Matrix Blog

Taxes, Insurance, Fees

[Estate Tax] 2010: Throw Momma From the Train?

June 14, 2010 | 12:01 am | |

The New York Times had a trifecta of estate-related coverage this weekend.

In What an Estate Looks Like to the Taxman explores the lack of estate tax for 2011. The threshold could be dropped from $3.5M in 2009 to $1M in 2011 if its reinstated. The coffers are pretty empty with all the spending post-credit crunch so I would find it hard to believe that it won’t be re-instated.

When Congress passed a law that eliminated the estate tax for people who die this calendar year — with plans to bring it back with a vengeance in 2011 — the joke among estate planners was that 2010 might go down as the year of “Throw Momma From the Train.”

The Confusion Over the Dormant Estate Tax Keeps Advisers Busy talks about the scramble for estate planning this year. Since housing tends to be the biggest asset in a typical estate, and the level of property values in the region, I’m anticipating a lot of estate tax appraisals next year.

The real problem comes for the merely rich — individuals worth more than $1 million and less than $3.5 million and couples with net worths of $2 million to $7 million who previously did not have to worry about the estate tax. If Congress fails to act again this year, the estate tax laws next year will revert to their levels before 2001, and that could snare a host of people who set up the estate plans on the assumption that there would be no tax when they died.

The real estate section cover story this weekend was Loved. Lived In. Listed as an Estate Sale. The article covers a fact of life (no pun intended) in real estate. In NYC, “estate condition” is a common term that suggests the property needs significant updating.

That is when the property entered the realm of the estate sale, a segment of the market often inhabited by one-of-a-kind apartments that haven’t been touched in decades. These places tend not to be bargains, especially after factoring in the often necessary and sometimes costly renovation. But they attract a certain species of intrepid buyer, satisfying an appetite for an ambitious redo, architectural distinction or an aura of prestige.


[Surety Bonds] Some States Are Cracking Down On Appraisal Management Companies

February 21, 2010 | 5:30 pm | |

Since appraisal management companies are now responsible for the super majority of appraisals being ordered through lenders for mortgage purposes due to HVCC and AMCs are not a regulate institutions, the consumer is exposed more than ever to the potential for low quality appraisals, continuing to undermine the public trust in the appraisal profession. I suspect trend this has the potential to push errors and omissions insurance rates higher and provide more exposure to the mortgage lending system.

I firmly believe that 5-7 years from now we will be looking back to today’s AMC trend and will be saying: “if we only did something about it.”

Admittedly I know very little about surety bonds and this is no sales pitch or a solution to the AMC problem. I am more interested in understanding ways to protect the consumer against negligence and instill confidence in the appraisal process. To require AMCs to pay for surety bonds in order to operate in a state sounds like it provides an easier way for consumers to go after AMCs for negligence. Feedback or suggestions welcome.

According to Wikipedia, a surety bond is a contract among at least three parties:

  • The obligee – the party who is the recipient of an obligation,
  • The principal – the primary party who will be performing the contractual obligation,
  • The surety – who assures the obligee that the principal can perform the task

I was contacted by Jay Buerck of who wrote provided the following post on surety bonds and appraisal management companies. He indicated that 6 states brought about new AMC legislation last year and it is expected to grow in the coming years. His article is simply trying to make everyone aware of this fact.

States nationwide are introducing tougher oversight and regulation of appraisal management companies. The push is part of a growing effort to bring more consumer protection and transparency to the home-purchasing process.

In all, six states: Arkansas, California, Nevada, Louisiana, Utah and New Mexico ó ushered in new AMC legislation in 2009. Industry officials expect another 15 to 20 states to consider adopting similar measures this year.

Appraisal management companies are becoming increasingly important because of sweeping changes to regulations for home valuations nationwide. The stricter regulations are geared toward boosting consumer safety and stabilizing the housing market.

“There is a significant belief out there that mortgage fraud played a significant role in the meltdown in the housing market, and any unregulated entity that is out there presents the possibility for mortgage fraud to creep back into the system,” Scott DiBiasio, manager of state and industry affairs for the Washington, D.C.-based Appraisal Institute, a global association of real estate appraisers, told Insurance Journal this winter. “I think legislators recognized that this was a gaping loophole that needed to be corrected.”

Taking consumer protection a step further, Arkansas became the first state to add a surety bond requirement to its appraisal management statutes. The new legislation requires that AMCs post a $20,000 surety bond with the stateís real estate appraiser board.

Surety bonds are essentially three-party agreements that ensure businesses or people follow all applicable laws and contracts. A surety bond also provides consumers and tax payers who are harmed by the business with an avenue of financial recourse.

Most of the new AMC legislation requires companies to make sure their appraisals are in line with the Uniform Standards of Professional Appraisal Practice. Theyíre also responsible for ensuring they use certified and licensed appraisers only.

There are also some financial disclosure and transparency requirements in some states.

“We need to have and the public deserves to know who owns, operates and manages these appraisal management companies,” DiBiasio said. “I think the $20,000 surety bond is really there to provide some minimal protection to consumers.”

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[Taxing Patience] Rowayton Cowboy Evicted

February 3, 2010 | 12:19 am |

[click to open story]

Scott Merrell, also known as the Rowayton Cowboy, was arrested Tuesday as he protested his eviction from his home. The city seized the multimillion-dollar home at Wilson Point after Merrell did not pay more than $110,000 in property taxes.

The home was sold at auction more than a year ago because of the tax situation.

Merrell has repeatedly claimed the city overvalued his home and that he should not have to pay.

‘Rowayton Cowboy’ faces Tuesday eviction [Stamford Advocate]
Police Take Rowayton Cowboy Into Custody [NBC Connecticut]
The Rowayton Cowboy, Scott Merrell is in police custody [The Hour]

There was a lot of coverage in this publicity effort, but if you lose in more than one legal venue, what is the point of all this?

Tax appeals are a growing phenomenon as housing markets decline and municipalities need revenue.

[Checking It Twice] IRS Form 4506-T For Good Reason

October 12, 2009 | 11:48 pm | |

As a testament to the overcorrection in mortgage underwriting mentality, Kenneth Harney in his The Nation’s Housing column writes about the IRS Form 4506-T that

authorizes a loan officer or mortgage investor to get electronic transcripts from the Internal Revenue Service covering multiple years of your federal income tax filings.

A transcript is pulled at mortgage application and at closing as an attempt by Fannie Mae to reduce mortgage fraud.

One has to ask themselves, why should this be a new process? I remember during the credit boom, no one seemed to care whether someone had the income they claimed they did, after all, real estate always went up and defaults would not be a problem.

Of course with other issues, like toxic mortgage titles, a petty thing like actually proving borrower income [sarcasm] now seems kind of important.

At issue is proof of ownership at the time of a foreclosure sale. During the housing boom, millions of mortgages were bundled into bonds and sold to investors, a process that resulted in lengthy and twisted paper trails that can obscure ownership. Many lenders believed they could complete foreclosure transactions and later produce formal proof they held the mortgage.

Its a lesson learned – problems at the end of the mortgage process (foreclosure) make it imperative and obvious to reduce the probability of later default at the beginning of the mortgage process. Hence a credit crunch.


[TGIF] Banks Need To Fail On A Friday

September 9, 2008 | 12:48 am |

I noticed that banks seem to fail on Fridays. Every bank failure in 2008 failed on a Friday.

It gives the regulators a chance to take over the institution over the weekend so it’s back to business on Monday.

Here’s a great article on this phenomenon in Slate’s Exlainer column..

On the Friday of a typical takeover, the FDIC arrives on-site with a large team to manage the transition. (When a large bank fails, this might include upward of 100 people.) The team has two main priorities. First, it must figure out which customers’ deposits are insured and which are not. This can be a tangle, since customers can sock away money in a variety of accounts to ensure that their deposits fall under FDIC-insured limits. The second priority is getting the bank ready to open under new ownership by Monday. That involves discarding any material with the old bank’s name on it—like posters, cashiers’ checks, and marquee signs—and putting the new bank’s paperwork, advertisements, and employees in place. Specialists from other departments, such as facilities, human resources, IT, public relations, and accounting, round out the FDIC’s team. Officials once even hired a hypnotist to help a bank employee remember a vault code.


[Entitlement] The Mummy Returns (Proving A Lack Of Underwriting Quality)

August 19, 2008 | 12:51 am | |

I saw the 3rd installment of The Mummy with my son recently and he opined immediately after the movie ended that “it was just about the worst movie he had ever seen.”

When you look around at every institution involved in the mortgage process, after seeing this prolonged bad movie, it’s especially interesting that, other than enforcement authorities (Like FBI and attorney generals), no one is doing anything about reparations for the rampant fraud and sloppy underwriting that likely adds up to billions. I find this a continual source of amazement.

A legal precedent may be in the making within the title industry:

Ticor Title, one of the largest title insurance firms in the country, is suing Countrywide Home Loans, the nation’s largest home lender, saying it shouldn’t have to pay out on a title policy because of Countrywide’s gross negligence.

In other words, title insurance companies may begin to go after mortgage lenders who were negligent in their underwriting. In other words, it is simply the low hanging fruit to help offset significant losses.

Here is the case that was the last straw for Ticor.

The case that Ticor has drawn a line in the sand over concerns a $360,000 first mortgage on a graystone Victorian in the Kenwood neighborhood on the South Side. The story of that loan was told in a front-page Tribune story in February, several weeks after a clothed, mummified male corpse was discovered in the boarded-up house by a real estate speculator who had purchased the property from Countrywide in a foreclosure auction.

I wonder if an appraiser inspected the property at anytime? Good grief. (This AP appraisal article should have been written back in 2005 when the industry was screaming about appraisal pressure.)

[Straight From MacCrate] Real Property Taxation Is It Fair?

April 8, 2008 | 11:31 pm | |

Jim MacCrate, MAI, CRE, ASA has his own firm, MacCrate Associates, but has worn many hats as a Director at PricewaterhouseCoopers in New York City and Chief Appraiser at European American Bank. He is a prolific writer on valuation issues and teaches a number of the real estate appraisal classes through the Appraisal Institute and New York University. I have had the pleasure of taking a number of courses taught by Jim. His wife Judy is an SRA and is an accomplished appraiser in her own right, having managed an appraisal panel for a large lending institution throughout its various mergers for a number of years. I can only imagine the riveting conversations at dinnertime.

Jim shares his thoughts on how taxing the real property tax process is – like a maze of pipes.
…Jonathan Miller

I have a great deal of respect for civil servants and the professionals who work in the real property tax assessment offices throughout our country. Many hold appraisal licenses in their respective states and are members of the Appraisal Institute, The International Association of Assessing Officers, American Society of Appraisers, and other professional organizations. Theirs is an extremely difficult job; nobody really likes them because the general public perceives them as tax collectors. In actuality, politicians determine the budgets and set the tax rates applied to the assessed valuation that determines your real property tax liability. In addition, politicians tend to limit the resources for the real property assessors to do an adequate job. Further they fail to enforce standards such as mandatory licensing for all personnel in the real property tax departments, hearing officers and judges who hear the grievances, and the property owners’ representatives who prepare the tax appeal cases.

Real property taxation is no longer a fair and equitable method to pay for the cost of government and social services. At one time, real property represented the majority of wealth and produced most of the income from farming and other operations. Wikipedia states that the conventional property tax has some advantages—simplicity, stability, and open record keeping—but also many disadvantages.

The first disadvantage is market value assessment procedures. Market value can change dramatically with the fluctuating real estate market conditions as we are just witnessing. The second disadvantage is selected assessment and visibility because rent and leaseholders are not directly taxed. Most often the current assessed value is unrelated to any implied level of government service. Further inequities include that property taxes do not adequately provide for education and other social improvements in impoverished areas. Because real property valuation is more of an art than a science, the real property tax system has become just as corrupted as mortgage brokerage operations on Wall Street. Likewise our politicians ignore the fixes that are required, just as they failed to act to prevent our current mortgage banking meltdown.

Wealth today is no longer concentrated in real estate because on average it has been leveraged to 80% or more. In addition, the mortgage financing opportunities of the last five years created fictitious wealth and many individuals who were mislead, today are struggling or defaulting on their mortgage payments, so don’t have a prayer of meeting their real property tax liabilities. Financing influences the price paid for real estate; certainly the irresponsible actions of Wall Street and the bankers during the mid-2000s have resulted in inflated real property values from 15%-20% or more across the board in most communities. Any reassessment based on sales inflated by favorable financing is neither justified, nor equitable. Instead of real estate, wealth is now concentrated in stocks, bonds and other investment vehicles.

In addition, many lawyers and appraisers who present tax appeals are not licensed and thus not required to subscribe to a code of ethics similar to those of professional appraisal organizations. Similar to appraisals prepared by mortgage brokers, their improper valuations are biased, so their status as advocates is questionable. Their compensation is often contingent on the tax savings, regardless of whether the tax ruling is fair and equitable to the remaining residents in the community who must pick up the shortfall.

As a member of the Appraisal Institute, my compensation cannot be contingent upon the reporting of a predetermined value or direction in value that favors the client’s cause, the amount of the value estimate, the attainment of a stipulated result, or the occurrence of a subsequent event. In addition, my analyses, opinions, and conclusions are developed, and my reports have been prepared according to the Code of Professional Ethics and the Standards of Professional Practice of the Appraisal Institute and in conformity with the Uniform Standards of Professional Appraisal Practice. Most importantly, if someone in the tax assessment department feels that I have violated that code of ethics, he/she can send my reports to the Appraisal Institute for peer review.

Now is the time for our politicians to focus on alternatives to real property taxation to be fair and equitable. At the very least, licensing should be mandatory for all practitioners involved in the real property tax assessment process, which includes attorneys, hearing officers, judges and anyone involved in assessment-related activities.

The author was on the Board of Assessors and the Assessment Review Commission in Nassau County. Thanks also for editorial assistance from Nancy Reiss, The Write Stuff and Max Ramsland, MAI.

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Housing Fantasy Is The New Reality Television

March 12, 2008 | 11:56 pm | |

Housing has long been viewed as an emotional investment. Along with the housing boom of the past 5 years, there has a been a boom in reality television shows. My first obsession was This Old House when Bob Vila was host.

Housing has morphed into a national obsession. No surprise there.

Take a look at this week’s television schedule for HGTV.

If we aren’t watching people decorate, we are watching them, sell, buy and flip houses.

This AP story I came across in the Washington Post called Real Estate Cold, Real Estate TV Hot seems to defy reality. Ratings are very high.

Given the downturn in many real estate markets across the country, I am struck by the dated nature of the reality show title “Flip This House”.

  • Are people still flipping?
  • Will buys consider a flip with so much excess inventory?
  • What banks are providing investors financing these days…reality shows???

The irony here is that housing reality shows have become housing fantasy shows.

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[Straight From MacCrate] Remember the Impact of Real Property Taxes on Real Estate Investments and Returns!

August 19, 2007 | 10:00 pm |

Jim MacCrate, MAI, CRE, ASA, has worn many hats in his career. He taught a number of the appraisal classes I have taken through the Appraisal Institute and I think he is one of the few people who actually understands the “J-Factor.” His wife Judy is an SRA and is an accomplished appraiser in her own right, having managed an appraisal panel for a large lending institution throughout its various mergers for a number of years. I can only imagine the riveting conversations at dinnertime.

As the rest of his colleagues (self included) lounge by the pool at the close of summer, Jim is hard at work thinking about the accuracy and impact of property taxes on real estate investments. His dedication is almost saint-like.
…Jonathan Miller

Just a reminder to investors and appraisers—real property taxes have a major impact on real estate valuation and investment returns and need your accurate analysis. Don’t just call the local assessor for the current real estate taxes and plug the information into a model to calculate the real property’s net operating income. Real property taxes are always volatile because of increasing government expenditures, reassessment upon sale, phased reassessments, elimination of exemptions for improvements, and tax abatement programs.

Why is such detailed analysis important? Most tenants for residential and commercial properties can only afford a specific percent of their gross income for occupancy costs (real estate taxes, rent, insurance and utilities). Once the occupancy costs exceed this percentage and the tenant risks defaulting on the lease, the real estate value can be affected. Your task is to clearly spell out any hypothetical or extraordinary assumptions about the real estate tax estimates.

What can you do to avoid being blind-sided? Start by getting the correct information. Remember real estate brokers do not always do their research. Be cautious if you analyze investments in different geographical locations. In fact, the Uniform Standards of Professional Appraisal Practice (USPAP) states that “Prior to accepting an assignment or entering into an agreement to perform any assignment, an appraiser must properly identify the problem to be addressed and have the knowledge and experience to complete the assignment competently…….” and “Competency applies to factors such as, but not limited to, an appraiser’s familiarity with”:

  • The specific type of property
  • The real estate market
  • The geographic area
  • The correct analytical methods

If you find yourself in an unfamiliar location, such as New York or Miami , investigate not only the supply and demand factors affecting the local real estate market, but also obtain sufficient information to project the real estate taxes over the investment holding period. You may need to affiliate with a qualified local real estate appraiser to develop the stabilized income and expense forecast with the correct real estate tax estimate for your direct capitalization and projected discounted cash flow analysis. Consider the following factors that can impact accurate real estate tax calculations:

  • The equalization rate may not represent the effective equalization rate or the stipulated rate in the municipality.
  • The tax rate may only be declining in the short term if new construction does not continue into the future.
  • The tax rate may increase dramatically with new government expenditures or unforeseen circumstances.
  • Reported exemptions may be inaccurate.
  • Although the property is reassessed on sale, expect a two- or three-year lag until the tax authority incorporates this reassessment.
  • The real property assessments for all the tax comparables may have calculation inaccuracies from programming or human errors.
  • Rental rates may have spiked and the taxing authority has yet to capture this increase in real property values and the assessed value.
  • Property-specific information may be inaccurate and impacts taxes until corrected.
  • Tax assessment changes are phased in over a number of years, while the taxable value increases every year.
  • Tax abatements that generally are phased out over time must be factored into the analysis.

As a final note, do not forget transfer taxes and mortgages taxes that can also affect your returns on real estate investments.

Note: a special thanks to Nancy Reiss of The Write Stuff.

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Insurance Market Forces: Greater Than Category 5

May 14, 2007 | 9:08 am | |

One of the dire predictions (that pesky conventional wisdom thing again) of the post-Katrina US was the soon to be lack of homeowner’s insurance or at the very least, hard to get and very expensive post-war homeowner’s insurance.

But then a funny thing happened… (Peter Coy, in Businessweek’s Hurricane Ahead, But Lower Insurance:

In most of the country, property insurance rates for homeowners and businesses are actually lower than they were before Katrina. And amazingly, insurance rates have been falling recently in many parts of Florida and the Gulf Coast that stand to suffer severe losses from hurricanes, encouraging continued construction in low-lying areas.


  • No major hurricanes hit in 2006 and investment returns by the industry set a record.
  • Private equity firms, in search of returns, have poured money into bonds, betting on whether a hurricane will hit.
  • Florida government is keeping rate increases in check.
  • Insurance firms have fled Florida, driving up competition in other states, thereby lowering costs.
  • New companies have entered Florida, gambling there won’t be a major storm anytime soon, offering new and lower priced products.

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Paying For The Sins of Lending

May 5, 2007 | 11:42 am |

New York Senator Charles Schumer wants to throw some compassion (and money) to consumer groups to bail out troubled homeowners. Its a noble gesture that will certainly help some people, but its really just a drop in the bucket. Salve in the wound so to speak.

Here is my problem with this sort of throwing money at the solution solution:

  • The idea of government providing help to its citizens have a very recent bad history (remember the extra FEMA trailers for New Orleans?)
  • The amount proposed has got to be a fraction of what is really needed as evidenced by the nearly 30 subprime lenders that have gone out of business in the past 2 months.
  • I would imagine that not every one of people hurt by subprime lenders, were unaware of the gamble they were taking. At what point does personal responsibility start?
  • And most importantly, this will virtually guarantee that if this bill is passed, a few years from now we will read about how the money was mismanaged.

In the rush for profits and lack of supervision, subprime lending will have a lot more to answer to in the future. Pointing the finger is a natural reaction to this and its deserved, but it doesn’t change the system. A lot of people were hurt, and so far, no meaningful discussions on how this could have been prevented have taken place.

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Talkin’ About The Weather Around The House (In Your Hip Boots)

March 12, 2007 | 10:47 am | |

After the nation was able to make it past the annual Sports Illustrated swimsuit edition, we were faced with an SI cover story on global warming.

One of the lessons from Hurricane Katrina and made official recently from climatologists, is that we are influencing to a certain degree, the weather. In fact, if we all go green right now, its probably too late to undo the damage. I had read somewhere that every mile of lost wetlands around New Orleans results in one foot of additional storm surge. The loss of wetlands over the past 50 years escalated the damage of Katrina…it wasn’t all about the levees.

A few degrees of warmer weather and a few inches of water can cause havoc in the housing market, especially with the surge (no pun intended) of second homes, of which a significant portion are located on coastal waterways and shoreline. There was an interesting cover story by Teri Rogers called The Real Riddle of Changing Weather: How Safe Is My Home? in last Sunday’s New York Times Real Estate section about consideration given to these changes in a high density urban market like New York City.

Click here for full sized graphic.

One of the take aways from the article for me was the potential underground damage to transportation and utilities and the rise in the use of glass in architectural design.

Incidentally, the FEMA flood zone maps for New York City haven’t been updated since 1983 and Battery Park City, which is a neighborhood created on the Hudson River from a landfill using the earth from the World Trade Center site isn’t even on the FEMA map. The maps still show the pre-existing piers. FEMA flood zone maps rate areas as zones of risk such as A5, B and C, usually in one hundred year increments. Perhaps, the time frame might need to be rethought.

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#Housing analyst, #realestate, #appraiser, podcaster/blogger, non-economist, Miller Samuel CEO, family man, maker of snow and lobster fisherman (order varies)
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