Ok, I was watching the New York Giants actually beating the New England Patriots last night. I felt a glimmer of hope for humanity and even the housing market by seeing the extra effort being played in a game that means nothing to the Giants playoff spot while the Patriots vied for an undefeated season. Of course the Giants lost and my optimism for the housing (and humanity) market dimmed.

With the housing market weakening in many markets, its easy to pile on with “grim” news. Here are a few attempts at contrarian reporting from sources other than the NAR.

Daniel McGinn at Newsweek provides some optimism in his article: Housing Optimism: Why the year in real estate wasn’t all bad news.

• Some Numbers Are Strong
  
• Things Aren’t Tough All Over
  
• Long-Term Owners Are Still Way Ahead
  
• Even Pessimists Admit to Uncertainty
  

Holden Lewis at Bankrate makes a defense of low-doc loans (sort of) by responding to a reader’s optimistic response to his quote: “Limited-doc mortgages exist mostly to allow people to cheat on their taxes” (I wholeheartedly agree with the cheating angle Holden mentions):

• Lenders sold themselves on convenience
  
• Inexperienced underwriters suffered a mental “blue screen of death” when confronted with complex tax returns, because they’re trained to process loans assembly-line style.

Megan McArdle of Atlantic Monthly in her post Who cheated who? she:

• Questions whether bankers are to blame
  
• Believes subprime borrowers will not default en masse
  
• Feels we are over reacting and that will cause more problems
  

Felix Salmon of Seeking Alpha in his post Are Subprime Losses Being Exaggerated? sort of teases us with this title but he’s really questioning the optimistic stance of many:

• Middle-class homeowners out there suffering under the burden of enormous non-recourse mortgages
  
• Its not just losses of subprime mortgages, its industries ranging from homebuilders to diswasher manufacturers
  

Confused? Join the rest of humanity – you’re not alone.

There has been a lot of great content presented by my guest columnists (and, ahem..me) on my other blog Soapbox as of late. Its a pleasure to have their contributions. Admittedly its appraiser-centric content, but isn’t that a big part of the credit crunch? Lack of understanding of mortgage risk and one way its measured is via value of the collateral.

Sounding Bored - My recent post outlines the problems with licensing the appraisal profession (hint: because it doesn’t go far enough) in Deja Vu: How Licensing Killed The Appraisal Industry As We Know It.

The Hall Monitor – Todd uses a tongue in cheek analysis of current appraisal practice and comes up with new rules for us to live by in Let’s Get The PAP Out Of USPAP!.

Fee Simplistic – Marty dissects the credit crunch for us via Tin Pan Alley music in The Paper Moon in the Cardboard Sky; Bewitched, Bothered & Bewildered; Don’t Know Why There’s No Sun Up in the Sky-Stormy Weather: How Tin Pan Alley Can Better Explain the Credit Crunch Than Alan Greenspan

Palumbo on USPAP – Joe speaks to the labyrinth of appraisal guidelines that exist and the problems with loosening the reigns in USPAP 2008: Be Careful What You Wish For.

There will be a quiz on Tuesday…

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.

I’d like to wish everyone a wonderful holiday!

One of the more useful applications of Google Earth is to be able to track Santa around the globe.

And for those who need to keep following the real estate market with holiday themes, try these:

• On The Night Before Christmas, All Through the House…Oops We Just Lost the House [The Huffington Post]

• Forgive and Forget [The New Yorker]

• A Happy New Year? It’s All Up to You. [WSJ]

• The Real Estate Agent Wish List [Portfolio.com]

Nobody goes there anymore because its too crowded. – Yogi Berra

Gen Xers seem to have a pulled one over on baby boomers, whom are known for their love of driving. Here’s a good public radio broadcast on walk-able urban places.

The Brookings Institute released a study called Footloose and Fancy Free: A Field Survey of Walkable Urban Places in the Top 30 U.S. Metropolitan Areas which dissects 30 cities for their walkability (hat tip to John Mason). This trend goes hand in hand with the housing boom as new urbanism trends pulled people from the suburbs to revitalized downtown centers.

The post-World War II era has witnessed the nearly exclusive building of low density suburbia, here termed “drivable sub-urban” development, as the American metropolitan built environment.. However, over the past 15 years, there has been a gradual shift in how Americans have created their built environment (defined as the real estate, which is generally privately owned, and the infrastructure that supports real estate, majority publicly owned), as demonstrated by the success of the many downtown revitalizations, new urbanism, and transit-oriented development.

There are two types of walk-able places:

• Regional-serving – areas that provide culture, employment, medical, higher education and other purposes.
  
• Local-serving – areas that are residential and provide support services for everyday needs.

Its a fascinating demographic shift that is also correlated with the trend towards green with greater reliance on public transportation and walking.

I wonder if the cooling of the housing market in many locals will slow or stop this change or if it already has its own legs? My sense is that the macro trend will continue to move in this direction.

One of the problems with lack of transparency, is that people…errr…don’t know what you are thinking. Just like the fact that I have been weak in my quantity of postings as of late. I can’t explain it, because, well, I got tired of being, uhhhh…transparent. Needless to say, I am again transparent, and even more superficial.

One of the rumors floating around the appraisal/mortgage world for the past few weeks, covers the topic of Fannie Mae’s restriction on loans in markets they designate as declining. It was even suggested that a restriction in one market versus another, suggests redlining. However, I don’t see that correlation.

but i digress…

In a market that is declining, Fannie Mae will have a 5% higher loan to value ratio so instead of requiring 20% down, it might be 25% if the local market is declining. So markets with average mortgage amounts below the $417,000 conforming limit, this could have quite an impact.

>Current home price trends indicate that home values continue to decline in many markets across the country. As a result, and based on our continued monitoring of loan performance, Fannie Mae is reinstating a policy to restrict the maximum loan-to-value (LTV) ratio and combined loan-to-value (CLTV) ratio for properties located within a declining market to five percentage points less than the maximum permitted for the selected mortgage product.

Notice the use of the word reinstating. This is a recurring theme in mortgage lending these days. Its not the introduction of new lending guidelines, its simply the enforcement of existing guidelines.

In theory, the appraiser gets to lead the way in determining declining markets (in sarcastic tone: shocking!, amazing!, incredible!)

>Fannie Mae strongly encourages lenders to use supplemental sources and tools to independently assess current housing trends, unless the appraisal indicates that the subject property is located within a declining market. When the appraisal notes that the subject property is in a declining market, the maximum financing policy must be applied. When the appraisal does not indicate that the subject property is located within a declining market, Fannie Mae strongly urges lenders to implement processes and apply supplemental sources and tools to validate current housing trends and not rely solely on the information reflected in the appraisal.

But the appraisal industry has been neutered so severely by the mortgage brokerage and mortgage lending industry with pressure to “play ball” that I am not confident the appraisal industry is able to have this responsibility in the first place until proper regulatory restrictions protecting appraisers are in place. No more than a small percentage (you know who you are) of appraisers would be brave enough to show a negative time adjustment for fear of losing a client. I hope recent enforcement actions by the NY Attorney General and the SEC will make a difference.

Still, its a prudent and thoughtful first step for Fannie Mae to take. One of the things that drove me crazy in prior periods of market decline, lenders would send out policy notices saying they would not allow negative time adjustments. We would argue back, saying that this was an underwriting issue and it was simply a matter of adjusting the loan to value ratio, not to mandate rose colored glasses and ear plugs for the eyes and ears of the lenders. We either dropped them as a client or they changed their mind.

The byproduct of this action in declining markets will likely be even lower sales volume via stricter credit, placing more price stress in already distressed markets.

I can’t help but see the irony here: the reduction of Fannie Mae’s loan to value criteria in declining markets could actually lead to more foreclosure volume and more exposure for lender’s collateral. But in the long run, its a prudent action.

This restriction in declining markets should never have been lifted in the first place. It is better for the stability of the lending system by re-introducing the concept of risk awareness to lending decisions.

Now thats a concept I think we can risk having.

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Inman News is presenting its Inman Real Estate Connect conference Wednesday, January 9 – Friday, January 11 at the Marritt Marquis in Manhattan. Through this twice yearly event (San Francisco and NYC), Brad Inman created the “go to” forum for the dissemination and sharing of real estate information and insight. As I have said many times, what distinguishes this conference from most others is that the attendees are decision makers.

Brad is moderating a panel in the general session on Friday, January 11, 9:00 a.m. – 9:45 a.m. that I’ll be participating in called:

NYC: Where Real Estate Meets Wall Street

The New York City real estate market has a special relationship with Wall Street where big bonuses can mean big luxury apartments. But Wall Street is also moving forward with many new investment products that may change the course of property valuation and hedging forever. How is Wall Street doing with these products and will the New York market benefit?

• Matthew Haines, Founder & Chairman, PropertyShark.com
  
• Jonathan Miller, EVP, Director of Research, Radar Logic Inc., Co-Founder, Miller Samuel
  
• Stan Ponte, President, Previews Marketing Division, Coldwell Banker Hunt Kennedy
  
• Michael Santoli, Associate Editor, Barron’s, Dow Jones & Company
  
• Steve Spinola, President, Real Estate Board of New York
  

Well, its been a long time coming because extracting data from the East End has been the most challenging of all the reports I have done to date, but the Hamptons/North Fork has finally been added to the family of market reports I prepare for Prudential Douglas Elliman.

The PDF version of the 3Q 2007 Hamptons/North Fork Market Overview [Miller Samuel] is available for download. I have been writing various incarnations of this market report series for them since 1994.

In short order (by 4Q), I’ll be adding data tables and charts to the Miller Samuel web site.

An excerpt

…The average sales price of a residential property in the East End was $1,805,104 this quarter, up 32.7% from the prior year quarter average sales price of $1,360,515 and up 8.2% from the prior quarter average sales price of $1,668,657. The median sales price was $882,000, up 23% from the prior year quarter median sales price of $717,340 but slipped 2% from the $900,000 median sales price in the prior quarter. The nearly identical growth in these indicators from the prior year quarter suggests that average sales price was not significantly skewed by the upper end of the market. Listing inventory, however, increased 27.8% from the prior quarter total of 3,501 units to 4,475 units in the current quarter. The tracking of inventory levels for this report began in 2007….In contrast to the rise in price indicators, the number of sales continued to slip. There were 427 sales in the current quarter, down 30.5% from the prior year quarter total of 614 and down 31.6% from the prior quarter total of 624 units. The sharp increase in price levels has likely played a significant role in the diminished number of sales this quarter. This is also consistent with the recent increase in listing inventory…

Download report: 3Q 2007 Hamptons/North Fork Market Overview [pdf]

No, I am not referring to the names in the Mitchell Report.

One of the advantages of the falling dollar has been the benefit to a handful housing markets, by attracting foreign buyers, enticed by the imbalance of currency. The British Pound is current about 2:1 and Euro is about 1.5:1 making for a significant discount to foreign buyers of US assets.

British buyers see US residential real estate at half price.

Specific to housing, real estate markets like Seattle, New York and Miami benefited from the increased demand, but housing markets in midwestern cities were likely benefited to a lesser degree, probably correlated to tourism trends. The weak dollar been one of the leading reasons that a market like New York City maintained relatively robust real estate market in contrast to many other markets. However, it is not enough of an economic force that it assures such a housing market from a downturn.

I wondered whether the weak dollar was really a good thing?

A currency depreciation as big as the one the dollar has already experienced–to say nothing of the prospect of a further drop–would be a big inflationary problem for a small, open economy like Britain (which still has a currency of its own). The effect is muted for the US, because its economy is bigger, less open (not because of import restrictions, but by virtue of its size), and because exporters selling to America are more inclined to price to market.

The sharp increase in exports has helped temper some of the economic damage from housing.

Every time the dollar weakens, US exporters and US import-competing industries are gaining competitive advantage and/or increasing their profitability. The explosive growth of US export volumes (reaching 10 percent per year) is part of the reason that, despite the collapse of US housing construction, the US economy is still expanding at a reasonable albeit declining rate.

The bottom line is that a weak dollar places the economy at greater risk for inflation, which has become a renewed concern over the past week as the FOMC opted for another 25 basis point cut in the federal funds rate.

Inflationary pressures bring on higher mortgage rates. And unlike Major League Baseball players, its not something to stick into the housing market.

The Federal Open Market Committee met yesterday. Good grief.

Before we get into that, take a look…

The WSJ’s very cool interpretation of each FOMC announcement is calledbuy mp3 Parsing The Fed.

>Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time.

The Fed seemed to move away from inflation bias and left the door open for more cuts. It seems to me they were motivated to action by the chaos of the credit markets and its significant negative impact on housing, ergo the economy, yet they may have actually made the financial markets worse by not doing enough to allay investor concerns. These are the investors that buy the paper that banks issue that frees up more capital, to loosen the reigns on credit a bit. Of course, this is not the only issue and doesn’t deal with shoddy underwriting, unethical lending practices, etc.

Forget hoping for lower mortgage rates. Thats not the immediate problem. Before there is any hope that the mortgage/credit crisis situation can be fixed, the markets need some sense of stabilization before any type of progress can be made. They need it now.

The markets expected a larger than the typical 25 basis point drop and were severely disappointed.

The markets dropped like a stone shortly after indicating the markets didn’t think the Fed went far enough. I was surprised at the intensity of the drop. This probably suggests that the credit markets are still far from stabilizing.

As of today, there is a 40% chance of another 25 basis point drop and a 30% chance of a 50 basis point drop and a 10% chance of a 75 basis point drop at the January meeting.

Analogy of the year The lending crisis as Crack Epidemic [City Blog/NYT]