President-elect Barack Obama nominated Timothy Geithner as Treasury Secretary and named Lawrence Summers as head of the National Economic Council. During his press conference announcing his economic team, Obama also pledged to “do whatever is required to keep the financial system working and capital flowing” but declined to specify how and when additional funds under the Troubled Assets Recovery Program should be spent, pending updates from current Secretary Henry Paulson and Federal Reserve Chair Ben Bernanke.

As president and CEO of the Federal Reserve Bank of New York, Geithner has played a central role in the federal government's response to the financial crisis that has played out for more than a year, and he has long been involved in the fiscal and monetary policy arena. Several industry insiders highlighted Geithner's varied experience as central to his nomination, especially that of the past year-plus.

“Geithner is held in high regard in financial circles and has been a thoughtful and effective leader throughout the recent financial turmoil,” said Rob Nichols, the president and chief operating officer of the Financial Services Forum.

Peter Kretzmer, Bank of America's senior economist, said Geithner's choice provided a sigh a relief for equity markets. But he cautioned that the recent choppiness could continue, given market volatility in which big swings have become commonplace. Nevertheless, Kretzmer said Geithner's background makes him an appropriate choice.

Geithner is known for his understanding of the current financial crisis. Well before it erupted in mid-September, he warned that the U.S. and global financial systems were "going through a very challenging period of adjustment.”

“The critical imperative today is to help facilitate that adjustment and to cushion its impact on the broader economy," he told Congress, calling for "substantial reforms" to policy, regulation and oversight governing markets.

An industry consultant, Pete Davis of Davis Capital Investment Ideas, praised Geithner's technical and policy background and said he expects pragmatic direction from him. Davis said it is difficult to say whether Geithner is overly friendly to the industry or excessively inclined to tighter regulations, but he said his clients—a variety of hedge funds, banks, and other financial firms—were pleased.

Although knowledgeable about the current financial crisis, Geithner’s views on a variety of fronts remain a mystery. While he’s written and spoken widely about the key issue of financial regulatory reform, his views on fiscal policy, home foreclosures, and trade, among myriad other economic issues, are not well known.

Appraiser News Online will continue following the confirmation hearings to see which way the winds may be blowing.

In an abrupt about-face, U.S. Treasury Secretary Henry Paulson announced that the $700 taxpayer bailout would no longer be used to buy toxic mortgages from troubled banks, but rather to continue to flood financial institutions with cash in an attempt to increase the availability of credit, including student loans, auto loans and credit cards. Paulson said he's also examining ways to help prevent foreclosures. "Our assessment at this time is that this is not the most effective way to use TARP funds," Paulson said. “I will not issue an apology for changing the strategy when the facts change. We had to move quickly. What we said to Congress then [in September] was that we needed a financial rescue package. And we got a wide array of authorities to use it.”

House Financial Services Chairman Barney Frank,D., Mass., said he was disappointed that Treasury was abandoning the asset-purchase plan. "I think [Paulson is] wrong not to use it that way," Frank said. In contrast, analysts welcomed Paulson's decision. "The argument for buying the bad debt was never a strong one to begin with," said Howard Simons at Bianco Research in Chicago. "The problem is and has been declining asset prices in the real estate area. Until you see housing prices stabilize, you will continue to have a growing supply of bad loans. We have better use for the public money than buying assets or loans that should never have been created in the first place."

With the shift now focusing on consumers, Paulson said that he plans to design a program that would increase the availability of credit. "This market is currently in distress, costs of funding have skyrocketed and new issue activity has come to a halt. Today, the illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards. This is creating a heavy burden on the American people and reducing the number of jobs in our economy," Paulson commented. According to Paulson, the U.S. Treasury and the Federal Reserve are working to develop a lending facility that would encourage investors to buy securities backed by credit cards, auto loans and mortgages.

In an effort to keep at-risk borrowers from losing their homes, Fannie Mae and Freddie Mac announced that they are suspending foreclosures and evictions during the holiday season from November 26 through January 9. The temporary suspension will extend Fannie and Freddie’s recently unveiled mortgage modification program to homeowners who haven't paid their mortgages for three months. Fannie and Freddie estimate that as many as 16,000 borrowers may benefit from the suspension. "With this suspension, seriously delinquent borrowers may have an opportunity to avoid foreclosure and work out terms to stay in their homes," said James Lockhart, Director of the Federal Housing Finance Agency.

During the suspension, the two companies will contact at-risk homeowners to modify existing loans to ensure borrowers aren't paying more than 38 percent of their monthly pretax income on their mortgages. Loan modifications may consist of reducing interest rates, extending loan terms to 40 years or delaying payments. "Until the streamlined modification program is fully implemented, we felt it was in the best interest of both borrowers and Fannie Mae to take this extra step to ensure that homeowners with the desire and ability to prevent a foreclosure have an opportunity to stay in their homes," said Herbert Allison, Chief Executive of Fannie Mae.

David Moffett, Chief Executive of Freddie Mac, said his company is on track to help three out of five at-risk borrowers avoid foreclosure. Although encouraged by the announcement, consumer advocates have noted that the suspension will only apply to a certain number of borrowers. "We hope others will take the cue and offer streamlined modification," says Barry Zigas, Director of Housing Policy at the Consumer Federation of America. Last year, more than 2.2 million foreclosures were filed and the Federal Deposit Insurance Corp. estimates that more than 4.4 million borrowers—not including Fannie- and Freddie-backed loans—will become delinquent by the end of next year.

The future of government-sponsored enterprises Fannie Mae and Freddie Mac has been speculated ever since federal regulators took over the pair September 6, a move which led to concern from investors regarding the future and stability of the GSEs. In particular, investors have refrained from purchasing bonds issued by Fannie/Freddie for fear that the companies may cease to exist in the near future. The topic will be debated by lenders, real estate brokers and academics at a November 26 meeting hosted by the Mortgage Bankers Association.

Some within the real estate industry, such as the associations representing homebuilders and real estate agents, would like to see Congress restructure Fannie/Freddie – both of which have been struggling with major loses as investors remain wary of the companies’ debt. Others, such as lending institutions, have voiced their support for the folding of the GSEs. According to one report, an idea being discussed among bankers is to replace Fannie/Freddie with several lender-owned cooperatives that would package loans into securities. Under this idea, the U.S. Treasury would receive fees for backing up those securities if losses reached catastrophic levels.

Appraiser News Online will continue to follow the debates and scenarios.

The Federal Reserve announced on November 25, that it will purchase up to $100 billion in direct obligations of housing-related government-sponsored enterprises – Fannie Mae, Freddie Mac, and the Federal Home Loan Banks – and $500 billion in mortgage-backed securities backed by Fannie Mae, Freddie Mac and Ginnie Mae. Spreads of rates on GSE debt and on GSE-guaranteed mortgages have widened appreciably of late.  This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally, according to a release.

Purchases of up to $100 billion in GSE direct obligations under the program will be conducted with the Federal Reserve's primary dealers through a series of competitive auctions and will begin the week after Thanksgiving. Purchases of up to $500 billion in MBS will be conducted by asset managers selected via a competitive process with a goal of beginning these purchases before year-end.  Purchases of both direct obligations and MBS are expected to take place over several quarters.  Further information regarding the operational details of this program will be provided after consultation with market participants.

Despite the economic crisis and struggling housing market during the past year, the Federal Housing Administration’s mortgage program experienced significant growth during fiscal 2008. During this period, FHA received over two million single-family loan applications, up 161.2 percent over the 768,770 applications received in fiscal 2007. Of all the applications, 977,550 borrowers applied to purchase homes, 885,972 applied for refinancing, and 144,635 applied for reverse mortgages. Among those seeking refinancing, 147,992 applications were from current FHA borrowers seeking new FHA loans, 727,225 were from private-sector borrowers interested in converting to FHA mortgages and 10,755 were from delinquent private-sector borrowers seeking FHA loans.

Not all applications resulted in loans. The FHA approved 1,199,624 mortgage applications during fiscal 2008, up 125 percent from fiscal 2007. There were 631,667 loans made to individuals purchasing homes, up 126.9 percent from fiscal 2007. Among those financing a new home, 492,295 were first-time buyers. A total of 455,803 loans were made for refinancing, a figure which jumped a staggering 211.4 percent  from fiscal 2007. In addition, 356,722 private-sector borrowers converted from conventional loans to FHA mortgages.

In the wake of the current housing crisis and record levels of both foreclosures and mortgage fraud, Michigan lawmakers are considering three bills designed to curtail mortgage fraud as well as unscrupulous lending practices. The bills—H.B. 4054, S.B. 343 and S.B. 356— would amend existing legislation to prohibit coercing an appraiser in order to receive a predetermined value on an appraisal. The bills establish criminal penalties and civil fines for violations of acts regulating mortgages as well as brokers, lenders and servicers of mortgages.

Most appraiser independence laws across the country make it a crime for a mortgage lender to apply pressure to an appraiser. However, H.B. 4054 would take it a step further by making it a misdemeanor for a licensed appraiser to respond to inappropriate pressure by a mortgage lender. Moreover, H.B. 4054 would also prohibit an appraiser from developing and communicating an appraisal that was developed as a result of coercion. Under the proposed provision, a licensee found in violation of this amendment could face a maximum fine of $15,000 and imprisonment for up to one year.

If passed, S.B. 343 would make it a penalty for a person without a license to engage in making secondary mortgage loans. The bill also would prohibit a person from coercing or inducing a real estate appraiser to inflate the value of real property used as collateral for a secondary mortgage loan. Under this proposal, the maximum fine faced by violators would increase from $5,000 to $15,000 and may include a maximum term of imprisonment for one year. A third bill, S.B. 356, would make it a crime for a person to willfully or intentionally coerce or induce a real estate appraiser to inflate the value of real property used as collateral for a mortgage loan. Violations of this law would also be punishable by a maximum fine of $15,000 or imprisonment for up to one year, or both.

Each of these bills has been passed in the legislative chamber in which it originated: the Senate for S.B. 343 and S.B. 356, and the House for H.B. 4054. With the Michigan Legislature currently in session, it is possible that further action could be taken on these bills before the end of 2008. If not, the bills will die and will need to be reintroduced in 2009. Copies of the bills are available at www.legislature.mi.gov.

At its November 12 hearing, the Nevada Real Estate Commission approved a motion to approve recommendations submitted by the State’s Broker Price Opinion Task Force regarding the use of BPOs in Nevada. Earlier this year, the Commission directed the Task Force to take an in-depth look into BPOs and to recommend changes to existing real estate laws and regulations regarding the use this tool. The Task Force’s recommendations include new language clarifying the use of BPOs by real estate professionals. According to the recommended language, real estate licensees may perform BPOs—for a separate fee—for a buyer or seller only for the purposes of listing and selling property, or for third parties making decisions related to the listing or sale of property. More importantly, the recommendations clearly state that a real estate licensee may not perform a BPO for financing or valuation purposes.

The Commission forwarded the recommendations to Nevada’s Legislative Council Bureau for review and input. It is likely that several recommendations will be implemented through the regulatory process. However, some may require legislative action, which the Nevada Legislature will consider when it reconvenes in February 2009. Following the LCB’s review, the State will conduct two public hearings on the proposed regulations.

The creation of a national Associate Member Committee is among the proposed amendments to Appraisal Institute Regulations that the Appraisal Institute Board of Directors will take up at its meeting on January 15-17, 2009, at the Flamingo Hotel in Las Vegas. According to the proposal’s rationale, submitted during the November 6-7 Board meeting, associate member involvement in and input to the Appraisal Institute is critical to its future growth and success. Furthermore, a national Associate Member Committee will provide a vehicle by which associate members can have a true sense of involvement, can directly convey their concerns and ideas within the governance structure, and can increase awareness of associate member issues.

The national Associate Member Committee would be composed of 10 Associate Members elected by the Regions. The 10 members of the Committee would elect its Chair. The Associate Members also would serve on their Regional Committees.

These proposed changes can be adopted by a majority of those Directors present and voting at a quorum meeting of the Board of Directors.

Members can access the full text of the proposed changes on the “My Appraisal Institute” page of the Appraisal Institute’s Web site at www.appraisalinstitute.org or upon request to the National Office.

Members who have any comments on the proposed changes, should contact their elected Directors and/or send comments via e-mail to 45daynotice@appraisalinstitute.org. Comments sent to this email address will be compiled for distribution to the Board of Directors prior to the Board meeting.

The Architecture Billings Index dropped another five points in October, declining to its lowest level since the index began in 1995, according to the American Institute of Architects. Furthermore, inquiries for new projects in October hit a historic low. According to the AIA, the October ABI is down significantly from 41.4 in September to 36.2 and inquiries dropped to 39.9. A score greater than 50 indicates an increase in billings. The index, which is an economic indicator of construction activity, shows a nine to 12 month lag time between architecture billings and construction spending.

"Until recently, the institutional sector had been somewhat insulated from the deteriorating conditions affecting the commercial and residential markets," AIA chief economist Kermit Baker said. "Now we are seeing that governments and nonprofit agencies are having difficulties getting bonds approved to finance large scale education and healthcare facilities, furthering the weak conditions across the construction industry."

September housing figures produced mixed signals as sale activity increased, but likely only due to falling prices. Annualized sales of total existing homes in September reached its highest pace since August 2007, rebounding 5.5 percent to 5.180 million units. Existing home sales were up 1.4 percent from September 2007. Median existing home prices declined in September to $191,600—the lowest since August 2004. Inventory is now at its lowest level since March 2008 as the number of existing homes for sale fell to a preliminary 4.266 million units.

New home sales in September increased 2.7 percent to a seasonally adjusted annual pace of 464,000 units. Median new home prices in September declined to $218,400, its lowest figure since September 2004. Inventory of new homes in September declined to its lowest level since June 2004 to 396,000 units.

Building permits and housing starts continue to decline. Housing starts fell to its lowest level since data tracking began in 1959 by 4.5 percent to a seasonally adjusted annual rate of 791,000. Building permits fell 12.0 percent to a seasonally adjusted annual rate of 708,000: single-family permits fell 14.5 percent and multi-family permits fell 7.1 percent.

According to Freddie Mac’s Primary Mortgage Market Survey released November 20, national average mortgage rates declined to 6.04 percent—the third straight week that rates have declined. The Mortgage Bankers Association’s seasonally adjusted Purchase Mortgage Index dropped from 284.4 to 248.5 in the week ending November 14. The purchase index is now at its lowest levels since January 2001.

First America, the country’s largest provider of business information, announced the creation of two new business lines: the Valuations and Property Solutions business line and the Outsourcing and Technology Solutions business line. The Valuation and Property Solutions business line will include First American eAppraiseIT, a national appraisal management company; First American Residential Value View; and First American Field Services. “We are moving toward a single platform that will allow clients to automatically match the appropriate valuation product—full appraisal, desk-review, BPO or specialty automated valuation model (AVM)—to specific product risk, using cascading logic,” said Joni Pierce, Chief Operating Officer of First American Residential Value View. Pierce said the move is intended to increase the company’s ability to share technology and best practices to better select and manage the independent appraisers, Realtors^® and field service providers who generate valuations and property information.

The Outsourcing and Technology Solutions business line will include First American’s National Default Outsourcing, National Claims Outsourcing, Loss Mitigation Services, Default Technologies, Loan Production Solutions, REO Servicing and Global Offshore Services.

The Office of Thrift Supervision shut down two troubled Southern California banks – $12.8 billion-asset Downey Savings and Loan in Newport Beach and $3.7 billion-asset PFF Bank & Trust in Pomona – and sold their banking operations to Minneapolis-based U.S. Bank. The moves came on the heels of the OTS’s closing of a community bank in Georgia, the third failure in the state this year.

The acquisition by U.S. Bank includes a loss-sharing agreement with the Federal Deposit Insurance Corp., which facilitated the transaction. Under the deal, U.S. Bank will assume $1.6 billion in initial losses on asset pools covered by the agreement, while the FDIC will share in future losses. U.S. Bank also agreed to implement a loan modification program on troubled mortgages at the two thrifts.

The FDIC said U.S. Bank had agreed to assume all of the deposits of both thrifts, which includes $9.7 billion in deposits from Downey, and $2.4 billion from PFF. The combined 213 branches of the two institutions would reopen as U.S. Bank branches.

The three failures are expected to cost the Deposit Insurance Fund $2.3 billion. The FDIC estimated the failure of Downey will cost $1.4 billion, while PFF Bank's collapse will cost $700 million. The failure of Georgia’s community bank is expected to cost between $200 million to $240 million.

The failures were the third- and fifth-largest this year, behind two other thrifts which also succumbed to an avalanche of bad loans. On July 11, the FDIC became the conservator of $32 billion-asset IndyMac Bank in Pasadena, Calif., the second-largest failure of all time. On Sept. 25, the OTS ended the $307 billion-asset banking business of Washington Mutual Inc. in the largest failure ever.

“The business lines are designed to deliver a full range of integrated services to our clients and to further improve operational efficiency,” said Barry M. Sando, President of First American Information and Outsourcing Solutions. According to Frank McMahon, Vice Chairman of First American, “As the creation of these new business lines demonstrates, we are committed to being a client-focused business partner, integrating business units, and leveraging our data, analytics and processing to enable our clients to improve performance and manage risk.”

To keep their borrowers from foreclosing, a small number of mortgage companies have taken the drastic step of writing down the principal amounts their borrowers owe instead of just lowering their interest rates via loan modification. Reducing the loan balance is a controversial move, one that many lenders view as a last resort. Yet as foreclosures mount, banks are facing the reality that in order to reduce their own losses, they may need to reduce the amounts borrowers owe.

The commercial mortgage-backed securities market – which is the market for debt used to finance hotels, offices and shopping malls – is now at risk of becoming the next casualty of the financial crisis. Fears that defaults on CMBSs are inevitable have caused the $800 billion market for these securities to slow.

Concerns have only grown after the recent release of a Citigroup Inc. report that noted the overall number of commercial mortgages packaged into securities that are 30 days or more past due rose to 0.64 percent in October from 0.39 percent at the end of last year. That figure marks the highest delinquency rate in two years.

In addition, red flags have gone up following the prediction by analysts at Credit Suisse that two big commercial mortgages that had been packaged into securities in the past year were likely to default. The loans in question, both of which were made in 2007, represent more than $330 million in U.S. dollars.

Fidelity National Financial, Inc. terminated its plan to acquire troubled rival LandAmerica Financial Group Inc., a development that casts doubt on LandAmerica's long-term prospects. After agreeing to the merger earlier this month, Fidelity backed out of the deal during a due diligence period.

Based on their 2007 market share, the combined companies might have controlled about 45 percent of the U.S. title insurance business. By comparison, the nation's biggest title insurer, First American Corp., had a 30 percent market share last year.

In a statement, LandAmerica Chairman and CEO Theodore L. Chandler Jr. said the company was disappointed with Fidelity's decision to call off the merger. He said the company's attention "remains focused on strengthening LandAmerica's business and exploring strategic alternatives during these incredibly difficult economic times."

During the downturn, title insurers have struggled to cut expenses fast enough to keep pace with declining orders and rising claims. Industry leader First American reported an $8.3 million third-quarter loss, despite having cut 5,800 employees since the beginning of last year. Fidelity closed 115 title and escrow offices and laid off 1,000 workers during the third quarter alone, as rising claims forced the company to strengthen reserves by $261.6 million and pushed Fidelity to a $198 million loss. LandAmerica lost $599.6 million during the third quarter and was in danger of defaulting on its debts, the company said in a recent regulatory filing.

Paul A. Welcome was elected to serve as The Appraisal Foundation’s Chairman of the Board of Trustees commencing January 1, 2009. Welcome has served as a member of the Business Plan, Executive and Publications Committees on the Board of Trustees. During his time on the Board of Trustees, Welcome held a number of leadership roles within the Foundation, including chairing the Admissions Committee and the Standards & Qualifications Board’s Nominating Committee. In addition, Welcome currently serves as a 2008 Officer in the role of Assistant Treasurer. 

The Appraisal Foundation Board of Trustees is responsible for appointing members to the Appraiser Qualifications Board and the Appraisal Standards Board. In addition, the Board of Trustees also secures funding and oversees the activities of these two Boards. 

“The Appraisal Foundation has been very fortunate to have dedicated volunteers, such as Mr. Welcome, who work diligently for the benefit of the entire appraisal profession,” said David Bunton, President of The Appraisal Foundation. 

Welcome holds a Certified Assessment Evaluator designation from the International Association of Assessing Officers, is an Accredited Senior Appraiser by the American Society of Appraisers, and is a Registered Mass Appraiser for the State of Kansas. In addition, he is a past president of the IAAO and has served on various committees since 1995. Welcome’s position as Chairman of the Board is for a one-year term.

For more information on the Foundation or the Board, visit www.appraisalfoundation.org. 

The Appraisal Institute regrets the passing of the following designated members, which were reported in November: Neil C. Adamson, Jr., SRA, Des Moines, Iowa; Kenneth B. Compton, MAI, Lewisville, N.C.; Charles E. Gerrodette, MAI, Seattle, Wash.; Robert P. Hayes, MAI, Des Moines, Iowa; Richard B. Hubbell, SRA, Hilton Head Island, S.C.; Donald L. Johnson, MAI, Ankeny, Iowa; Curtis R Lytle, SRA, Wellsboro, Pa.; James M. Muri, SRA, Pittsburgh, Pa.; Julius Oelsner, SRA, Savannah, Ga.; Walter T. Potts, Jr., MAI, SRA, Sun City West, Ariz.; A. Louis Santagata, MAI, Brooklyn, N.Y.; Robert H. Scrivens, Jr., Florham Park, N.J.; and Edgar H. Throndsen, MAI, Midvale, Utah.

This information is listed in Appraiser News Online on a monthly basis. For a list covering the past several years, go to the In Memoriam page of the Appraisal Institute Web site, www.appraisalinstitute.org/findappraiser/memoriam.aspx, which is continually updated.

On November 14, Fannie Mae released a “Market Conditions Addendum to the Appraisal Report” (Form 1004MC) that will be required with all appraisals of one-to-four unit properties effective April 1, 2009. This form is intended to provide lenders with a clear and accurate understanding of the market trends and conditions prevalent in the subject neighborhood. According to Fannie Mae, the form provides appraisers with a structured format to report the data and to more easily identify current market trends and conditions. For instance, the appraiser’s conclusions are to be reported in the “Neighborhood” section of the appraisal report.

Accompanying the release is a Frequently Asked Questions document that provides guidelines for using the newly introduced Market Conditions Addendum to the Appraisal Report, as well as FAQs about the Addendum, new policies and clarifications of existing policies, and other general appraisal topics.

Information about Fannie Mae’s appraisal policies can be found at www.efanniemae.com and the FAQ document is available at www.efanniemae.com/sf/formsdocs/forms/pdf/sellingtrans/appraisalfaqs.pdf.

Appraisal Institute seminars and courses that provide education on Fannie Mae (and Freddie Mac) forms are being updated to provide information on the new Addendum. Specifically, the Appraisal Institute’s Appraisal Challenges: Declining Markets and Sales Concessions seminar, which is currently scheduled in more than 20 locations across the country, will have expanded talking points and specific information devoted to the new Addendum. Appraisal Institute members are encouraged to attend this seminar to receive information on the new Addendum, and other important topics that are relevant to the current economic environment.

On November 17, the U.S. Department of Housing and Urban Development published its final rule to reform the Real Estate Settlement Procedures Act. The final rule, which is more than six years in the making, has a profound effect on every settlement service provider, including real estate appraisers, mortgage lenders, mortgage brokers, title insurance companies, settlement agents, real estate brokers and homebuilders. Much has changed from the proposed rule, and the Appraisal Institute is continuing to analyze the final rule. Most visibly, the final rule requires the use of a new three-page Good Faith Estimate and it revises the HUD-1 Settlement Statement into a three-page form.

Information on the final rule, including the new forms, can be found at www.hud.gov/offices/hsg/sfh/res/respa_hm.cfm. Several key provisions are discussed further below.

Volume Discounts - Among the good, HUD dropped its proposal to advance volume based discounts, which would have placed extreme pricing pressure on appraisers, particularly small businesses. The final rule only reiterates HUD’s contention that all settlement service providers may negotiate discounts as long as they go to the consumer.

Appraisal Management Fees - The final rule, however, fails to distinguish between appraisal fees and management fees within the appraisal fee classification. Professional appraisal organizations have argued management fees should really be disclosed as loan processing charges, not appraisal fees. Ultimately, this issue will remain a point of interest and discussion with HUD, as it falls under issues of enforcement rather than in the final rule.

Average Costs - Further, settlement service charges are blurred, somewhat, by a provision expressly stating that RESPA permits the listing of “average charges” on the HUD-1. The final rule is qualified to some degree providing that an average charge may be used for any settlement service, provided that the total amounts received from borrowers for that service for a particular class of transactions do not exceed the total amounts paid to the providers of that service for that class of transactions. Professional appraisal organizations urged that actual charges be clearly disclosed to consumers. A simpler and more consumer-friendly approach would require the disclosure of all actual charges to consumers, rather than averages.

10 Percent Tolerances - The final rule requires that loan originators stay within a 10 percent range for a total aggregate amount for groups of settlement service charges. Real estate appraisals are grouped with credit reports, tax services, flood certifications, and mortgage insurance premiums. Provisions were included in the final rule to describe when a GFE can be revised beyond the 10 percent tolerance. The final rule clarifies the different types of circumstances (defined as “changed circumstances” in the final rule) that can be a basis for providing a revised GFE. The final rule emphasizes that market price fluctuations by themselves are not changed circumstances. For example, if an appraiser that a loan originator intends to use for a particular transaction raises its prices by $50 after the loan originator has already provided a GFE, that increase would not have constituted a changed circumstance under the proposed rule. Such a price increase by the appraiser would not be a “changed circumstance” allowing the issuance of a new GFE. The final rule, however, clarifies that the other circumstances warrant changed circumstances, including situations where information particular to the borrower or the transaction either changes or is later found to be different from what was known at the time the GFE was provided. For example, new information affecting the borrower’s credit quality or a change in the loan amount might occur often enough to be “reasonably foreseeable,” but it would still fall within the types of circumstances included in the second clause of the definition of “changed circumstances.” At the time of this writing, it is unclear whether appraisal services fall under the “information particular to the borrower or the transaction” clause, given that appraisals are specific to the property, but the Appraisal Institute is seeking clarification on this, and will report this, and other information to its members.

The final rule is set to go into effect in 2010, although some provisions take effect sooner. Congress has kept a watchful eye on HUD’s RESPA rule, and this issue may see some consideration in the 111^th Congress.

Given the magnitude of these issues, we would like your comments on the final rule, as we are continuing scanning issues of concern to our membership. Please share your comments with Inside the Beltway at insidethebeltway@appraisalinstitute.org.  

In a November 19 letter, the Appraisal Institute strongly urged the Federal Deposit Insurance Corporation to require the use of appraisals performed by licensed or certified appraisers as part of its program, Loss Sharing Proposal to Promote Affordable Loan Modifications. Currently, the program permits the use of broker’s price opinions to ascertain loan-to-value ratios as part of the modification of “underwater loans” – loans where the value of the collateral is less than the loan amount – that are in default. 

The Appraisal Institute was joined by the American Society of Appraisers, American Society of Farm Managers and Rural Appraisers, and National Association of Independent Fee Appraisers in penning the letter. 

While the letter supported the overall intent of the Loss Sharing Proposal – reducing the number of homes in foreclosure – the groups pointed out that use of a BPO for any purpose other than establishing a purchase or selling price of property is illegal in at least 24 states.  Further, it was argued that FDIC regulations and guidance require the use of appraisals for loan modifications when there has been any material change in market conditions.  Lastly, the groups mentioned that allowing the use of BPOs, which answer the question of price rather than value, was a significant step toward loosening valuation requirements at a time when the federal government should be ensuring that taxpayer “bailout” dollars are not exposed to unnecessary risk.

Further, since these are all troubled loans, many properties may have deferred maintenance. Because of this, the organizations believe the most prudent approach is for the FDIC to require an interior inspection appraisal.  However, the groups also recognized that a complete appraisal report may not be the most appropriate valuation product in some circumstances, and suggested that USPAP gives appraisers the flexibility to modify their scope of work consistent with the needs of their clients. The groups requested that the FDIC consider the use of other appraisal products such as limited appraisals and appraisal updates. The groups also pointed to the work being done to develop new appraisal tools that strike a balance between cost and efficiency and the risk associated with the transaction.

To view a copy of the FDIC’s proposal visit www.fdic.gov/consumers/loans/loanmod/index.html. For the full letter, visit www.appraisalinstitute.org/newsadvocacy/letrs_tstimny.aspx#Comments.

For more information on the rest of the FDIC’s Loss Sharing proposals, including a proposed $24 billion allocation, see story below.

On November 13, the federal bank, thrift and credit union regulatory agencies jointly issued proposed Interagency Appraisal and Evaluation Guidelines intended to reaffirm supervisory expectations for sound real estate appraisal and evaluation practices. The agencies have set aside a 60-day comment period, during which time industry groups will be able to provide their opinions on all aspects of the proposed guidance.

Building on the existing federal regulatory framework to clarify risk management principles and improve internal controls for financial institutions' real estate collateral valuations, the proposed guidance is designed to respond to growing concerns over appraisals and credit quality. As written, the new guidance would replace the 1994 Interagency Appraisal and Evaluation Guidelines and would apply to all real estate lending functions within a federal financial institution, including commercial and residential lending departments, capital market groups, and asset securitization and sales units.

Key points of the proposed guidance revisions include:

• Additional detail on the agencies' expectations for an independent appraisal and evaluation function
• Greater explanation of the agencies' minimum appraisal standards, including clarification of requirements for appraisals of residential tract developments
• Revisions to the Uniform Standards of Professional Appraisal Practice, which are incorporated by reference in the agencies' appraisal regulations
• Risk-focused appraisal and evaluation reviews separate and apart from an institution's compliance function

The Appraisal Institute’s Government Relations Committee is reviewing the proposed guidelines and will develop a comment letter on behalf of the organization. Members are encouraged to convey concerns to the Government Relations Committee representatives in their Region so they can be considered in the Appraisal Institute’s comment letter. Comments may also be submitted directly to the Appraisal Institute Washington office, at bgarber@appraisalinstitute.org.

The Interagency Appraisal and Evaluation Guidelines are available at www.fdic.gov/news/news/press/2008/pr08117a.pdf.

House Financial Services Committee Chairman Barney Frank, D-Ma., held an oversight hearing November 18 to discuss the Troubled Asset Relief Program being managed by the Treasury Department and related initiatives taken by the Federal Reserve Bank and the FDIC in response to the turmoil in domestic and global financial markets. The results of the hearing were not available at press time, though according to the House Financial Services Committee, senior officials, institutions using or affected by the initiatives, and academic and other experts were scheduled to speak.  

According to Frank, the Committee had prioritized three primary areas of interest: “First, the effort to recapitalize financial institutions. Second, the effort to reduce volatility and restore liquidity to financial markets. Third, the effort to reduce foreclosures and mitigate the erosion of housing values, which were, and remain, the epicenter of the current economic crisis.”

Meanwhile, in remarks made November 12 regarding the Financial Rescue Package, Treasury Department Secretary Henry Paulson urged banks to resume lending to credit worthy borrowers while asserting that the government would not use any of the $700 billion to buy bad assets from banks. Secretary Paulson’s comments mark a shift in strategy for the Treasury Department, which had originally proposed that a portion of the federal bailout package be used to purchase illiquid mortgage-related assets dragging down the balance sheets of U.S. financial institutions.

Now, however, Paulson is hoping to find alternative ways to mitigate foreclosures. One possible plan may be to adopt the model put in place by the Federal Deposit Insurance Corp. since its takeover of IndyMac Federal Bank FSB, in which eligible mortgages are reworked by reducing interest rates, extending their durations and lowering principal due on them. To date, loans modified under the FDIC plan have reduced payments for participating homeowners by an average of $380 month, or about 23 percent.

Secretary Paulson’s plan to deter bailout money away from struggling mortgages was not met without opposition. FDIC Chairwoman Sheila Bair, in a break with the administration, vocally pressed for $24 billion in bailout funds to stem the growing wave of American foreclosures (see related story below). In addition, some members of Congress have raised questions regarding the Treasury Department’s plan and approach to dealing with the $700 billion in allocated funds.

To read Secretary Paulson’s full remarks, visit www.treas.gov/press/releases/hp1265.htm.

The Federal Deposit Insurance Corp. said it could prevent 1.5 million foreclosures by using $24 billion in government guarantees to modify roughly 2.2 million troubled loans. The centerpiece of the plan, which Director Sheila Bair unveiled November 14, envisions the government sharing up to half of a modified loan's losses if it goes into default again. However, the plan has received pushback from Secretary of the Treasury Henry Paulson, who called the plan "an important program" but added that it would be "a subsidy or spending program," which is not consistent with the Troubled Asset Relief Program. The TARP has favored direct capital injections into financial institutions.

The FDIC said, "A loss-share guarantee on redefaults of modified mortgages can provide the necessary incentive to modify mortgages on a sufficient scale, while leveraging available government funds to affect more mortgages than outright purchases or specific incentives for every modification."

The FDIC said as many as 4.4 million loans could be considered for a modification under the program. They include 1.4 million loans 60 days or more past due, as well as three million more projected to become delinquent by the end of 2009. The program would be limited to owner-occupied properties.

On November 11, Federal Housing Finance Agency Director James Lockhart and Treasury Interim Assistant Secretary for Financial Stability Neel Kashkari delivered remarks regarding a new GSE mortgage modification program designed to greatly reduce preventable foreclosures and to get struggling homeowners into mortgages that they can afford.

“This streamlined modification program will have uniform requirements and will be supported by a consistent, efficient process approved by key industry participants,” said Lockhart in a statement. “It is an achievable goal if homeowners, banks, mortgage servicers, investors, Fannie Mae and Freddie Mac all work together.”

“[The] announcement by FHFA, the GSEs, and HOPE NOW is an important step forward to make sure the system has capacity to help all qualifying homeowners who are reaching out for help,” said Kashkari. “The Treasury Department is committed to continuing to take strong action to stabilize our financial system and we welcome this important announcement to help homeowners avoid preventable foreclosures.”

The new loan modification program – which targets the highest-risk borrowers who have missed three payments or more, own or occupy their property, and have not filed for bankruptcy – creates a fast-track method of getting troubled borrowers to an affordable monthly payment.

According to Lockhart, the term “affordable” is defined as “your first mortgage payment, including homeowner association condo dues of not more than 38 percent of the household's monthly gross income.”

Lockhart added that creating an affordable payment will be achieved through a mix of reducing the mortgage interest rates, extending the term of the mortgage, or even deferring payment on a part of the principal. It is the servicers who will have the flexibility to use this mix to achieve that goal of affordable payment.

“This unified effort on the part of Fannie Mae, Freddie Mac, private lenders and servicers, and the federal agencies represented here is a bold attempt to create a nationwide program that can quickly and easily reach many of these troubled borrowers here – and, in doing so, stabilizing their families, their communities, and their neighborhoods,” concluded Lockhart.

At its November 5-6, 2008, meeting, the Appraisal Institute Board of Directors elected Joseph C. Magdziarz, MAI, SRA, to serve as 2009 Vice President. He will assume the office on January 1, 2009. He will then serve as President-Elect in 2010 and President in 2011.

Magdziarz’s nomination by the Appraisal Institute’s Leadership and Development Nominating Committee had been submitted to the Appraisal Institute’s Board of Directors at its June meeting in Austin, Texas.

Magdziarz, President of Appraisal Research, Inc., located in Rockford, Ill., has been an active member of the Appraisal Institute for 38 years. He has served on numerous Appraisal Institute committees, including the National Audit Committee for three years, of which he spent a year as Chair. Magdziarz also has been Chair of the Instructor and Faculty Committees, Chair of the Publications Committee, and presently is completing his fifth year as Chair of the Education Committee. Furthermore, Magdziarz also has served and held office in the Appraisal Institute at the local and regional levels.

With regard to the Appraisal Institute’s future, Magdziarz said, “We must continue to be the leader in providing education for the real estate valuation profession. We must continue to discover, redefine ourselves, and adapt to rapid changes in client services, the world economy, and technology.”  He added, “We must move quickly to foster and promote our presence as the world leader in valuation services.”

Magdziarz has degrees in finance and real estate from Rockford College and Rock Valley College. He resides in Rockford, Ill., with his wife of 41 years, Sandra, and his bulldog, Bella.

Frank J. Lucco, SRA was recently awarded the Bert L. Thornton President’s Award by the Appraisal Institute. The award honors an Appraisal Institute member who is: committed to the organization, active and engaged in its activities, an effective spokesperson for the organization, and in touch with the needs of its members and the changes the organization must make to help its members.

“The award means the world to me. Not only because it was presented to me by President Pugh, one of my closest friends and colleagues, but because I was chosen over many who have made great contributions to the organization,” Lucco said.

Of the 30 years that Lucco has been serving the Appraisal Institute locally, regionally and nationally, he said, “I have enjoyed the daily challenges that require initiative and creativity.” In 2000, he was president of the Houston Chapter. In that same year, he and three colleagues worked on a white paper for the AI that predicted many of the events impacting the residential real estate appraisal industry today. Currently, he serves as vice chair of strategic planning and chair of long-range planning for the Appraisal Institute.

Lucco is the managing director of IRR-Residential Appraisers & Consultants with offices in Houston, Austin and San Antonio. For the last 12 years, he has focused on residential consulting, forensic reviews and litigation support. Lucco is regularly featured on radio and television programs as an expert resource on issues concerning the housing market and valuation. He has been appraising residential properties in Texas since graduating from the University of Houston in 1978.

On November 19, U.S. Housing and Urban Development Secretary Steve Preston announced that the HOPE for Homeowners (H4H) Board of Directors has approved changes to the program to help more distressed borrowers refinance into affordable, government-back mortgages and keep their homes. Among the changes are increasing the loan-to-value ratio to 96.5 percent for some H4H loans; simplifying the process to remove subordinate liens by permitting upfront payments to lienholders; and allowing lenders to extend mortgage terms from 30 to 40 years. The changes, allowed under the new authority provided under the Emergency Economic Stabilization Act of 2008, will reduce the program costs for consumers and lenders alike while also expanding eligibility by driving down the borrower's monthly mortgage payments.

"Clearly, meaningful changes were needed. These modifications should increase lender participation and help more families who are having difficulty paying their existing mortgages, but can afford a new affordable loan insured by HUD's Federal Housing Administration," Preston said.

Federal Housing Administration Commissioner Brian D. Montgomery said, "These changes will further encourage lenders to take a hard look at this program before heading down the path to foreclosure and will provide families with another resource to refinance into a loan they can afford. HOPE for Homeowners will continue to serve as another loss mitigation tool that can be used to help families keep their homes."

HOPE for Homeowners will continue to only offer affordable, government-insured fixed rate mortgages. Further, this program will maintain FHA's long-standing requirement that new loans be based on a family's long-term ability to repay the mortgage. Only owner-occupants are eligible for FHA-insured mortgages.

The HOPE for Homeowners program was authorized by the Housing and Economic Recovery Act of 2008. A Board of Directors was charged with establishing underwriting standards to ensure borrowers, after any write-down in principal, have a reasonable ability to repay their new FHA-insured mortgage. The program began October 1, 2008, and will end September 30, 2011.

The HOPE for Homeowners Board of Directors includes HUD Secretary Steve Preston, Treasury Secretary Henry Paulson, Federal Reserve Board Chairman Ben Bernanke, and FDIC Chairman Sheila Bair. They have named the following people to serve on the board as their designees: FHA Commissioner and Chairman of the Board Brian Montgomery, Federal Reserve Board Governor Elizabeth Duke, Treasury Assistant Secretary for Economic Policy Phillip Swagel, and Federal Deposit Insurance Corporation Director Tom Curry.

For more information on HOPE for Homeowners, visit www.hud.gov/hopeforhomeowners.

Leaders of the Group of Twenty, meeting in Washington earlier this month, agreed on common principles to stabilize the global financial system and implement reforms to strengthen financial markets and regulatory regimes to avoid future crises.

These principles include:

• Accounting standards setters should work to enhance guidance for valuation of securities, taking into account the valuation of complex, illiquid products, especially during times of stress.
• Regulators should develop recommendations to mitigate pro-cyclicality, including reviewing how valuation and leverage, bank capital, executive compensation and provisioning practices may exacerbate cyclical trends. Longer term, the group countries will review of the scope of financial regulation, with special emphasis on unregulated institutions, instruments and markets.
• Authorities should ensure that financial institutions maintain adequate capital to sustain confidence. International standards setters should adopt strengthened requirements for banks' structured credit and securitization activities.

The countries' finance ministers are expected to take action to implement these and other principles by March 31, and the group intends to meet again April 30.

For more information, visit www.whitehouse.gov/news/releases/2008/11/20081115-5.html.

As capital continues to prove scarce, seller financing is making a comeback – and not just in traditional small real estate transactions. More large deals have turned to the idea of financing part of a property’s purchase price in order to ensure that that same property moves. It’s a business decision primarily impacting sellers who are under pressure to raise cash.