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Posts Tagged ‘AMC’

[Matrix Zeppelin Series: Readers Write] Thoughts About Trolling For Crazy Prices, Phantom Listings And Causation

August 9, 2006 | 10:11 am | |

August should be a slow month for real estate commentary as people take time off to relax, assuming they are not melting as the sun seems to be crashing to earth. Matrix readers however, have been cranking up their air condtioners and reflecting on housing related economic changes.

Throwing caution to the electric power grid, here’s a few notable comments from the Matrix Zeppelin:

  • When housing prices were going through the roof, the FED kept interest rates low, based on the fact that “inflation,” which uses rents as the basis of housing costs, was low. Greenspan and then Bernanke made the case that the FED should focus on inflation, not asset prices (like the price of owner-occupied housing). How that housing prices are softening, but rents are rising, it appears the measure of inflation is shifting to the former. Bottom line: policy is inflationary. Governments, households, and (if you include pension liabilities) businesses are deep in more debt than they can service. Those debts cannot be paid in today’s dollars. The options are a reduction in the value of the dollar, which is to say inflation, or mass default. The hope appears to be that inflation will bring nominal income up to the level required to support today’s housing prices and credit card debts. The problem: lots of the debt is variable rate. But someone seems willing to lend for 30 years for no more than the return on cash. Amazing.

  • …allowing for inflation and a weakening dollar just to rescue those who got into real estate over their heads. I’m not certain why anyone should feel responsible for their behavior anymore, if the government is just going to come in and clean up their messes for them.

  • I wonder if any meaningful proportion of the residential listings currently on the market are sellers who are not serious and/or are “trolling” for a crazy price. I know several people personally who have their apartments listed but whose selling is strictly optional (meaning, they don’t have to relocate, don’t need a larger space for more kids, etc.), and their pricing reflects their flexibility. They offer what they consider to be a “score” price, meaning if they sold it at that they’d be very happy with their returns. That might be one of several contributing explanations to the reduction in sales volume without a related reduction in prices, a phenomenon you’ve mentioned several times and this article [CNN/Money] reminded me of again.

  • One could hypothesize that there is currently a greater proportion of such listings in the total, due to the widespread perception over the past year that the “bubble” was peaking. That might account for a bit of “phantom” inventory in comparison to previous eras. One could then extrapolate that the inventory growth or level was somewhat exaggerated.

  • The WSJ journal incorrectly states that the boom began in 1991. However, prices in many places were in decline for several years after that. Their chart shows that the decline in sales activity stopped getting worse in 1991, but remained below the long term trend until 1998. I would pick that point as the start of the “boom.” Until then it was merely a weak recovery.

  • Your use of the term “stagflation”, two days in a row make me want to go out and find a used AMC Pacer to buy.

  • I believe between 2002-2004 we were all playing in a market that never really existed. With the correction of compliance over appraisals we are now starting to see who we can start pointing fingers at.

  • Low rates and exotic loans allowed people who could not purchase in the past the chance to buy a home. But eventually, prices (in certain areas) ran much higher than median incomes could afford. And now we have the market slow down and eventual correction. How the correction will play out… I really don’t know. I think many like to point to RISING mortgage rates (and will do so more and more) as the cause of the housing slow down, but I think it was the low rates (and exotic loans) that ACTUALLY caused it.

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No Smoking Gun: Appraisal Inflation Is More Widespread Than You Think

July 25, 2006 | 12:01 am | |

The Wall Street Journal does a brief piece on what will likely prove to be a significant issue for many property owners down the road (getting big air): inflated appraisals. Its encouraging only because its on the front page so hopefully it will get attention from the regulators. The article New Headache For Homeowners: Inflated Appraisals Rosy Valuations, Common In Boom, Now Haunt Sellers; It’s ‘Pay-the-Piper Time’ [WSJ] however, uses the same cast of characters in its coverage.

Here’s why the problem doesn’t get reported as extensively as it should: There is no smoking gun. 

Any new stories about inflated appraisals these days seem to originate from the National Community Reinvestment Coalition, a Washington-based nonprofit that supports low-income housing who last year came up with a novel solution to the appraisal problem. I have covered the efforts of NCRC before [Soapbox].

Why does the appraisal inflation issue get so little play in the media? Likely because most real estate mortgage industry people close to the issue downplay the problem since there has not been a quantifiable cost to be held accountable to. Here are samples of the typical mortgage industry response.

National Association of Mortgage Brokers, says brokers shouldn’t pressure appraisers to distort value estimates. But he advises appraisers to create and enforce their own ethical standards.

Their recommended solution of self-policing is a cop-out and rarely works in any profession. The appraisal industry is one of the most fragmented of all.

This don’t ask, don’t tell attitude has created the appraiser mantra -  Get work.  Hit number anyway you can.  Do it Fast.  Get more work. Talk a lot about servicing the clients needs. Repeat.  If the appraiser doesn’t take this path, then they need to find other types of clients.  A whole generation of experienced appraisers have been forced out of the business.  Its the era of the appraisal factory.  Inexperienced personnel cranking out the reports is the norm of today.  Some firms have appraisers that can generate 40-50 reports per week.  Think about the time spent coordinating the appointments, travel to and from the property, inspect, visit all comps, confirm data, write up report, review, deliver, follow up on client questions and concerns, field irate calls from clients or borrowers if the appraisal is too low to make the deal, re-work report, re-send new final version…times 40 in a week?

Lenders often play down the issue. Tim Doyle, an official of the Mortgage Bankers Association, says he sees no “broad” problem with inflated appraisals, outside of criminal rings engaged in fraudulent mortgage deals. Even though mortgage lenders typically sell loans to investors shortly after making them, the lenders have an incentive to ensure those loans are backed by property valued at least as much as the loan balance, Mr. Doyle says. Investors can force the lenders to buy back a loan if it goes into default and the appraisal was fraudulent, he says.

So the MBA is saying, if it becomes a problem, then leave the risk assessment to the buyers of the mortgages on the secondary market and then the lenders will reimburse them. However, if poor quality is so widespread, then how does this solve anything? The banking industry, at least at the upper levels, who tend to be detached from these sort of front line issues, like the way things are. Lenders will only start to complain when poor quality begins to affect profits or there are other economic incentives or federal regulations for enforcement.

To summarize the players in the appraisal process who are happy or at least satisfied enough to stay with the status quo with the process:

  • Banks/Mortgage Bankers – they want to keep costs down and as long as someone with an appraisal license says the value is ok, then there is nothing to worry about.
  • Mortgage Brokers – they want to continue to retain control over the appraiser, after all, mortgage brokers are paid only if the transaction goes through and this is a way to ensure that continues to happen. They say that appraisers should self-police themselves.
  • Appraisal Management Companies – The less quality concerns by banks there are, the more business they are able to generate, so of course they are happy with the status quo.
  • Many Appraisers (Usually large firms aka ‘Appraisal Factories’) – High volume appraisal firms are happy with the way things are and have figured out that the secret to additional revenue is simply volume with no problems for their clients to deal with. Its easy to find those appraisers – just look and see if their client base is nearly 100% mortgage brokers.

The WSJ sights the seminal October Research study from 2003 which says that 55% of appraisers are pressured to change a value. Of course that is a wildly conservative number if reality is factored into the process. If an appraiser refuses to change the number or bend, they simply don’t get work anymore and therefore the occurrence of the pressure goes away (if their appraisal practice doesn’t go away first).

There is virtually no appraisal oversight of appraisers on a state level (which is responsible to administer the federal law) because there is limited funds available for it and to make matters worse, many states take a portion of the revenue from licensing fees and allocate it to other purposes.

The notion that appraisal management companies (AMC) create a ‘Chinese Wall’ so the bank does not control the appraisal process is incredibly misleading and disconnected from the realities of lending. AMC’s are usually only able to attract the bottom of the barrel (my apologies to the few exceptions). They are the worst element in the appraisal industry because of the low fee structure and unrealistic turnaround time requirements. They have nurtured an army of form-fillers. AMC’s are only able to competently rate this vast army of form-fillers by how quickly their turn around time is. In other words, since these appraisers generally can’t afford data services or don’t use what is available, the AMC appraisers often rely on data from the broker involved in the sale – a tainted data source in lending parlance – to generate a quick value to get more work. If they do get data from public record, they are unable or simply do not confirm details like condition, view, concessions, etc.

The person determining which appraiser gets the work, isn’t the one who has their collateral at risk – and aren’t those lending institutions the ones at risk, and aren’t they federally insured?  Licensing initiated in the early 1990’s after the S&L debacle has built an army of form-fillers who are simply rating on how fast they are.  Why? If you have a license, thats all you need to be in compliance. Speed, significant negligence and short cuts.  This system worked fine as long as the market was going up if you subscribe to the don’t ask, don’t tell theory.  Well, the market isn’t rising now, or at least not as dramatically.

The appraisal inflation problem is much more serious than reported yet it can’t be proven by stats since the market has kept rising, hiding the problems.  Most of the players connected to the process are generally happy.

The appraiser has no independence in the appraisal process, in any way shape or form. The entire structure of the mortgage appraisal system is seriously flawed. I find it absolutely amazing thats its been able to go on this long without some sort of regulatory concerns raised.

Are We Damned If We Do Or Damned If We Don’t? Cause It Seems Like Deja Vu All Over Again[Soap Box]

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[Soapbox Cleaning] Readers Get Worked Up About AMC’s, Wamu Layoffs

July 17, 2006 | 8:29 am |

Soapbox readers provided commentary about last week’s decision to close the in-house residential appraisal department at Wamu signified the end of an era. AMC’s won because when you get right down to it, its all about short-term costs in upper management, not about long-term exposure and risk. Soapbox would like to thank today’s B-Schools for this.

Soapbox readers write:

  • I am saddened by the shift to AMC’s. It is nothing short of catastrophic that these “efficiency’ mills win because of greed and impatience. We will all pay for it in the long run.
  • Optis was there homegrown loan Origination System that they completely blew up. I believe they dumped over $1B into this system that never worked. There appraisal management system is Optis Value, not Optis. This system functions fine and actually enabled WAMU to benefit from enormous increases in processing efficiencies and staff reductions on their operations side. This fact was reiterated by WAMU executive as recently as yesterday. There is nothing wrong with there Appraisal Management System, this was purely a senior management decision to move from an in house Appraisal Department to a VMC model.
  • May its time the appraiser took a stance against the AMC’s. You know full good and well that the fees that have been paid will be cut in half or better. The AMC are acting more like an employer every day. Maybe they should be made to toe the line like an employer and the appraiser gets additional benifits. Looks like the ranch is looking better and better every day now.
  • Yes, as an independent fee appraiser I have seen most potential review assignments go to the same low price fast turn-around incompetent form fillers who write the garbage reports that are up for review. They all must have been gone the week of the 4th, because I picked up a few review assignments, with my standard fee and turn times, and I can not believe the crap some appraisers are trying to get away with now days. All three sales from another county when there are three good comparables within a few blocks of the subject; 20% to 50% price inflation instead of the 5% to 10% that we are all used to seeing; and reports without ANY comments!

We even had someone who felt AMC’s were the only way to order a USPAP compliant appraisal because it eliminates the everyday pressures applied by mortgage brokers. You gotta think the reader’s heart was in the right place.

  • AMC’S are the only entities that contract out for unbiased appraisals – in other words they are the only entities that order USPAP compliant appraisals. Our office has a swinging door for standard mortgage companies that order appraisals because they only order until the first one does not hit value, then they go somewhere else. In my review work, only about half reflects good work, the rest are just trying to keep their clients. I hate AMC’s, but it is the price I pay for being honest.
  • You make an interesting point and I think your heart is in the right place but I disagree with the intentions of AMC’s. AMC’s don’t order appraisals based on making the deal like the mortgage brokers are often accused of. However, the fees are so low, that for the most part, and no offense, but their appraisal panels are the bottom of the barrel. Does the lender get a better understanding of the collateral? No. AMC appraisers quite often rely on all their comps from the broker involved in the sale who has a vested interest in the outcome. In other words, the order AMC process may be not as biased toward the outcome, but the mechanics of the appraisal certainly are and the outcome is the same.

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Bank Mergers Increases Need For Moral Flexibility

March 20, 2006 | 12:02 am |
Source: NYT

Floyd Norris’ column asks: Do big bank mergers lead to more crime? And is that a reason to toughen antitrust enforcement? [NYT]. His article is based on a study published in the Journal of Finance: Bank Mergers and Crime: The Real and Social Effects of Credit Market Competition

The study uses micro-evidence that:

Neighborhoods that experience more bank mergers are subject to higher interest rates, diminished local construction, lower prices, an influx of poorer households, and higher property crime in subsequent years.

A First-Hand Appraisal Professional Testimonial

We can see this specifically within the appraisal profession. I have been talking about this for more than a decade. The wave of bank mergers has removed local oversight from the appraisal review function. In other words, appraisers that are morally flexible have been able to thrive because of this disconnect.

Large bank mergers generally result in a system of central controls and as a result, national vendors get appraisal contracts over locals. The irony here is that the national venders, known as appraisal management companies (AMC’s), track appraisers based on speed and whether they have a license, with a fee structure that is half the going rate.

Guess what happens? AMC appraisers can not afford to purchase reference materials and data. But it doesn’t really matter since they are only worried about turn times.

The pressure on reputable appraisal firms remains incredible.

If this is what happens in a fairly cut and dry scenario, I can only imagine what happens in more complex financial transactions.

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With A Flag, An I-Beam and a Christmas Tree, The Party Is Just Getting Started

February 27, 2006 | 12:06 am | | Milestones |

Ever since I was a kid, I remember seeing and reading about Christmas trees on top of buildings under construction but they were not quite finished. I also remember seeing an American flag and there was usually a ceremony of some kind that was covered in the newspapers.

There has been a tremendous amount of construction in recent years and I started thinking about topping out ceremonies:

What is this all about? Why a tree?, and Why was I looking up instead of watching where I was walking?

According to Modern Steel Construction / December 2000 [pdf]

When or how it started, but the tradition of ‘Topping Out’ has become a cherished custom of Ironworkers whenever the skeleton of a bridge or building is completed. Topping Out is a signal that the uppermost steel member is going into place, that the structure has reached its height. As that final beam is hoisted, an evergreen tree or a flag or both are attached to it as it ascends.

This tradition of ironworkers is most closely associated with the International Association of Bridge, Structural, and Ornamental Ironworkers union in Washington, DC.

“Topping out” is the term used by ironworkers to indicate that the final piece of steel is being hoisted into place on a building, bridge, or other large structure.

The project is not completed, but it has reached its maximum height. To commemorate this first milestone the final piece of iron is usually hoisted into place with a small evergreen tree (called a Christmas tree in the trade) and an American flag attached. The piece is usually painted white and signed by the ironworkers and visiting dignitaries (figure 1). If the project is important enough (and the largesse of the contractor great enough) the ceremony may culminate in a celebration known as a “topping out party” in which the construction crews are treated to food and drink.

For those who are into Scandavian mythology here is the History of the “Topping Out” Ceremony [Columbia University] via The Ironworker magazine.

Topping Out Bear Stearns NYC

Mohawk Indians are the most well-known ironworkers and are close associated with topping out buildings.

Here’s a sampling of local coverage for a typical event:

Topping Out at 7 World Trade Center
Topping Out At The Ukrainian Museum’s Top Project
Topping Out the Blanton: That tree on the roof? Means the new museum is A-OK.
Vought-Alenia plant to be topped out

but its not limited to the US…

New unit at Northwick Park Hospital finished [UK]
New home to help juveniles re-integrate [HK]

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