January 2010

FULL APPRAISALS GAINING POPULARITY OVER AVMs

According to Bill Rayburn, CEO of FNC Inc., mortgage lenders are more likely to order a full appraisal and less likely to ask for an automated valuation model (AVM) these days. Rayburn says the decline in relative AVM activity is due to a higher demand for accuracy in the wake of declining home prices.

When asked what constitutes a quality appraisal, Rayburn was quoted in Origination News as replying, "In the minds of most consumers it is one that enables them to get their loan, which may not be correct at all. A quality appraisal is the one that provides the client with the correct value, and that is a difficult thing when you have markets moving around."

Rayburn noted that appraised values are lower not only because of market conditions, but also because of more "conservatism" on the part of appraisers.

"Appraisers are hired to provide an objective, unbiased estimate of value, so they need to attempt to be unbiased in every assignment," Rayburn said. "That's a difficult thing to do many times."

MANY EX-MILLIONAIRES ARE BAILING OUT OF
MILLION-DOLLAR MORTGAGES

Mortgages of over $1 million are more likely to be in a state of default than smaller ones. According to American CoreLogic Inc., about 12% of outstanding mortgages higher than $1 million were 90-or-more days overdue, while only 7.4% of all U.S. mortgages were that far in arrears. Spectrum Group, a consulting firm out of Chicago, reported that the number of American households with a net worth of $1 million (not counting their primary residences) dropped from 9.2 million in 2007 to 6.7 million in 2008.

"The rich aren't as rich as they used to be," said Alex Rodriguez, a Miami real estate agent with JM Group USA. "People have reached the point where they can't afford the carrying expenses of a $2 million home."

A lot of people behind on their high-dollar mortgages are resorting to short sales, as a way to get out from under them. The Office of Thrift Supervision reported 40,000 short sales in the first six months of 2009, almost three times the amount reported for the first half of 2008.

"You are just starting to see the tip of the iceberg with luxury short sales," said Adrian Heyman, a real estate broker in Scottsdale, Ariz. "A lot of wealthy people are upside down in their mortgages, and they just can't afford the second and third vacation home anymore."

APPRAISER JAILED FOR THREATENING CUOMO'S LIFE

A Long Island real estate appraiser is in the Suffolk County, N.Y., jail  under a $500,000 bond, after allegedly calling the New York Attorney General 's office and threatening to shoot state Attorney General Andrew Cuomo.

According to an official from Cuomo's office, Jack Geoghan of Bayport, N.Y., called the office and said, "If that (expletive deleted) Andrew Cuomo is on the Long Island Expressway and his head is blown off with a 30.06 (a bullet from a high-powered rifle), you'll know who did it."

The AG office official said Geoghan also sent an e-mail to the office with similar content. The official said Geoghan "was apparently upset over some of the actions our office has taken regarding cracking down on mortgage-related fraud." Cuomo's lawsuit against First American eAppraiseIT for allegedly inflating appraisal values for Washington Mutual Bank eventually resulted in the establishment of the Home Valuation Code of Conduct.

John Geoghan, father of the incarcerated appraiser, said his son is really not such a bad fellow.

"He's your average guy; he's got a good education and is smart as a whip," John said of Jack. "Guns and stuff, that's not his thing. He doesn't own a gun."

The elder Geoghan said his son has been struggling with alcoholism and marital problems. He would like to bail him out, but finds the half-million-dollar price tag to be a bit steep."

"God, if he shot the president he wouldn't get that much," John said.

NEW BREED OF HOUSE FLIPPERS EYE FORECLOSURES

During the housing boom that peaked several years ago, literally millions of Americans would buy a house, not to live in, but to sell a short time later for a quick profit. Many of them were left hung out to dry when the housing meltdown hit, but bargain prices on some foreclosed homes today are leading to another resurgence in house flipping.

Now that the days of easy credit are gone, the flipper of today needs plenty of cash and knowledge of the real estate market in the areas where they operate. With home prices no longer escalating, these entrepreneurs tend to buy at foreclosure auctions. The current home-market conditions lead lenders of repossessed property to set minimum bids below the mortgage balance due on them. Even though they take a loss on the property in such cases, they get money for it right away and are saved expenses, such as repair, taxes and insurance.

While a prepared and knowledgeable bidder can turn a profit under such circumstances, caveat emptor (let the buyer beware) rules. The foreclosed "bargain" could have been heavily damaged by the disgruntled former owner and there could have even been another unrepaid loan taken out on the property.

MANY AMERICANS ARE HAPPIER AFTER
GIVING UP HOME AND RENTING

An unusual combination of cheap rents and underwater mortgages are leading many Americans to walk away of the homes they own and move into a home to rent.

"It's just a better life; it really is," Shana Richey, a schoolteacher in Palmdale, Calif., told Wall Street Journal reporter Mark Whitehouse.

Richey owed $230,000 on her home, before strategically defaulting on it and renting a different house. She is now able to buy season tickets to Disneyland for herself and her children and take cruises, things she could not afford to do while trying to pay her mortgage.

According to Whitehouse's article, the U.S. homeownership rate dropped from 69.2% in 2004 to 67.6% in September 2009, the steepest decline in this category in more than 20 years. There were over a million strategic defaults in '09, an increase of over 300% from the amount of those just two years previously.

ASK MARTITIA

QUESTION: Do changes in the Ethics Rule of USPAP, which went into effect January 1, prohibit an appraiser from re-appraising a property for three years after he or she last appraised it?

MARTITIA: No, unless the appraiser had an agreement with the client of less than three years ago not to disclose that he or she had appraised the property. The new Ethics Rule from the Uniform Standards of Professional Appraisal Practice does not otherwise forbid an appraiser from appraising the same property within three years. It does, however, require the appraiser to disclose in the appraisal report if he or she has appraised the property, or had any other relationship with the subject property, within three years from the date of assignment.

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

AUCTION RESULTS

REAL PROPERTY: A 4,000 square-foot building in Manhattan sold for $1.6 million at an auction last summer. The four-story brick structure at 137 Avenue C contained a restaurant on the first floor and a total of six apartments on the other three. It was generating $154,594 annually in rent. The asking price the previous summer was $3.2 million and the opening bid was $1.45 million.

PERSONAL PROPERTY: A 1939 first edition of the four-volume, 1 million-word book by Winston Churchill, entitled Marlborough: His Life and Times, sold in New York at a Sotheby's auction for $10,000  last month. This was an autographed copy of what is known as Churchill's "historical and literary masterpiece."

QUOTES

"The human brain starts working the day you are born and never stops until you stand up to speak in public." – George Jessel

"Why does a woman work for 10 years to change a man's habits and then complain that he's not the man she married." – Barbra Streisand

"I am a Ford, not a Lincoln." – Gerald Ford

"You can't win unless you learn how to lose." – Kareem Abdul-Jabbar

"There are no rules of architecture for a castle in the clouds." – Gilbert Chesterton

"You can never plan the future by the past." – Edmund Burke
 

Newsletter Editor: kevin@elliottco.com
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