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Appraiser News Online
Current issue: May 15, 2013
 
Republicans Target Housing, GSEs at National Convention
Mitt Romney officially was nominated as the Republican presidential nominee Aug. 28 at the Republican National Convention in Tampa, Fla. As part of the event, the GOP announced its platform, including its positions on housing and the government-sponsored enterprises.

“The collapse of the housing market over the last four years has been not only a severe blow to the entire economy, but also a personal tragedy to millions of Americans whose homes have lost value and to so many others who have lost their homes,” the platform read.

The platform stated the GOP’s opinion that the Obama administration has not sufficiently boosted the housing market, and they singled out the Dodd-Frank Act as a particular failure, calling it “a massive labyrinth of costly new regulations that deter lenders from lending to creditworthy homebuyers and that disproportionately harms small and community banks.” The platform stated the GOP’s belief that Dodd-Frank hindered home sales and investment in housing in general, and depressed the construction and mortgage lending industries.

Under a Romney administration, the platform stated that it would establish a mortgage finance system based on “competition and free enterprise that is transparent, encourages the private sector to return to housing, and promotes personal responsibility on the part of borrowers.”

The platform also stated the belief that “both Fannie Mae and Freddie Mac should be wound down in size and scope” because they cited the two GSEs as a primary cause of the housing crisis. The GOP also stated its plan to downsize the Federal Housing Administration and limit its scope to helping first-time homebuyers and low- and moderate-income borrowers.

Additionally, the platform noted the GOP’s position on principal write-downs, saying “taxpayer dollars should not be used to bail out borrowers and lenders by funding principal write-downs” and that “banks should be well capitalized, which is the best insurance against future taxpayer bailouts.”

“Homeownership is an important goal, but public policy must be balanced to reflect the needs of Americans who choose to rent,” the platform stated. The GOP advocated for a comprehensive housing policy that addressed the demand for apartments and multifamily housing, and it noted that any assistance should be subject to stringent oversight.

Read the Republican platform.
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Defining ‘Subprime’ Could Impact GSE Lawsuits
How a judge legally defines “subprime mortgage” could impact the fates of three former Freddie Mac executives facing charges they misled investors about the safety of loans that the government-sponsored enterprise had backed, The Wall Street Journal reported Aug. 21.

Attorneys for three former Freddie executives, including Chief Executive Officer Richard Syron, wrangled with the U.S. Securities and Exchange Commission over the definitions of “subprime” and “subprime-like” in U.S. District Court. The attorneys were trying to get Judge Richard Sullivan to dismiss an eight-month-old lawsuit claiming fraud over “materially false and misleading public disclosures” purportedly made by Freddie execs at the height of the housing bubble in 2007 and 2008.

The crux of the argument on behalf of Syron, as well as former Freddie Executive Vice President Patricia Cook and former Senior Vice President Donald Bisenius, was that Freddie advised investors it did not classify single-family loans using the words “prime” or “subprime,” the Journal reported.

Rather, the GSE gave investors tables that outlined loan characteristics and allowed them to draw their own conclusions about the safety and soundness of the loans in which they were investing. Further, the defendants’ attorneys argued that the number of loans that would have been classified as subprime had the term been used would have been so low as to rate “not significant.”

SEC attorney Suzanne Romajas agreed that there is no accepted definition of “subprime,” but she said the issue was irrelevant because Freddie executives had failed to disclose to investors that certain mortgages were “high risk.” She noted that had Freddie included mortgages with “subprime-like” characteristics in the “high risk” category, it would have increased the company’s high-risk loan exposure to 10 percent of its portfolio rather than the 0.1 percent it claimed, the Journal reported.

The SEC’s court filing alleged that the three former Freddie executives knew their portfolio included subprime loans because they referred to them as such in internal communications.

Syron’s attorney, Thomas Green, argued that his client did nothing wrong, pointing as proof to that fact that Syron did not sell any of his Freddie shares and suffered $24 million in personal losses.

Judge Sullivan said the case might simply come down to determining a definition for “subprime.” “The whole mess could have been avoided if someone decided to define the damn thing, don’t you think?” he asked attorneys on both sides, the Journal reported.
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Georgia AMC Ranked a ‘Fastest-Growing’ Company
The 2012 Inc. 5000 list released Aug. 21 ranked America’s fastest-growing companies, and an appraisal management company landed near the top of the overall list and was the highest ranked real estate-related entity.

The Valuation Management Group, an AMC based in Marietta, Ga., reported that its revenue increased 6,267 percent over the previous three years to $34.3 million in 2011 landing it at No. 29 out of 5,000 companies. The 62-person firm was ranked No. 22 on the 2010 list.

The second-highest ranked real estate-related entity was Arlington, Va.-based Innotion Enterprises, which ranked No. 80 overall. The firm provides property management, marketing and sales for real estate-owned assets. Third highest in the real estate category was Sherman Oaks, Calif.-based Landmark Network (No. 108 overall), a residential real estate appraisal management company.

Among all industries, Unified Payments was ranked the fastest-growing U.S. company. The North Miami Beach, Fla., organization offers payment processing services for merchants. The company generated $59.5 million in revenues in 2011 with only 31 workers; in 2008 it had just $0.3 million in revenues, which placed its three-year growth rate at an enormous 23,646 percent.

View the complete Inc. 5000 list.
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Fed Atlanta President: Current Monetary Policy is ‘Appropriate’
Federal Reserve Bank of Atlanta President Dennis Lockhart indicated that the argument for additional central bank easing is not the near guarantee so many in the market currently believe, The Wall Street Journal reported Aug. 21.

Lockhart spoke to a hometown audience where he noted that the existing stance on monetary policy is “appropriate” to prevailing economic conditions, the Journal reported. However, he also said “there is a risk to monetary policy being employed too aggressively and without effect to address economic problems” that would be more logically handled by other facets of the government.

The voting member of the interest rate-setting Federal Open Market Committee is closely monitored because several central bankers consider his views to extensively align with the FOMC’s consensus outlook, the Journal reported. Therefore, when Lockhart indicated an increased openness to additional central bank stimulus and noted the risk of the Fed doing too much, markets noticed.

Lockhart described himself as “undecided” as to what would occur when policymakers meet in September. And having signaled the up-in-the-air nature of the next meeting, he sided with the core group of Fed officials, many of whom have been open to additional action without indicating that anything is imminent. Only a small number of officials have decisively signaled a preference for easing or taking no action.

Lockhart’s statements seemed to suggest that further Fed stimulus in the guise of balance sheet-expanding bond purchases “would not fundamentally alter the growth trajectory in this current recovery,” Eric Green of TD Securities told the Journal.

“However, that does not necessarily mean Lockhart or the rest of the FOMC are not inclined to try; after all, they have a dual mandate and by their own account expect to fail over the next several years,” Green told the Journal.

According to the Journal, the clearest indications relative to the Fed outlook are likely to surface when Fed Chairman Ben Bernanke speaks at the Kansas City Fed’s Jackson Hole, Wyo., conference Aug. 31.

When the Fed met near the beginning of August, the only significant adjustment that policymakers made came in their official policy statement, in which they clearly stated that economic difficulties could result in some type of expanded easing. The meeting minutes, which often quantify in approximate terms the degree of support for a particular issue, are likely to demonstrate how widespread the central bank’s evolution was at that time.

Certain individuals think that the Fed needs to ease when they meet in September. Yelena Shulyateva, an analyst at banking group BNP Paribas, told the Journal that “our central scenario is for the Fed to act in September…they have hinted so strongly that they’ll do something” that not to take action will lead to definite trouble for the economy.

Although data on economic performance has been inconsistent, hopes of Fed stimulus have elevated stock prices, and the confidence that that can convey has decided economic value, Shulyateva told the Journal. If the Fed fails to take action, “that can disappear quickly” and cause further downward pressure on overall economic momentum.
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Nearly Half of Fannie Mae REOs Kept off the Market
Almost half of Fannie Mae’s inventory of real estate-owned property is unable to reach the market, with the enterprise reporting that the properties mainly are hung up in the foreclosure process, HousingWire reported Aug. 22.

According to HousingWire, the National Association of Realtors’ existing home sales report noted that the association is pushing government agencies to release more REO properties, particularly in markets short on inventory. Critics have alleged that Fannie Mae, Freddie Mac and the U.S. Department of Housing and Urban Development are intentionally holding back the homes in hopes of getting more money for them when the housing market recovers, HousingWire reported.

Fannie reported in its second quarter filing that 23 percent of its 109,000 repossessed properties are available for sale. That number is down from the 28 percent reported at the same time last year. The agency reported that is has accepted buyer offers on an additional 19 percent of its properties while another 11 percent await appraisals.

Of the 47 percent unavailable for market, Fannie reported that 14 percent are in redemption status, and the length of time a homeowner or second lien holder can redeem the property varies from one state to another. Another 13 percent of unavailable REO properties remain borrower-occupied, and 8 percent are in a pilot rental program called Tenant in Place or Deed for Lease, where the original borrower rents the home, HousingWire reported.

In a second pilot program, Fannie has plans to sell about 2,500 REO properties to investors who will rent out the properties, a deal that’s expected to close sometime in the third quarter.

In the second quarter, Fannie recovered an average of 65 percent of the unpaid principal balance on REO homes it sold. That number is up from a low of 59 percent in early 2011. Home prices have been rising steadily since early 2012, increasing profits for Fannie, HousingWire reported.
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New Guidelines Could Make Short Sales Easier
The Federal Housing Finance Agency and the government-sponsored enterprises Fannie Mae and Freddie Mac announced new guidelines Aug. 21 that may make it easier for underwater borrowers to sell their homes for less than what they owe on their mortgages, The Wall Street Journal reported.

The new guidelines would allow the GSEs to place a $6,000 cap on the amount of money second lien holders can receive when a short sale is completed so as to prevent mortgage holders from arguing over their portions of short sale proceeds. Second mortgage holders still would be allowed to reject a sale.

The FHFA’s new guidelines, which will take effect Nov. 1, apply only to homeowners who have not missed a mortgage payment and whose underwater mortgages are guaranteed by Fannie or Freddie. About 4.6 million underwater borrowers have loans backed by the GSEs, and 80 percent of those borrowers are current on their mortgages, the Journal reported.

Guy Cecala, publisher of Inside Mortgage Finance, told the Journal that he did not think $6,000 was enough to entice second lien holders to approve a short sale.  

Bank of America Corp., Wells Fargo, JPMorgan Chase and Citigroup Inc. are the largest holders of second mortgages in the U.S.

Short sales usually sell for 10 percent less than ordinary homes, although that’s still better than foreclosure sales, which tend to go for 30 percent less, the Journal reported.

Short sales currently make up an increasingly larger number of home sales, constituting 8.8 percent of home sales in May, compared to 7.6 percent during May 2011, and 6.5 percent in the same month in 2010. If even more short sales gain approval, banks could be forced to record losses on home equity debt.
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GSEs Sued over Tax on Real Estate Transactions
The city of Bridgeport, Conn., filed a federal lawsuit against government-sponsored enterprises Fannie Mae and Freddie Mac challenging a claim made by the GSEs that they are exempt from an excise tax paid to municipalities and the state when real estate transactions occur, BusinessWeek reported Aug. 22.

The lawsuit states that Fannie and Freddie maintain that they are exempt as governmental entities, but Bridgeport officials claim the GSEs have been federally chartered, private stock, publicly traded corporations since 2003.

The lawsuit seeks class action status on behalf of all Connecticut municipalities and a judgment that the GSEs are subject to the tax along with any damages in an amount yet to be determined, BusinessWeek reported.

The tax — which is paid for recording real estate transfers — amounts to 1 percent of the transaction. The revenue is shared between the state and municipalities, BusinessWeek reported.
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Despite High Prices, Canadian Housing Unlikely to Bubble, Burst
Despite high housing prices in Canada, the market there is unlikely to experience a bubble and bust like that in the U.S., according to the Royal Bank of Canada, MarketWatch reported Aug. 22. Instead, the Canadian government has implemented mortgage finance reforms since 2008 to cool the housing market.

The reforms have included requiring a minimum down payment of 5 percent on government-backed mortgages and a reduction in the amount of time borrowers have to pay down mortgages. Payoff terms were reduced from 35 years in 2008 to 25 years as of June.

While MarketWatch reported that Canadian housing prices have doubled in the past 10 years, the government’s tightened underwriting standards have prevented a major housing crisis, MarketWatch reported.

RBC noted that the nation’s market continues to cool; the number of newly listed homes for sale dropped 3.3 percent from June to July. The Canadian Real Estate Association reported that the average sales prices for homes also have fallen for the fourth time in the past five months, dropping 0.8 percent from June to July on a seasonally adjusted basis.

Both Vancouver and Toronto — hot markets for condos—have seen declines in resales for the past several months.

But MarketWatch reported that Canadian borrowers take on much greater mortgage interest-rate risk than U.S. borrowers. A third of Canadian homeowners have adjustable-rate mortgages. However, Robert Hogue, senior economist at RBC, told MarketWatch that he’s seeing more borrowers move into fixed-rate loans.

Craig Alexander, chief economist at Toronto-Dominion Bank, noted that if the Bank of Canada was to raise interest rates by 2 percentage points, it would mean 8 percent of Canadians would have more than 40 percent of their household income going to debt. “Statistically, when more than 40 percent of income is going to personal debt that is when you have real problems, so about 8 percent of Canadians would find managing their debt level extremely difficult,” Alexander told MarketWatch. However, he added that it would not present a problem on the magnitude of what U.S. households have faced.

The Bank of Canada reported that it gradually would start raising interest rates in 2013.

Standard & Poor’s noted in July that five Canadian banks were vulnerable to market changes and adjusted their ratings from “stable” to “negative,” MarketWatch reported. Those banks included Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Laurentian Bank of Canada and National Bank of Canada.

Sheryl Kennedy, CEO of Promontory Canada and former deputy governor at the Bank of Canada, told MarketWatch that she does not expect problems in Europe to have a significant impact on Canada since the country’s financial institutions don’t have a lot of exposure to markets there. She did indicate, however, that if the U.S. were affected by issues in the euro zone, it could impact Canada.
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Wells Fargo Defends Position as Mortgage Market Leader
Wells Fargo attributed its control of 1 in 3 U.S. mortgages to simply being better than any of its rivals, American Banker reported Aug. 22.

In a two-page, unsigned document sent to mortgage professionals, the San Francisco-based bank stated that its growth in market share is driven by clients choosing Wells Fargo over its competitors due to better service, American Banker reported.  The document was confirmed by Tom Goyda, a spokesman for Wells Fargo.

“In a free economy, competition is essential,” Wells Fargo said in a statement, American Banker reported. “We believe customers must have choices in where they bring their lending business.”

According to the document, Wells Fargo has funded 6.4 million mortgages since the beginning of the housing crisis in 2009. Wells Fargo also originated $131 billion in mortgages in the second quarter of 2012, leading to a record $2.89 billion in mortgage-banking income, American Banker reported.

Wells Fargo's position as mortgage market leader drew warnings from regulators and lawmakers who expressed concern that the bank’s control of mortgage lending and servicing could eventually hurt consumers and undermine markets.

David Stevens, chief executive officer at the Mortgage Bankers Association and a former official in the U.S. Department of Housing and Urban Development, noted that if Wells Fargo encountered any difficulty or instituted a strategy shift, credit opportunities for homebuyers could be endangered.

“The nation benefits from a broadly distributed mortgage-finance system,” Stevens told American Banker.

Wells Fargo controlled 33.1 percent of the origination market through the first six months of 2012, according to Inside Mortgage Finance, an industry publication, American Banker reported. In mortgage servicing, which involves billing and collections, Wells Fargo also is the leader, controlling 18.5 percent of the market.
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New Mortgage Rules Could be Boon for Big Banks
A report released Aug. 22 from financial research firm FBR Capital Markets noted that big banks and mortgage insurers would greatly benefit from changes unveiled by the U.S. Department of the Treasury Aug. 17 as part of its plan to wind down Fannie Mae and Freddie Mac, TheStreet reported.

The report noted that the wind down would not limit the number of loans that Fannie and Freddie could guarantee, but rather it would establish stricter standards for loans seeking government guarantees. The FBR report noted that meeting the stricter guidelines would increase costs for banks. As a result, the nation’s largest banks (such as Wells Fargo, JPMorgan Chase, US Bancorp and PNC Financial) would greatly benefit from the new guidelines because they could meet the economies of scale while small and mid-sized banks would not.

Smaller banks also likely would suffer under newly proposed rules from the Consumer Financial Protection Bureau, which is working to establish national mortgage servicing standards. The agency released its proposed rules Aug. 9 and opened them to public comment through Oct. 9; they are set to be implemented Jan. 21, 2013.

While the CFPB’s rules are designed to provide consumers with greater information and transparency regarding their mortgages, as well as give banks specific guidelines for handling consumer complaints and offering foreclosure alternatives, the cost of implementing the new guidelines could drive smaller players out of the market, according to a second report, this one by Fitch Ratings, MBA NewsLink reported Aug. 22.

Fitch Ratings indicated that the rules could create further market consolidation, leading smaller and mid-sized servicers to either pull out of the business or consolidate for the sake of cost efficiency. The report noted that while the changes most likely would be manageable for larger banks, smaller institutions would be hard hit by increased compliance costs.

Mortgage Bankers Association President and CEO David Stevens told MBA NewsLink that the rules needed to be fair in order not to squelch industry innovation or keep new players out of the market.
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Fixed Mortgage Rates Increase for 4th Straight Week
Fixed mortgage rates moved higher for the fourth week as Treasury yields rose, Freddie Mac reported in its weekly Primary Mortgage Market Survey released Aug. 23.

The 30-year fixed-rate edged up 0.04 percentage points from the previous week to 3.66 percent (down from 4.22 percent a year ago). The 15-year fixed-rate crept up 0.01 percentage points to 2.89 percent from the previous week (down from 3.44 percent a year ago).

The one-year adjustable-rate mortgage decreased 0.03 percentage points from the previous week to 2.66 percent (down from 2.93 percent a year ago). However, the five-year Treasury-indexed adjustable-rate rose 0.04 percentage points to 2.80 percent (down from 3.07 percent a year ago).

“Fixed mortgage rates inched upward this week along with other long-term yields,” Freddie Mac Vice President and Chief Economist Frank Nothaft said in a news release. “The Census Bureau reported that residential building permits were up in July, although builders slowed the pace of construction starts on one-family homes in July to the least since March, while apartment and condominium building picked up to the most since April,” he said. Nothaft also noted that “existing homes sales rose in July from June’s eight-month low and the median sales price jumped 9.4 percent from a year earlier, representing the largest 12-month gain since January 2006.”

View Freddie Mac’s weekly Primary Mortgage Market Survey.
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S&P: Expanded Servicing Rights can Hurt CMBS
Although special servicing firms can play a key role in helping to improve recovery rates for CMBS investors when the economy is stressed, Standard & Poor’s noted that new and lesser known firms can actually overcrowd the market and complicate the servicing process, National Mortgage News reported Aug. 21.

Special servicing firms are entities that reinstate cash flow from distressed assets in structured finance offerings. However, that crucial role can be slowed and problem-plagued when controlling class investors replace the existing servicers with one of their choosing, National Mortgage News reported.

When reviewing ratings agency confirmations from the past few years, S&P realized that a significant number are tied to the transfer of servicing rights.

A RAC is a written indication that a certain change will not cause S&P to lower, qualify or withdraw an existing rating on any class of certificates issued in conjunction with a trust, National Mortgage News reported.

Specifically, these types of RACs now comprise in excess of 30 percent of all RACs, which is significantly greater than the 10-year average.

With the escalating amount of distressed commercial mortgage assets, new entrants and obscure special servicing operations could cause further complications to the system, National Mortgage News reported.

Analysts told National Mortgage News that the frequency of servicing transfers likely will continue going up, which they think is the result of increased delinquencies due to the faltering economy. When they reviewed CMBS trends in light of increasing distressed asset figures and an upcoming spike in asset maturities scheduled to peak in 2016-2017, they determined that declining collateral property values and rising realized losses are specific issues that can result in further servicing transfers.

S&P recommended that all servicers in CMBS transactions comply with industry standards and that transfers should be executed with limited disruption. The ratings agency encouraged servicers to provide the necessary transition assistance to ensure that the disturbances and delays that the investors and borrowers face are minimized, National Mortgage News reported.
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ANREV, INREV Partner with NCRIEF on Global Index Fund
The Asian and European associations for investors in non-listed real estate products have aligned with the National Council for Real Estate Investment Fiduciaries to create a new fund index to measure the performance of non-listed real estate vehicles internationally, PEI Media Group reported Aug. 22.

According to ANREV, the new global fund index will allow the non-listed real estate sector to be evaluated and compared to other worldwide asset classes, PEI reported. One of the main goals for the index is to give investors further information for asset allocation.

“A global index will have far-reaching benefits for the whole industry, particularly in terms of establishing universal performance benchmarks and standardization,” Patrick Kanters, INREV chairman and managing director of global real estate at APG Asset Management, told PEI. “It will also help with specific issues such as improving asset liability modeling.”

Regional fund indices already exist at NCREIF and INREV, according to PEI, and an inaugural Asian fund index was started by ANREV in 2011. The total global index could possibly include 670 funds with a combined estimated gross value of $654 billion.

Mark Roberts, managing director and global head of research at RREEF Real Estate and chairman of NCREIF, said that the goal of this initiative “is to improve the transparency of real estate as an asset class and help our members make more informed investment decisions,” PEI reported.

A global index working group has been created with representatives from all three bodies to move the process forward, with the intent of presenting initial findings at ANREV’s annual conference in Hong Kong in October and at NCREIF’s fall conference in Florida in November.
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AI in the News: AVMs ‘Interfere’ with Appraisers
Pat Turner, SRA, president of P. E. Turner & Co., Richmond, Va., was featured in the Washington Post Aug. 24 in an article that discussed the Consumer Financial Protection Bureau’s proposal to require lenders to provide consumers with copies of appraisals “promptly after receiving them,” including automated valuation models.

Turner referred to AVMs as “interference” in the work of the local appraiser, adding that appraisers often submitted reports to management companies only to hear back that an AVM has found supposed “comps” that indicated a property’s value should be lower than what the appraiser reported.

Also featured in national media coverage this past week were Alan Hummel, SRA, in Valuation Review and Pat Turner, SRA, in National Mortgage Professional.

These stories are among the recent media coverage included in the “AI in the News” feature on the members-only section of the Appraisal Institute website.

An Appraisal Institute member appearing recently in local media coverage included Pat Turner, SRA, Arizona (Tucson) Daily Star, Arlington Heights (Ill.) Daily Herald, Boston Herald, Charlotte (N.C.) Observer, Columbus (Ohio) Dispatch, Hartford (Conn.) Courant, Los Angeles Times, Miami Herald, The Real Deal (New York), San Diego Union-Tribune, Seattle Times and Toledo (Ohio) Blade.

See the latest media coverage about the real estate valuation profession, the Appraisal Institute and its members. Media coverage at “AI in the News,” found on the member log-in page of the Appraisal Institute’s website, is updated daily and also includes the latest news releases from the Appraisal Institute.
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