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The OCC and an alphabet soup of 5 additional regulators: FDIC, CFPB, FHFA, NCUA and the Federal Reserve issued a joint press release that if adopted, takes a small step forward in the regulation of appraisal management companies, who are largely responsible for the collapse of valuation quality since the credit crunch began.

To many, this action is long overdue. Appraisal management companies control the vast majority all mortgage appraisals in the US, having been legitimized by HVCC back in May 2009. I’ve burned a lot of calories over the past several years pointing out the problems with the AMC industry so admittedly it is nice to see them getting attention. The fact that these institutions are not licensed to do business at a statewide level but the appraisers who provide the valuation expertise they manage is inconsistent at best.

Still, the recognition of this regulatory glitch probably won’t have a significant impact on appraisal quality provided by AMCs. As my friend Joe Palumbo maintains, is like fool’s gold.

I think proposal is at least a starting point.

A couple of highlights – regulators would:

• Require that appraisals comply with the Uniform Standards of Professional Appraisal Practice (today we had a clerical AMC staffer tell us that writing out the math calculations on the floor plan was a requirement of USPAP).
• Ensure selection of a competent and independent appraiser. (It is unbelievable to think this is necessary but it does make the legal exposure a little larger for AMCs.)

Housingwire has a good recap of the proposed regulations and so does the Wall Street Journal provides a nice overview (I gave them background for the piece).

The proposal by the Office of the Comptroller of the Currency, Federal Reserve and other regulators mandates that appraisal-management companies hired by federally regulated banks use only state-licensed appraisers with “the requisite education, expertise, and experience necessary” to complete appraisals competently.

Moral hazard There is no significant financial incentive for lenders to stop accepting the generally poor quality appraisals the AMC industry presents them daily. The hope is that the additional regulatory largess the AMCs have to confront will force the issue with lenders simply because the AMCs will have to raise their fees. Without a real “value-add” to the banks other than cost control and fast turn times, the lack of quality for a large swath of AMCs may no longer be overlooked by banks. Yes I can dream.

Residential appraisers, mostly 1-2 person shops, have largely been left without a voice and the bigger financial institutions have lobbied financial reform overtop of us without the regulators truly understanding what our role should to be to protect the taxpayer from excessive risk.

Anumber of smart appraisers I know have created a petition whose sole purpose is the get the attention of the CSFB to address the issue of “customary and reasonable” fees. Our industry has no other way to reach the regulators or the ability to lobby our views in Washington. I hope they are listening.

Tags: FHFA, Appraisal Management Companies, FDIC, AMC, Petition, OCC, CFPB, NCUA, Press Release

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Had a great conversation with Tom Keene, Scarlet Fu, Olivia Sterns and guest host Strategas Research Chief Investment Strategist Jason Trennert about the US housing market. We also dabbled a bit in Brooklyn and Manhattan rents and talked NCAA March Madness picks. Always fun to come in and join the Surveillance team.

Go MSU Spartans! Go State!

Tags: Tom Keene, Bloomberg TV, Scarlet Fu, Bloomberg Surveillance, Olivia Sterns, Jason Trennert

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I can’t wait for the documentary Money for Nothing to be released. In fact I donated to IndieGoGo.com because I was so impressed that I wanted my own copy.

This documentary is compelling and so are all the cast members. It includes a who’s who list of current and past members of the Federal Reserve as well as economists and Wall Street experts. Cast members include my friend Barry Ritholtz and Gary Shilling who both have been on my podcast. Todd Harrison of the great site Minyanville.com and John Mauldlin who I have always looked to for insights. Jim Grant of Grant’s Interest Rate Observer who called me at the height of the crisis to get a gauge on the Manhattan housing market.

During the housing bubble I often felt like screaming as I saw the financial world through my appraisal glasses thinking I missed an important math class in 8th grade. Fast growing banks with gigantic mortgage volume and many of my appraisal competitors in bed with mortgage brokers were clearly smarter than me – they could make the numbers work and I couldn’t.

In 2003 and 2004 I remember being absolutely confident as a non-economist that the Fed was keeping interest rates too low for too long. I could see it in the loss of lending standards and the lavish incomes enjoyed by those around me who embraced a world of based on moral flexibility. The froth was simply ignored.

Don’t mean to get sentimental on you dear readers, but this movie struck a chord with me. Enjoy the trailer and watch for the release date announcement.

Tags: Barry Ritholtz, documentary, Indiegogo

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A recent post in CNN/Money featured Andy Warhol’s 1984 “U.S. Unemployment Rate. No Campbell Soup Cans but it feels strange to associate his art with economic data from the 1980s. It somehow works for me. One of the coolest property inspections I made was through “The Factory” years ago.

In 2007 the “Stand-up Economist” Yorman Bauman led the way with this much watched video on the difference between macro and micro economists. “Microeconomists are wrong about specific things while macroeconomists are wrong about things in general.” HI-larious.

And recently the TV game show “Teen Jeopardy” had 5 questions about the “Federal Reserve.”

Christie’s sales rep said:

“Economic data has become popular culture. While we used to think of it as being some kind of verified information only for people who are really knowledgeable about the economy, it’s popular culture now. You can talk to a taxi driver about it.”

I completely agree. Gangnam Style and GDP now go hand in hand.

We devour housing data ie the recently released Real Deal Data Book (I’ve got a lot of charts and tables in there!)

Throw in the heavy downloads of our report series for Douglas Elliman, NAR Research, CoreLogic, Case Shiller, RealtyTrac, etc. it’s clear to me that housing data is an obsession and embedded in popular culture (thank goodness).

Tags: Case-Shiller

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I’ll repeat that: Tight Credit Is Causing Housing Prices to Rise.

Yes I know. I’ll explain.

This week the Federal Reserve released it’s January 2013 Senior Loan Officer Opinion Survey on Bank Lending Practices and it continued to show little movement in mortgage underwriting standards but demand was up. The increase in demand has not softened mortgage lending standards. In fact, mortgage standards have remained essentially unchanged since Lehman collapsed in 2008.

On the household side, domestic banks reported that standards for both prime and nontraditional mortgages were essentially unchanged over the past three months. Respondents indicated that demand for prime residential mortgages increased, on net, while demand for nontraditional residential mortgages was unchanged.

Tight lending standards has prevented many sellers from listing their homes because they don’t qualify for the trade up, holding supply off the market. The shortage is manifesting itself by also keeping people unaffected by tight credit from listing until they find a home they wish to purchase. Record low mortgage rates keep the demand pressure on as affordability is at record highs. Rising prices are not really based on anything fundamental like employment and a robust economy.

Tight credit + record low mortgage rates => reduced supply + steady demand => rising prices.

Like I said before…

Tight Credit Is Causing Housing Prices to Rise.

I’ll repeat that….

Tight Credit Is Causing Housing Prices to Rise.

January 2013 Senior Loan Officer Opinion Survey on Bank Lending Practices [Federal Reserve]
Falling Inventory Has Created a Housing “Pre-Covery,” not “Recovery” [Miller Samuel Matrix]

Tags: Lehman

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The Federal Reserve has been relying more on CoreLogic housing data these days, rather than Case Shiller or NAR and I’m down with that. The New York Fed has put the CoreLogic data for New York, Connecticut and New Jersey to good use in a very easy to use interactive County format that I highly recommend you check out. They even present a two-fer: all sales, without distressed sales.

My only criticism of the presentation (and it’s really me just being petty) is the orientation to market peak in 2006 as the benchmark. I see the 2006 peak as an artificial level we should not be in a hurry to return to since it reflected all that was bad with the credit/housing boom.

But I digress…

The top chart shows that Manhattan and Brooklyn after removing distressed sales, have “recovered” using the Fed’s methodology. In fact all 5 boroughs are out-performing the US housing market.

Manhattan is clearly one of the top performing locations in the region or at least it is ahead of the region. The map below shows the counties (green) that are now equal to 2007 price levels. Not many in close proximity to Manhattan are doing as well.

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Housing Market Recovery in the Region [Federal Reserve Bank of New York]

Tags: Case-Shiller, Federal Reserve, New York, Recovery

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The Federal Reserve’s Senior Loan Officer Opinion Survey on Bank Lending Practices came out and the news was more of the same. Their survey covers senior loan officers at about 60 domestic and two dozen foreign banks with US branches.

Key in on: Net Percentage of Domestic Respondents Tightening Standards for Mortgage Loans

Banks’ residential real estate lending standards reportedly remained about unchanged over the past three months. As in each of the previous three surveys this year, respondents reported little change in their standards for prime mortgages. In the October survey, standards on nontraditional mortgages were reportedly unchanged, in contrast to the tightening reported earlier in the year. Respondents continued to report that demand for residential mortgage loans had increased over the past three months on net, although the fractions of banks that reported an increase in demand for both prime and nontraditional residential mortgage loans declined from their levels in the July survey. Standards and demand for home equity lines of credit were reportedly about unchanged.

People are confusing rising demand with easing standards.

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Very much enjoyed my conversation with Tom Keene and Scarlet Fu on Bloomberg Television’s Surveillance.

Scratch notes before my appearance:

Some thoughts about the Fed’s QE3 as it relates to housing (Einstein defines insanity as doing something for a 3rd time hoping it works).

-Focus of QE3 seems to be housing, but it shows how little Fed understands housing since this seems to be an effort to press borrowing costs lower.
-Falling rates until now have increased affordability 15% this year but reaction in sales is less. A diminishing return for this action. Yes it temporarily helps but is more akin to the 2010 tax credit – remove it and consumers stop buying.
-Fed must believe recent “happy housing news” isn’t sustainable. Prices and sale generally showing improvement.

-Banks prob won’t drop rates all that much-could even see a slight increase in short term: admin backlog from existing business, guarantee fees by Fannie Mae to kick in a few months and spreads already low. This action provides little traction.

-QE3 doesn’t address THE REAL PROBLEM – mortgage underwriting remains irrationally tight. Smaller universe qualifies for mortgaged and a large number of contracts fall through – approx 15%.
-Telegraphing low rates through 2015 eliminates any urgency for consumers to take action. National volume up YOY but 2011 was the aftermath of 2010 tax credit so comparing against low.

Bernanke’s Speech on QE3 [MarketPlace.org]
Benanke Statement on QE3 [Federal Reserve]
QE3: What is quantitative easing? And will it help the economy? [WaPo Wonk Blog]
Fed’s Evans Says QE3 Will Make Economy More Resilient [Bloomberg]
Low Rates Not Improving Housing Market, Miller Says [Bloomberg Surveillance TV]

Tags: Tom Keene, Scarlet Fu, Bloomberg Surveillance, Fannie Mae, Television, Ben Bernanke

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The WSJ presented a series of charts on US distressed properties based on information from the St. Louis Fed (most proficient data generators of all Fed banks) and LPS.

Here are the first and last maps of the series. To see all of them, go to the post over at Real Time Economics Blog at WSJ.

A few thoughts:

• The distress radiates out from New Orleans 7 months after Hurricane Katrina hit. There was relatively tame distressed sales activity in the US in 2006, the peak of the US housing boom.
• The article makes the observation that distressed activity is seeing some improvement in 2010. However the “robo-signing” scandal hit (late summer 2010) and distressed activity entering the market fell for the next 18 months as servicers restrained foreclosure activity until the servicer settlement agreement was reached in early 2012. This is likely why the distressed heat maps show some improvement.
• The music stopped when people couldn’t make their payments en mass circa 2006, the US national housing market peak. It’s quite astounding how quickly credit-fueled conditions collapsed across the US.

Tags: Hurricane, Federal Reserve Bank of St. Louis, Hurricane Katrina

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Today I received a nice note from an economist at HUD saying they are using the market report series we prepare for Prudential Douglas Elliman in US Department of Housing and Urban Development’s US Housing Market Conditions site, specifically their annual Regional Activity summary. Using-our-market-reports-aside, its a pretty good overview of what happened in each region. Sort of reminds me of a Beige Book-like housing analysis.

Not only that, but they provide access to a slew of data, research papers and reports as well as interactive maps that allow you to drill down to local levels.

This isn’t a sales pitch so check it out.

Here’s a hot button research paper on their site now:

Loan Modifications and Redefault Risk: An Examination of Short-Term Impacts

A primary concern with loan modification efforts is the seemingly high rate of recidivism. Within 6 months, more than one-half of all modified loans were 30 days or more delinquent and more than one-third were 60 days or more delinquent (OCC and OTS, 2008). Do these high rates of redefault imply that loan modifications are failing?

I would say as currently structured – YES.

Tags: HUD, Beige Book

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David Leonhardt had a fantastic front pager in the New York Times yesterday that was such a compelling read, I re-read it to try and absorb anything I missed the first time. The article Fed Missed This Bubble. Will It See a New One? looked at the case made by the Fed to enhance its regulatory power.

David asks the question for the Fed:

If only we’d had more power, we could have kept the financial crisis from getting so bad.

But power and authority had nothing to do with whether they could see a bubble.

In 2004, Alan Greenspan, then the chairman, said the rise in home values was “not enough in our judgment to raise major concerns.” In 2005, Mr. Bernanke — then a Bush administration official — said a housing bubble was “a pretty unlikely possibility.” As late as May 2007, he said that Fed officials “do not expect significant spillovers from the subprime market to the rest of the economy.”

I maintain that because of human nature, mob mentality, or whatever you want to call it, all regulators drank the kool-aid just like consumers, rating agencies, lenders, investors and anyone remotely connected with housing. Regulators are not imune from being human.

Once the crisis was upon us, the Fed and the regulatory alphabet soup woke up and began drinking a lot of coffee.

David concludes:

Which is why it is likely to happen again.

What’s missing from the debate over financial re-regulation is a serious discussion of how to reduce the odds that the Fed — however much authority it has — will listen to the echo chamber when the next bubble comes along.

Exactly.

I think this whole thing started with the repeal of Glass-Steagal where the boundaries between commercial and investment banks which were set during the Great Depression, were removed. Commercial banks had cheap capital (deposits) and could compete in the Investment Banking world. But Investment banks could not act like commercial banks. Their access to capital was more expense motivating them to get their allowable leverage ratios raised significantly. One blip and they go under.

Tags: Alan Greenspan, Ben Bernanke, Sub-Prime

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A quick shout out to Sam Chandan at Real Estate Econometrics for his invite to me to speak to his MBA real estate class at Wharton last Monday. A lot of fun and no tomatoes thrown. Added bonus, they have Au Bon Pain as snack shop.

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The widely held belief that houses were used as ATM’s during the credit boom is a valid assumption given the massive withdrawal of home equity. Of course that parallels mortgage lending and as a result, housing activity boomed over the same period.

With the post-Lehman credit crunch, millions of homeowners can’t refinance their mortgages or obtain a mortgage for a purchase. The contraction in credit has choked off the high pace of sales activity our economy has grown accustomed too. Yet sales and prices appear to be leveling off after a steady decline.

Q: Who’s buying these homes?
A: People that can actually afford and qualify for a mortgage.

According to a recent public policy discussion paper from the Federal Reserve Bank of Boston by Daniel Cooper Impending U.S. Spending Bust? The Role of Housing Wealth as Borrowing Collateral

house values affect consumption by serving as collateral for households to borrow against to smooth their spending….house values, however, have little effect on the expenditures of households who do not need to borrow to finance their consumption.

In other words, the segment of the consumer market that needs to borrow to spend, aren’t spending now. That doesn’t mean “no one is spending” – this is the cause for significant confusion in interpreting the health of our current economy.

For those who borrow to spend

The results show that the consumption of households who need to borrow against their home equity increases by roughly 11 cents per $1.00 increase in their housing wealth.

During the housing boom, the excess demand was simply fueled by those who had to excessively borrow to spend. It doesn’t mean that everyone had the same thinking.

Back to basics.

Tags: Lehman

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