Matrix Blog

Government, Politics, Regulations & Policy

Flipping In Secret

August 29, 2005 | 9:36 pm |

A survey of recent condo sales in Miami showed that nearly half the condo owners were LLC’s. It is believed that these are mainly speculators. Corporations and foreigners often create an LLC when purchasing real estate to protect themselves from liability. Speculative flipping appears to be on the rise in metropolitan areas around the country.

If you have been appraising for a while, remember the painful experience the FDIC’s bailouts starting with Vernon Savings and Loan in Vernon, Texas in the late 1980’s? This was often claimed as the straw that broke the camel’s (FDIC’s) back and a flood of bailouts soon followed. One of the reasons for the collapse was the high volume of property flipping, with the same property often transferring several times in the same day. While the stories are different today, flipping is still occuring.

Buyers and sellers are increasingly withholding information that as appraisers, we are bound to verify. According to USPAP, we are supposed to report all prior transfers within the past three years. Our licensing requires us to disclose what we were unable to verify that is needed for the valuation.

It is now even more important than ever to get a copy of the contract and review it. We are stumbling into undisclosed flips more than in prior years. Flipping appears to be one of the reasons Fannie Mae recently redesigned their appraisal forms.

How do we determine if there is a flip? Usually, an experienced appraiser will notice that the sales price, even considering an optimistic appreciation assumption, doesn’t make sense and match the names in the contract with the owner on record. For the appraisal firms that do high volume with trainees, I hope you have good E & O insurance. 😉

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PMI: Going Over Your Limit

August 28, 2005 | 1:00 am |

See previous post on Matrix: PMI Gets You In The House: Now Get Rid Of It.

The Homebuyers Protection Act was passed by Congress in 1998 requiring lenders to notify homeowners when the equity in their home reached a level where PMI was no longer required.

Here is the testimony of Richard J. Roll, Founder and President, American Homeowners Association (AHA) in front of the United States Senate Committee on Banking, Housing and Urban Affairs on February 25, 1997 on PMI. He was speaking about the abuse of PMI overcharges.

“Your home falls under this act if you purchased, constructed, or refinanced your single-family home after July 29, 1999, and your loan is not a government-insured FHA or VA loan. If you purchased your home before July 29, 1999, your lender is not required to cancel your PMI when you reach 20 or 22% equity, but many lenders will do so if you ask.

Here is an article on the costs associated with PMI insurance to homeowners.

There is significant incentive for a homeowner to get PMI removed from their loan payment. In order to do this you need the services of a certified real estate appraiser to provide a value estimate. If the home has appreciated enough to where the equity is at least 20% of the overall value, then the odds are relatively good that you can get the lender to remove the PMI.


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PMI Gets You In The House: Now Get Rid Of It

August 28, 2005 | 12:41 am |

percent Homeowners can save thousands by canceling private mortgage insurance [PMI]. PMI is an insurance on the top 20% of the loan so the lender is assured that they will get the full 80% or balance of the funds outstanding if the property goes into foreclosure.

The Homebuyers Protection Act was passed by Congress in 1998 requiring lenders to notify homeowners when the equity in their home reached a level where PMI was no longer required.

“Your home falls under this act if you purchased, constructed, or refinanced your single-family home after July 29, 1999, and your loan is not a government-insured FHA or VA loan. If you purchased your home before July 29, 1999, your lender is not required to cancel your PMI when you reach 20 or 22% equity, but many lenders will do so if you ask.”

How to Cancel PMI Here’s a great article on removing PMI from your loan by Chip Wagner, an accomplished appraiser in the Chicagoland area. Most lenders require and approved and state certified appraiser to perform the evaluation.

Here’s how they do it in Minnesota. I suspect it is not much different than other states.

Note: Check with your lender for specific instructions.


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Eminent Domain: Nice Home, I’ll Take It

August 27, 2005 | 8:56 pm |

Eminent Domain refers to “the power possessed by the state over all property within the state, specifically its power to appropriate property for a public use.”

The valuation principal behind this is the idea that the highest and best use for the property will benefit the public which supercedes the private property rights of the property owner. This has been unnerving to many because property ownership is perceived as a basic tenent of citizenship in this country.

Last week, the Supreme court announced that it would not re-visit [Note: Paid Subsc.] the controversial ruling made in the eminent domain case, KELO et al. v. CITY OF NEW LONDON et al.

In the original decision, the Supreme Court found that local governments have the right to take private property if it faciliates economic growth. The New London case was controversial because the area to be taken was comprised of residential homes that were not blighted or crime-ridden. Another sore point was the fact that developers are making a profit against the loss of private property.

Before the New London case, the Poletown case in Michigan 20 years ago was seen as a leading symbol of eminent domain abuse.

There is the potential for abuse by government authorities in these takings and the fear of a land grab by developers who have strong political connections with local governments. This ruling has begun to prompt states to examine when a government should take private land, what methodologies should be used for fair compensation as well as others

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Fannie and Freddie Now Have To Tell

August 20, 2005 | 11:48 pm |

Its hard to imagine its finally happening, but regulations proposed in early 2005 were just finalized that make Fannie and Freddie now responsible to detect and report mortgage fraud to OFHEO [Office of Federal Housing Enterprise Oversight [Note: PDF]].

This is a first step (albeit tiny) in creating some sort of enforcement activity against mortgage fraud considering the trillions of mortgage dollars under their watch. However, I am not sure what ability they will have to undertake this responsibility.

Now its time to turn attention to state enforcement, to ensure they have adequate budgets to fight appraisal fraud.

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Home, Sweet, Condo?

August 18, 2005 | 10:20 pm | |

According to this article from the Real Estate Journal [Note: Subscription], condo prices exceeded single family home prices for the first time ever in early 2005.

Condo Facts
* Condos leapt to prominence after the 1961 Housing Act enabled the FHA to insure mortgages on the units.
* 970,000 condos were sold nationwide in 2004
* 1 out of 7 existing home sales are condos
* national median condo sales price is $223,500
* national median home sales price is $218,600

Why are the overall condo prices higher than houses?

With the resurgence of urban areas and a decline in “nuclear” families (40% in 1970 to 24% in 2000), condos have increased in demand.



Areas of Concern
Now there is concern that the change is more than demographics, that condo prices are rising too fast [Note: WSJ Subscription] as a result of speculators and investors favoring them over housing.

With great investor concentration in condos, could infer that the single family housing market has the potential to be less volatile in a market down turn.

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Well, Maybe The Inflation Threat Is Not That Bad After All?

August 18, 2005 | 2:32 pm | |

Yesterday, the Bureau of Labor Statistics released the CPI figures for July and while core inflation was relatively flat, energy and housing saw large gains. The concern was that oil was threatening to fan the flames of inflation. The PPI Report

A day later that concern seemed a bit exagerated as…economists expressed little concern [Note: Subscription] that the higher prices producers are paying signal broad inflation.

Economists also pointed to Tuesday’s consumer-price report, which showed a modest 0.5% advance in July, with the core rate increasing a benign 0.1%.

In addition, the producer-price index for intermediate goods rose 1%, largely because of energy-cost pressures, and the core intermediate index fell 0.1%, the third consecutive monthly decline.

What is the Producer Price Index? In other words, CPI measure price changes to the buyer while PPI measures price changes to the seller.

Rising oil prices appear to be slowing economic growth and placing investor concerns of inflation at ease for now.

Economic stats seem to be more volatile than ever. For example, core cpi would have been even lower had it not been for the rise in auto prices, yet this does not correlate with recent record auto sales due to aggressive discounting. Economists have long complained about the reliability of auto sales and later revisions. Accounting for about one-sixth of US jobs, so the impact of these stats affects the reliability of the overall numbers significantly.

What does all this mean? Many believe the Fed has at least 3 more increases in it before the end of the year. This doesn’t seem to mean that mortgage rates are bound to increase.

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FBI sees double the Suspicious Activity Reports

August 15, 2005 | 3:49 pm |


The Federal Bureau of Investigation received more than double the number of mortgage-related “suspicious activity reports” from 2003 to 2004.

Common mortgage fraud schemes include:

  • Property Flipping – Property is purchased, falsely appraised at a higher value, and then quickly sold.
  • Inflated Appraisals – An appraiser acts in collusion with a borrower and provides a misleading appraisal report to the lender. The report inaccurately states an inflated property value.

Mortgage fraud indicators include:

  • Inflated Appraisals – Exclusive use of one appraiser
  • Increased Commissions/Bonuses – Bonuses paid (outside or at settlement) for fee-based services and/ or higher than customary fees

Mortgage fraud is growing and moving from cities to more rural areas and appraisals using fraudelent information is an important component.

If you look at what causes fraud, it’s a case of economics,” said Bill Matthews, vice president of Reston, Va.-based Mortgage Asset Research Institute, “If you have a frothy market it causes fraud to go undetected.”

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Supersized Housing With More Amenties

August 14, 2005 | 4:39 pm | |

According to the US Census, the average size of a house in the US is 2,349 square feet, up almost 300 square feet from 1990. We are seeing larger homes coming into neighborhoods called Faux Chateaus [Note: Subscription] or McMansions [Note: Paid Subscription].

Its not just the size thats increasing in new construction, more amenities are being added.

This trend tends to overshadow pricing in the housing market. Larger housing skews the overall market statistics, both median sales price and average sales price, so the rise in prices would be overstated.


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Addition Of New Housing Units Described As Evidence Of Population Growth

August 8, 2005 | 10:26 am | |

According to Crain’s New York Business, the city is filing suit against the Census Bureau [Note: Subscription] arguing that the addition of housing units was evidence that the population expanded since 2000, rather than contracted.

Its an interesting argument since the demand for housing has been particularly robust which can not solely be driven by low mortgage rates and changing demographics.

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Making Sense of Manhattan – Panel Discussion at the 92nd St Y

August 7, 2005 | 10:05 pm | | Public |

Making Sense of Manhattan @ the 92nd Street Y

After the positive feedback received for last year’s panel discussion of the same name, Braddock & Purcell (Kathy Braddock and Paul Purcell) are again hosting the same panel members at the 92nd Street Y this fall.

Last year Paul Purcell asked tough questions of all three panelists: Pamela Liebman, Alan Rogers [former Chairman of Douglas Elliman] and yours truly. I have learned a lot from Pam, Alan and Paul over the years and anticipate that this second edition of the panel will be equally, if not more informative.

Apparently the 92nd Street Y did as well because they booked a larger auditorium!

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Liability of Appraisers Who Help Understate Tax Liability

August 2, 2005 | 8:24 am | |

On the Tax and Legal update section on ERC’s web site, there is reference to an IRS memorandum that discusses applying penalties to appraisers who knowingly manipulate appraisals to help an individual pay less tax. Examples of appraisals done for tax purposes include estate tax, gift tax, facade easements and charitable contributions.

the IRS Office of Chief Counsel [note: pdf] discussed the possible application of section 6701 of the Internal Revenue Code to appraisers. Section 6701 imposes a penalty on anyone who aids or participates in the preparation of any return or document and has reason to believe it will result in the understatement of someone else’s tax liability.

What’s wrong with being held accountable for the value estimate? Nothing, except…

…and here’s the caveat, the person requesting the appraisal should be on the hook as well. The tax attorney or accountant is often the person trying to influence the appraiser. My problem with this IRS memo, is that the appraiser is left twisting in the wind.

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