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Foreclosures and Their Impact Upon the Reassessment Process
IAAO WebinarThursday July 9 , 2009
Presented by IAAO Councils and Sections and the IAAO Associate Member Committee
The statements made or opinions expressed by presenters in this webinar and in
related materials do not necessarily represent a policy position of the International
Association of Assessing Officers.
HOUSING CRISIS, FORECLOSURES, AND THEIR IMPACT ON THE
REASSESSMENT PROCESSPRESENTED BY
KENNETH VOSS, CAE ,MAI, SRA
KENNETH VOSS & ASSOCIATES, LLCSENIOR CONSULTANT, TEAM CONSULTING
CHIEF APPRAISER, HENRY COUNTY, GEORGIA
AFFORDABLE HOME OWNERSHIP: “The Great American Dream” is revealed, spread, and fueled by American and Government Dreamers.
– Historically home prices and home ownership represented stability and security
• Over the past 50 years prices inched upward, usually exceeding inflation by 1 to 1 1/2% a year
• Starting around 1998 prices increased rapidly becoming disconnected from the past trend
5
• Home Ownership-”The Dream” continues when more people begin to believe it, desire it, find more resources available to achieve it.
– Government believes it can happen for anyone
– Individual borrowing capacity triples
• Historic shift in governments philosophy from financial assistance to outright unrealistic enabling
6
• 1990 Jimmy Carter created CRA (Community Reinvestment Act), revived by the Clinton administration in 1998-99 providing more lending to low-income families.
NOTE: Banks considered discriminatory with possible lawsuits if they did not lend to minorities
• 1998 President Clinton and supporters continue efforts to effectively abandon market “regulator” for housing
7
• The Glass-Steagall Act of 1933 was intended to protect our financial system by insulating commercial banking from other forms of risk.
• The Act was repealed in November 1999 when Congress approved landmark legislation and adopted the Gramm-Leach-Bliley Act.
• The new legislation made it easier for commercial banks, securities houses and insurers to enter one another’s business.
• 2000 forward: Congress protects GSE’s (Government Sponsored Enterprises) i.e., Fannie Mae, Freddie Mac, from regulation and growth restraints thus weakening underwriting standards.
8
• Banks continue to fund mortgages by overlooking any sort of effective regulation thus seemingly facilitating “The Dream.” These new mortgage standards are even considered Innovative along with other motivation from Congress
• 2000 the Bush administration, also with motivation from Congress, continues loose regulation standards allowing “private sector” investors to monitor themselves.
• Greenspan gives green light to Adjustable Rate Mortgages (ARMs), preferred because less expensive than the traditional fixed-rate mortgage
9
• 1999-2000 “The Dream” fueled by the governments goal of increased ownership is now fully realistic, rapidly spreading and growing. This growth was the inevitability of less regulations, weakened standards, more money from lending more sources to morepeople, at historic short term low rates.– Acceptable practice, lowest or no down payment
– Fixed rate mortgages considered foolish
10
• 1999-2008 Decreased Regulations (DR) continue
• and further facilitate affordable home ownership.
– Little or no money down
– NINJA loans, no income, no job, no assets
– Unrestricted monthly payments, not relative to income, credit history score, employment history or tax returns. Note: Credit 620-660 considered subprime, 720+ considered prime, in between called Alt-A
11
– Interest only loans and ARMs increase
– Limited documented loans now 92% or higher
– Home prices rise
– Enticed by rising home values created by artificial low interest rates, Speculators and Investors ride the wave of decreased regulations
– Banks seriously continue to thrive. Example: Countrywide Bank, who received favorable treatment from the new freedom Fannie Mae and others experienced huge profits as they grew to become the nations leading mortgage lender.
– Others banks aspire to this fame.
12
• The increase in available funding and human desire increases new home construction. The Federal Reserve keeps interest rates low by increasing the money supply
• Once again enticed by rising home prices Speculators and Investors ride higher on the wave of decreased regulations, flipping house and making a “quick buck.”
• Home prices rise higher
13
• “The Great American Dream” is also fueled by human nature from all social classes who just couldn’t resist, and then went on a debt-fueled spending spree. Individuals who could not qualify for a conventional loan found that they could get one with higher interest (only problem was that they were not telling the whole truth to the lender). – Decreased regulations freed lenders from the responsibility of asking
probing questions.
• Many potential home owners adopt a “don’t worry” philosophy. Payment on the principle “isn’t cool” besides, the mortgage can be refinanced at the end of the initial term.
14
• True but irresponsible attitudes:
1. My house will continue to increase in value and the “price is right.”
2. Slightly higher interest rates are OK because the house can be/is mine now.
3. It’s OK to purchase a house I can’t afford right now because home values will continue to increase.
4. It’s OK because I can even get “cash out” if I purchase now or refinance later.
15
5. My house cash value is still increasing
6. Short term financial implications, reset prices, rate increases, caps and terms, “no problem”!
Affordable Home Ownership: Government, private, and human desire keeps “The Dream” alive…but the Web grows
bigger.
• Government continues to encourage agencies such as Fannie Mae, Freddie Mac…to borrow and spend
16
• Home prices skyrocket which leads to a self-reinforcing risky cycle
• Borrowers (low-income, poorly educated, minorities +++ the “Average American Dreamer”) and lenders make poor choices
Examples:1. Above-market interest rates, higher fees, higher points,
ARMs with short initial loan terms all offered by lenders and chosen by buyers.
17
2. Fees that could strip the borrowers equity through unnecessary refinancing options are considered necessary.
3. Prepayment penalties prevent refinancing
4. ARMs are still available without regard to whether the borrower can actually afford to make payments after the teaser rate has expired.
18
5.Refinancing at low interest rates, taking out larger mortgages thereby taking on more debt with less equity was a common choice.
• The dream machine continues to function despite concerns.
• Banks, Speculators, Investors of mortgage backed securities, Government agencies, even Wall Street continue to flourish under Decreased Regulations.
• Concerns grow: Are things getting “out-of-control.” Really?
19
• Wall Street firms like JP Morgan, Chase, Merrill Lynch, Lehman Brothers (who already experienced double and triple their profits) took mortgages and sold them to investors in pools then sliced into pieces.
• Using mortgages from all over the United States and bundling them together, marketed as mortgage backed securities, created an up-side: the protection from unexpected downturns in the housing market
20
• Wall Street continues to purchase subprime and Alt-A mortgages utilizing a mechanism known as “securitization.”
• Rating agencies, designed to assess the risk involve with mortgages, decreased standards creating confusion by:– Assuming home prices would continue to rise– Allowing risk taking for a few extra basis points– Spreading conflicts of interest with incompetence– Ignoring mortgage-backed securities packaging and pricing
• Mortgage-backed securities linked to rating agencies begin to experience problems.
21
Affordable Home Ownership: Human nature joined with decreased regulations, plus the inevitable, substantial circumstances, cause dreams to fall apart. Default or Hang Tight?
• The first glance is at a newly created high price housing bubble, that for many years covered the problem of defaults.
• The bubble becomes very transparent, growing, and potentially traumatic!
22
• House prices begin to decline and the economic climate cools.
• The inevitable wake-up call: “was this a dream or a nightmare?” Now what?
• “I can’t pay my mortgage payment” has a whole new meaning. Real-world big-time financial and emotional trauma takes the place of “the dream.”
23
• The economy and job market continue to decline and loan defaults. Initially, defaults occurred mainly for ARMs, but, subprime, and eventually fixed rate loans (initially exempt) are now in jeopardy. Foreclosure time has arrived.
Affordable Homeownership: Now what? Perhaps a cup of stimulating coffee will make my dreams disappear, HELP!!
24
• Congress attempts to resolve or delay the impact of defaults, foreclosures, loss of security, even loss of personal integrity associated with the “Great American Dream” by passing out stimulus enhanced modification drugs (plans).
• Congress struggles to find a way to keep borrowers in their homes amidst deflating property values.
• Stimulus money and modification plans seem like the best solution
• Modification plans include efforts to:
25
1. Convert existing ARMs and questionable mortgage plans to fixed rate mortgages
2. Lower interest rates by extending the term of the fixed rate mortgage
3. Lower interest rates with other creative methods.
eg- military benefits
1. “Interest only” payments for a short, limited time (generally one year)
2. Allow delinquent amounts to be added to the outstanding loan with a “start-over” monthly payment
26
• Good News/Bad News: help is supposedly on the way, but all efforts are still time consuming, frustrating, labor intense.
• Job losses, falling home prices and fear continue to plague the modification process.
• A recently filed ratings report indicates that between 65% and 75% of modified loans are 60 days delinquent within 12 months of the loan change.
27
• Ultimately, that wonderful dream is now a real nightmare. All too many homeowners now choose to walk away and forget it ever happened (or try to)!
Affordable Home Ownership: “The dream,” “the nightmare,” “the hangover,” might be less intense for some, but the real effects on national, state and local agencies are just beginning.
• The Reassessment Process is greatly affected and complicate as a result of foreclosures.
28
• During the housing BOOM many new sales were recorded indicating large increases over prior sales.
– The new “high” values increased property values in subdivisions and surrounding areas
• Appraisers analyze market transactions and adjust values during a revaluation
– During this process, some new sales were found to be much higher than surrounding values thus appearing “suspect”
29
– Further investigation indicates some of these sales might be instances of Mortgage Fraud.
• The foreclosure crisis/panic and national economic downturn have created multiple negative effects and further complicate the appraisal/assessment process – Rapid deterioration of areas outside the highest
foreclosure neighborhoods. – Homeowners in these areas bear the brunt of the most
severe drops in home prices.– Severe drops in home prices cause many to experience
some of the highest “over property tax payments.”
30
– Home sale prices in lower-income neighborhoods are really low
– Disinvestment negatively affects the tax digest (market value of a jurisdiction)
• Dramatic increases in foreclosures present communities with a host of new problems ranging from declining tax bases to increased crime.
• Foreclosed properties have a significant impact on nearby properties and remain vacant for long periods of time.
31
– As the foreclosed property remains vacant and diminishes in physical condition, owners are less likely to maintain the property because:
1. No incentive since they might lose it anyway
2. Owners face other financial problems, all competing for fewer dollars
Deferred maintenance further causes properties to appear run down. A set-up for vandalism and crime
32
• Local government also bear significant increased costs when a home owner loses their property through foreclosure:
– Crime
– Fire hazards
– Legal fees
– Community standards enforcement, zoning
– Public nuisances, health issues
33
• Assessors office has to deal with these issues as they become inundated with appeals.
• Assessment process is much more complicated and costly.
• Falling property values jeopardize crucial property tax streams needed to fund public systems, schools, police, roads, etc.
34
• Reduced local tax base means tightening the belt, cuts or elimination of services.
• Often an increase in the Tax Rate occurs in order to offset lost revenue from property value decreases due to defaults and foreclosures.
35
• In conclusion: Foreclosures have had a huge impact on the reassessment process. Currently I am the Chief Appraiser for Henry County, Georgia and below is a list of my recent observations:
1. Henry County has over 83,000 parcels as of January 1, 2009.2. Over 46,000 change of value notices (decreases) were sent on
values based on January 1, 2009.3. Reduced assessment base by over $800 million.4. In 2009 we have over 4,700 appeals.5. This is over a 50% increase from 2008.6. Appraisal staff will be stretched thin with compiling data and
presenting appeals to the Board of Equalization.
36
7. Foreclosures and the problem they create further takes time away from doing statistical reviews and updating property
characteristics.
8. 2009, 2010 will be two of our most challenging years as we set priorities that will affect the financial stability of our county.
37
Scott G. Winter, RES
Supervisor, City of Milwaukee
Milwaukee, WI
(414) 286-3137
39
Has Anything Really Changed?
Dealing With Foreclosures in the Real Estate Market
By Scott G.Winter, RES
Some Real estate markets are heavily
influenced by foreclosures.
However, not all foreclosures are the
same.
41
Foreclosure is a process and not a sale.
Transactions can be made before during or after the foreclosure process.
The better term is a foreclosure-related sale.
42
Assessors have several options:
Ignore all foreclosure-related transactions.
Include all foreclosure-related transactions.
Use a weighting system, according to the percentage of foreclosure-related sales in a neighborhood.
Verify as many foreclosure-related sales as possible.
43
The more one uses unverified sales the more one strays from a defendable value.
44
USPAP requires us to consider market conditions.
Many States require assessors to use the best information available.
So, basic appraisal premises still apply to revaluations in this market.
45
Market value transactions can be used for
modeling.
Nonmarket value sales should not be used
for modeling.
46
The most probable price (in terms of
money) which a property should bring in a
competitive and open market under all
conditions requisite to a fair sale, the buyer
and seller each acting prudently and
knowledgeably, and assuming the price is
not affected by undue stimulus. 47
The buyer and seller are typically motivated;
Both parties are well informed or well advised, and acting in what they consider to be their best interests;
A reasonable time is allowed for exposure in the open market;
Payment is made in terms of cash in United States dollars or in terms of financial arrangements comparable thereto;
The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.”
48
What was the sales price?
What was the date of sale?
How was the property marketed?
How long was it on the market?
How does that time compare with the typical marketing time in that market?
49
What was the asking price?
How many offers were there?
Are there any subsequent sales or listings?
Was it sold through an auction?
Was it a closed-bid or open-bid auction?
Was the auction well attended?50
Was other real estate included in the sale price?
How was the sales price arrived at?
Was the sales price simply the mortgage balance?
Was there a Broker’s Price Opinion, (BPO)
Was there a Broker’s Comparative Market Analysis, (CMA)?
51
Are there any recent appraisals?
What was the purpose of the appraisal?
What was the date of the appraisal?
What type of value was measured?
What is the value conclusion?
52
Was personal property included in the sale price?
Were there any changes to the property before the sale?
Were there any physical changes to the property after the sale?
What was the condition of the property at the time of sale?
Do you have any documentation for cost to cure?
53
Did the sale price include any
costs for:
back taxes
liens
uncollected interest
cost of filing foreclosure
other expenses
Are there any additional payments that the buyer
is required to make in addition to the sale price?
54
If Sold by a Bank
Are there any prohibitions against selling the property for more than the mortgage amount?
Did the property have to be sold within a certain time period? If yes, give details
Was there any timed price reductions dictated to the broker?
Was there a minimum sales price?
55
Scott G. Winter, RES
Supervisor, City of Milwaukee
Milwaukee, WI
(414) 286-3137
56
58
U.S. Economy and Mortgage Market Crisis: Origins of the
Crunch
Robert Van Order
University of Aberdeen and
George Washington University
June 2009
Origins of the Credit Crunch
59
•A bubble in house prices beginning around 2003, which led to
excess production and a bust beginning in 2006.
•A sharp increase in defaults, especially in the “subprime”
market, beginning around 2006.
•A seizure in the mortgage-backed securities markets where,
beginning in 2007, which spread around the world, affecting
the willingness to lend by and to anyone involved.
•It was mostly about “nonprime” and the manner and rapid
growth of it’s securitization.
•All the evidence is not in.
60
Securitization Market Shares
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
2
00
8 Q
1
2
00
8 Q
2
2
00
8 Q
3
2
00
8 Q
4
Ginnie Mae Private-Label Freddie Mac and Fannie Mae
Source: Inside MBS & ABS (The 2008 Mortgage Market Statistical Annual - Volume II),
Inside MBS & ABS (April 25, 2005, July 11, 2008 issues, and January 9, 2009).
Annual (1985 – 2007) Quarterly (2008)
MBS Share Issuance (Percent of MBS Issuance)
Subprime,
Non-Traditional
Lending Boom
(2004-2007H1)Subprime Crisis,
Private-label MBS
Collapse
(2007H2-2008)
4th quarter 2008:
0.00
50.00
100.00
150.00
200.00
250.00
300.00Ja
nu
ary
19
91
Jan
uar
y 1
99
2
Jan
uar
y 1
99
3
Jan
uar
y 1
99
4
Jan
uar
y 1
99
5
Jan
uar
y 1
99
6
Jan
uar
y 1
99
7
Jan
uar
y 1
99
8
Jan
uar
y 1
99
9
Jan
uar
y 2
00
0
Jan
uar
y 2
00
1
Jan
uar
y 2
00
2
Jan
uar
y 2
00
3
Jan
uar
y 2
00
4
Jan
uar
y 2
00
5
Jan
uar
y 2
00
6
Jan
uar
y 2
00
7
Jan
uar
y 2
00
8
Jan
uar
y 2
00
9
House Prices: the “Sand States” (California, Arizona, Nevada and Florida) had the bubble.
Other Cities Sand States
61
House Prices
62Sour Mac
-3.3
-3.4
-2.0-25.9
-25.7
-3.2
RI –13.0
CT –7.2
DC –6.2
-8.1
-25.2
-10.4
-7.1
-0.8
-9.5
-8.8 -5.2
-1.4-0.3
-5.0
-7.2
-13.0
-3.4
-15.0
-9.9
-6.0
-4.9
-1.8
-3.0
1.7
-1.8
-10.9
-6.9
-5.3
-29.5
-2.9
-6.0
-0.9
-8.4
-4.2
-4.5
-2.1
-4.2
-0.2
-8.7-11.7
-4.1
-8.5
-7.2
-4.0
-1.1
>= 0%
-5 to 0%
< -20%
-10 to -5%
-20 to -10%
United States –12.1%
Delinquencies were especially bad in the sand states.
63
National = 2.87% Seriously Delinquent
(90+ days delinquent or in foreclosure, Prime & Alt-A Conventional)
Data as of September 2008
0.69-1.29%
1.30-1.69%
2.50-6.63%
1.70-2.09%
2.10-2.49%
Source: Mortgage Bankers Association
5.38%
5.63%
4.08%
64
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
0.181
2/0
1/0
3
02
/01
/04
04
/01
/04
06
/01
/04
08
/01
/04
10
/01
/04
12
/01
/04
02
/01
/05
04
/01
/05
06
/01
/05
08
/01
/05
10
/01
/05
12
/01
/05
02
/01
/06
04
/01
/06
06
/01
/06
08
/01
/06
10
/01
/06
12
/01
/06
02
/01
/07
04
/01
/07
06
/01
/07
08
/01
/07
Axi
s Ti
tle
Subprime share was bigger in the sand states
ssubshare
sothershr
Subprime ARM default rate is about 20 times that of prime
65
0
3
6
9
12
15
18
21
24
27
30
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
Loans 90 days or more delinquent or in foreclosure (percent of number)
Source: Mortgage Bankers Association; “Prime Conventional” includes Alt-A
(Quarterly data not seasonally adjusted;1998Q1-2008Q3).
Prime Conv. FRM
FHA & VA
Subprime
FRM
– Recession
Subprime
ARM
28.8%
11.3%
5.5%
1.6%
8.1%
Prime Conv. ARM
2002 2003 2004 2005 2006 2007
Average Loan Size $000 145 164 180 200 212 220
FRM Share (%) 29 34 24 19 20 28
Refinancing (cash out) Share (%) 52.1 51.2 51.6 47.9 45.7 44.8
FICO Score 609 618 618 621 618 613
Combined LTV
(%) 80 82 84 85 86 83
Debt-to-Income Ratio (%) 39 39 39 40 41 41
Full Documentation Share (%) 70 68 66 63 62 67
Silent Second Share ***
Mortgage Rate
(%)
(%)
2.9
8.7
7.3
7.7
15.8
7.3
24.6
7.5
27.5
8.4
na
8.6
Subprime Loan Characteristics
s”
Source: Yuliya Demyanik and Otto Van Hemert (2008), “Understanding the Subprime Mortgage Crisi
**Margin is spread of rate on the loan over index to which the ARM rate is indexed.
***Share with unreported second mortgages. From Ashcroft and Scheuerman (2008)
66
• So it wasn’t just a regional recession that spread. It was through the financial system.
• But we’ve had financial problems before. What was the difference?
• My candidate is a big increase in moral hazard. • Interacted with a change in funding away form
insured deposits (as in the S and L crisis in the 80s) so that there could be bank runs but not on deposits/
• Ratings and models used to measure credit risk are too transparent! E.g., you can more or less read what it takes to get an AAA rating off S&P website.
67
Why did it fall apart and why the spread?
• Loan quality was bad for reasons discussed above.• It was a part of the bubble—promoted increased demand
at the wrong time.• A massive “lemons” problem.• There was a “bank run” and panic. • Total write-downs on subprime securities look to be way
more than total default losses are likely to be.• An especially important part of the spread was the
complicated security structure and uncertainty about who had what.
68
69
A TYPICAL Asset-Backed Security
(ABS) Structure: Subordination
Loan 1 Loan 2 Loan 3 Loan 4$1 Billion
Total Loans…..
Trust (SPV)
$850m
AAA Rated
$100m, BB Rated,
$50m, NR,
$1 Billion
Subprime
Structured Deal
69
70
A Collateralized Debt Obligation
(CDO): Retranching
BB tranche
from
DEAL 1
BBTranche
from
DEAL 2
BB tranche
from
DEAL 3etc
$1 Billion
In BB assets…..
Special purpose
vehicle
AAA Rated
BBB Rated
Equity
$1 Billion
CDO Deal
70
COMMENTS
• These look similar in the sense of structuring, and are very complicated because the structuring and restructuring is hard to see through.
• Lots of counterparty risk• Lots of room for “moral hazard”• Fragile when you don’t have price growth
to bail you out.• Look at what happened to prices!
71
72
COMMENTS• 2003 was a watershed year. That was when prices really
took off and the bubble got big, largely in the sand states. It was also when subprime and Alt-A increased, especially via securitization.
• They had a role (interactions are complicated) in the acceleration of prices after 2003, but also in the decline later.
• Moral hazard ramped up after 2004 or 2005, perhaps because competition for business led to ramping up.
• A kind of perfect storm: Bubble bursts as new housing hits the market and subprime demand fades and low quality (in ways investors didn't see at first) mortgages began to reveal themselves.
• The “contagion” was the big thing and happened because of “asymmetric information.”The markets froze because no one knew what the other guy was good for.
• Are guarantees good or bad or unavoidable?73
John Lifflander, ASACovenant Consultants, Inc.
Ridgefield, WA (360) 687-1602
Email: [email protected] of: Fundamentals of Industrial Valuation
Economic OutlookJohn Lifflander, ASA
To estimate the “present worth of FUTURE value,” appraisers need understand
economic forecasts
76
Decline in Owner Equity
77
Increase in Federal Spending
78
Debt is 65 Trillion
79
John Lifflander, ASACovenant Consultants, Inc.
Ridgefield, WA (360) 687-1602
Email: [email protected] of: Fundamentals of Industrial Valuation
Ken Voss, CAE [email protected]
Scott G. Winter, RES [email protected]
Robert Van Order, PhD [email protected]
John Lifflander, ASA [email protected]
