March 2009

APPRAISER REGULATORS WARN TREASURY OF BPOs AND AVMs

The president of the Association of Appraiser Regulatory Officials (AARO) wrote a letter to Secretary of the Treasury Timothy Geithner that “expressed concerns” about policies that would allow broker price opinions (BPOs) to be used in lieu of appraisals to establish collateral value on some home refinancing.

“We are very concerned that using valuation products, such as BPOs, prepared by unqualified individuals, who are not accountable to any valuation oversight entity, and who are not held to any valuation standards of professional practice, is dangerous to the mortgage bailout program, to the financial and banking industry and to the consumer,” AARO President Neva Conway said in the letter.

Conway listed five concerns, which contributed to his stated opposition to the use of BPOs where appraisals have been required. The concerns were:
 

1. “BPOs are unreliable, and real estate appraisals are far more likely than BPOs or AVMs (Automated Valuation Models) to produce accurate opinions of the fair market values of single family collateral properties.”
    

2. “Individuals performing BPOs lack meaningful (or sometimes, any) valuation qualifications, may not be objective and unbiased or even independent of the transaction for which they’re opining a value, and are not properly accountable to anyone for their BPO work.
    

3. “Permitting real estate agents and/or brokers to provide valuations for the millions of loan modifications predicted, would severely weaken the Congressionally established system os state appraiser certification and licensing which, while not perfect, is operating effectively throughout the country to oversee appraisal practice, to protect the safety and soundness of mortgage loans and provide consumers who buy homes with an important, independent source of information on the actual market values of their properties.”
    

4. “There is an ample supply of appraisers who can perform appraisals quickly and reliably.”
    

5. “Appraiser licensing agencies are consumer protection agencies and have responsibility to protect the public and to protect the integrity of appraisals used by the financial market.”

BPOs are opinions of real estate agents, who are not licensed or certified appraisers. AVMs are computer-generated models that don’t reflect anyone’s opinion.

HOUSING STARTS JUMP AFTER BOTTOMING AT HISTORIC LOW

The U.S. Commerce Department reported that housing starts rose 22% in February to a seasonally adjusted annual rate of 583,000. The last time housing starts increased was in June, and this was the largest percentage increase in 19 years.

The increase was driven primarily to starts in multifamily units, which were up 80%, while single family unit starts rose by a more modest 1.1%

This is a pleasant surprise to economists, who expected housing starts to decline once again.

“With new home sales still falling and the month’s supply at a record, there is no reason for homebuilding to rise,” said Ian Sheperdson, chief U.S. economist at High Frequency Economics. “This is a temporary rebound, not a recovery.”

Last month the Commerce Department reported that housing in this country fell 16.8% in January to a seasonably adjusted annual rate of 466,000, the lowest level since 1945.

According to the report about January, housing starts were down 56% from what they were the previous January and had dropped 79% in the past three years.

“Eventually the extraordinary level of new homebuilding should help get inventories of unsold homes under control,” wrote David Greenlaw and Ted Wieseman, who are Morgan Stanley economists. “For now, the drop in new construction is being overwhelmed by the flood of fire-sale-priced foreclosed homes and short sales hitting the market, so foreclosure mitigation efforts will also be the key to the inventory situation.”

UNCLE SAM EXPECTED TO LOAN $1 TRILLION
FOR COMMERCIAL REAL ESTATE

In an attempt to prevent, or at least lessen the effects of, a commercial real estate crisis, the federal government is expected to lend a significant amount of money to participants in the commercial real estate sector. Ben Bernarke, chairman of the Federal Reserve Board, said that at least $1 trillion in funds would be lent by the government to the private sector for commercial real estate use.

Currently banks are estimated to be collectively holding over $170 trillion in outstanding commercial loans, as vacancy rates have soared to near record levels. This year, about $300 billion of these loans are due for refinancing, but banks are wary of doing so because of declining real estate values.

“The need is urgent,” Kenneth Rosen, real estate professor at the University of California at Berkeley, said about government lending for commercial real estate. “It is important to get this job done before we have another problem.”

20% OF MORTGAGED REAL ESTATE HAS NEGATIVE EQUITY

First American CoreLogic’s latest negative-equity report showed that, as of December 2008, one out of every five mortgaged properties in the United States were in a negative-equity position. This amounted to 8.3 million mortgages in this country, 700,000 more than in the report of the previous September.

Nevada, according to the report, had the highest percentage (over 50%) of mortgage loans in negative equity. California had the largest amount of borrowers (1.9 million) in such a situation.

More than 5.3% of all mortgaged properties are in a severe-negative position with a loan-to-value ratio of, or more than, 125%. The report said of the 2.2 million mortgages in that position, more than 70% of them were in five states: California, Florida, Nevada, Michigan and Arizona.

“The worrisome issue is not just the severity of negative equity in the ‘sand’ states, but the geographic broadening of negative equity that is expected to occur throughout the year,” said Mark Fleming, chief economist of First American CoreLogic.

SENATORS PUSH FOR FINANCIAL PRODUCTS REGULATORY AGENCY

Senators Richard Durbin of Illinois and Charles Schumer of New York have introduced a bill that would create a new five-member regulatory agency that would oversee financial products that are marketed to individuals, such as mortgages, credit cards and student loans.

If passed in its current form into law, the agency, called the Financial Products Safety Commission, would be given the power to ban products or sales practices that it considers to be abusive. It would also be allowed to sue or bring criminal action against those who disobey its rules. While these products are already regulated, the senators feel this new agency would enhance consumer protection in the financial arena. It might also relive banking regulators of some of their responsibilities.

“This new financial oversight agency would look out for consumers first, acting quickly to protect members of the public from predatory practices,” Sen. Durbin said. “It would ensure that companies are held accountable when they abuse, deceive or take advantage of the consumer they claim to be helping.”

ASK MARTITIA

QUESTION:  An appraiser is asked to appraise a property with handicap-accessible features, such as wider doorways, special plumbing fixtures and ramps. How should the appraiser address these unique features in the appraisal report?

MARTITIA: The appraiser should report market preference for the specialized features of the house, but should not draw an unsupported conclusion that they add to or take away from the home’s value. Costs do not equal value, and such features may or may not contribute value to a property. The demand for those features will determine how its value is affected.

Martitia Mortimer, Elliott’s executive vice president, answers appraisal questions on a regular basis in Elliott Real Estate News.

QUOTES

“When buying and selling are controlled by legislation, the first things to be bought and sold are legislators.”  -- P.J. O’Rourke

”If your head tells you one thing and your heart tells you another, before you do anything, you should first decide whether you have a better head or a better heart.”  -- Marilyn vos Savant

“The most important ingredient in the formula of success is learning how to get along with people.” --Theodore Roosevelt

“Television is a medium because anything well done is rare,” -- Fred Allen

“If a small thing has the power to make you angry, does that not indicate something about your size? -- Sidney Harris
 

Newsletter Editor: kevin@elliottco.com
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