KeNo's Housing and Economic Portal: Thursday July 16 Housing and Economic stories

KeNosHousingPortal.blogspot.com

TOP STORIES:

Complaints erupt about lowball home valuations - (www.latimes.com) Real estate professionals (who fraudulently caused the run up in appraisal values on the way up) say appraisers with little local knowledge are using foreclosures, short sales and distress transactions as 'comparables,' distorting property values and killing deals. It's by far the hottest controversy in real estate this summer, and it could directly affect the value of your house -- probably negatively -- by tens of thousands of dollars. The issue concerns lowball valuations and the new rules guiding appraisers in both price-depressed and rebounding markets. Consider these snapshots of what's going on: * In San Diego, Steve Doyle, division president for Brookfield Homes, is trying to close out the final 20 houses of a 120-unit single-family subdivision. Prices range from $340,000 to $350,000. But recently there's been a major hitch: Appraisers assigned by banks are coming in with valuations $60,000 or more below Doyle's selling prices. The appraisers, who Doyle says are unfamiliar with local market trends, inexperienced or both, are using distressed sales -- foreclosures and short sales for less than the amount owed on the mortgage -- as their "comparables." Some of the distressed properties are in poor condition, and all of them offer fewer amenities, Doyle said. * In Wilmington, N.C., a loan applicant with a house in excellent condition and an unblemished payment record sought to refinance into a 4.75% mortgage. She had purchased the property four years ago for $160,000 and made about $20,000 worth of improvements in the interim. Her loan application, said Paul Skeens, president of Colonial Mortgage Group of Waldorf, Md., was "a slam-dunk. Nothing to it." The house was worth $180,000 to $200,000, according to a local realty estimate. But when an appraiser with little local knowledge was sent in by a bank to value the house, he chose two short-sale properties that had both closed in the mid-$140,000 range and one inheritance sale around $155,000. The last property was "in horrible condition," Skeens said. The deal-paralyzing appraised value that came in for the cream-puff refi: $149,000. * In the suburbs near Cleveland, Enzo Perfetto, manager of Enzoco Homes, builds custom houses on clients' lots. Recently, Perfetto said, banks have begun assigning appraisers from far outside the area to value lots as part of mortgage packages on new homes. Some of the comparables they use are foreclosure situations, and that depresses land valuations. A young couple who paid $75,000 for their lot recently had it valued at just $30,000 by an out-of-area appraiser who only looked at online data, Perfetto said, discouraging the young couple from proceeding. "I think the pendulum is swinging way too far in the wrong direction on appraisals," Perfetto said. Bank-assigned appraisers often "don't know the local market and they're going for low numbers to be 'safe.' " Complaints about lowball appraisals -- from builders, realty agents, consumers and mortgage companies -- have erupted since May 1, when government-sponsored mortgage investors Fannie Mae and Freddie Mac put their new appraisal rules into effect nationwide. Critics charge that the new system is fostering the use of appraisers willing to work for low fees -- sometimes 50% below previous standards -- and who are willing to conduct home appraisals far outside their typical areas of activity. The Fannie-Freddie system -- known as the Home Valuation Code of Conduct -- is complicated by the fact that it is a byproduct of a legal settlement in 2008 between New York Atty. Gen. Andrew M. Cuomo and the two mortgage companies.

End of cheap debt era brings sector to a standstill - (www.ft.com) Two years ago, Henry Kravis, co-founder of Kohlberg Kravis Roberts, arguably the most venerable name in the 30-year history of leveraged buy-outs, declared it to be “the golden era of private equity”. KKR had just filed for a New York initial public offering that would have helped Mr Kravis to keep pace with his fierce rival Stephen Schwarzman, co-founder ofBlackstone, which had floated weeks earlier with a valuation of more than $30bn (£18bn, €21bn). Yet the halcyon days for private equity – which had grown rapidly by using a sliver of its own investors’ cash and bucket loads of cheap bank debt to acquire some of the world’s biggest companies – were about to come to an abrupt end. Since Blackstone’s IPOin June 2007, its shares have fallen by two-thirds. KKR has been forced to ditch its plans for a New York listing, opting instead for a less glamorous merger with its beleaguered Amsterdam-quoted vehicle. One of the biggest headaches for the industry is that banks have stopped lending money for buy-outs. As the debt has dried up, so have the deals. In addition, many private equity groups have suffered heavy mark-to-market writedowns on their portfolios of companies bought using record amounts of debt during the credit bubble. As stock markets and the economy have gone into a tailspin, swathes of these companies are now worth less than their debt. With few signs of a recovery, it is doubtful whether their private equity owners will ever see a return on their money. To make matters worse, the rapid growth of the buy-out industry has attracted greater scrutiny from regulators and politicians. Now it faces the risk of awkward legislation and higher taxes on both sides of the Atlantic. At a dinner last month in London, David Rubenstein, co-founder of the Carlyle Group, said: “A few years ago investors were queuing up to throw money at us. So there was no pressure to explain what we were doing. Now we have to work much harder to get our message out there.” Credit markets are unlikely to re-open any time soon for private equity. Banks are still nursing big losses and many are now part-owned by governments, whose priority is consumers and small business rather than leveraged buy-outs. There is more trouble on the horizon for the buy-out bosses once dubbed “the masters of the universe”, as their investors are suffering badly.

Tax Bill Appeals Take Rising Toll on Governments - (www.nytimes.com) Homeowners across the country are challenging their property tax bills in droves as the value of their homes drop, threatening local governments with another big drain on their budgets. The requests are coming in record numbers, from owners of $10 million estates and one-bedroom bungalows, from residents of the high-tax enclaves surrounding New York City, and from taxpayers in the Rust Belt and states like Arizona, Florida and California, where whole towns have been devastated by the housing bust. “It’s worthy of a Dickens story,” said Gus Kramer, the assessor in Contra Costa County, Calif., outside San Francisco. “These people are desperate. They know their home’s gone down in value. They’ve watched their neighborhoods being boarded up. They literally stand in there and say: ‘When can I have my refund check? I need to feed my family. I need to pay my electric bill.’ ” The tax appeals and reassessments present a new budget nightmare for governments. In a survey conducted by the National Association of Counties, 76 percent of large counties said that falling property tax revenue was significantly affecting their budgets, said Jacqueline Byers, the association’s research director. Officials in some states say their property tax revenue is falling for the first time since World War II. The recession has already taken a significant toll on states’ budgets, as rising joblessness, a weak business climate and a drop in consumer demand have cut sharply into receipts from taxes on sales, personal income and business earnings. The pain at the state level is trickling down to county and local governments. To compensate, about 10 percent of large counties are raising the tax rates associated with home values to minimize the revenue loss, the county association said. Even so, most counties simply have to absorb the lost revenue. Municipalities are laying off workers, renegotiating labor contracts, freezing salaries and cutting services. The revenue losses are coming as homeowners prod towns for new assessments, and as municipalities conduct regular revaluations of their real estate. While declining residential values weigh heaviest on many governments, the value of commercial real estate is also sliding as businesses shut down and move out of storefronts or shopping malls. Property taxes are meted out by a disparate patchwork of cities, towns, counties, and school and fire districts, all with their own rules. Because tax formulas vary widely county to county, not every decrease in assessed values automatically lowers a household’s property taxes. But officials across the country say there is no question that the number of appeals has risen from the usual trickle to a flood. In suburban Atlanta, thousands of people lined up at government offices to file their requests for reassessments before a March 31 deadline. In parts of Ohio, appeals have multiplied fivefold. Tax lawyers in the northern suburbs of New York say they have never been so busy, and some towns have hired extra employees to sift through the paperwork and are spending hundreds of thousands of dollars on legal fees to deal with the cases in tax courts. The call for counties to acknowledge the falling price of homes is loudest in states where taxes are highest, or the housing crisis has hit the hardest.

For Banks, Wads of Cash and Loads of Trouble - (www.nytimes.com) H. Averett Walker used hot money to turn Security Bank from a sleepy Southern lender into a regional powerhouse. Darrell D. Pittard used hot money to jump-start his brand-new MagnetBank, allowing it to lend hundreds of millions of dollars even though it did not have a single drive-up window or even a customer with a checking account. It is a formula being replicated at banks across the United States. Rather than simply wooing local customers, they have turned to out-of-state brokers who deliver billions of dollars in bulk deposits, widely known as “hot money,” from investors nationwide. In fast-growing regions like this one in central Georgia, the money produced record bank profits and financed whole new communities, built at a phenomenal rate. But the hot money also came with a high cost. To lure the money from brokers, banks typically had to offer unusually high rates. That, in turn, often led them to make ever riskier loans, leaving them vulnerable when the economy collapsed. Magnet failed early this year and Security Bankis barely hanging on. Though few people have heard of it, hot money — or brokered deposits, as it is also known in the industry — is one of the primary factors in the accelerating wave of failures among small and regional banks nationwide. The estimated cost to the Federal Deposit Insurance Corporation over the last 18 months is $7.7 billion, and growing. Hot money has bedeviled regulators for three decades and they are starting to fight back, albeit tentatively, devising new restrictions to keep the practice from taking more banks down. But in one of the hidden lobbying battles in Washington this year, the banks are pushing hard to keep the money flowing. So far the banks are winning, and the hot money continues to fuel bank growth. The industry has even invented variants to get around the few rules that have been put in place by regulators. Banks defend the use of brokered deposits as an important tool to bring in money to help communities grow. But even some industry executives acknowledge that certain banks became too dependent on the deposits, and that this abuse caused banks to fail. The consequences can be seen across the country. The 79 banks that have failed in the United States over the last two years had an average load of brokered deposits four times the national norm, according to an analysis performed for The New York Times by Foresight Analytics, an industry research firm based in California. And a third of the failed banks, the analysis shows, had both an unusually high level of brokered deposits and an extremely high growth rate — often a disastrous recipe for banks. The data also shows that the problem isn’t likely to go away. The 371 still-operating banks on Foresight’s “watch list” as of March held brokered deposits that, on average, were twice the norm. Even this year, in the depth of the recession, a number of struggling banks have been piling up hot money in a desperate effort to survive. It is the same mix — rapid increases in hot money and heavy lending for risky real estate development — that brought down many of the savings and loans in the late 1980s. Warnings and Resistance: Regulators now acknowledge that they saw the warning signs during the most recent boom, but failed to take aggressive action. “We went through this golden age of banking and I just think that everybody lost their compass,” said Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corporation. Their indifference has been costly. Even brokered deposits are insured, up to $250,000 for each customer account. But once a bank fails, these deposits become an albatross to the F.D.I.C., which often looks for a healthy bank to take over the failed bank.

Seven U.S. Banks Seized in Busiest Year for Closures Since 1992 - (www.bloomberg.com) Six banks in Illinois and one in Texas were seized by regulators as the deepening financial crisis pushed the toll of failed U.S. lenders this year to 52, the most since 1992. Twelve banks have failed this year in Illinois, the most of any state. The seven lenders seized yesterday, with total assets of $1.49 billion and deposits of $1.34 billion, were closed by state or federal regulators and the Federal Deposit Insurance Corp. was named receiver, according to statements from the FDIC. Buyers were named for each of the closed institutions. The Illinois banks are affiliates of Peotone Bank & Trust Co., in Peotone, Illinois, about 45 miles (72 kilometers) south of Chicago. The failures resulted primarily because of soured loans and losses on investments in collateralized debt obligations, the FDIC said. Illinois, with an unemployment rate above the national average, was one of seven states to begin the fiscal year without a spending plan. “The six failed Illinois banks are all controlled by one family and followed a similar business model that created concentrated exposure in each institution,” the FDIC said. CDOs, which packaged bonds and loans into notes of varying risk and yield, lost money as real estate defaults soared. Regulators this year have closed the most banks since the savings-and-loan crisis of the 1990s as lenders struggle with mounting losses on mortgages and commercial loans. The total for 2009 is more than double the 25 banks shuttered in 2008 and surpasses the 50 that were closed in 1993. The prior year there were 181 failures or government-assisted transactions. FDIC Fund: The FDIC estimates yesterday’s seizures will cost its insurance fund $314.3 million. The regulator imposed an emergency fee in May to raise $5.6 billion to rebuild the fund, which has deteriorated in the past 18 months. More assessments are possible, the FDIC said. Illinois Governor Pat Quinn, a Democrat, refused to sign a budget because lawmakers failed to approve raising the income tax. In his original $53 billion budget proposal in March, the governor sought personal and corporate tax increases to help eliminate an $11.6 billion deficit and maintain state services.Chicago is 280 miles from Detroit, home to General Motors Corp. and Chrysler LLC, which were forced into bankruptcy. Lear Corp., the Southfield, Michigan-based maker of automotive seats, announced plans yesterday to enter bankruptcy. The unemployment rate in Illinois was 10.1 percent in May, compared with 9.4 percent nationally.