We don’t believe it.  Shadow Inventory, yes.  Banks holding back, not likely.  Basic market research, and our own experience as an REO brokerage tell us otherwise.

Let’s start with the series of foreclosure moratoriums between October ’08 and April ‘09.  First, major lenders and GSE’s stopped filing notices of default, then the federal government mandated it.  REO processing basically came to a halt for 6 months.  Standing inventory that was previously stagnant started to sell off quickly.  Agents used to complain about REO inventory; now we started complaining and speculating about the lack of it.  Multiple offers, buyer competition, number of listings down, number of sales up.  The market shifted for a moment and we all started theorizing: were these signs of a market recovery, were the banks holding back, etc.?

In April the wheel started to turn again as mortgage companies resumed foreclosure activity (see WSJ: Banks Ramp Up Foreclosures), hence the spike in notices of default.  The notices of trustee’s sale won’t follow for another 3-6 months.  We can’t compare these data in real time; we need to account for lag.

REO is a long process, and requires momentum.  You can’t grind to a halt and expect to restart at full speed.  It will take time to get the inventory to market: 5- 9 months to the trustee’s sale (foreclosure), another 2 to 12 months before the occupants vacate and the bank can take possession, and another month to trash out, clean up, etc.  A current notice of default might not become an REO listing for 18 months or more.  Inventory that was in process during the moratorium season is only now coming to market, and slowly.

One of our most reliable forecasting indicators is the amount of BPO activity, which mostly escapes attention.  Lenders order BPO to get a first glimpse of a property value and evaluate market strategy.  When BPO activity increases, REO activity increases.  Not coincidentally, our BPO activity was slow during the moratoriums, but has increased dramatically in the last 45 days.  We believe that there is a lot of REO inventory in process, and it will make it to market in due time.

In Silicon Valley, the current foreclosure cycle has been waxing and waning for over 24 months.  Our client lenders have been continuously adjusting, however slowly, to better accommodate the overwhelming volume of defaults.  They are increasing staff and focusing their resources on cutting loses through more efficient default servicing, and more successful loan mods and short sales.  In our opinion and from our perspective, deliberately holding back inventory so as to manipulate values would be counter-productive to cutting loses.

Lenders make loans.  They need to make a lot of loans to recover some of their enormous losses.  You can’t make loans on Shadow Inventory.

When we think of “The Feds” we think of the federal government, like the guys who busted John Dillinger and Bonnie & Clyde.  So when we hear the term “the FED,” aka The Federal Reserve, it sounds like some government agency.  But that’s just a clever disguise.

The Federal Reserve Board is a private organization.  It’s like a private Central Bank that loans money to the federal government, then charge interest on it. The government borrows the principal; the American people pay the interest.  That’s why we pay income tax: interest payments on the federal debt, paid to the Federal Reserve.  It’s a trap that we can never escape.

But the government doesn’t repay the principal; they just borrow more.  Meanwhile, the interest keeps compounding, and the Federal Reserve Board can adjust the rate whenever they want, without notice.  Did we mention compound interest?

This deal is rigged, sort of like an interest-only, monthly adjustable, reverse amortized loan, built to fail.  The American economy is like a home loan in default.  The government is the landlord and the taxpayers are the tenants. The landlord owes more than the house is worth and is using the tenants’ rent to try to make the interest-only payments, but is falling behind.

Sound familiar?  If this was a home loan, it would trigger a notice of default, followed by a trustee’s sale and foreclosure.  The tenants would get locked out by the sheriff, quite to their surprise (just paid their rent) and would have no place to go.  The landlord would be nowhere to be found, having fled with the rent.

Is the government in foreclosure?  Maybe they’re asking the FED for a loan mod.  Maybe they’re just walking off with the rent.

Appraisers have, by far, the most stringent licensing and continuing education requirements in the real estate industry.  If real estate or loan agents had to obtain half of the experience and education that appraisers do, we’d likely have 80% fewer licensees.  That might no be such a bad thing.  It would sure raise the standard of practice.  Imagine a real estate or loan agent having to log hundreds of hours of experience, supervised by a broker, before qualifying to take the license exam.  Appraiser candidates will now also be required to have a college degree or equivalent.  How many wannabe agents would give up, get out, or not even bother?  You’d have to really be dedicated, just like an appraiser.

You can’t get rich being an appraiser either, at least not any more.  The cost of doing business is foreboding and growing each year:  multiple association fees, redundant data source subscriptions, MLS fees, heavy E&O policies, 96 hrs continuing education every 2 years, etc.  At the same time, compensation is diminishing every year.

Since the mid-80′s or so, a standard residential appraisal report would cost a consumer about $350, usually paid directly to the appraiser at the time of inspection.  Since the mid-2000′s, twenty years later, the same report can cost the consumer between $450 and $600, paid to a third-party appraisal management company.  Of this, the appraiser gets paid about half, maybe $250, sometimes a lot less.  Hmmm . . . let’s see:  consumer cost up, compensation down, more expenses, less pay, more liability . . . no wonder appraisers are vanishing.  Oh, did we mention more liability?

Certainly there are players in every facet of the housing industry that contributed to the current crisis, and there have been some shady appraisal outfits, but the appraisal industry has unfairly fallen victim to the great blame game.  Appraisers are subject to more intense scrutiny, litigation, restrictions and regulations than ever before.  Banks have forsaken them, reduced their fees, or mostly passed them off to the management companies mentioned above.  It’s not like appraisers were the ones lying about their income on the loan applications, or writing ridiculously overpriced purchase offers, or convincing buyers that they could afford a home loan with 90% of their monthly income and still get enough cash back to buy a new Escalade.

This year, at a time when property valuations are critical to the housing recovery, we’ve seen a lot of sub-standard appraisal reports, almost all of them performed by unlicensed apprentices, and their inexperience is obvious.  Reports are full of inconsistencies, errors and contradictions.  The result is that more good purchase contracts are failing.  Of course, apprentice reports are supposed to reviewed by, and their work supervised and signed-off by a licensed appraiser, but the quality control is lacking.  It’s the equivalent of having real estate agents writing contracts or unlicensed loan agents writing loans without the required supervision of a broker.  Of course, that never happens, right?

Government intervention, although well intentioned is just making the situation worse, as it usually does, but that rant is better saved for another time.  You certainly can’t blame appraisers for hanging up their spurs.  I think I would, too.  I know of a number of very qualified, experienced appraisers that have done just that.  I miss them.  I miss the quality of their work.  The whole economy misses them, too.  We’ve got a long road to recovery if we keep dumbing down the industry.