Berkshire Hathaway Offers to Buy ResCap; Buybacks Continue to Plague Industry; Letters from Trenches on Appraisals

Tonight the NBA finals start, just in time, or so it seems, for the NBA basketball season to start all over again. But here's some aerobatic basketball fun for fans.

North Dakota doesn't make the news often enough! Now the citizens are considering eliminating property taxes.

Not only do we have to endure five more months of election news, and then a few more about the lame duck Congress, but we are six months away from the end of the world. There is a lot of talk swirling around that this year marks the end of the world as we know it and apocalypse is coming. Some say the ancient Mayans predicted the end of the world, but that isn't exactly true. There is no clear prophecy in ancient Maya records because the single stone reference of any sort that might refer to it is damaged and the last part of the inscription cannot be understood (Monument 6 from the ruined site of Tortuguero makes reference to the date, but the rest is just not clear). That is one area of trouble, but it is compounded when you consider other Mayan prophesies that exist in other documents are not only difficult to interpret, but they do not specify 2012 either. Nonetheless, believers will not be swayed, so why try?

I am continuing to hear news that buybacks over trivial, and not so trivial issues, continues to plague the industry. The biggest buyback news of late was Freddie Mac's request of Bank of America. One of the interesting components of that was that a vast majority of the loans that are being repurchased are current. This leads one to believe that these repurchases are taking place due to the quality check (QC) process that takes place on newly originated GSE loans. And this is indeed a concern to originators everywhere. The GSEs tend to sample a small percentage of loans originated by a lender to ensure that they are underwritten as per their guidelines - usually within six months. But with these loans, some of the loans being repurchases were originated in 2009/10. This suggests that it took over 2.5 years for Bank of America and Freddie Mac to identify and settle this issue. There is a more in-depth write-up about the situation at www.stratmorgroup.com, near the top right.

With the Fed voting last week to move ahead with our banks adhering, over the next several years, to the Basel III guidelines, one can expect to see changes. One of those changes is the shift of servicing from some depositories to non-depositories - we saw some of that last week with the sale of several billion of servicing by BofA to Nationstar. In a distantly related story, the Financial Times reports that Berkshire Hathaway has offered to buy the mortgage servicing business and loan portfolio of Residential Capital/GMAC/Ally. ResCap owes significant debts to Berkshire. "As part of its bankruptcy, ResCap said it intended to accept "stalking horse" bids of up to $1.6bn from Ally for its loan portfolio and $2.4bn from Nationstar, a home lender majority owned by private equity investor Fortress for its servicing business. In papers filed on Monday, Berkshire offered to beat Ally's bid for the loan portfolio by $50m and to match Nationstar's bid for the servicing business with a lower break-up fee and expense reimbursement."

"The depressed housing market has also been an important drag on the recovery. Despite historically low mortgage rates and high levels of affordability, many prospective homebuyers cannot obtain mortgages, as lending standards have tightened and the creditworthiness of many potential borrowers has been impaired. At the same time, a large stock of vacant houses continues to limit incentives for the construction of new homes, and a substantial backlog of foreclosures will likely add further to the supply of vacant homes. However, a few encouraging signs in housing have appeared recently, including some pickup in sales and construction, improvements in homebuilder sentiment, and the apparent stabilization of home prices in some areas." Thank you Chairman Bernanke. Is this news to anyone in real estate or real estate finance?

Or how about the Fed's report showing that American's wealth declined between 2007 and 2010 - in large part due to housing? I'll apologize for being a little cynical here, but is the Fed next going to tell us that changes in shooting and stabbings leads to changes in the rate of violent crimes? How about that increased travel leads to more gasoline usage? Ok, back to business.

Friday the commentary had some input on the current state of appraisals. Joel B. from Arizona suggests, "Thanks for the notes on appraisers. I don't want to come across as a fan of all the current and recent regulation, because I'm absolutely not, but specifically for loan originators the question of how to train an apprentice seems easy enough. First, you make them obtain a license - an obvious first step if they'll be doing an origination work; then you title them as an assistant and design a comp plan specific to the position that doesn't include being paid on the terms of the loan. Now, as long as you disclose their NMLS ID, they are free to be trained or handle origination type activities. Perhaps something similar can be done for appraisers."

Dennis S. from California writes, "You mentioned the reliance of appraisers on the MLS.  A major issue I have constantly brought forth to our local real estate community is the accuracy of the descriptions in the MLS.  We have a home across the street from us that was sold as a short sale.  Throughout the occupancy by the owners they did no work to the property, from landscape to routine maintenance.  The property sat on the market for several months before an offer was written, accepted and then finally approved by the lender.  Escrow closed over a month ago and the entire month, seven days a week, contractors have been working on the house to update it, repair it, paint it, etc.  The house sold under market (naturally I say that since it is in my neighborhood!) but the listing agent put no remarks in the listing about the condition other than, "great home in great location, move right in." This home is now a comp at a low value with no mention in the MLS that whoever buys it will need to spend considerable money to get the home to reasonable condition.  Appraisers will use the comp price and make no adjustments for condition and state it as "average."  This pulls down the market.  When I bring this issue up to realtors they say, "I know but what can I do?"  Realtors are afraid to police themselves but they must. They must take pictures when showing properties and let the listing agent know if they do not modify the MLS statements they will send the pictures into the MLS oversight board and lodge a violation complaint. Agents puff their listings to get showings, but a good agent will show a property based upon its price and location and once inside will know what their client may be buying.  Being honest upfront about the condition will better serve the market, and the sellers who will have potential buyers looking at their listings who know it is valued for work to be done after close. Unfortunately the vast majority of agents are unable to connect these dots and/or lack the courage to police their fellow agents.  But they are more than willing to complain when their listing has a low appraisal."

Amy T. observes, "The appraisal issues are huge and the commentary was enlightening.  We pull a credit refresh to insure that our data on our borrower is up to date and correct but we rely on valuation data that is old and getting older while the loan is in process with no chance of any type of market update. We are in one of those markets with multiple offers and over asking price transactions where a high percentage of appraisals come in below the agreed upon price, this situation is extremely frustrating for buyers who have been waiting for the market to improve before stepping in and are then thwarted by low valuations.... Although I also appreciate that rapid appreciation is not healthy for our real estate economy we need to find a balanced middle ground where the industry approach reflects the reality of the appreciating market, how are we going to get the market to really move forward if people cannot buy houses. My chief complaint about the new appraisal environment is that we the lender are not permitted to order a second appraisal for a unhappy client BUT the client can go to another lender and get another appraisal and that happens a lot.  Appraisals are not a science and no two on the same subject will be the same.  In the past when I could order a second appraisal to satisfy a client the cost to the borrower would be discounted, not full price for two appraisals.  So today, like so many of the regulations, the consumer actually pays the price not only the cost of a second appraisal with another company but having to do a whole new mortgage application in order to obtain a second opinion on the value of the property.  Who wins?"

Looking at the markets, yesterday, in the early going, everyone seemed excited about the news from Spain on securing some EU banking aid. The impact of improvement in Europe, which nudged rates slightly higher as well as stocks, lasted until about the mid-morning coffee breaks, and then headed the other way. By the end of a "news less" day here in the United States, the 10-yr closed at a yield of 1.60% and agency MBS prices were better by .125-.250, resulting in some intra-day price improvements. (Spain's 10-yr, for perceived risk comparison, is at about 6.6%.)

Today for U.S. news we had Import Prices for May (expected, and actually, -1.0% against a prior reading of down 1/2 percent) and Export Prices were -.4%. This afternoon at 1PM EST the Treasury will be auctioning off $32 billion of 3-yr notes - look for a yield of about .37%. In the early going we find rates a shade higher than Monday afternoon, with the 10-yr at 1.63% and MBS prices -.125.


The 5 toughest questions for men. (Part 3 of 5; guaranteed to get me into hot water, but I will gladly print the opposing view if someone sends it to me.)
1. What are you thinking about?
2. Do you love me?
3. Do I look overweight?
4. Do you think she is prettier than me?
5. What would you do if I died?
What makes these questions so difficult is that each one is guaranteed to explode into a major argument if the man answers incorrectly (i.e. tells the truth). Therefore, as a public service, each question is analyzed below, along with possible responses.
Question # 3: Do I look overweight?
The correct answer is an emphatic: "Of course not!"
Among the incorrect answers are:
a. Compared to what?
b. I wouldn't call you fat, but you're not exactly thin.
c. A little extra weight looks good on you.
d. I've seen larger.
e. Could you repeat the question? I was just thinking about how I would spend the insurance money if you died.