tradition. Sounds like more of the same.

This clip was way back from August 3rd (tip ‘o cap to Credit Slips), but its worth a listen to. Hopefully consumers will have more protection, something that we forgot about in the last boom – I’m a big fan of Elizabeth Warren.

[click to open report]

Last week, the Obama Administration, via Secretary Donovan at HUD launched a monthly recap of key data on the health of the housing dubbed the “Monthly Housing Scorecard.”

The U.S. Department of Housing and Urban Development (HUD) and the U.S. Department of the Treasury today introduced a monthly scorecard on the nation’s housing market. Each month, the scorecard will incorporate key housing market indicators and highlight the impact of the Administration’s unprecedented housing recovery efforts, including assistance to homeowners through the Federal Housing Administration (FHA) and the Home Affordable Modification Program (HAMP).

“Scorecard”? They got game of transparency, no? Ok that’s harsh – nevertheless it captures a lot of great housing data captured in one location to show the “Obama Administration’s efforts to stabilize the housing market and help American Homeowners.”

Monthly Housing Scorecard – June 2010 [HUD]

Guest Columnist:
Joe Palumbo, SRA

Palumbo On USPAP is a column written by a long time appraisal colleague and friend who is currently the Director of Valuation at Weichert Relocation Resources and a user of appraisal services. He spent seven years at Washington Mutual Bank where he was a First Vice President. Mr. Palumbo holds an SRA designation, is AQB certified and he is a State Certified residential appraiser licensed in New Jersey. Joe is well-versed on the ever changing landscape of the Uniform Standards of Professional Appraisal Practice [USPAP] and I am fortunate to have his contributions. View his earlier handiwork on Soapbox and his interview on The Housing Helix.
-Jonathan Miller

The Fool’s Gold of AMC Licensing

Since I landed in the world of Relocation some three and a half years ago, I really did not pay much attention to what was happening in the trenches of the lending world. That changed when the concept of licensing appraisal management companies came about. My interest became more of an occupational study since these laws are so “broad-brush” and vague. As the manager an in-house appraisal arm of Relocation Management Company I was shocked and disappointed that that these laws cast a net on just about anyone who manages selects and retains appraisers for third party use. Clearly this type of legislation was created out of a knee-jerk reaction to one of the many “crisis-type” issues that came AT the appraisal community in 2008 and 2009. I am specifically referring to the attention to the “appraisal process” brought about by the ill-informed attorney general Mr. Cuomo of NY and the infamous HVCC. I agree with the basic the tenets of the HVCC and the AMC laws I just do not think there will be a net tangible positive affect and that the “real issues” are being conquered. AMC laws and HVCC are not the PANECEA. I WISH THERE WERE a panacea because some calm is needed. Being the realist and institutionally tenured manager of the appraisal process I just know reality of what happens VS what is supposed to happen.

For starters let me say that the relocation world has no direct OTS-like government oversight or appraisal requirements for the appraisals which are NOT intended for lending. The relocation industry is self- policing and we rely on what is set up by state licensing and our own quality control. Let me also say that while my department may perform some of the same functions that an AMC does, we do not TAKE ANY of the appraisers fee. We do select maintain, review AND USE appraisers as well as arbitrate valuation disputes. Also for the record I am not anti-appraisal management company.

Here is the issue: As pointed out by the OTS, last year FIRREA laws of 1989 already contain much of the language that the AMC Laws cite. States have also set up Appraisal Boards who are supposed to monitor fraud egregious issues and such. The problem with FIRREA and the State Boards is simple: money, resources and time. So along come laws that state it is unlawful to coerce an appraiser, unlawful not to pay them, unlawful to tell them which appraiser to use, unlawful to have people who select and review who are not “trained in real estate”, and so forth and so on. So the new laws are just restating the same of what we already had but we still lack an efficient mechanism to enforce. If the AMC laws are governed and enforced by the state boards who are short on cash and time then what makes AMC laws different? Currently 18 states have such laws on their books.

On top of the AMC laws many states are requiring AMC’s to be “registered”. This process is costly and requires plenty of paperwork. KUDOS to the Governor of Virginia, who signed his states law basically making it illegal to engage in the “appraisal nonsense” described above, but NOT requiring a registration process or fee. Also noted as being proactive is Arizona, which requires licensing and registration for AMC’s but which has a single line exemption for the relocation industry simply because: “we are not the problem” (the law reads the exemption for appraisals prepared for the purpose of employee relocation) .

Recently I was contacted by a state board attorney whose state passed AMC legislation in 2009; she stated “this law was not intended for your business model….because you use the appraisal with the client, whereas an AMC does not use…. it they get it…Q C it and pass it on”. It is great to see some realistic thinking for a change. The AMC- appraiser relationship is much like the HMO doctor relationship: mutual need mandated by external forces peppered with some mistrust. Don’t get me wrong there is a lot of merit to the underlying premise of HVCC and such I just do not think it is going to result in a changed world for the appraisal community. What the appraisers do not like about the AMC’s are the request for fast appraisals, some at a lower fee than they have seen in years, requests coming with numerous assignment conditions many of which are not realistic and unacceptable (3 comps within 3 months and 1 mile) the occasional “can you hit the number request” before the analysis gets done (comps checks)…among many others.

Many of the pressures ON AMC’s…yes I said ON AMC’S, are a result of what has transpired in the world: Increased competition, web-based valuation tools, fingertip internet real estate research, fraud, secondary market issues, and MISUNDERSTANDING of the appraisal process in general. I wonder what planet the “investors” live on that have guidelines they will not purchase loans in declining markets? I also believe that a lender than asks an appraiser to “remove a negative time adjustments” should be reported to the LVCC hot line” . Oh… that’s right there is none? Call your department of banking they say. Good luck. I had an appraiser the other day who did not read or adhere to the engagement letter I sent tell me “we have an AMC law here and you have to pay me regardless or you are breaking the law”. I stated, “great, I will take my chances since you signed the engagement letter but yet failed to meet the (simple) requirements stated in the letter, which is why I have called you three times ”. We’re not talking about value here we are talking about basic development and reporting issues that were not clear to me as user and client. Is this what the AMC laws are for?

Does anyone really think that the requirement of an AMC to fill out an application, pay a fee and require a few staff to take a 15-hour USPAP will stop the madness? Actually if the fees are an issue it could increase the cost of operating for the very folks that are presumable not paying a “fair rate”. Since the BIG 3 lenders (all using profitable AMC’s) have 60% of the market now via servicing or closing every US loan, I don’t see things changing until we see a UNIFIED industry, an industry that will unilaterally agree to push back on any conditions that are deemed to be unreasonable. It is very difficult to push back on three financial giants, but without a push, it will not happen. The other day a friend told me of a lender (his client) who is seeking to create a special list outside the AMC they use; their claim is poor service and product….betcha licensing that AMC would fix that! I also heard of a request coming from a AMC in a state that requires they be licensed and registered. The “caller” asked the appraiser if he could “hit the number”. He asked “isn’t that a violation of the HVCC and the AMC laws?”. The caller laughed…who is enforcing this stuff anyway..we do it all the time and we just send a text message to our appraisers telling them what they need”. There are approximately 97,000 appraisers in the US handling over 1 trillion dollars in mortgage money. Over 75% of the states require licensed appraisers for federally related transactions and 45% require for all appraisals. Imagine if ALL 97,000 decided to make change by just saying “no” on unreasonable compensation or assignment conditions. If we did not have state licensing there would be a clamor to get it. Remember what was stated twenty years ago? “State licensing will change everything” .

Maybe it didn’t because we didn’t MAKE it matter.

What we had already in FIRREA and state law is part of the mechanism to get us to the next level. The missing ingredient is unity. It does not mean abolishing the AMC’s or AMC laws either. Let’s look within and stop trying to reinvent the wheel with both the products and the process. We are miners of fool’s gold until we make real change happen from within, which while not easy is the only way for true meaningful change.

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May housing starts, seasonally adjusted, fell sharply with the expiration of the tax credit – signed contract by April 30. No surprises here. I suspect we’ll see similar levels for a few months. The tax credit likely “poached” sales from future months rather than jump start the housing market.

Privately-owned housing starts in May were at a seasonally adjusted annual rate of 593,000. This is 10.0 percent (±10.3%) below the revised April estimate of 659,000, but is 7.8 percent (±9.7%) above the May 2009 rate of 550,000. Single-family housing starts in May were at a rate of 468,000; this is 17.2 percent (±7.9%) below the revised April figure of 565,000. The May rate for units in buildings with five units or more was 112,000.

I’ve long marveled at the stats in this report (sarcasm) – notice the margin of error in the above paragraph. Still, it’s the standard reporting method for new housing starts.

The chart above is intended to provide perspective to any month over month gains. The peak for housing starts was January 2006 at $2.3M annual starts, 3.8 times the seasonally adjusted annualized rate.

NEW RESIDENTIAL CONSTRUCTION IN MAY 2010 [U.S. Department of Commerce]