The Role of Appraisal Inflation in Loan Securitization

July 13, 2010 by Mimi Miller.

The Role of Appraisal Inflation in Loan Securitization

By George W. MantorPrint Article Print Article

RISMEDIA, July 13, 2010—Street level appraisers have been getting a lot of heat for their role in the rise and collapse of real estate values and most of it is unfair. Without exception, every appraiser I have ever met was professional, direct, and considered the facts when arriving at his or her opinion of value.

That isn’t to say that there aren’t dishonest appraisers. I’m certain that just like any occupation, the percentage of bad apples probably mirrors the population in general.

And, there is no question that there is pressure, both subtle and not so subtle, to hit the “right number.” Opportunities certainly exist for appraisers to profit from either inflating or deflating values. But, blaming them or suggesting that they were responsible for the crash, fails to acknowledge the parties who had the most to gain from inflating values—like Wall Street.

Much of the misunderstanding emanates from an inaccurate view of the residential appraisal and its role in financing. The appraisal is not undertaken to determine the value of the property so much as to satisfy the underwriter that the risk is acceptable.

People are often shocked to discover that the appraiser already knows the contract price. But, the appraiser’s purpose is simply to verify that on the day in question, comparable properties were selling for similar prices.

It is but one piece of the financial intermediaries’ efforts at controlling risk. If the ability to collect on credit default swaps was contingent on a certain percentage of loans failing within a particular pool, then controlling risk is vital.

The appraisal is also part of the documentation used to support the quality of loans in a securitized pool. The financial intermediary wants the investor to believe that the value of the security is sufficient to justify the risk.

Comparable properties or “comps” are the meat and potatoes of the vast majority of residential appraisals.

There are other types of appraisal methods employed by lenders depending on either the uniqueness or complexity of the property being offered as security. But, for most residential lending purposes, underwriters rely on the comparable property method.

Most of the housing stock of the last fifty years has been tract development, both vertical and horizontal, offering only a few variations among thousands of homes.

Large areas of homogeneous housing make valuing homes fairly simple. They are a commodity. If they are clustered together, one can quickly see what a buyer in that area has to choose from.

That’s it. No complex algorithms or cryptic equations, just the principle of substitution. And that can change overnight if certain events occur.

Anything that brings more homes to market than the natural pace of activity can absorb will drive down the prices that buyers will negotiate.

One of the remarkable things about the period from 2004 to 2007 was the buyer’s willingness to pay more and more, and doing so because they believed that the replacement cost, i.e. the price of new construction was rising dramatically.

It is no mystery why the states that had the greatest amount of large scale new home construction also had the fastest appreciation rate despite the fact that you would think that all that over-building would keep prices flat or drive them down—but, no.

But, Wall Street had even more to gain than builders. Inflated values were a solution to a lack of borrowers. Demand was so great for the pools that they had to find a way to expand the market, and trigger the defaults.

They keep getting away with saying they didn’t know this would happen, and I keep saying that every consequence of this financial debacle was not only known to them, it was planned for, lobbied for, implemented by them in contravention of so many laws and regulations that run the gamut from local, city, county, state and federal that it suggests that there is literally nothing they would not do to make a buck.

They absolutely knew the consequences and got rich from them.

Remember, risk analysis is what they do. They are researchers, social scientists, accountants and lawyers.

They analyze risk and, as part of their business model, they are always keenly aware of value trends. They knew that one of the factors that would influence defaults would be a steep drop in values that would prevent the refis they promised and contribute to defaults across all pools of loans.

You may wonder, what difference does it make if they knew or didn’t know the consequences? It’s an element of proving fraud.

A misrepresentation is fraudulent if the maker (a) knows or believes that the matter is not as he represents it to be, (b) does not have the confidence in the accuracy of his representation that he states or implies, or (c) knows that he does not have the basis for his representation that he states or implies.

We keep forgetting the tool in all of this was information. The financial intermediaries had it and they studied it, and their denials that they knew this would happen fail in the face of their own research.

I found an interesting piece of that research, a little 20 page document called innocuously enough, “Global Economic Paper No. 177.”

It is produced by none other than Goldman Sachs Research Staff and its subject is Home Prices and Credit Losses.

“Regarding mortgage credit performance, feeding the predictions from the home price sales model into the mortgage loss model…”

Did you get that? They actually have pricing and default models. They know exactly what a home is really worth and they don’t even need an appraiser.

They knew exactly what circumstances were contributing factors to default.

They knew that the inclusion of certain terms in mortgage loan documents would cause foreclosure rates, which historically ran around 1% annually, to skyrocket to over 10%. Currently, as of mid-July 2010, nearly 13% of home loans are in default.

As a result, about a quarter of American homeowners have negative equity in their homes. Had the values been real, they would have held.

They knew that there were not nearly enough borrowers to place into loan pools to satisfy the demand.

They knew that wages had stagnated and affordability was becoming prohibitive to further lending.

The key to it all—inflated appraisals.

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10 red flags that signal your home’s weakest links.

May 25, 2010 by Mimi Miller.

Avert Disaster: Listen to Your House
10 red flags that signal your home’s weakest links
By Erik Forbes

Just like a car that sputters when something under the hood is amiss, houses send out warnings of their own. Protect your investment—not to mention your security—by learning some of the warning signs and seeking out help. Be sure not to blow off the red flags: Left untreated, these small problems can become big, expensive disasters.
Red Flag What’s Going On Get Help
1. Your water bill suddenly increases for no obvious reason
If you haven’t left the hose running for a few days by mistake, you may have a water leak someplace underground where it cant be seen. To confirm, shut off everything in the house and check the water meter reading over an hour. If the flow continues, you have a leak. Plumbing How-Tos
2. Slow flushing toilets and sluggish drains
Because toilets dump a lot of water down waste lines quickly they are usually the first to exhibit signs that there is a clog or trouble with a septic system. If other drains are slow too, you can be sure that it is the whole system that is not working properly and not just one cranky fixture. Untreated clogs can become a big, smelly mess. Unblocking a Cleanout
Emergency Drain Fixes
3. Rusty nails, dark wall stains and musty odors, but no leaks
Water damage does not need a leaky pipe or roof to occur. In many homes, problems with poor ventilation can cause water damage that is every bit as bad as a leak from a burst pipe. In fact, it can be worse because it often goes undetected longer and can cause health problems. Reducing Moisture Problems
Environmental Protection Agency
4. Doors and windows that will not close or keep opening, and mysterious cracks that keep getting larger
Sure your house could be haunted, but it’s more likely that your home is settling unevenly. Small expansion cracks in concrete or plaster are usually nothing to worry about but if there are more problems you should call a structural engineer. When it’s time to call a structural engineer …
5. You continually have to relight a pilot light on an appliance
The thermocouple is probably bad. (This is the safety device that shuts off the gas to an appliance when it senses that the pilot light is no longer burning.) A thermocouple is a “fail safe” device—that is, when it goes bad it performs its intended function regardless of need. So although your pilot may be on, the wayward thermocouple will still shut it and the gas off. Find someone to fix your furnace
6. Your clothes come out of the dryer too hot or still damp
Often lint will clog dryer vents that are too long or kinked. In some cases this will even lead to fires. To solve the problem dryer vents should be kept as short as possible and cleaned at least once a year Dryer Vent Maintenance Could Save Your House
7. Flu and allergy like symptoms whenever you are at home
Dirty air filters and dirty ducts in your home’s heating/cooling system can fill your home with sickening mold and bacteria. Other causes may include adhesives and chemicals in furniture and rugs and a lack of fresh air circulating into your home. Environmental Protection Agency
8. Hot switches and plugs, sizzling electric boxes, dimming lights and tripping breakers
These are symptoms of a seriously overburdened electrical system. Switches and plugs that get hot when you use them, sizzles and buzzes in electric boxes, lights that dim when you turn on other appliances and breakers and fuses that continually need to be reset or replaced are red flags saying you need to upgrade your electrical system. Unchecked, this problem could escalate into a fire hazard. Charting Electrical Circuits
9. Small holes in wood surfaces, mud tunnels along foundations, and sawdust
Sounds like termites are taking over. These pests are a problem everywhere, but especially in southern states. Because termites do most of their damage where it cannot be seen—inside the wood—you should always be on the lookout for warning signs. Have your home inspected if you suspect these monsters are present. Warm Weather Pests
10. Small piles of sand around roof drains and gutters
Just like sand in an hourglass, when an asphalt composite (tar paper) roof starts to go bad, the little grains of sand stuck to the paper start to fall off and flow down. When enough grains have fallen off that you see bare patches, it’s time for a new roof. Roof Maintenance Tips
National Roofing Contractors Association

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Boulder is a top place to live for 2010

May 5, 2010 by Mimi Miller.

America’s Top Places to Live for 2010
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RISMEDIA, May 5, 2010—The three most important things to remember when moving and buying a new home are: location, location, location. As potential home buyers start looking for new homes, RelocateAmerica.com, a leading website in providing relocating consumers access to resources for their upcoming relocation, has released its 13th annual list of “America’s Top Places to Live for 2010.”

The “Top Places to Live” list features several breakout categories such as the Top 10 Recovery Cities, Retirement Cities, ‘Earth Friendly’ Cities, Recreation Cities and Small Towns.

New for this year, the Top 10 Recovery Cities focused on areas poised for swift economic recovery. Many of these communities did not see the massive real estate bubble that formed in other areas and have a more diverse economy.

To be considered for the list, a community is nominated at RelocateAmerica.com. From the thousands of submissions, RelocateAmerica.com’s editorial team reviews the nominations and selects the top places to live, as well as the Top 10 for each smaller category, based on interviews with local leaders; feedback from residents; and economic, environmental, education, crime, employment and housing data for the past year.

“Given the tough economic times our nation is facing, home buyers have re-evaluated their priorities and are looking to relocate to communities that offer plenty of perks, but minimal hassle and cost,” said Peter Meyers, Vice President, Research and Content Development, at RelocateAmerica.com. “While some cities are facing a road to recovery that could take years, others are poised for a quick rebound – and already have seen growth. We wanted to highlight those cities that are on the road back to economic health.”

Top 10 Overall Cities:

1.Huntsville, AL
2.Washington, DC
3.Austin, TX
4.San Diego, CA
5.San Antonio, TX
6.Tulsa, OK
7.Charlotte, NC
8.Raleigh, NC
9.Boulder, CO
10.Minneapolis, MN
Top 10 Recovery Cities:

1. Huntsville, AL
2.Austin, TX
3.Las Cruces, NM
4.Washington, DC
5.San Antonio, TX
6.McAllen, TX
7.Billings, MT
8.Albuquerque, NM
9.Everett, WA
10.Boulder, CO
Top 10 Retirement Cities:

1.Ashville, NC
2.Bella Vista, AR
3.Green Valley, AZ
4.Sarasota, FL
5.Prescott, AZ
6.Tampa, FL
7.Greenville, SC
8.San Antonio, TX
9.Hot Springs Village, AR
10.Colorado Springs, CO
Top 10 ‘Earth Friendly’ Cities:

1.Portland, OR
2.Boston, MA
3.Madison, WI
4.Boulder, CO
5.Austin, TX
6.Chicago, IL
7.Minneapolis, MN
8.Fort Worth, TX
9.Ann Arbor, MI
10.Huntsville, AL
Top 10 Recreation Cities:

1.Boulder, CO
2.Santa Cruz, CA
3.Flagstaff, AZ
4.St. George, UT
5.Ithaca, NY
6.Corvallis, OR
7.Salt Lake City, UT
8.Stevens Point, WI
9.Wilmington, NC
10.Portland, OR
Top 10 Small Towns (<40K pop.):

1.Grinnell, IA
2.St. Augustine, FL
3.Fairhope, AL
4.Stillwater, MN
5.Summit, NJ
6.Ashland, OR
7.Batavia, IL
8.Ithaca, NY
9.Peachtree City, GA
10.Trumbull, CT

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8 things you must include in a financial plan.

May 3, 2010 by Mimi Miller.

8 Things You Must Include in a Financial Plan
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RISMEDIA, May 3, 2010—Just like a comprehensive will or family trust, people need to give serious attention to in-depth financial planning. Financial planning addresses everything that has to do with money. With your adviser’s help, you’ll leave no financial stone unturned. Should you refinance your mortgage? Should you buy or lease a car? What should you do with the inheritance from your grandmother? How can you get more tax-sheltered dollars out of your professional corporation? Where do the answers come from? They come from the “subsets” of financial planning – things like cash flow management and tax planning. The new guide from Mutual Benefit outlines eight areas of focus when preparing a financial plan.
Income Tax Planning
Tax planning actually spans all parts of your financial plan, such as investment strategies, retirement planning and estate planning. Specifically, you need to make sure you’re maximizing all available deductions, exemptions and credits to minimize your tax bite.
Retirement Planning
How much should you save for retirement? And how will you do it? Is retirement right for you? Your planner will discuss tax-qualified retirement plans -including IRAs, Keoghs, 401k plans, 403b plans, corporate pension and profit-sharing plans. You’ll also want to look at non-tax-qualified retirement plans, non-qualified deferred compensation plans, selective incentive plans and tax shelters.
Estate Planning
You’ll start with wills, trusts and estate distribution issues, but that’s not all. A good planner will help you construct a plan so you avoid estate taxes. Too few people worry about estate taxes—they’re too far away, too intangible. But the only way to avoid them is to strategically plan for them today.
Legacy Planning
A good planner will understand legacy planning. A good legacy plan comes from knowing, living and then planning from your values. You are building bridges that will take you and those you love to greater levels of abundance, purpose and significance. You’ll talk about those things that are truly important to you, and then determine the best ways in which to pass those values on after you pass.
Asset Protection
It is imperative to develop strategies that maximize protection of your assets from frivolous lawsuits or creditors in this litigious society. You don’t want to spend years saving and growing your assets only to have them taken away by ambulance chasers. Your planner should address ways in which to implement asset protection.
Education Funding
There are three basic sources of education funding: cash flow dollars, dollars from tax savings and compound interest dollars. You won’t want to use cash flow dollars as they’re the most expensive. Income tax savings and compound interest dollars are far less expensive but require advanced strategic planning. That’s what your planner is for.
Investment Portfolio Management
Entire college courses are built around portfolio management. Simply stated, your licensed investment advisor makes sure your portfolio is “balanced.” In other words, you need both long-term and short-term investments; liquid and illiquid investments; tax-advantaged and non-tax advantaged investments. As part of portfolio management, your registered investment advisor will discuss the pros and cons of different kinds of investments – stocks, bonds, money market funds, annuities, mutual funds, real estate, tangibles, limited partnerships and certificates of deposit, among others. You will look at the whole thing in light of how much risk you can tolerate.
Risk Management and Insurance
There are three basic things you can do with risk: You can avoid it, absorb it, or transfer it. Find out what you can do to avoid risk. Your planner might advise using trusts, family partnerships, or family corporations. He should tell you how to protect your assets from frivolous malpractice claims, frivolous creditors and similar problems. Your planner should also be able to give specific direction as to ways you can absorb or transfer risk.
For more information, visit www.mutualbenefitwealthmanagement.com.

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Colorado and New Mexico Top Places To Retire List

April 9, 2010 by Mimi Miller.

Colorado and New Mexico are AARP’s latest top unique locations for retirees. Baby Boomers are searching for retirement locations that aren’t based on available beach real estate. Tax incentives, health care options, weather and property values are the new beach front property.

Outside of financial or medical needs, baby boomers have separate criteria to search for their perfect retirement home. Based on their lifestyle, new retirees also focus on living simply, living environmentally friendly or living with a skyscraper next door.

Top 4 Places For Baby Boomers to Retire

Portland, Oregon is number 5 on AARP’s America’s Top Places for Boomer’s to Retire list. The bohemian feel of the small city attracts a European charm for lounging and relaxing. The city’s Pearl District brings shopping to diverse and eclectic levels meant for the unique individuals encompassing the city.

Rehoboth Beach, Delaware, a state once dogged by Wayne’s World in the nineties for being incredibly boring is number 3 on the list of top retirement destinations for baby boomers. The location, only 3 hours from Philadelphia and D.C., nestles majestically within America’s vibrant East Coast and is looking to have a 75 percent increase of retirees over the next 25 years.

Las Cruces, New Mexico is the surprising number two pick of AARP’s boomer’s list for top places to retire. The relatively mild climate and breathtaking landscape set in the Organ mountains inspires relaxation and affordable living.

Loveland, Colorado is numero uno on America’s Top Places for Boomer’s to Retire. The “sweetheart city” is 45 minutes from bustling Denver. Vast Colorado skies in view of the colossal Rocky Mountains make this city a winner for retirees looking for a small town feel with big opportunities.

Written by Amy Munday

Submitted by Amy Munday on Fri, 2010-04-09 13:58

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Credit Issues Slowing Recovery

April 7, 2010 by Mimi Miller.

Daily Real Estate News | April 6, 2010 | Share
Credit Issues Slowing Recovery, Execs Say
A survey of 200 real estate executives by Akerman & Co, a national commercial real estate company, reveals they believe credit issues and the volume of distressed properties continue to inhibit the recovery of the real estate market. The report found that:

79 percent of respondents said availability of credit and other financing challenges was the most pressing issue facing the industry.
65 percent believe that large inventories of lender-owned properties are preventing a recovery in the commercial real estate industry.
44 percent said inventories of distressed properties and their effect on pricing was the second most pressing issue.
54 percent believe residential is the real estate sector best positioned for a recovery.
20 percent said the industrial sector is best positioned.

Source: Akerman Senterfitt (04/05/2010)

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Existing Home Sales, Prices Decline

March 26, 2010 by Mimi Miller.

Existing-home sales fell 0.6 percent in February to a rate of 5.02 million units from 5.05 million in January, but they were 7.0 percent higher than the 4.69 million sold a year ago, NAR reported this morning.

The national median sale price of existing homes was $165,100 in February, a 1.8 percent decline from a year ago. Housing inventory rose 9.5 percent to 3.59 million homes, which represents an 8.6-month supply at the current sales pace, up from a 7.8-month supply in January.

First-time homebuyers accounted for 42 percent of all home transactions in February, NAR reports. Distressed homes — typically short sales and foreclosures that sell for a discount — accounted for 35 percent of all sales last month, while investors accounted for 19 percent of transactions.

NAR chief economist Lawrence Yun says stormy winter weather in February had a negative impact on the market. “Some closings were simply postponed by winter storms, but buyers couldn’t get out to look at homes in some areas, and that should negatively impact near-term contract activity.”

Yun notes that year-over-year sales have been higher for eight straight months, and prices are more stable than they have been over the past few years. But, he says, “the housing recovery is fragile at the moment.”

Regionally, existing-home sales data was mixed. Sales in the Northeast rose 2.4 percent to an annual pace of 840,000 in February and were 12.0 percent above a year ago. The median price rose 7.5 percent from February 2009.

In the Midwest, sales increased 2.8 percent in February to a level of 1.11 million and were 8.8 percent higher than February 2009. But the median price fell 2.0 percent below a year ago.

In the South, existing-home sales fell 1.1 percent to an annual pace of 1.85 million in February but were 6.9 percent above a year ago. The median price declined 4.2 percent from February 2009.

Existing-home sales in the West fell 4.7 percent to an annual rate of 1.22 million in February but were 3.4 percent higher than February 2009. The median price declined 9.8 percent from a year ago. Tue, Mar 23, 2010

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Metro Denver Economic Indicators

March 4, 2010 by Mimi Miller.

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Six economic indicators move in a positive annual direction in Metro Denver, up from one last month
Economic indicators for Metro Denver showed promising signs of improvement in March, according to data compiled by the Metro Denver Economic Development Corporation (Metro Denver EDC) in its Monthly Economic Summary for March 2010.

Nine indicators – including the indicator for foreclosures – moved positively for the month, compared to seven indicators in the prior report. Six indicators moved in a positive annual direction, compared to one indicator in the prior month’s report.

Recent residential real estate data suggest housing markets are shifting due to a variety of influences. The extension of the homebuyers’ tax credits in late 2009 removed a sense of urgency for buyers, therefore, existing home sales nationwide and in Metro Denver have slowed.

“Many buyers still hoping to receive the credits are now returning to the market, though, and brokers say the pace of home sales should accelerate in the coming months,” stated Patty Silverstein, chief economist for the Metro Denver EDC and president of Development Research Partners.

Increased sales volume should help home prices, which are stabilizing – and even rising – in some markets. The Denver-Aurora-Broomfield MSA, for example, was one of 24 metro areas to report an increase in median home price between 2008 and 2009.

As home prices continue to stabilize, mortgage delinquency rates should gradually subside. Data from the Mortgage Bankers Association show the nationwide delinquency rate declined in the fourth quarter of 2009, and Colorado’s rate ranked ninth-lowest in the nation. Significant delinquency challenges remain, though, as roughly one in 17 Colorado home loans was at least 90 days past due or in foreclosure in the fourth quarter.

Foreclosures are an even greater concern in California, Nevada, Arizona, Illinois, Michigan, and Texas – all key economic development competitors with Colorado.

“These six states alone represented 60 percent of U.S. properties with foreclosure filings in January,” said Silverstein.

The nationwide median home cost for 2009 ($173,200) was down nearly 12 percent over-the-year, while the median in the Boulder MSA ($346,000) fell by just 3.8 percent. Price trends were stronger in the Denver-Aurora-Broomfield MSA, where the 2009 median price of $219,900 represented a slight, 0.3 percent increase from the 2008 median. The Denver-Aurora MSA was one of 24 metropolitan areas to report an increase in median home price between 2008 and 2009, and the region’s median price ranked 26th-highest in the nation. The Boulder MSA’s 2009 median home price ranked 11th-highest overall.

Data from the Mortgage Bankers Association’s National Delinquency Survey for the fourth quarter of 2009 show Colorado’s rate of mortgage delinquency – 6.91 percent – ranked ninth-lowest in the nation.

Clearly, residential markets are facing a combination of early momentum and continued challenges. High unemployment and policy changes in the months ahead – including an end of the Federal Reserve’s financial support for mortgage-backed securities and the expiration of the homebuyers’ tax credits – will bring additional hurdles. Ideally, residential markets will build momentum in the coming months that can sustain a recovery as the policy environment changes.

The benchmark revision for national-level employment data shows the nation’s total employment loss from the start of the recession through December 2009 was nearly one million jobs higher than the data initially suggested.

The Colorado Department of Labor and Employment is currently conducting its annual benchmark review of the state’s employment and unemployment data. Statistics for the month of January and revised data for prior years will be released on March 10. A supplement to the March Monthly Economic Summary will be issued following the data release.

The Monthly Economic Summary provides a snapshot of metro area economic activity, as well as its relationship to national and regional economic trends. Key highlights include:

Consumer Sector
•The Conference Board’s U.S. Consumer Confidence Index fell abruptly between January and February as consumers’ assessment of present conditions – specifically, business conditions and the labor market – fell to the lowest level reported since 1983. Consumer confidence in the Mountain Region was little better, although consumer outlooks have improved from lows reported at the same time last year.

•Metro Denver retail sales followed a typical seasonal trend and declined between October and November. The November sales total, however, represented a significant slowdown in an over-the-year sales decline that had persisted for the past twelve months.

•The January average occupancy rate for Metro Denver hotels (51.1 percent) was slightly above last year’s rate. January’s average room rate was nearly six percent below the average from January 2009.

•December 2009 passenger traffic at Denver International Airport was 1.7 percent lower than the year-ago traffic level. Airport traffic for all 12 months of 2009 declined 2.1 percent over-the-year as businesses and households limited their travel.

•The three major national stock indexes ended February with gains from the prior month, but all three indexes still showed a negative year-to-date return. By contrast, the Bloomberg Colorado Index rose 2.2 percent year-to-date in February. The state’s energy and media companies reported some of the largest market gains.

Residential Real Estate
•A decline in Metro Denver home sales between December and January was roughly consistent with seasonal trends, but total January sales were 4.7 percent lower than the sales total reported one year earlier. Despite the slower sales activity – which was partly expected given the late-year surge in tax credit-driven home purchases – average sale prices showed signs of improvement.

•Metro Denver foreclosure filings in January fell more than five percent from filings reported in January 2009. Filings declined over-the-year in four of the region’s seven counties but increased in Boulder County, Jefferson County, and the City and County of Broomfield.

•The pace of Metro Denver building permit activity changed little between December and January, although January permits for all property types rose 21 percent from the number reported one year earlier. The gain was due to a year-over-year increase in single-family detached home permits, as January permits for the remaining property types fell below year-ago levels.

Commercial Real Estate
•According to CB Richard Ellis’ fourth quarter MarketView report for Metro Denver, large corporations drove what little office market activity occurred in 2009. Brokers expect a similar trend in 2010 because large corporations – as opposed to small or local businesses – are more likely to have access to capital and credit in a still-difficult lending environment. With the overall demand for space still limited, however, brokers say the wide gap between asking rates and signing rates will persist this year. As a result, office market development will remain stalled. Despite these challenges, CB Richard Ellis brokers expect Metro Denver’s dynamic economy and favorable balance of supply and demand for office space will help the region’s market recover ahead of markets elsewhere.

•A fourth quarter report by Grubb & Ellis expects large tenant transactions to dictate Metro Denver’s office market conditions in 2010. Grubb & Ellis brokers say 2010 should mark the bottom of the market, however, and lease rate spreads should begin to normalize by the end of the year. Notably, the Grubb & Ellis report shows negative office market absorption in 2009 represented the smallest recession-related loss reported in Metro Denver over the past two decades.

•A fourth quarter report by Grubb & Ellis shows Metro Denver industrial market vacancy rates – while low compared to rates for other property types – have risen thanks to two recession-driven trends. The collapse of the housing market put pressure on construction-related tenants early in 2009, and a pronounced decline in consumer activity strained retail warehouse tenants later in the year. The report notes, however, that the absence of industrial construction should help the market rebalance comparatively quickly. Grubb & Ellis brokers expect flex space leasing trends will remain weak in 2010, although properties near the National Renewable Energy Laboratory, Lowry, and Fitzsimons could move more quickly.

•A recent report by CB Richard Ellis notes that Metro Denver’s industrial market – while still facing considerable challenges – has less of a debt burden than other property types and industrial markets nationwide. As a result, CB Richard Ellis brokers expect the region’s market may not experience the same increase in distressed transactions that brokers expect to see in other markets this year. Because lease rates are significantly below levels that would promote development, though, brokers expect industrial market construction activity will remain subdued in 2010.

•A fourth quarter report by CB Richard Ellis suggests the downturn in Metro Denver’s retail market slowed as 2009 ended. Vacancy rates remained high and average lease rates continued to decline, but the somewhat slower erosion of market fundamentals that occurred in the fourth quarter suggests the retail market may at least stabilize in the coming months. Brokers note, however, that the retail market tends to lag other property markets and the rest of the economy, so a retail recovery is likely to take time. The report also suggests that retail construction and investment activity will be slow to rebound.

*A full report is available to Metro Denver EDC investors.

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Beware of this bill going through Congress. It will eliminate our choices and favor the big banks too big to fail!

March 3, 2010 by Mimi Miller.

Mortgage Banking Industry Threatened
By John Rebchook, on March 3rd, 2010
A portion of mortgage reform working its way through Congress that has received little publicity in the mainstream press, could have the unintended consequence of driving up the cost of 30-year mortgages, and driving out of business almost a third of the companies that make home loans.

Mortgage bankers and brokers in Colorado are among the most vocal opponents of the “risk-retention” requirement proposed in the Restoring American Financial Stability Act.

The idea is to require lenders to have some “skin in the game,” in an attempt to curtail lenders from making inappropriate, risky loans, a leading cause of the foreclosure crisis that swept the country starting in 2007.

Proposal goes too far

But the proposal goes too far by requiring lenders to retain up to 10 percent of the loan value for every mortgage they make that is sold into the secondary market, for as long as the loan in outstanding, according to a broad-range of critics. That would mean mortgage bankers and brokers – among other lenders – would need to have billions of dollars on hand, something they are not set up to do, opponents contend. (See chart below for an example of the impact to mortgage lenders.)

“To require a 5 percent or 10 percent risk retention, really penalizes independent mortgage bankers,” said Mike Rosser, who started in the Denver mortgage business since 1965.

“Most of the FHA loans that are being done, and have been done, are by the independent mortgage bankers,” added Rosser, now principal of an Aurora-based consulting firm, the Mortgage Investment Co. Inc. “This will be very bad for homeowners who want to get an FHA loan because they will have far fewer choices of where to go.”

HUD already polices lenders

Rosser said many in Congress do not realize that the U.S. Department of Housing and Urban Development, which owns FHA, “already has a very strong auditing program, a mortgagee review board, they do quality audits all of the time, and have a certain amount of capital requirements to get into the FHA business. So this is really redundant.”

Some lenders point out that the so-called toxic-loans of the past – such as options ARMs and other subprime loans- no longer are being made, while the plain vanilla 30-year mortgages have been packaged and sold as securities for decades, without causing the problems of the discontinued loans that were made without strict underwriting guidelines.

Skin in the game

Peter Lansing, head of Universal Lending, one of the largest privately held mortgage banking companies in Denver (and a sponsor of InsideRealEstateNews), said that Congress “wants us to have some financial skin in the game,” which is why it is considering the risk retention requirements.

“It’s if the industry took a loan, threw it over their shoulder, and took no responsibility actions was a good loan for their borrower,” Lansing said.

But despite the recent financial calamity involving so-called toxic loans, the lending industry has done very well when it properly underwrites conservative loans based on a borrower’s assets, appraisal, income, credit scores and work history, and debt to income ratios. In fact, a report completed this week, shows that borrowers of risky loans are more than three times likely to default than traditional loans. (For a separate story on that report, please go to this link.)

Congress may be unaware of consequences

Lansing said he does not see this as a Democratic or Republican issues.

“I honestly think that Congress has not thought this through,” Lansing said. “What Congress is proposing is ‘over-medicating.’ Congress does need to guard against future abuses which happened in the past. I don’t want to carry this too far, but just like building codes are stricter in the U.S., so if we have an earthquake, it doesn’t have the same devastation as we have seen in some other countries, with less stringent building standards. But we don’t need is over-medication, which will actually be devastating to consumers and mortgage lenders.”

Public in the dark

He said that while people in his industry are aware of it, he said most of the public doesn’t have a clue it is being proposed or its impact.

“This would be very bad for the consumer,” Lansing said. “No mortgage lender has the type of capital needed to put in an escrow account or something like that. The only way to raise the money is to charge the consumer. On a $200,000 loan, if they only required another 5%, that would be an extra $10,000. That’s obviously not going to work.”

Peter Mills, which last September helped found the Community Mortgage Banking Project, a Washington, D.C.-based coalition created to represent the interests of independent mortgage companies, agreed with Lansing.

“The problem is it does not distinguish between high-risk loans and well-underwritten loans,” Mills said. “It is a very blunt instrument, which would affect everyone across the board.”

Mills said the Senate version would require a 10 percent risk retention amount and the House version a 5 percent retention. But he said even a 1 percent retention would be too much. For a lender making about $1 billion a year in loans, in three years it would need to put aside more than $50 million in funds at even a 1% risk retention rate, by his group’s calculations.

Lenders protest proposal

The Community Mortgage Banking Project and the Community Mortgage Lenders of America, last November sent a letter signed by 87 mortgage lenders across the country to the Senate Banking Committee. Eight of them were from Colorado. Only Michigan had as many lenders sign the letter.

“We are very active on this issue in Colorado,” Lansing said. In addition to Universal Lending, the letter was signed by executives from America’s Mortgage in Wheat Ridge; Cherry Creek Mortgage in Greenwood Village; Clarion Mortgage Capital in Greenwood Village; First National Bank Mortgage in Fort Collins; Ideal Homes Loan, Englewood; Pinnacle Mortgage Group, Lakewood; and Unifirst Mortgage, Grand Junction.

“Under the risk retention requirement in the draft bill, independent mortgage bankers- which accounted for almost one-third of all home mortgages in 2008 – would be forced out of business,” according to the letter to Christopher J. Dodd and Richard C. Shelby, the chairman and ranking member of the Senate Banking Committee, respectively.

Community banks, credit unions impacted

But it wouldn’t stop there.

Community banks and credit unions also would “face liquidity and balance sheet constraints that would limit their lending capabilities,” according to the letter.

The impact of a “poorly designed” risk retention requirement would consolidate the market into the hands of a few major lenders, according to the mortgage bankers.

“This is an ironic result in a bill that is trying to mitigate systemic risk and too-big-to-fail concerns,” the mortgage lenders contend.

Bank Monopolies Feared

Mortgage bankers are facing off on the issue with traditional banks, which have money on hand from short-term investments such as checking and saving accounts and CDs. In a statement, the American Bankers Association said that lenders with secured deposits already have enough capital on hand and should be excluded from the risk retention requirement, although it oppose some other parts of the proposed legislation.

“The big banks could certainly live with this,” said consultant Rosser.

But Lansing, of Universal Lending, isn’t so sure.

“Yes, large financial institutions could be better able to handle these requirements,” Lansing said. “But last year, something like $2.75 trillion in mortgage loans were made in the U.S. Is any bank in the country big enough to absorb those kind of costs and handle that kind of volume?”

Also, Lansing said that consumers would lose if only a few banks were making home loans.

“What Congress, unintentionally would be doing is creating a situation where maybe only three or four lenders in the country would make all of the home loans,” Lansing said. “What Congress would be doing is creating monopolies. I’m not against regulation. I think our industry needs, good, sound regulations that make sense. For example, I think some kind of risk retention probably is appropriate when making high-risk loans. But I am against monopolies.”

The Mortgage Bankers Association, which represents about 280,000 people nationwide, strongly opposes the measure, saying it would have “dire consequences” for mortgage markets.

The provision would “unnecessarily stem competition, reducing choices and increasing the costs of credit for consumers,” according to the group. “At the same time, smaller community banks and even larger depositories would be constrained from lending – and available funds for home financing would be reduced by countless billions of dollars – to meet reserve requirements,” according to the MBA.

Grassroots group shares concerns

And the American Homeowners Grassroots Alliance, which in the past has butted heads with lenders on many issues, worries that the risk-retention requirement will require more more responsible lending, “it may also somewhat limit the availability of mortgage loans for qualified borrowers and thereby slow the housing market’s economic recovery.”

It urged the banking committee to avoid this unintended consequence.

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New appraisal law creating havoc with our market.

February 26, 2010 by Mimi Miller.

appraisal rules cause chaos
The code of conduct was intended to protect lenders and borrowers from faulty appraisals, but has caused delays and higher costs.
By Marcie Geffner of Bankrate.com

The new “code of conduct” that was supposed to protect lenders and borrowers from faulty appraisals has caused higher costs, delays and considerable chaos in home sales and loan refinances.

Mortgage brokers, appraisers and real-estate agents are up in arms over the new rules, which dictate how lenders select an appraiser when they originate certain home loans. Few borrowers care much, if at all, about how appraisers are hired or paid, but those borrowers whose loans have been delayed or derailed due to the new rules may take a very keen interest, indeed.

At the center of the controversy is the Home Valuation Code of Conduct, which outlines appraisal-related practices that lenders must follow with respect to so-called conventional or conforming loans that they want to sell to Fannie Mae or Freddie Mac.

The practices are intended to reduce the incidence of appraisal fraud and prevent inappropriate pressure being placed on appraisers to inflate home valuations. The code, which became effective May 1, does not apply to FHA loans, which are insured by the Federal Housing Administration, or VA loans, which are guaranteed by the U.S. Department of Veterans Affairs. (Fannie Mae and Freddie Mac have both posted FAQs about the code.)

New rules protect borrowers from inflated appraisals
David Feldman, president of First American eAppraiseIT, an appraisal software and management company in Irvine, Calif., says the code is “very good for borrowers” because the new practices will help to ensure that home valuations will be “less inappropriately influenced.”

“(Homebuyers) don’t want to pay too much, and they want to pay the right price,” he says. “For refinances, if you were hoping for a ‘higher value,’ prior to the code, if there was any pressure, you might have gotten it or not. Now that will be lessened, so it protects borrowers from themselves.”

Bing: Read the new appraisal rules
That may prove beneficial, yet the code also has created other, unintended consequences in these areas:

1. Accuracy. The accuracy and credibility of an appraisal should be the borrowers’ chief concern. Appraisal management companies, which now perform more than half of the appraisals nationwide, contract with tens of thousands of appraisers but typically assign jobs only to several thousand, who complete their work “quickly and with good quality and good service,” Feldman says.

John Stafford, a loan officer with Reliant Mortgage in Dallas, takes exception to such claims. He says there are two types of appraisers: the “slapdash” kind, who base their valuations on the first comparable sales they can find, and the more competent kind, who “work very hard to get the absolute best value, but fair value within the regulations as they are.”

Borrowers should be concerned, Stafford says, because “a lackadaisical effort on an appraisal can easily create a value that is 10 percent lower than it should be.” An artificially low value can kill a home purchase transaction if the appraisal doesn’t support the sale price or derail a loan refinance if the appraisal results in a higher loan-to-value ratio and, consequently, a less attractive interest rate.

2. Timeliness. The timeliness of an appraisal is also a prime concern for borrowers because they typically need to meet the time frame of a purchase-contract contingency or interest-rate lock.

Rob Carter, a real-estate agent with ZipRealty in Washington, D.C., says the code has introduced much more uncertainty into the appraisal process.

“We are all used to knowing when the appraisal is going to get done and what the outcome is going to be,” he says. “It’s a little frustrating when you don’t know.”

Feldman disputes the notion that the code has caused delays.

“The turnaround has not been affected even a twitch,” he says.

3. Cost. Borrowers are also naturally concerned about the cost of an appraisal. Stafford says appraisals have become more expensive as a result of the code because lenders had relied more heavily on automated valuation models, or so-called drive-by appraisals, which required only a confirmation that the home hadn’t vanished from the property. Now, he says, lenders are more inclined to require a full appraisal, which is more costly.

Moreover, borrowers may now be required to pay for an appraisal upfront, which means they’ll be paying out-of-pocket for that expense even if the loan doesn’t close. Borrowers also may have to pay for a second appraisal if the first proves problematic or they want to switch their application to a different lender. The code allows appraisals to be transferred, but lenders aren’t required to facilitate that and must make sure an incoming appraisal complies with the code.

A related issue is whether appraisers should be better compensated for their services. Feldman acknowledges they’re paid significantly less for jobs they’re assigned through appraisal management companies, but he believes their pay is a “cultural question” that shouldn’t concern borrowers.

“Should borrowers pay more so appraisers can make more and therefore be happier?” he asks. “Or is this a new model that appraisers make less per order, although they may become more efficient, so at the end, they may be OK?”

Cultural questions aside, there’s no debate that appraisal management companies have gained market share as a result of the new rules. Some of these companies are independent; others are owned in whole or in part by lenders or title insurers. These companies schedule the jobs and keep as much as half of the fee for their services.

4. Disclosure. Borrowers may like a new rule that requires the lender to supply a copy of the appraisal to the borrower three days before the loan closes. That right may be waived, though not at closing.

Lenders are careful to comply with this rule, Feldman says, because an inability to demonstrate that they did so will void their certification of the loan to Fannie Mae or Freddie Mac.

That may give comfort to the two mortgage companies, but the code offers no recourse to the borrower if the appraisal isn’t handed over on time and, thus, causes a delay in closing.

How to cope with new appraisal rules
Borrowers are well-advised to have a frank conversation with a loan officer, mortgage broker or real-estate agent before they apply for a loan, since they no longer can rely on behind-the-scenes “value checks” to find out whether an appraisal is likely to return a high enough value for the proposed transaction.

Feldman advises borrowers to check into sale prices of comparable homes, online home valuations and news reports of home value trends before they apply for a loan, as difficult as that research may be for individuals not schooled in such matters.

“The hard part for homeowners (is) to be as realistic as they can, so they don’t waste their time and just get disappointed,” he says. “A good lender or mortgage broker will guide you.”

Carter advises homebuyers not to waive the appraisal contingency in a purchase contract, because that may be their best protection against an inflated sale price, perhaps as a result of an overly exuberant bidding war.

The code itself calls for an “Independent Valuation Protection Institute” to operate a compliance-and-complaints hot line and promote “best practices for independent valuation.” That may sound like a good idea; however, this institute has yet to be established.

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