What could go wrong? Well, as Aaron Task and I discuss with Jonathan Miller, president and chief executive officer of appraisal firm Miller Samuel and proprietor of the authoritative Matrix real estate blog, pretty much everything.
From the heavy comment volume on the post, I’d say the take for Yahoo! Finance readers to Dan’s question was: NO
ALERT: There is a significant financial penalty to banks and homeowners when a lender uses shoddy valuation methods to determine the market value of a home.
Doh!
This finding especially interesting to me because so many rant about appraisal values being too low, when in the case of REO, its because the values are too high. In either scenario it comes down to the banks’ reliance on cheap and fast automated valuation models (think garbage data in, garbage results out interpreted by gum chewing teenagers just out of high school) or appraisal management companies who rely on appraisers with limited, if any local market (requirement: licensed in the state, 24-48 hour turn times, agree to work for 50% of market rate).
Call me crazy but I have been ranting about this for years and yes, I have a vested interest in the outcome. The banking industry now sees the appraisal process as a cost function have-to-do and not a tool to mitigate risk. By encouraging the use of cheap automated valuation models and appraisal management companies to save money, they end up with an invalid benchmark to make a decision that adversely impact people’s lives. Crappy appraisal quality becomes a self-fulfilling prophecy for the bank which then drives their desire to automate and pay virtually nothing for valuation services even though the product is awful.
The research suggests banks could reduce the number of foreclosures by improving their estimates of what such homes will be worth. If their estimate of foreclosure value is lower, banks may choose to offer a loan modification to a struggling borrower instead, letting them stay in their house.
The first is that they may not actually be overvaluing property at all, but rather placing the minimum bid knowing the property is not worth it.
Lenders may be overvaluing properties because their valuation methods—which they use because they work well in most markets—don’t happen to work well in weak ones.
Finally, there may be incentives that encourage lenders to overvalue foreclosed properties. Doing so would allow them to shift accounting losses from their loan portfolio to their REO portfolio.
Foreclosure Activity Dips Nationally, But 21 States and DC Post Annual Increases
Judicial Activity Up 24 Percent Annually, Non-Judicial Activity Down 23 Percent
The other big item in the report was the fact that half of the nation’s largest cities saw an increase in foreclosure activity.
The metro areas with the highest foreclosure rates among the 20 largest were Riverside-San Bernardino in California (one in 166 housing units), Atlanta (one in 244), Phoenix (one in 259), Miami (one in 264) and Chicago (one in 302).
I thought it was telling that two of the best housing markets in the country performed very differently – NYC v. DC. Rules and regulations play a key role in determining how quickly a market clears itself of excess distressed housing stock.
New York City metro had the smallest foreclosure rate by far with 1 foreclosure in 3,439 housing units, about 1/3 the rate of Washington, DC’s 1,198. Of course it probably only means that DC will be rid of its foreclosure housing stock much faster than NYC since New York state takes longer (over 1,000) days to process a foreclosure than any other state.
Foreclosure Laws and Procedures By State [RealtyTrac
]
February 2012 U.S. Foreclosure Market Report [RealtyTrac]
I’m not sure what to make of the real estate angle here – my brain is cracking under weight of the lessons to be learned. But I’m really more interested in the investor’s ingenuity. He gets a gold (or copper) star for effort and I wish him success.
Posted by Jonathan J. Miller -Sunday, March 4, 2012, 1:40 PM 3 Comments
Yesterday’s New York Post Article “The $lamptons: Unsold & foreclosed homes plague East End” got a number of people I know upset with the context of the piece. The article quotes reputable people (assuming I’m reputable) but not to reference the premise of the Property Shark report being cited.
Here’s the lead article quote:
Five years after the housing bubble burst, the number of unsold Hamptons homes has hit a 30-year high while prices have plummeted.
Reality: Prices fell sharply after Lehman collapse in 2008, but the overall market generally remained stable for the past 3 years so I’ll focus on the foreclosure numbers.
One of those upset with the piece was Enzo Morabito, a real estate broker who has long been a top producer in Long Island and the East End. He cites the article’s disconnect with his first-hand experience and emailed me this comment along with data to back up his view:
As I’m sure you all agree, this poorly researched article is sensational, inflammatory and potentially very damaging to the real estate market in the Hamptons.
For me, the New York Post has always been a guilty pleasure of mine for my commute home. Details such as their trademark use of “$” as replacement for “S” in real estate headlines are part of the package – hey, it’s a tabloid. While I’m always appreciative of being included in the New York Post for their real estate coverage, I happen to agree with Enzo and think this one went too far with hyperbole. Admittedly I am skeptical that this single article will damage the East End housing market – and I do think the real estate brokerage industry nationally worries too much about the power of the media over the housing market. But I get their concern because the appraisal industry has been a recipient of blame for housing’s woes in recent years.
The story is based on some sort of report by Property Shark, who is an essential NYC data provider trying to get traction on the East End. I’m sure reports like this are designed to garner PR attention – hey that’s how the media world works.
Are foreclosures expected to rise nearly everywhere in the United States over the next few years? Of course but by widely varying degrees – and that’s not the point being made in this post.
I haven’t been privy to the Property Shark report, but I know the BBC segment and the NY Post article were based on their report – the following quote and link was at least a part of it:
More than 48 homes in the Hamptons worth more than $1 million each are in foreclosure.
Here’s a Suffolk County “distressed” property map by Property Shark which would include short sales that was sent with their release to the media. The problem with this map, as with the old Google Base maps for distressed housing (don’t think they are displayed anymore?) is they are not updated and give the impression that every single property in every market is distressed.
Here’s the latest MLS data crunch recap sent to me by Enzo:
There are 117 Hamptons properties listed on the MLS that are “Short Sale” or “REO/Bank Owned.”
Hamptons includes: East Hampton and Southampton Townships: Eastport, Montauk, Flanders, Water Mill, Bridgehampton, Amagansett, East Hampton, Speonk, Sag Harbor, Westhampton Village, Westhampton, Quogue, Remsenburg, Hampton Bays, East Quogue, Southampton and Southampton Village.
74% are under $500K
14% are in $500-700K range
8% are in $700K to $1 million range
4% are over $1 million
HLS/Realnet (MLS) currently 5,116 properties listed as being actively for sale in all of the Hamptons (same communities as noted above), 2,728 above $1M
So I took a look at the numbers provided by Enzo, consistent with my experiences, and applied my math:
53% of all East End listings are above $1M
34% of all East End 2011 sales were above $1M
4% of all East End listings above $1M are short sale/REO
1.76% of all East End listings above $1M are REO.
Market share of foreclosure activity declines moving from bottom to top.
I would guesstimate that overall foreclosures in the East End market are historically just under 1%.
After considering all this, I found Property Shark’s pronouncement that 48 foreclosure listings are the highest total in 30 years is misleading because no context was provided.
Although I don’t have and historical data series for Hamptons REO going back 30 years, just because Property Shark cites it as the “highest” doesn’t mean it is a “high” number.
I’m not being an apologist for anyone here but c’mon data providers and media, let’s remember to provide context for everything we analyze and present. People trust information they read to be at least reasonably reliable.
The ‘$lam’ptons: Unsold & foreclosed homes plague East End [New York Post]
This is interview required viewing for anyone connected with real estate and mortgages. Here are a few choice snippets:
“We’ve made fraud and perjury just a business expense.”
“Felony, fraud, perjury on a mass scale.”
“It wasn’t Jamie Dimon…or the $8 burger flippers…the process was too institutionalized…what we don’t know is who the mid-level bank execu who said too hell with 700 years of property law…just rubber stamp it and get it through…”
“It’s the Ford Pinto approach…eh some will burn to death, we’ll write a check later.”
Spoken with amazing clarity – always love Barry’s insights and delivery of his views.
WashPost Columnist: Mortgage Settlement Makes “Fraud a Business Expense” [Bloomberg Law/YouTube]
The Robosigning Deal is a Useless Embarrassment [The Big Picture]
Foreclosure settlement a failure of law, a triumph for bank attorneys [Washington Post]
From my perspective, the $26B was a nominal rounding error despite the trillions in mortgage related fraud that occurred during the credit/housing boom. For essential context and the stunning lack of fairness to “Main Street” the agreement speaks volumes about why we can’t fight our way out of a paper bag (housing crisis).
If you want to gain perspective on the settlement deal, then you must read his blog post and his column. Please.
Foreclosure settlement a failure of law, a triumph for bank attorneys [Washington Post]
The Robosigning Deal is a Useless Embarrassment [Ritholtz/Big Picture]
Posted by Jonathan J. Miller -Wednesday, February 29, 2012, 12:38 PM Comments Off
[click for video]
The Caroline Hepker of the BBC reports on the uptick in short sales on the East End. There are more and the number of high end listings are rising. I’m not clear of the reference for the following statement but she cites that:
For the first time, America’s wealthiest families are now losing their homes at a faster rate than any other group.
For my part, I was asked to discuss the state of national housing market for context. Short sales were not held back by the robo-signing scandal that had the effect of providing a temporary reprieve from foreclosures entering many housing markets across the country.
Short sales are a fact of life everywhere and don’t generally depress housing prices in and of themselves since lenders won’t accept offers that are significantly below current market levels.
House hunting in Hamptons as US market remains depressed [BBC News]
Posted by Jonathan J. Miller -Tuesday, February 28, 2012, 6:15 AM Comments Off
There was an interesting paper discussed in the NYT Economix Blog that was just released called “Housing, Monetary Policy, and the Recovery” that provides some context to understanding how much housing is preventing a more robust economic recovery.
What is interesting about this research is the idea that not only did the economy get crushed by the housing crisis, but the fact that the recovery is being delayed because of the legacy of bad lending decisions that created the run-up in housing prices.
Low interest rates just aren’t cutting it anymore – in order to gain traction with the consumer, the study indicates that rates would have to be inverted – that lenders would need to pay borrowers. Crazy.
The pace of recovery since the financial crisis has been less than half as fast as after the last two major recessions, which ended in 1975 and 1982. In first 10 quarters after those recessions, the economy grew by 13.4 percent; in the wake of this recession, the economy grew by only 6.2 percent.
And, the paper says, “more than half the underperformance in this recovery is associated with housing-related sectors.”
No shortage of charts in the paper – here’s a couple that jumped out at me:
Posted by Jonathan J. Miller -Thursday, February 16, 2012, 9:31 AM 1 Comment
After a reprieve in 2011, and a key reason why prognostications of a US housing market bottom is misguided, RealtyTrac reported that foreclosure filings were up 3% in January, month-over-month. Notice of defaults, however, are still depressed, down 22% from a year ago and unchanged from the prior month.
The 3% is statistically insignificant and I am not being an alarmist, but it represents the beginning of the distressed sale ramp-up now that the mortgage servicing settlement has finally been hammered out (actually the increase occurred before the agreement was final).
Daren Blomquist with RealtyTrac said increased foreclosure activity in key judicial foreclosure states is the likely result of lenders gaining some certainty over foreclosure processing issues, court decisions and regulations impacting the default process. He also points to the $25 billion mortgage servicing settlement that financial firms reached with state attorneys general over robo-signing and foreclosure issues.
On the surface, filings are still 19% below year ago levels, but the year ago level was artificially low just after the “robo-signing” scandal at the end of 2010.
“It’s a bit surprising that we are seeing this increase in January before the settlement was even announced,” Blomquist said. “It may be that lenders were ramping up (foreclosure activity) with the expectation of the settlement happening.”
RealtyTrac reports foreclosure filings rise 3% in January [Housingwire]
Had a fun interview with Tom and Sara this morning on the always MUST watch/listen Bloomberg Surveillance. We talked housing, rentals, vacancy and inventory. An added bonus was the addition of Adam Davidson – co-founder and co-host of Planet Money... Read More
