Posted by Jonathan J. Miller -Thursday, February 28, 2008, 6:44 PM
With all the announcements by Fannie and Freddie, the talking points memo by Fannie for Cuomo, appraiser pressure and clearinghouse discussions, it was definitely a relief to provide my Three Cents Worth as a post on Curbed. This week I felt the urge to look at days on market and listing discount market indicators rather than watch the grass grow looking to get a deal on lawnmowers.
To view Three Cents Worth: Marketing Time = Time To Market
Check out previous Three Cents Worth posts.
Posted by Jonathan J. Miller -Thursday, February 28, 2008, 1:29 PM
I am hopeful that the severe losses announced by Fannie Mae and Freddie Mac over the past 24 hours will stimulate some sort of shake up in the mortgage industry to prevent what happened over the past several years to not happen again.
$3.6B here, $2.5B there,
soon or later its real money
I have been a long time proponent of the lending process to be open and honest about actually knowing how much the collateral is worth that mortgages are issued against. If the value is in the property, then whats the problem? It’s an underwriting decision, not a valuation placement whether to make the deal when guidelines are strayed from. Appraisers are to simply report what is happening in the market and move on to the next assignment as a disinterested third party.
It’s all about appraiser neutrality – thats essential to maintain credibility of values.
Sharon Lynch at Bloomberg News in her article Fannie Proposes Ban on Lenders’ In-House Appraisers presented my thoughts on the current problem:
About three quarters of residential mortgage appraisals are arranged through brokers who only get paid if a loan closes, Miller said today in a phone interview. He called the practice “laughable” because it creates a financial incentive for mortgage brokers to push appraisers toward higher valuations. Higher appraisals also mean more homeowners qualify to refinance their homes and take cash out, he said.
and broke the story about the placement of a Fannie Mae talking points memo on the American Banker web site yesterday which lays out the key points in the negotiation with NYS AG Cuomo.
“It would be a monumental change because it would require a shift in the way that the lending industry does business,” said Jonathan Miller, chief executive officer of Manhattan-based appraisal company Miller Samuel Inc. and a longtime proponent of creating a firewall between residential appraisers and mortgage originators. “I think it would be tremendous.”
I fretted in an earlier post that the large losses would slow down progress for reform, simply because any reform would slow down transaction activity until the lending industry adjusted to them and that would hurt the GSE’s near term financial performance.
Here is the text of the talking points memo (items in bold appeared in bold in the original memo):
THE NATIONAL APPRAISAL CLEARINGHOUSE TALKING POINTS
In November, 2007, the New York Attorney Generalâ€™s Office sued First American (and its subsidiary, eAppraiseIT) for allegedly inflating the appraised values of homes.
The lawsuit is part of a broader investigation into alleged fraudulent practices in the mortgage industry, specifically related to appraisal practices.
Fannie Mae wishes to cooperate with the New York AGâ€™s investigation and, as part of a cooperation agreement, will likely agree to a number of items, the most significant being:
- Requiring as part of our reps and warrants, and as a precondition of the sale of any mortgage to Fannie Mae, that the lenders or brokers do not have and did not utilize either in house appraisers to conduct the subject property appraisal NOR do they have any wholly owned subsidiary or other subordinate entity that performs appraisals.
- Requiring as part of our reps and warrants, and as a precondition of the sale of any mortgage to Fannie Mae, that LENDERS not rely on appraisals provided by brokers, either for purchase transactions or refinancing transactions. This would, in effect, require lenders to always secure their own appraisal of any property purchased through a broker.
- A CLEARINGHOUSE of appraiser information, conduct and activity will be established.
a. All lenders will be required to provide post-purchase copies of appraisal documents to the Clearinghouse.
b. It will be an independent entity with an executive and board of directors (no Fannie Mae employee involved).
c. It will staff a hotline for industry and consumer complaints.
d. It will provide annual reporting publicly.
- These requirements will go into effect for loans acquired by Fannie Mae after September 1, 2008.
In my next post, I am going to expand on what I think the ramifications of this are. Of course, the big assumption is whether this deal will even happen.
UPDATE: Catch the comments on Mortgage News Daily about this post.
Posted by Jonathan J. Miller -Wednesday, February 27, 2008, 11:29 AM
Before the champagne bottles could be uncorked by appraisers who felt vindicated by the potential agreement to be reached where Fannie Mae and Freddie Mac would agree to only buy loans from lenders who took some logical precautions on the valuation of the collateral (install the protections for competent appraisers, by creating firewalls), I think we all need to consider what the incentive for change their approach to lending would require, and its made me more skeptical after a good nights sleep.
Both GSE’s are likely to show reduced earnings throughout 2008 because of the rise in default rates. Their stock prices have fallen by more than half since last summer.
As of December, 2.2% of all prime mortgages were at least 60 days past due, up from 1.5% a year earlier, and the highest level since 1998, according to First American CoreLogic. More than one-fifth of subprime loans were 60 days or more past due. A check of delinquency rates for large, high-quality mortgages shows that “credit quality is now deteriorating sharply even for prime mortgages,” Morgan Stanley analyst Kenneth Posner wrote in a recent research note reiterating a negative outlook on Fannie. Delinquency and foreclosure rates for jumbo loans in December were more than double the previous January.
So if their don’t ask, don’t tell mentality still exists (avoiding focusing on the problem of realistically estimating the value of collateral pledged against mortgages by lenders), why would the GSEs want to place additional burdens on the lending industry right now which would slow down sales activity?
They need the flow of new mortgages through their pipeline to boost potential revenues don’t they? Investors seem to be more likely to buy conforming paper than jumbo paper these days but as new problems come to light, that sense of safety with the GSE’s could vanish too.
I suspect that NY AG Cuomo is going to have to play hard ball to get this deal done with Fannie and Freddie. His office has been impressive on this front and gets what the problem. From the news coverage yesterday, it sounds like negotiations have been ongoing for a long time (probably due to their scope of suggested change) and there will be future litigation if it doesn’t happen.
There probably needs to be the same actions from other state AG offices to turn this ship around. AG’s in Ohio, Colorado, Massachusetts and Georgia have been particularly active on dealing with the appraisal situation but not in the national context like New York has.
If investors can’t feel comfortable with appraised values as they relate to mortgages, the perceived risk level goes off the chart. Let’s start dealing with common sense and reality and break away from past practices. If an appraiser can’t perform their valuation without pressure to hit the needed number, the credit markets are not going to get comfortable with the risk/value relationship in mortgage lending.
Posted by Jonathan J. Miller -Wednesday, February 27, 2008, 10:40 AM
In light of the trend of homeowners to walk-away from their houses, because somehow they got the idea that debt increased their purchasing power…
BofA CEO Kenneth Lewis:
As a result, there is a new class of homeowners in name only. Because these people never put up much of their own money, they don’t act like owners, committed to their property for the long haul. They behave more like renters, ducking out of an onerous lease in the midst of a housing slump.
As seen on Slate.com
Posted by Jonathan J. Miller -Wednesday, February 27, 2008, 10:29 AM
In the widely email distributed article this week from The Atlantic (and what’s up with the Atlantic these days? an even better read.): The Next Slum? Christopher Leinberger suggests that the problems of the inner city may work their way into the suburbs.
Thats a logical argument given the trend toward new urbanism …city’s rule, suburbs drool, as they say.
Crime and vacant properties seem to be on the rise in suburbia but I think that phenomenon is attributable to the rise in foreclosure rates due to subprime and credit problems. Many houses were built for people who egenrally couldn’t afford them or they were very vulnerable to an up tick in mortgage rates. Take Stockton, CA for example.
Arthur C. Nelson, director of the Metropolitan Institute at Virginia Tech, has looked carefully at trends in American demographics, construction, house prices, and consumer preferences. In 2006, using recent consumer research, housing supply data, and population growth rates, he modeled future demand for various types of housing. The results were bracing: Nelson forecasts a likely surplus of 22 million large-lot homes (houses built on a sixth of an acre or more) by 2025â€”thatâ€™s roughly 40 percent of the large-lot homes in existence today.
However, I would think builders would adapt to the change in demand. I am not entirely sold on the logic presented since the lack of demand for McMansions would drop their value and bring more demand. Nelson appears to be suggesting a nation full of empty homes.
In the past decade, as cities have gentrified, the suburbs have continued to grow at a breakneck pace. Atlantaâ€™s sprawl has extended nearly to Chattanooga; Fort Worth and Dallas have merged; and Los Angeles has swung a leg over the 10,000-foot San Gabriel Mountains into the Mojave Desert. Some experts expect conventional suburbs to continue to sprawl ever outward. Yet today, American metropolitan residential patterns and cultural preferences are mirror opposites of those in the 1940s. Most Americans now live in single-family suburban houses that are segregated from work, shopping, and entertainment; but it is urban life, almost exclusively, that is culturally associated with excitement, freedom, and diverse daily life. And as in the 1940s, the real-estate market has begun to react.
However, the idea that urban centers could see more home price appreciation than the exurbs or even the suburbs over the next few decades is plausible. It’s already occurring.
Posted by Jonathan J. Miller -Tuesday, February 26, 2008, 9:11 AM
New York State Attorney General Cuomo is close to striking a deal with the two mortgage GSE’s Fannie Mae and Freddie Mac to instill some separation between the quality and sales function of banks that do business with them. Although this was initiated by New York, the deal would have ramifications for all lenders of conforming loan products that sell their mortgage paper.
Its not a done deal yet but its being reported as “close” by the Wall Street Journal’s Amir Efrati in this morning’s article Deal Nears to Curb Home-Appraisal Abuse. Here’s my contribution:
Jonathan J. Miller, a veteran New York appraiser and longtime critic of industry practices, said the proposed deal “sounds like a promising step, and that Mr. Cuomo’s office is addressing some of the key problems that appraisers have had to deal with and that have led to the disconnect between value and risk in the mortgage markets.” He estimates that home values are overvalued nationwide by at least 10% because of inflated appraisals.
My 10% estimation is very conservative and was based on my New York area experience and interactions with colleagues across the country.
Reuters and American Banker have also issued stories on the negotiations.
The deal proposes the following actions by Fannie and Freddie:
- They will not do business with lenders that use in-house appraisers.
- They will not buy mortgages from lenders that who use appraisals from wholly owned subsidiaries. (I believe this would apply to Landsafe, Countrywide’s Appraisal Management company).
- Require lenders not to use appraisals arranged by individual mortgage brokers.
- Create a clearinghouse for appraiser information and provide reports to the public.
Note: I will be updating this post throughout the day – the ramifications are huge
Posted by Jonathan J. Miller -Monday, February 25, 2008, 12:01 AM
I have had the pleasure of providing a monthly chart for the Economic Spotlight section of Crain’s New York Business magazine since September 2003. Here is the latest, which appears in the current issue of Crain’s New York Business.
Source: Crain’s New York Business
Go here for a complete archive of my Crains’s New York Economic Spotlight charts that have been published. They are organized by year.
Posted by Jonathan J. Miller -Thursday, February 21, 2008, 10:34 PM
I was invited to participate in the Reuters Housing Summit this week (which happened to be during my vacation and how cool is it to talk about housing when you are taking time off from work?) It was quite an interesting experience – I thoroughly enjoyed it. Each participant gets grilled for an hour by Reuters senior editors and reporters. I felt I needed another twenty four hours to address all the housing issues of the day, but alas, it was my vacation. The interviews were recorded and snippets were released as audio files.
Check out:the summit blog for more interviews and the housing section of the Reuters site.
- Salvatore Graziano, an attorney with Bernstein, Litowitz, Berger and Grossmann
- Jonathan Miller [me!] and again
- Douglas Palmer, Mayor of Trenton, New Jersey
- Pam Liebman, president and CEO of The Corcoran Group
- Nouriel Roubini, professor of economics at New York University
- Faith Schwartz, executive director of Hope Now
- Marc Dann, Attorney General of Ohio
- Jesse Jackson is president and founder Rainbow PUSH Coalition Inc.
- Bob Toll, Toll Brothers CEO
- Robert Steel, Treasury Undersecretary
- Robert Shiller, professor of economics at Yale University
- Richard Syron, chief executive of Freddie Mac
- Doug Kass of Seabreeze Partners
- Stephen Ross, CEO of Related Cos.
And to continue with the shakey market theme (supposedly) our satellite was intentionally shot down and an earthquake struck northwestern Nevada.
In other words, a good week for a vacation.
Posted by Jonathan J. Miller -Tuesday, February 19, 2008, 11:02 PM
As I sit an look at how we got here, its apparent to me that no one really has a clue about how we got here in the housing market. Its a “cover my you know what” scenario now, but its really our nature to look on the bright side while its happening and the dark side after its over.
Unbridled optimism got us here.
“The Dark Side of Optimism [Salon] via Naked Capitalism: Why looking on the bright side keeps us from thinking critically,” management consultant Susan Webber argues yes. In her view, “the financial and business communities dismissed all the warnings” about the housing meltdown/credit crunch bearing down upon them because they wilfully adhered to an always-sunny-side-up view of life.
Ok back to reality…
Foreclosed homes that sit vacant are sometimes a better option for homeless because the utilities are still running.
“Many homeless people see the foreclosure crisis as an opportunity to find low-cost housing (FREE!) with some privacy,” Brian Davis, director of the Northeast Ohio Coalition for the Homeless, said in the summary of the latest census of homeless sleeping outside in downtown Cleveland.
That’s not the optimism I was expecting.
Daniel Gross in his Moneybox Column on Slate explores the proposed restrictions on foreclosures. He argues that these actions simply delay the inevitable process of “price discovery“, a process where the market determines a price based on supply and demand.
In other words, the optimism that got the mortgage industry and borrowers in trouble has carried through to the political process, whose optimism will delay getting out of this quagmire.
The carnage in subprime loans has led to a spate of foreclosures. When banks or investors take over properties, they recoup whatever they can by placing it on the market quickly and accepting any reasonable offer.
Foreclosure also has the effect of hastening price discovery on the mortgages on those homes, and on the bonds backing them. Here, again, the impact can be devastating to those who bought the assets with a great deal of leverage. Hedge funds and other institutions sitting on the depreciating debt either had to put up more collateral to maintain their leveraged positions, or dump the assets to raise cash. Bond insurers must increase reserves to prepare for defaults of the bonds they insured. And if the bond insurers fail, the financial firms that purchased insurance from them will have to take their own write-downs.
Optimism is met with an equal and opposite reaction: Pessimism.
Banks are blacklisting condo projects to minimize their damage. Major lenders have created blacklists. This seems like a prudent decision…avoid certain projects to avoid issuing a high risk mortgage. But doesn’t this accomplish exactly opposite by poisoning a local market delaying its recovery and placing performing assets in the market at higher risk?
Warning to developers: this will make it extremely difficult for most buyers to come to close on Miamiâ€™s newest buildings.
Unbridled pessimism brings unforseen risks just like optimism does by inserting external forces that fight the natural order of supply and demand.
Of course, there is another way to deal with our natural housing optimism: take a bus and get a boxed lunch on a foreclosure tour.
Posted by Jonathan J. Miller -Tuesday, February 19, 2008, 8:25 AM
Hey, I am off this week, changing light bulbs around the house, day ski trips and some down time. A vacation from vacations. So count on irregular contributions to Matrix (is that any different than normal?) even though I am always itchin’ to post, because I never know when a light bulb needs changing.
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