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BP and BPOs, the New Toxic Twins

June 7th, 2010 by Bill Collins Leave a reply »

What Do BP and BPOs Have In Common?

Long-standing, cozy relationships between the oil industry and those charged with regulating it have become all too apparent with the tragic oil spill in the Gulf.

After the financial crisis, attention became focused on similar “all too friendly” relationships between regulators and some of the big players in the real estate and financial sectors.  There are many areas that need reform and many different ideas on how to do so.  However, there is one area where all appraisers and informed decision-makers can agree:  BPOs (Broker Price Opinions of residential real estate) and BOVs (Broker Opinions of Value of commercial real estate) need to end before they contribute to another collapse of the real estate market and a new crisis.

Once again, we at Appraiser Help want to note our support for the positions taken by the four appraisal organizations which authored the March 8th and April 20th letters that we have previously discussed opposing the use of both BPOs and BOVs.  Links to these two letters are here: Letter From Appraisal Organizations Regarding BPOs and BOVs.

We also again request that Andrew Cuomo take one final action as Attorney General, before his coronation as Governor of New York, to read our letter dating back to August 4, 2009 (go to www.EndBPOsNow.com to see) and use the powers at his disposal to help bring an end to these unseemly financial practices.

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US Financial Crisis Inquiry Questions Moody’s CEO and Warren Buffett

On June 2nd Bloomberg.com reported on the written testimony of Moody’s Corp. Chief Executive Raymond McDaniel, in which he stated that his company’s ratings during the past several years of CDOs (collateralized debt obligations) and residential mortgage securities were “…deeply disappointing.” The report went on to say that Mr. McDaniel described the housing market collapse and economic troubles “were of a magnitude that many of us would have once thought unimaginable…Moody’s is certainly not satisfied with the performance of these ratings.”

The Chairman of the Commission, Phil Angelides, was reported by Bloomberg.com to have said: “To be blunt, the picture is not pretty…Moody’s did very well. The investors who relied on Moody’s ratings did not do so well.”

Also on June 2nd, the New York Times reported on the testimony of Warren Buffett, CEO of Berkshire Hathaway which is the largest stockholder of Moody’s.  Apparently seeking to distance himself from Moody’s, the “Oracle of Omaha” who was testifying before the Commission under subpoena after first declining to appear, essentially admitted that he does not know everything.  “I’ve never been to Moody’s,” he said, adding that “I don’t even know where they’re located. I just know that their business model is extraordinary.”

In another televised interview, Mr. Buffett said that he would not recognize the head of Moody’s if he was standing next to him.  The Times report also quoted Mr. Buffett as saying that: “The entire American public was caught up in the belief that housing prices could not fall dramatically…” and that Moody’s “made the wrong call” and admitted that he “…was wrong on it, too.”  Wikipedia’s online dictionary describes an oracle as: “A person… considered to be a source of wise counsel or prophetic opinion.”  Perhaps we need a new nickname for Mr. Buffett (maybe “Bubblehead”, considering his now regrettable comment just prior to the real estate collapse, which he referred to as a “Bubble-ette”).

Links to the Bloomberg.com report and the New York Times article are found here:

Questions for Moody’s and Buffett

Moody’s Chief Says CDO Ratings ‘Deeply Disappointing’

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Anointing a New Oracle: Robert Shiller

Maybe it’s time for Mr. Buffett to pass the baton to Yale University professor of economics and finance (and housing guru) Robert Shiller, who has consistently recognized underlying patterns and accurately predicted home price movements.  Bloomberg.com most recently interviewed him on May 26th where he expressed some of his current concerns.  This interview can be heard by clicking on the following link: Bloomberg News – Yale’s Shiller Interview on Home Prices

On June 1st, the New York Times reported on the increasing number of underwater homeowners who are taking advantage of drawn out foreclosure proceedings to otherwise stabilize their financial picture and a link to that article is found here: Owners Stop Paying Mortgages, and Stop Fretting

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Big Banks Agree, Who Wants to Buyback This Stuff?

One additional Times article from June 4th described the banks lack of enthusiasm when approached by Fannie Mae and Freddie Mac to buyback loans considered to be predatory or fraudulently underwritten and a link to this article is found here: Banks Say No.  Too Bad Taxpayers Can’t.

Some of the prevailing anti-bank sentiment was “comically” presented in the Huffington Post on June 4th, a link to which is found here: Financial Crisis Explained Through Comics

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Numerous Concerns Regarding the Commercial Real Estate Market

On May 25th the New York Times discussed reports from several sources describing a so-called “shadow inventory” of commercial space that is empty due to layoffs and consolidations.  This space, which is not currently offered for rent or recorded anywhere, will be “backfilled” if and when the economy and employment picks up resulting in a lack of leasing activity.  A link to this article is found here:  Empty Desks May Slow Upturn in Real Estate

On June 2nd, the Wall Street Journal discussed the looming problems with commercial mortgage backed securities.  It noted their popularity at the height of the real estate market and reported that approximately $700 billion of these securities are outstanding which is an amount greater than securitized credit card debt, student loans and auto loans combined.  The Journal noted that the delinquency rate with these loans increased to 8.4% in June, more than triple that of the previous year as reported by Trepp LLC, a provider of commercial real estate backed security information.  The article also reported research by Fitch Ratings which project a loss rate of 10% for commercial securities issued in 2007 at the height of the commercial real estate boom.  Howard Chin, a managing director of Guardian Life Insurance Co. of America which oversees a portfolio of commercial mortgage backed securities is quoted in the article as saying that “The worst is yet to come.”

Another Journal article stated that Moody’s Investors Service Inc. reported that commercial property values were down 42% from the market peak in October 2007 while other reports by Moody’s and Real Capital Analytics Inc. indicated that as of March 2010, industrial and office prices had declined 32% during the prior two years with retail space down 28%.  The Journal article noted that: “…because banks remain wary of commercial real estate loans, landing financing to make such a purchase can be time consuming and tedious.”

The Wall Street Journal reported yesterday that GE Capital planned to reduce its commercial real estate by 50% because that business “…has proved a huge headache in the wake of the credit crisis.” No time frame was delineated for accomplishing this but the Journal reported that the market value of commercial buildings owned by GE Capital has fallen by nearly 40% since 2008.

Rates & Dates

The Wall Street Journal reported yesterday that mortgages insured by the FHA are “…falling into delinquency at a lower rate than they have in the past..In April, nearly 8.5% of loans backed by the agency were 90 days or more past due. While that was still higher than a year earlier, April marked the third consecutive month in which delinquencies, which peaked at 9.4% in January, declined.” This improved performance was attributed largely to a tightening of standards by lenders.

Freddie Mac reported that rates were essentially unchanged with 30-year fixed-rate mortgages at 4.79% for the week ending June 3rd, up from 4.78% during the previous week.

Additional information from Freddie Mac can be found by going to: Freddie Mac Primary Mortgage Market Survey PMMS

How Many Appraisers Are Left in The US?

The Appraisal Subcommittee currently reports that there are 114,192 certified or licensed appraisers in the United States with 33% of them Certified General Appraisers, 50% Certified Residential Appraisers and 17% Licensed Appraisers.  While this number may appear higher than many appraisers would expect in consideration of the difficulties in the appraisal profession, it appears as though it contains many appraisers who no longer appraise full time but retain their license, possibly in the hope that industry conditions might improve.  A state by state breakdown can be viewed by clicking on the following link: Active Appraisal Credentials – ASC – Appraisal Subcommittee

Ask Angie

We want to congratulate our two most recent winners: Timothy Faso, a Certified Residential Appraiser with Fort Neck Real Estate Appraisal in Seaford, New York.

Today’s questions:

Question 1) Who said:

“Our greatest glory is not in never falling, but in getting up every time we do.”

1. Confucius

2. Sonny Liston

3. Richard Nixon

4. Lindsay Lohan

5. None of the above

Question 2) Who said:

“One original thought is worth a thousand mindless quotings”

1. Plato

2. Bill Gates

3. Auguste Rodin

4. Diogenes of Sinope

5. None of the above

The first person to respond with both correct answers wins a choice of either:

One Free Trade Show Pass or $199 off a Full Conference Pass to Valuation 2010 or

A Free Copy of the Directory of Appraisal Management Companies for FHA Appraisers

Angie’s Hall of Fame: Those who have been crowned winners more than once during the past two years and who have been retired from competition for the rest of 2010:

Suzanne Fahien

Pat Reass

Tell us what you think!

We invite your responses to any of the issues raised in this newsletter. Please e-mail us at: bill@appraiserhelp.com with your thoughts!

We really hope you find our newsletter to be informative!  If you have any input on future topics for discussion, please email me your questions and I will do my best to address them in the next issue.  If you want to look back at past issues you can see our archive at www.appraisernews.com

Regards,

Bill Collins, Appraiser Help Inc.

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