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.