Housing Bubble Bursting?

[Randolph Kinney]

Housing Bubble: Toil and Trouble

http://www.realestatejournal.com/buysell/markettrends/20070306-lahart.html?rejpartner=mktw

Seven years after the stock-market bubble busted, the troubles in the housing market look strikingly familiar. In fact, everything is going according to the textbook -- the textbook in this case being Charles Kindleberger's 1978 classic, "Manias, Panics, and Crashes."

Mr. Kindleberger found speculative bubbles tended to follow similar patterns. First, there is some "displacement" -- such as the development of the Internet or a prolonged period of ultralow interest rates -- that radically improves the outlook for some area of the economy. People take advantage of the opportunity, fueling a boom that is fed by progressively easier access to cash. At the height of the bubble, there's "pure speculation"; assets are bought to quickly sell them again at a higher price -- day-trading in 2000, condo-flipping more recently, tulips long ago.

The speculation eventually runs its course and in the ensuing downturn, swindles come to light. That leads to "revulsion." Lines of credit dry up and regulators, Sarbanes-Oxley style, rush to shut the door of the empty cow barn. In the worst cases, selling panics follow.

Revulsion is where housing appears to be.

 

[James E. Manning]

After thirty-two years in the mortgage business as an appraiser, I am very close to calling it quits.

I truly believe that this is the quiet before the storm on so many levels.

First, the mortgage business has been taken over by the "Foxes". Over 60% of all loans today are originated by "Mortgage Brokers". The great banks and savings and loans of the past have given up "the Farm" when it comes to originations. Now most of them only act as a wholesaler or purchaser of loans.

They are not the only ones. Up until recently, the secondary market (Fannie Mae & Freddie Mac) use to purchase up to 70% of all conforming loans. That number has dropped to 40%. Used to be that FNMA (and Freddie Mac)set the standards to which all loans were underwritten. As an appraiser, when FNMA changed the appraisal form, we all changed the form. When FNMA wanted transfer document numbers on the comparable sales, we all snapped to attention and provided doc #'s. Not anymore. To make things worse, you have them both "Cooking the books" and posting very large losses.

Let me give you a short observation from an appraiser's point of view. When I am contacted by any number of mortgage brokers shopping for an appraisal, more often than not, I am asked to do a "Comp Check" before actually performing the appraisal. What this amounts to is a "Pre-determination" of the value of the subject property. Not only do I not provide this "Service" but it is illegal for me to do so. Evidently, this doesn't stop other appraisers from doing so because I am told all of the time that others do it. What these mortgage "Professionals" are doing is dialing for dollars. And they keep dialing until they find an appraiser that will play ball.

Now, let's step back and try to see what all of this does to the integrity of the loan. Does this loan come with a truly objective opinion of value performed by a seasoned professional giving the underwriter and potential investor an accurate idea of not only current market value but of general market trends in the neighborhood? No. It is most probably the worst indicator of value given by the most unethical appraiser out of the ten appraisers contacted to do the appraisal.

Couple this with the general lack of oversight of the mortgage broker industry and you have a disaster waiting to happen. Did I mention that most real estate companies (both large and small) have their own mortgage divisions? Talk about conflict of interest! And do you think these realty companies would continue to use appraisers that would not move their transactions forward? Guess again.

This does not all come down to an unethical appraiser. What alarms me even more are the lax credit underwriting standards and "easing" of credit over the past five years. "Did Webster's drop the word "Prudent" from our vocabulary? As you imply, the "Sub-prime" market is a mess and this is just the beginning.

Most of us know "De-regulation" of the S & L's in the 1980's was a disaster. I really don't see much difference between then and now. There is NO regulation that I can see. Where is the oversight or regulation of Hedge Funds? Mortgage Brokers? Wall Street Investment Bankers that package all of these loans. I am confident that a large number of these mortgage-back securities are ending up in some pension fund's portfolio.

I have heard a lot of people state that we are "protected" by any kind of adverse market conditions here in the immediate Bay Area because of job growth, employment stability, blah, blah, blah. How about the City of Santa Clara, right in the middle of Silicon Valley. Did you know there are approximately 50 single family residences currently on the market? This is down from roughly half(or 100) from just 4-5 months ago. However, over a third of those (35%+) currently on the market are vacant homes. That is an alarming statistic. How could that be in the middle of Silicon Valley, "Land of Opportunity"! Even more alarming is that 16% of those listed are either offered as "Short Sales" or are good candidates for a short sale(the loan balance is either close to or exceeds the list price after expenses). Like I said, the quiet before the storm.

I haven't even started on the minimum payment ARM which so many borrowers took out that helped to propel the real estate market higher and higher over the past five years. Enough has been written about teaser rates and 100% to 125% loans so I won't burden you with that.

The "AVM's" and piggy-backs are finally coming home to roost. I for one am raising my fee's for an "Honest and unbiased" appraisal. No more driveby's for $250.00 or 1004's for $350.00. Since fees haven't gone up up in over 8-10 years, it's high time they did! If the broker's continue to rule the mortgage landscape, you can count me out! If you continue to play their game of reduced fees, you will ride them all the way down to $100.00. Try paying your health costs with that!

 

[Greg Bell]

Amen brother!

 

[hastalavista]

James-

Welcome to the forum.
A well written post, and all topics which many of us discuss from many different viewpoints. I think you, like I, will find the forum a rewarding, informative, and interesting experience.

See you on the forum.

 

[moh malekpour]

Well said James. I couldn’t say any better. I don’t count on regulators or law enforcements to solve the lending problems but I count on the natural force of financial loss to ,at least, waken up some of those purchasers of those bad loans.
So far, about 30 or more of sub prime lenders have been closed down. New Century, the largest sub prime lender is filing for bankruptcy. Their excuse is that they are under criminal investigation. The real reason is that they just cannot afford to buy back those bad loans. This is going to happen to all of them. They all have to either file for bankruptcy, sell or merge. We are not going to see independent sub prime lending as we know within a year or so.
Now, if these crooked lenders are going to escape from buying back those bad loans, what would happen to purchasers of those bad loans like pension funds, insurance companies and GIS that have so many defaulted loans in their hands now? They cannot go after new century because it is protected under the bankruptcy law so who is left there that they can go after? Loan agents, phone monkeys, and brokers possibly have no insurance and are gone somewhere to spend their money obtained from those bad loans. The remaining crew would be appraisers who facilitated those loans to be closed and all of them have E&O insurance.
New Century has sold at least 3000 loans that were closed last 2 years. 95% of those loans have one or more appraisal reports attached to them because they all had low or none LTV financing. 50% of those loans are going to default and homes will be foreclosed. The purchasers of those loans have a right to dump them back to whoever originated them and when the big fish is not there, they are going to go after any small fish still swimming in the ocean and that would be dumb appraisers who has done those inflated appraisals. I am not saying that all those bad loans are as the result of fraudulent appraisals but some of them are. As we all know, those brokers never wanted honest appraisers to begin with so there is a chance that some of those bad loans have bad appraisal in them.
It is sad to see a negligent, stupid appraiser who has destroyed his own career by producing fraudulent appraisals for a small fee and now has to pay back for the mess that the whole crew has created.

 

[JSmith43]

Great start, James! I only caught a few things upon which I shall comment. I thought the Fannie/Freddie combined market share is now closer to 25% than 40%

Regarding out of state MB's shopping for appraisers with comp check requests, you can capture some of that business with good phone technique and a USPAP compliant desktop appraisal product, which will work from time to time. At least it is a professional response at the ready.

Search "comp check" on the forum & take your pick at the multitude of threads. Lots of people fall on their swords during those discussions!

Final comment, mostly for non-posting readers: I lived and worked through the S & L so called deregulation, performing a mix of commercial and residential appraisals. I wouldn't refer to the S & L's as deregulated.

They were chained to regulations requiring them, for decades to rent money from depositors at mostly short term rates of around 3% and could ONLY loan it out via long term residential mortgages (usually around 6%). As short and long term rates ramped up over the '70's and into the 80's, depositors shunned 3% returns, S & L's were stuck with a bunch of 6% paper and eventually had to pay 6%+ just to attract enough deposits to keep their required 3% capital reserve.

It was a sucker game from the start....all due to the bakes in regulations. Don't get me started about the insulation from reality effect of the gov. program insuring depositors in these sick and getting sicker S & L's. The deregulation part was a hail mary pass attempt to see if some S & L's could save themselves with more business choices. That was retarded thinking.

The over-regulation allowed the bulk of S & L's to continue operating under a non-viable business plan about 10 years longer than they should have or would have under actual market conditions (like being free to dissolve, start making boats, etc). One of the final regulatory insults was to change the accounting rules for the populist, depression era baby of the new deal reformers (the S & L's), was to create special accounting rules for them so they wouldn't all blow by the 3% capital reserve standard.

It gave them more time to hang themselves in the market place, by (are you ready for this?) throwing present value theory out the window and allowing the S & L's to amortize losses on the value of their mortgage portfolio to be amortized out into the future. In other words, posted later, after this bunch of regulators retired, I guess.

OK. I'm done for now

 

[Randolph Kinney]

After thirty-two years in the mortgage business as an appraiser, I am very close to calling it quits.

<snip>

I haven't even started on the minimum payment ARM which so many borrowers took out that helped to propel the real estate market higher and higher over the past five years. Enough has been written about teaser rates and 100% to 125% loans so I won't burden you with that.

The "AVM's" and piggy-backs are finally coming home to roost. I for one am raising my fee's for an "Honest and unbiased" appraisal. No more driveby's for $250.00 or 1004's for $350.00. Since fees haven't gone up up in over 8-10 years, it's high time they did! If the broker's continue to rule the mortgage landscape, you can count me out! If you continue to play their game of reduced fees, you will ride them all the way down to $100.00. Try paying your health costs with that!

Welcome James (to this thread and to the forum).

My input to your post is - don't quit. Times are tough and will become worse. The toilet of bad loans has not yet flushed. I look forward to the settling of accounts with those people who enabled or participated in fraud to make the deal work. The sad part will be some appraiser who is caught up in a bad loan who did a good appraisal but the misrepresentation of the borrower's employment, income and assets are what caused the loan to be made and ultimately the default.

Loose lending standards are another issue that has caused loans to be made that should not. 100% LTV loans with high DTI and poor credit scores are now proving to be more risky than what these lenders and investors bargained for. The real estate market has turned from a rapidly rising value to flat to declining value and therefore can't be used to bail out a distressed borrower. Again, the appraiser involved with these loans may suffer the consequences when they default.

The good that will come from this mess will be a thinning of the herd - lenders, mortgage brokers, loan officers, AMCs, and appraisers.

The bad that will come from this mess will be a loss of public confidence in the real estate professionals. The worst may come to be a severe financial loss to hedge funds, insurance companies, pension funds and 401(k) plans holding CDOs, securities in subprime lenders, or other mortgage back securities.

 

[James E. Manning]

Try this on

Speaking of accounting, how about the ability of lenders to book the total, fully amortized payment as income even if the borrower is only making the minimum payment and accruing the difference in his loan balance? What are they thinking?

Did you know that the average age of an appraiser in California is 55? Most of us are pretty old to be changing our ways but I think we collectively really need to look at ourselves as this unravels. I think most of got into this racket because we value the independence it brings. However, I don't think this business model will work anymore. We are too fractured. We need to be more unified like NAR with all their political clout.

This may turn some of you off or even offend some of you but I think we should unionize. I don't mean join an association or participate in the Foundation. I mean join a union like the teamsters or AFL-CIO (if they would have us). A group with teeth. Could you imagine brokers and lenders beating us up if we were members of the Teamsters?

The stage hand is in a union. The school teacher is in a union. The postman is in a union. The pilot is in a union. The people that clean the room at the Ritz-Carleton are in a union. The bus driver is in a union. The list goes on.

You want an appraisal? Hire a union appraiser. PAY UNION APPRAISAL FEES!

You continue to do things the way we have for the last thirty years, the fees will be the same in the next thirty years.

 

[Randolph Kinney]

The Social Cost of Subprime Loans

http://www.marketwatch.com/news/story/minorities-paying-more-home-loans/story.aspx?guid=%7BE0A6F388%2DEDC7%2D4C65%2DA45A%2DD4A2F0A127F1%7D

You can bet that the government is going to really react negatively over the data of borrower's race and high interest rates, bad loans.

WASHINGTON (MarketWatch) -- African-American and Latino borrowers are paying more than whites for home loans in six areas around the country, a study released Thursday showed.

In all six areas, the report found, African-American borrowers were almost four times more likely to get a higher-cost home loan than white borrowers. In those same six areas, Latino borrowers were also almost four times as likely to get a more expensive loan, the report said.

The report focuses on both prime and subprime lending by Citigroup, Countrywide, General Motors Corp. unit GMAC, HSBC, JPMorgan Chase, Washington Mutual, and Wells Fargo. All those banks originated "a substantial volume" of prime and subprime loans, the report said.

House bill tightens rules on Fannie Mae, Freddie Mac

http://www.marketwatch.com/news/story/new-rules-proposed-fannie-mae/story.aspx?guid=%7B058E24DD%2DD73E%2D48CE%2D9892%2DD82E49413421%7D

Bill gives more power to regulator, creates affordable housing fund

WASHINGTON (MarketWatch) -- Big mortgage-buyers Fannie Mae and Freddie Mac are facing congressional action once again that would create a more-powerful regulator for the companies, which are both cleaning up their books after accounting problems forced big restatements.

Authored by Reps. Barney Frank, D-Mass., Richard Baker, R-La., and others, the bill would also direct some of the companies' funds to an affordable housing fund.

Frank has said that about $500 million a year would go toward affordable housing programs.

The bill proposes taking contributions from the companies for the housing fund equal to 1.2 basis points on each company's outstanding mortgages. Contributions would be made each year from 2007 to 2011. The program expires after 2011.

 

[hastalavista]

This may turn some of you off or even offend some of you but I think we should unionize. I don't mean join an association or participate in the Foundation. I mean join a union like the teamsters or AFL-CIO (if they would have us). A group with teeth. Could you imagine brokers and lenders beating us up if we were members of the Teamsters?

The stage hand is in a union. The school teacher is in a union. The postman is in a union. The pilot is in a union. The people that clean the room at the Ritz-Carleton are in a union. The bus driver is in a union. The list goes on.

You want an appraisal? Hire a union appraiser. PAY UNION APPRAISAL FEES!

You continue to do things the way we have for the last thirty years, the fees will be the same in the next thirty years.

This thread is the longest on the forum, so I think there is some leeway on staying on/off the specific topic for short spurts, so I'll go "off" real quick to comment on your point:

I don't find the idea of a union offensive. I just find it ineffective. Lawyers, Realtors, Accountants, Doctors, Actuaries, Architects and a number of other "professional" industries do not, as a general practice, have unions. In the case of lawyers & Realtors, who can argue that they need a union to have "clout"?

I do agree with the description of our profession being "fractured". I would also say that a serious problem is appraiser-created (or, perhaps, mandated licensing created? And, I say this as one who has benefited from that licensing mandate): Pick 100 appraisers at random. Of those, how many understand what they are actually doing? All could probably fill out a form. But how many could complete an appraisal without the form? Provide 100 appraisers with a copy of USPAP, no form, and present them with the following problem:
I am a private individual who needs to have my typical home appraised for two reasons:
A. I need to know what the value was a year ago for tax purposes. I plan on giving this to the IRS.
B. My wife and I may split up and we've agreed to have the house appraised by one appraiser for current value. That way, if we do split-up, we will use it as a basis for our asset distribution.

The appraiser has a copy of USPAP. Ask 100 this question. How many would know what to ask in follow-up to this simple two-part question. How many that never did this type of assignment would advise the potential client that they've never done one before? How many could complete the assignment without a form to follow?

I don't know how many could do it. I can only guess. My guess is less than 50% and I hope someone could prove me wrong.
If I am right in my assumption above, then the only thing that probably could maintain a high fee at this level of "professional awareness and competence" is a union.

Just my 2-cents! I'll stay on topic from now on. :new_smile-l: