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[Inflation] Be Paranoid, Or Deal With It

June 17, 2008 | 11:42 am | |

One of the remarkable things about the Fed’s recent monetary policy was that they opted to deal with the housing market first, and then inflation. Prior to the credit crunch summer of 2007, the fed was concerned about the economy overheating. And then it realized too late that the housing market was likely to be the proverbial straw that broke the economy’s back.

Fix housing by lowering rates hoping mortgage rates would follow. Deal with inflation later.

The end result? The sharp drop in the federal funds rate since last summer has done nothing for the housing market. It’s all about credit or lack thereof.

Now the concern going forward is inflation, which is sure to occupy the conversation for the next several years.

Inflation is a rise in general level of prices of goods and services over time. Although “inflation” is sometimes used to refer to a rise in the prices of a specific set of goods or services, a rise in prices of one set (such as food) without a rise in others (such as wages) is not included in the original meaning of the word. Inflation can be thought of as a decrease in the value of the unit of currency.

Today’s “Producer Price Index numbers show a sharp increase overall, but mild increase on core (excluding food and energy – which is a mystery to me in its relevance beyond academia since consumers eat and buy gas.)

The Producer Price Index advanced 1.4 percent in May, its fastest pace in six months and another troubling sign that inflation is worsening, the government said Tuesday.

Many economists, however, prefer to measure price increases in products other than energy and food. While this gauge, called the “core” index, does not measure the full effect of inflation on Americans, it does offer a guide to how long inflation might linger. For May, core producer prices rose at a tepid pace, 0.2 percent, in line with economists’ expectations.

What does an inflation threat mean to housing? It likely means higher mortgage rates (they are rising now) which will slow down the recovery.

Here’s a few inflation articles burning a hole in my pocket…

The Fed Chairman ascribes to “inflation targeting” which basically says that if inflation rises above a set level, the rate is raised, no matter what the source. Here’s an interesting paper on why inflation targeting doesn’t work, called, oddly enough: The Failure of Inflation Targeting. Quite often the source of inflation, such as food or oil, is imported and beyond the control of a country’s government.

Elizabeth Spiers of Fortune Magazine wrote an interesting piece called The great inflation cover-up which examines the disconnect between reality and CPI. Many of us are seeing rising prices first hand (I paid $4.99/gal at the pump last weekend) and yet the CPI stats reported seem very mundane. This theme seems to go along with many “national” housing stats like housing starts (released today) and existing home sales. There is a real disconnect between how information is reported and what the consumers “on the ground” experience is. Possible explanations:

Paranoia – absolutely real and I am guilty as charged. Bring on the “red light” theory. You only remember how many red lights you hit while driving your car.

Reliance on core inflation – eliminates short time volatile components like food and energy. Inflation is inflation in my book. When we say core inflation is tame and I am paying $4.99 for gas, its simply a misleading indicator for consumers.

CPI simply isn’t accurate – There are some schools of thought that CPI overstates inflation. ergo the 1996 Boskin Commission and some feel its significantly understated (saves the Feds on social security increases and the conversion to “rental equivalent” for housing in 1983 makes me, well, paranoid.)

Pollyanna Creep Economy
And while we are talking about accuracy, inflation could very well be much higher. Here’s an interesting Harper’s article from last month’s issue called Numbers racket: Why the economy is worse than we know (Free version). The article pokes holes in the alphabet soup of indicators such as CPI, GDP, unemployment, etc. and references a web site called

So what’s the point to all this (besides using up my collection of inflation articles I was saving for a rainy day and it’s sunny out right now)?

If we are trying to restore investor confidence in the credit markets, it is tough not to be disillusioned by the growing awareness of the lack of statistical accuracy available to consumers (and the assumption that these figures are also relied on by fiscal policy makers). I relate this first hand to my appraisal profession where I am struck by the fact that banks actually read the appraisals that are submitted to them now versus a few years ago, when nobody cared about the reliability of valuation.

Paranoia strikes deep (for what it’s worth)

Speaking of paranoia, we now know that using IM is more efficient than email.


[Housing On Fire] Blogoshere Hose-Down, Heaven Can Wait Edition

May 30, 2008 | 12:01 am | |

Periodically, I like to round-up some of my favorite recent blog posts or articles that are housing market/credit/economy related. It’s journalism heaven: housing provides an endless supply of stuff to write about and this week was no exception.

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[Bail Out] Worried About Future, Banks Spread Out

April 27, 2008 | 4:57 pm |

Bank earnings are down.
Way down.
Real concerns about future losses from non-performing mortgages, other credit instruments like credit cards and the need to recapitalize.

Fed policy has been pretty generous to the economy, no?


Current hopeful scenario: Lower the federal funds rates a lot so that banks can lower mortgage rates to enable consumers to refi their way out of trouble for the time being or purchase a new home.

Looked good on paper…

But mortgage rates have been rising, whether it’s a jumbo or conforming, fixed or adjustable.

Banks need to recapitalize because they have been forced to lend and hold the mortgages they issue in their own portfolio.

Borrow at a low rate,
lend at a high rate.
Enjoy the spread.

Banks can lend at a higher rate because fewer banks are lending so there is less competition. In addition, the banks that are still lending have much tighter underwriting requirements compared to the past 3-4 years.

Why? Banks now have to be more accountable for risk in their mortgage lending decisions rather than offloading risk to investors, who would in turn offload the risk to other investors and so on.

It’s all about the credit markets. Until they begin to function again, banks will not be incentivized to offer lower the rates on mortgages they issue.

This is another form of “bailout.” The Fed is keeping the banking sector from imploding (opposite of spreading – very lame, sorry).

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[Getting Graphic] Of LTVs, Inventory Ratios And Of Course, Death Benefits

April 19, 2008 | 11:46 pm |

Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related chart(s).

Northern Trust’s Paul L. Kasriel has a great monthly publication and this month’s issue struck me as particularly telling.

First of all, home mortgage debt is at the highest level it has ever been and that is a serious problem. High leverage and volatile rates place many homeowners at serious risk. However, from the news coverage, it feels like it’s 95% rather than 52.5%.

The ratio of home sales to inventory is almost as high as levels seen in the early 1980s. The chart shows that a lot of time is needed to pass in order for excess inventory to be absorbed. Not much magic will change that. Talk of market bottoms in the next few quarters appears to be beyond silly.

And beyond that, if a seller happens to die in the next decade, the buyer of this house gets the insurance money (hat tip: Bankrate).

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[Federal Musak] Everything Is Beautiful, In Its Own Way

April 8, 2008 | 10:06 pm | |

Images of wood veneer inside a dingy elevator with musak playing in the background…

This is what passed through my mind when I saw this headline (and not to be the chicken little messenger of gloom and doom, but come on!):

Bush Says Economy Is Poised to Rebound.

Quick question: name one (or two) events that will lead an economic turn around in short order and overcome the twin issues of credit and housing.

Quicker answer: Nothing obvious.

The president, with all due respect, is sending a misleading message. What he should have said was: We don’t need a second stimulus package because the first one hasn’t had time to kick in. It’s tough to take the administration’s optimism seriously because they were largely asleep at the switch over the past two years with the disconnect from housing’s impact on the economy. So was Congress by the way.

And now, when threatened by Congressional legislation that may undercut the administration’s stance, they are finally taking action:

The Bush administration appears set to support a significant expansion of its assistance for struggling homeowners in a bid to forestall more-aggressive action being contemplated by Democrats in Congress.

U.S. Treasury Secretary Henry Paulson echoes the concern of the president, saying that the legislation in Congress will be damaging, not helpful to housing and credit.

“In terms of government intervention in housing and capital markets, I have seen a number of proposals calling for that. I haven’t seen any that wouldn’t do more harm than good. So, you will not find me or the Bush administration calling for government intervention,” he said. “U.S. policy is not for massive or more significant government intervention.”

Reality check:

The economy lost 76,000 jobs in February and 80,000 jobs in March. Mortgage rates are not moving downward and credit availability is limited.

The new jumbo conforming mortgage class has high fees associated with it and it’s rates are higher than jumbo mortgages themselves. That’ll all but eliminate the benefits of this new mortgage class. Old habits die hard: The credit crisis was partly the result of banking’s disrespect of investors and investor’s greed to accept reward without respect for risk. This new mortgage class does the same thing. A new mortgage product is being introduced so it’s not tested in the market and packagers of the new debt are telling investors: a mortgage of $729k has EXACTLY the same risk as a mortgage of $417k so the risk premiums should be the same. Good grief.

Consumers are pulling back spending as consumer debt (excluding mortgage debt) is at a record $2.539 trillion and are shifting debt to credit cards from home equity loans:

The slowdown reflected much weaker demand for auto loans and other type of non-revolving credit, which rose at a rate of 0.4 percent in February, much lower than the 3.6 percent growth rate in January. Credit card debt rose at a 5.9 percent rate.

Consumers have been moving to put more of their purchases on their credit cards as banks have tightened lending standards for home equity loans in response to the deepening credit crisis. The price of homes has fallen sharply in many parts of the country.

Meanwhile a Federal Reserve governor is not so rosy in his outlook.

Perhaps when the elevator musak starts playing Rage Against The Machine (closing credits music in The Matrix movie), we can feel better about the messages being delivered to us.

Or at least I can.

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Modifying The Way We Look At Our Existing Mortgages

March 14, 2008 | 8:17 am |

Just ask.

Last fall, we refinanced our house. Our 5/1 mortgage product was tied to 1 year LIBOR and I was more or less happy with my rate so I didn’t think much about it after we closed. In February, I noticed LIBOR had fallen sharply, about 0.75%, and called my bank. I had no early withdrawal penalty and I asked for a loan modification, having never requested one before. I figured it would be easier and cheaper than a refinance.

A mortgage modification contains the exact same terms as the original refinance, but with a different (lower) mortgage rate and of course, different (lower) mortgage payments than agreed to at the original closing.

Apparently I was the first person to request a modification from the bank on this product. A week of getting their legals ducks in a row and we were ready to do the paperwork. The rate fell another .25% and as a courtesy, they locked me in the day before they increased rate. We end up with a mortgage a full 1% below what we had before. Our only cost was a $500 fee and an agreement not to modify that same mortgage again.

Sheila Bair, one of the most articulate and outspoken FDIC chairs in recent memory makes the case for mortgage loan modifications. I am guessing that many consumers would not think of this option, nor would it be advertised by mortgage lenders because it reduces the spread (profit) on the mortgage.

One of the reasons stated for the slow pace of loan modifications is that some servicers remain concerned about the potential for legal liability based on those modifications. Given the flexibility provided in most PSAs, it seems unlikely that a servicer engaging in loan modifications to avoid greater losses through foreclosure will be legally liable to investors. In addition, loan modifications that avoid greater foreclosure losses are consistent with industry standards embodied in the principles and guidance provided to servicers by ASF, which should provide an additional degree of protection from legal liability. In fact, servicers who take no action to address upcoming unaffordable resets in their loan portfolios and choose to rely on the traditional loan-by-loan process leading to foreclosure probably run a greater risk of legal liability to investors for their failure to take steps to limit losses to the loan pool as a whole.

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Inside Football: Optimistic Contrarian Views On Housing

December 30, 2007 | 8:25 pm |

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.

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Mortgage Lenders Don’t Want The Bill For Mortgage Problems

November 17, 2007 | 6:38 pm |

Within the bill (H.R. 3915: Mortgage Reform and Anti-Predatory Lending Act of 2007) that appears headed for a lot of negotiation and work if it has a chance of being passed, the US House of Representatives is trying to prevent another mortgage and credit problem in the future by dealing with loose and deceptive loan practices.

One of the concerns with the legislation is its lack of precision, possibly inviting litigation every time a borrower falls behind on their payments. Yet the problems are real.

>Treasury Secretary Henry M. Paulson recently said there could be more than 1 million foreclosure proceedings started this year, with 620,000 of them dealing with sub-prime loans made to people with poor credit. Some analysts say a much larger number of mortgages is headed for trouble.

The White House objects to parts of the bill and the Senate does not have a bill in the works yet, delaying reforms on the mortgage market, which could be a year away. Hardly responsive to the problem. I wonder why the federal government can’t seem to get its act together on mortgage reform right now?

Holden Lewis of Bankrate breaks down H.R. 3915 nicely.

The “credit” card is played

>opponents said the bill would limit the availability of credit by hobbling lenders with red tape and filling them with a fear of running afoul of regulators or getting sued by borrowers.

The Mortgage Bankers Association objects to the bill because it places restrictions on its members, including selling mortgage products with interest rates above the what the borrower qualifies for. Another restriction they object to is the introduction of licensing to the profession.

While I agree with the intention of licensing, it is only there to complement existing restrictions and will not solve the problem by itself. The MBA can not self-police (look what happened). By only implementing licensing and no other regulator reforms, will only make the problem worse.

After appraisal licensing was introduced in 1991, the quality of appraisals fell considerably over the next decade. The rise of wholesale lending (mortgage brokers) as an origination source and appraisal licensing was a powerful cocktail for bad mortgages.

Why? Because an appraisal license freed the lender from some liability. Hey, I hired them because they were licensed by the state. There was less responsibility or focus on the competence of the appraiser being hired. A similar thing will happen with mortgage brokers if this is the only action taken.

There needs to be greater oversight introduced and the lenders need to be held more responsible (financial incentives are the only way to make this work) for the quality of mortgages they sell to investors, to force lenders to take a hard look at the mortgage brokers they do business with. Until now, its been lip service.

This is a systemic problem that mushroomed to disaster this summer. It will likely take as long to fix the problem as it took for the problem to develop, perhaps into the next “up” cycle.

On second thought, lets ram this legislation through right now.

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Mortgage Patterns: Beating Values, Going Conventional, Government Gets Busy

July 17, 2007 | 2:20 pm | |

There has been a lot of change and turmoil in the mortgage arena as of late: Subprime problems, rising mortgage rates, credit tightening and so on are the things that many of us are acutely aware of. Never in my experience has so much discussion been placed on the topic of mortgages. The orientation about a formerly overheated housing market has shifted front and center to mortgages. As a result, the topic is being analyzed, dissected and over-interpreted just the way the housing market was.

Here are a few mortgage topicss and their interplay with a weak housing market. Additional topic ideas are welcome.

According to David Berson of Fannie Mae, there is growing trend toward government backed mortgages like FHA and VA loans.

Borrowers with blemished credit histories (who previously might have taken out conventional subprime loans) are likely now turning to FHA loans to purchase a home or to refinance their existing mortgages.

While the idea that the US government is gaining more exposure to residential mortgages after being asleep at the switch as the subprime mortgage mess developed is offensive to many, its not like the government is lending the money directly (unless I am missing something, so please enlighten me if I am). Here’s some message board feedback addressing the irony (via

Of course, having lived through the S&L crisis filled with acronyms like FDIC and RTC, I know that government has a weak track record of oversight when it comes to mortgages.

In addition, conventional mortgages are getting “fixed”…

The market share of adjustable rate mortgages have dropped considerably as mortgage rates trend upward (albeit modestly). According to the Mortgage Banker’s Association, the market share of ARM’s to Fixed Rate mortgages have dropped from 31% to 20% over the past 18 months. The drop is attributed to the decline in the number of investors and weakening sales prices. Regulatory pressures will also keep the number of new ARM mortgage products down, like no-doc (liar) loans and negative-ams (negative amortization). This will filter out a large swath of potential buyers including a large swath of first time buyers making the shift from rental to owner occupancy.

A self-serving (for me, since I am a co-owner of an appraisal firm) strategy that comes into play with values slipping in many markets is playing with the timing of the appraisal. In Bob Tedeschi’s always interesting (despite the column name) Mortgages column, his recent article Could Be Time for an Appraisal, addresses the issue of slipping markets and timing the appraisal.

“If you’re not selling, you’re typically fine,” said Bob Moulton, the president of the Americana Mortgage Group, a brokerage in Manhasset, N.Y.

But, Mr. Moulton said, there are exceptions. “As house values drop,” he said, “people can have a tougher time refinancing, because the house won’t appraise for the amount they might need.”

I am a little fuzzy (and squeamish) on the comment made about “not selling” but otherwise, this concept banks (sorry) on the idea that in a declining market, get an appraisal early in the application process. In other words, it may be an advantage to the applicant (you) to request the appraisal earlier from your mortgage broker. If values are dropping, the mortgage will be based on a higher value than if the appraisal was done just before closing. hmmmm…

This seems logical (but as a result, off-loads more risk to lenders), but I am not aware of any banks that my firm deals with that will generally honor an appraisal even if it is three to four months old. Even during the height of the market, I wasn’t familiar with appraisal valuation dates exceeding 90 days.

The appraisal is a perishable product, a snap shot of the market. Lenders are well aware of generally weaker market conditions than seen in prior years. In other words, when a market is deteriorating, one of the things a lender looks more closely at is the valuation date of the appraisal (and rumor has it, is actually reading the reports now). In changing markets, an underwriter’s comfort level drops significantly as the timeline from appraisal (valuation) date to closing date expands.

Possible summaries

* Recap (safe, generic version): In the cart before the horse analysis, the challenges facing the mortgage market will exaggerate the problems facing the housing market. Tightening credit and an elevated wariness within lending institutions toward home mortgages will temper any form of housing recover for the next few years.

* Recap (cynical, sarcastic, “late-night I’m tired” version): Weaker housing markets (price and volume) have caused more emphasis to be placed on (clearing throat sound) an actual understanding of the market values of collateral being used, with less emphasis on questionable lending practices and less volatile mortgage products. While there is certainly nothing wrong with being creative in lending, the backlash of tightening credit is in direct response to lax lending practices by the very same industry to begin with.

I wonder if any lessons have been learned in this housing cycle as it pertains to mortgages. When taking the long view, somehow I doubt it.

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[Getting Graphic] Stressing Subprime Mortgage Rate Resets

June 19, 2007 | 7:41 am | |

Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related chart(s).

Source: Fannie Mae

With all the discussion about the doubling of the foreclosure rate last month as compared to the prior month (based on RealtyTrac‘s stats), then it would follow that sub-prime resets are something to look at. David Berson of Fannie Mae, in his weekly column, took a close look at the numbers. [Note: Berson’s link lasts one week. On or after 5/25/07, go here and search for his 5/18/07 post.]

The 2006 loan status is a good summary because all those products have reset. 76% were paid off and 12% continue to be paid at the higher rate (88% in good shape). 10% are under some sort of stress. The 2007 are really too soon to rely on because this data is only through the 1st quarter. However the stressed loans (excluding payoffs and current) are nearly double the rate of last year at 18%.

This is probably something to worry about because mortgage rates are currently rising which will add to the stress level.

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Badge of Irony: HALTing Appraisal Pressure Despite Ghost In The Machine

May 19, 2007 | 4:54 pm | |

New York State joins the post-housing boom mortgage clean-up effort and tries to learn more about the ghost in the machine. The machine being the lending industry and yet the government seems to know so little about it. This is ironic because fraud appears to have been blatantly prevalent (It ain’t just subprime) for many years. And although mortgage fraud is a significant problem, the cumulative effect of “little white lies” that are engrained into the system will be the most difficult to undo, detect or prove. You know, the things that are commonly done so much that eventually no one realizes that they are illegal or unethical?

New York state Governor Eliot Spitzer announced creation of a new interagency task force with the neat acronym (an important element of government culture): HALT (Halt Abusive Lending Transactions) that:

is designed to help the public handle questionable lending practices in the subprime market, and to make it easier for low-income families to buy new homes.

A Political Fine Line
Any government agency walks a fine political line when trying to reign in subprime lending because on one hand, the government can shut low-income families from access to funds to purchase new homes by being too tough, and on the other hand, low-income families will continue to get hurt if government does nothing and the abusive tactics continue. This week, Fed Chair Bernanke addressed the subprime issue and seemed to take a laissez-fare position on fixing the subprime mess.

There was a “Debtor Nation: The Mortgage Mess” special on CNN/Paula Zahn Now show last night that included real estate editor Gerri Willis. One of the facts mentioned was the statistic reported by that 34% of loan applicants don’t know what type of mortgage product they have on their house. Amazing. No wonder the scope of the mortgage problem is so widespread. I am not downplaying the mortgage problem in any way, but at some point, people need to take some responsibility for their actions (assuming they are not misled).

The first overt action taken from this task force was announced yesterday:

Attorney General Andrew Cuomo issued a subpoena to Manhattan appraiser Mitchell, Maxwell & Jackson Inc., the company said. Manhattan Mortgage Co., a [mortgage] broker, also received a subpoena, Chief Executive Officer Melissa Cohn said.

I have known Jeff Jackson and Steve Knobel of Mitchell, Maxwell & Jackson (MMJ) professionally since they founded their firm in 1991 (my firm started in 1986). MMJ is my primary competitor. In addition, our firm has done work for mortgage broker Melissa Cohn, founder of Manhattan Mortgage on and off, but very little in recent years.

Here’s another irony:

I am pretty confident that Mitchell, Maxwell and Jackson (MMJ) as well as Manhattan Mortgage do very little, if any subprime work. Manhattan and the surrounding region have a relatively low concentration of subprime lending activity and these firms aren’t known for this type of work.

I am sure the AG’s office know these two firms are not orientated towards subprime, so this effort must be largely directed at the issue of appraisal pressure and not subprime lending.

Here’s how the MMJ responded to the media:

Y. David Scharf, an attorney at New York law firm Morrison Cohen LLP, who is representing Mitchell, Maxwell & Jackson, said his client has been told it’s not a target of the investigation.

The information that is being requested is whether or not pressure has been brought to bear on appraisers to change their appraisals,” Scharf said. The firm is “continuing to gather information” in response to the subpoena, he said.

We did not change appraisals in any circumstances,” he said.

I thought the closing quote by Jeff Jackson in the Crain’s article was particularly interesting.

Because we are a large company were not as easily pressured as a small company might be.

This phrasing seems to infer that the smaller an appraisal firm is, the more unethical it has the potential to become. I believe that size is not a proxy for insulation from pressure. Sure, a small firm can be pressured by small clients, whereas a larger firm is less likely to react to that type of pressure. I think that’s what Jeff was referring to and I agree with that example.

However, a large mortgage broker can inflict significant pressure on a large appraisal firm. Get the appraiser addicted to high volume and the potential to be influenced is just as significant. Small and large appraisal firms, like firms in any other industry, are always concerned about covering their overhead.

Every appraisal firm who does mortgage work, no matter what their size, is vulnerable to significant appraisal pressure.

The issue of appraisal pressure is why I got into blogging in the first place and started the appraiser blog Soapbox before I got the idea for Matrix. I can work up a good rant about the appraisal pressure issue with very little effort at a moment’s notice. One of my personal goals in life is to speak about appraisal pressure before Congress to explain what the problem is and how to solve it. Many of these ideas have been fleshed out in both of my blogs already. Of course, at the rate this is going, I may get my chance. I’ll keep my fingers crossed.

but I digress…

An edited down version of the Bloomberg wire story also ran in the New York Times today.

I was contacted by Bloomberg for the story to ask whether we too were issued a subpoena.

Other appraisers — Miller Samuel Inc. and the Vanderbilt Appraisal Company, competitors of Mitchell, Maxwell & Jackson — said they had not received subpoenas.

A quote of mine was left out of the New York Times version of the Bloomberg story – sort of an overview of the state of affairs in the appraisal industry:

Appraisers frequently face pressure to revise their findings, said Jonathan Miller, president of Miller Samuel.

“I would seriously doubt that there is one appraiser in the United States that has not been on more than one occasion pressured to make a number,” Miller said.

In a study conducted last year by Richfield, Ohio-based October Research Corp., 90 percent of appraisers said they felt influenced to write bogus appraisals. Four years ago, that number was 55 percent. Seventy-one percent said mortgage brokers asked them to do it.

I’d say the October Research report results were on the conservative side because I think the idea of appraisal pressure is so commonplace, its become invisible. Here’s a typical example:

Mortgage Broker XYZ hires my firm to appraise a property for a cash-out refinance. I estimate the market value but its not high enough to make the deal work. The value is reasonable but the property owner needs more. The deal dies and the mortgage broker simply never uses my firm again. This incident is a one-time situation but it exists in perpetuity because that mortgage broker learned from the experience and only selects appraisers who “play ball.”

Another irony in these situations, is that we have had owners or top producers at mortgage firms that don’t use us regularly, recommend or use us when it impacts them personally such as for a divorce, an estate, a complex deal, a lender who requires them to use us, a friend thinking about buying a property, etc. In other words, when incentivized to obtain a reasonable estimate market value, we get the call.

A Badge of Honor
I have spent a large portion of my professional appraisal career steering clear or getting rid of clients that pressure us. Don’t get me wrong. There are clients that don’t pressure us at all. Those clients are the keepers. I have worn this effort as a badge of honor. However, that badge of honor is bad for business and has cost myself and my family in significant economic terms during my career. I could triple the size of my firm tomorrow if removed that badge.

But that’s for another rant…

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Molasses Primer: The Subtext on Subprime

May 18, 2007 | 9:16 am | |

Change can be slow as molasses…

Fed Chairman Ben Bernanke spoke yesterday at the Federal Reserve Bank of Chicago‘s 43rd Annual Conference on Bank Structure and Competition in Chicago yesterday. There is a certain irony (well, to me, anyway) in that this was given a speech given at a conference on banking industry structure when the mortgage problem is based on a fundamental structure problem with the banking system. Structure is the key word here. Take a look at our other blog Soapbox for articles that contain the use of the word structure as it relates to the appraisal and lending industries.

Basically Bernanke does not want to regulate subprime, or be very selective on what is being regulated.

Bernanke concludes (excerpted from his speach):

Credit market innovations have expanded opportunities for many households. Markets can overshoot, but, ultimately, market forces also work to rein in excesses. For some, the self-correcting pullback may seem too late and too severe. But I believe that, in the long run, markets are better than regulators at allocating credit.

We at the Federal Reserve will do all that we can to prevent fraud and abusive lending and to ensure that lenders employ sound underwriting practices and make effective disclosures to consumers. At the same time, we must be careful not to inadvertently suppress responsible lending or eliminate refinancing opportunities for subprime borrowers. Together with other regulators and the Congress, our success in balancing these objectives will have significant implications for the financial well-being, access to credit, and opportunities for homeownership of many of our fellow citizens.

There seems to be a disconnect here. Bernanke is saying markets take care of themselves and we shouldn’t do too much, only in specific instances, because it might hurt those people it is intended to help. And I can’t seem to find the logic as to why he thinks the subprime mortgage problem won’t spill into the prime mortgage market.

From the Washington Post:

we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system,” according to the text of his remarks. While some subprime lenders have closed or entered bankruptcy proceedings, the problems in that market are not hurting banks or thrift institutions, he said.

Holden Lewis of Bankrate, who writes a must-read blog gets analytical and even goes all rhetorical on us to make his point.

He didn’t explain why he doesn’t expect the subprime debacle to spill over into prime mortgages or the overall economy, although he did acknowledge that the slowdown in home sales can be traced partly to the tightening of subprime credit. He contradicts himself there.

…So it would be better for our society if the homeownership rate were lower. Is that an unreasonable conclusion?…isn’t it safe to say that those neighborhoods would have been more stable had the houses been owned by landlords who had an incentive to maintain the dwellings to make them rentable?

Les Christie at CNN/Money writes:

But, according to Bernanke, the kinds of innovations in credit markets represented by exotic subprime loan products have had a positive effect, opening up home-buying opportunities for millions of Americans.

Bernanke wants regulators to be careful not to overreact and address specifics only. Aren’t these the same regulators who were there when underwriting quality deteriorated and subprime exploded?

Subprime lending has its place so its clear that its in no one’s interest to choke it off. However, I believe that the problems in subprime lending are not unique to subprime lending and are prevalent throughout the mortgage lending industry as it relates to collateral. These include:

  • Massive documentation that borrowers are unable to understand.
  • Appraisal pressure so prevalent and part of the lending culture that no one sees it as a problem.
  • “Don’t ask, don’t tell” position taken by lenders to their wholesale mortgage broker partners.
  • Commission-based lending system – high production with no real accountability from sales person.
  • Inflated appraisals understate risk to investors.

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