Posted by Jonathan J. Miller -Friday, May 4, 2012, 8:16 AM Comments Off
[click to expand]
I wanted to illustrate how little of the Miami housing market today is financed with a mortgage. And despite that, sales activity is trending higher. Counter intuitive but a reflection of its two drivers of demand: investor at the lower end and cash buyers, often foreign, at the upper end.
Any thoughts on the FHA, Conventional financing cross over back in 2Q 2011?
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.
Posted by Jonathan J. Miller -Monday, March 12, 2012, 8:38 AM Comments Off
Got this solicitation in the mail last week. I’d name names but letter doesn’t provide any.
They had our mortgage amount and the bank name that originally issued the mortgage (it’s long since been sold). The letter uses phrases that are close enough to actual to be confused for legitimate.
Housing and Economic Recovery Act of 2012? Try 2011. HARP, Foreclosure, “Failure to Respond”, restructuring, “Loan modification department”, 7% rate?
Out of curiosity, we called and they wanted us to mail our personal financial information to determine if we qualify.
Can you imagine the damage pariahs like this will do to people in desperate financial straits?
Low appraisal ±5% – It’s good to see my profession not responsible for all the world’s problems and the least of the “blown deal” phenomenon.
Tight credit ±10% – Surprised it’s not higher although this accounts for people who applied for a mortgage. One of the big issues today is potential buyers staying on sidelines because they don’t think they would qualify. In other words tight credit is a much large issue than illustrated.
“Other” ±20% – The largest category by far, the dreaded “other” is the bane of our economic existence. My mother always told me to look both ways when crossing the street or “Other” might clip you in a large sedan. I’ve got to think that the lion’s share of “Other” is made up of buyer cold feet and some sort of appraisal/credit combo.
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 -Friday, February 24, 2012, 12:40 PM Comments Off
The following was shared by an appraiser colleague in the Midwest as told to him by a loan officer:
“You want to talk welcome to America. I am doing a loan for [redact] and they [the borrowers] are not US citizens. He did not work all of last year and she made approx. $21,000. And, their tax refund is $9200!!! ….”
“….How is that even possible? I knew you would enjoy this as much as I did, except I had them in front of me and my head was going only in America!“
Posted by Jonathan J. Miller -Thursday, February 16, 2012, 12:18 PM 3 Comments
I was originally going to call this post: When Pundits Have No Idea What They Are Talking About but changed it to be more direct.
I have been a long time reader of City Journal and have been a fan of Nicole Gelinas’ writing. That’s why I was surprised to read a slanted rant-fest in the Winter 2012 edition called: The Rental Mania That Wasn’t. It’s inaccurate real estate stereotyping at its worst.
Gelinas demonstrates a lack of understanding with the Manhattan rental market, inconsistent with her long established writing credentials. She pontificates that the article was hyperbole and concludes the housing (rental) market has peaked because the New York Times said there was plenty of room to go:
If the Times thinks there’s no ceiling in sight, you can almost bet that the ceiling has already been reached. The paper of record has a track record on this. In 2005, the Times Sunday magazine ran a nearly 9,000-word story on the nation’s real-estate boom.
Well the rental market still has plenty of wiggle room if we are talking peak. We are currently 27% below the inflation adjusted rental peak reached at the end of 2006. In other words we are not in uncharted territory as a rental market.
The Manhattan sales market didn’t peak until mid-2008. And the reference to Bob Toll confuses the national housing market with Manhattan market. The national market peaked in mid-2006, 2 years before Manhattan did.
The rental market is up 9.5% year over year and continues to rise. Why? Because credit remains tight and likely will remain tight for the next several years driving many people to rent rather than purchase.
And then there is the issue of “froth”:
Toy further notes that “to compete for top rents, some landlords are undertaking expensive apartment renovations in older rental buildings. Even 10-year-old properties are being subjected to face-lifts.” That points to landlord worry, not complacency. You don’t plunk down tens of thousands of dollars in free cash flow to overhaul an apartment unless you’re nervous that newly built apartments are going to pose a threat. In a sizzling rental market, nobody insists on a washing machine or a hardwood floor.
This logic also shows a lack of understanding with the current dynamics of the market. The renovations are being done because the cost of renovations are far less than the resulting increase in achievable rent. There is a premium on upgraded space. You can see it in the market.
And the closing snipe is hypocritical since Ms. Gelinas is held to the same standard as Ms. Toy.
Neither Toy nor the Times editors did their job here—unless their job is to sell real-estate advertising.
My recommendation to Ms. Gelinas is to be more responsible with your platform and actually understand the issue you are writing about. I live and breath housing metrics every day and was offended by the inaccuracy and mischaracterization of your writing.
The Rental Mania That Wasn’t [City Journal
For Rentals, No Ceiling in Sight [NY Times]
A lot has been made about the “class warfare” sniping between presidential hopefuls in the current campaign. It’s unfortunate, but as it relates to housing, the disparity is somewhat alarming.
For this week’s New York Times real estate cover story, For Sellers, High End Is Hot, I was asked to back up my statement:
“There is a greater disconnect between the very top of the market and everything else than I have ever seen in my 25 years in the business,” said Jonathan J. Miller, the president of the appraisal firm Miller Samuel.
I sliced up the Manhattan apartment market in 20 (5%) equal segments for 1991, 2001 and 2011 by median sales price and compared the top 5% with the bottom 5% after adjusting for inflation.
And guess what? The spread between the top 5% and the bottom 5% is getting wider, a lot wider:
10 years (2001-2011) +12.5%
10 years (1991-2011) +66.2%
20 years (1991-2011) +87%
The data shows that the gap expanded more significantly during the Dotcom-related housing boom of the late 1990s and then continued in the aughts (00’s) with the credit boom. In many metro area markets and affluent suburban towns across the US, this same phenomena can be seen.
An advertisement for Powerball “Yeah, That Kind of Rich” on a phone booth (now that’s a weird contradiction) that I photographed (to the right) says it all. At least we can all aspire to own a Porsche Panamera – by itself in left lane – love that car!).
After the collapse of Lehman in 2008 and the collapse of the secondary mortgage market for jumbo (non-conforming) loans, there was great concern over the health of the high end of the market. Less access to financing or more difficult mortgage underwriting for jumbo mortgages became the norm because jumbo lenders had to hold these loans in their own portfolio instead of offloading them to investors representing the Icelandic banking system or Wisconsin school districts.
And there should have been concern. The credit crunch has adversely impacted the high end luxury market.
However I am not talking about the high end or luxury market in this analysis. I am speaking to the market that is above it.
I am really talking about the “super” or “luxe” or “ultra” (or insert your own hyperbole) high end market and the top few percentage points of markets they represent. Trophy properties are in demand right now. The buyers are paying cash and demand is high.
Meanwhile the balance of the housing market is mundane, sliding or stabilizing, grappling with bad lending decisions during a period where everyone lost their rationale mind.
Right now is an exciting time to be “trophy-hunting”, housing-wise.
To be clear, Bill’s forecast is based on prices of the key housing indices i.e. Case Shiller and CoreLogic without seasonal or inflation adjustments. He is very clear about the definition of a housing bottom which is key to the argument – in fact, there are two housing bottoms:
First there are two bottoms for housing. The first is for new home sales, housing starts and residential investment. The second bottom is for prices. Sometimes these bottoms can happen years apart.
New Home Sales Bottomed in mid-2010 (moved sideways ever since).
Housing Prices Will Bottom Around March 2012 (will move sideways after that).
He provides a logical argument but I think he’s missing a key ingredient in the logic – how will the market be impacted by distressed properties and how they will impact the price trend:
Falling inventory is masking significant shadow inventory built-up during the credit crunch. Inventory is declining to more manageable levels, not because there are fewer homes to sell, but because sellers are holding back until conditions improve – big difference.
In other words, the call of a bottom is missing a huge element from the equation – supply. The forecast of a housing bottom could certainly be right in the short term, and housing prices could bottom in March temporarily, but there is a lot of excess supply to be dealt with and I suspect that prices will begin to slide as REO activity begins to slowly enter the market. It simply has to – there is too much of it.
No gloom and doom here, just that the market still has a lot of distressed inventory to absorb. Distressed real estate (foreclosure) volume has fallen by about one third in 2011 as lenders/servicers held back releasing more units into the market largely because of the “robo-signing” scandal in late 2010 and the potential AG settlement that has been languishing for much of the year.
The housing market got an REO reprieve in 2011 and has caused housing bulls to get ahead of themselves and the housing market, way too focused on demand, and not enough focus on supply.
