In spite of the holidays notes and letters continued to come in, and covered a number of topics including influencing appraisers, how renovating properties is not for the timid, whether or not young people should be in this business, and the credit environment. Let's jump in!

Guy K. authored, "Regarding dodgy appraisals being in the news lately, I'm not sure where to start. I can see where a real estate agent can try to influence an appraiser, but as a lender, we have no control over anything related to the appraisal. We have to order appraisals through an AMC and am never able to talk to the appraiser (this includes all my support staff including processors, underwriters, etc.), so I find it hard to believe that lenders are somehow convincing appraisers to increase values by 20% (unless there is some back office contact going on that is unknown to everyone else). Who are these phantom lenders that have this back door access to appraisers? And, if they are doing this they are violating the procedures put in place after the last meltdown. Not only do appraisals cost more money now, but they take an additional several days to get back, which slows down the entire loan process. This whole appraisal issue has been a pisser to me for years, but I am not one of the people that tried to strong arm appraisers into increasing values above what the market showed the values to be.

"And the comments about using 'net rents' for residential properties makes no sense to me.  Maybe I've been doing this too long and can't wrap my mind around more work for the appraiser to substantiate a value?  Is the person saying that now you need to figure gross rent multipliers (or some other way of doing the income approach) on owner occupied single family residences?  Really?  So now we would add another $200 to do an income analysis, take more time to get the appraisal back and create even more issues with having an appraiser commenting on things that are unclear once the underwriter gets the appraisal to review? I have seen lots of back and forth over the years on rental surveys for investment properties, but never anything that related to the actual value placed on the property. It was only to verify the market rents for purposes of using that income to help the borrower qualify to buy the property. To do something similar to commercial properties would be a major shift in our industry, take a lot of time and money to put into place, and ultimately, cost the consumer even more money to obtain a home loan. But, based on how things have gone in recent years, I wouldn't be surprised to see something like this happen eventually. It just seems that this is another way to make the entire loan process even more cumbersome than it already is."

Recently the commentary noted that, "Fraud leads to problem properties and loans. The big institutional investors are slowing down their purchases of distressed properties, as they have yet to show the huge profits they promised to their own investors. They have a big backlog of homes to renovate and rent, and skilled construction labor is hard to come by these days. I always suspected that the execution of this trade was going to be more difficult and expensive than people were figuring it would be."

I received this note from a veteran broker. "This is yet another good example of Wall St. thinking it knows everything about everything, but actually knows nothing about anything. Renovating a distressed property is not as easy as trading pieces of paper, or on-line paper that does not even exist. Renovating RE takes real people in real time.  Physical work actually must be completed.  Work must be done by individuals that actually know how to complete an actual task, not just type on a keyboard. Personally I hope they all lose huge amounts of money, and wind up selling those properties for less than the purchase price. Maybe that will give REAL local consumers an opportunity to buy and create livable communities."

And on current mortgage credit trends Tony Sagami with Mauldin writes, "'Mortgage credit is too tight. They should have changed that a long time ago.' So said Jamie Dimon, the CEO of JPMorgan. 'Today's rule is an important step forward in creating an environment where good lenders and good borrowers can work together without reservation' said Julian Castro, HUD Secretary. Geez, I can't decide who is dumber when it comes to repeating the same mistakes: the 'profits-at-any-cost' crowd on Wall Street or the 'do-anything-for-votes' politicians in Washington, DC? I can't decide; they're both dumber than dirt and often in bed when it comes to lining each other's pockets. What I'm talking about today is the new regulations for mortgage qualification rules a.k.a. "qualified residential mortgage" (QRM) rules.

"Some background first. After the 2008 financial crisis and subprime mortgage implosion, governmental agencies led by the Federal Housing Finance Agency enacted a series of tougher rules to clean up the overly easy mortgage qualification process. Of course, tighter lending standards and higher down payments squeezed a lot of marginal buyers out of the real estate market, and that meant fewer dollars for big banks that package the loans and members of the National Association of Realtors that sell the homes. The drop in income bothered them so much that they formed a big organization called the Coalition for Sensible Housing Policy to push the noble goal of helping first-time homebuyers with a return to the good old days of easing credit. Big surprise. The lobbying efforts (and no doubt large political contributions paid off. The 20% down payment requirement has disappeared and Fannie Mae and Freddie Mac will now guarantee some loans with down payments of as little as 3%. Bye-bye credit standards."

His opinion piece went on. "These new QRM rules make it possible for mortgage applicants to do away with pesky things like good credit and a down payment. 'The QRM rule is a win-win for consumers, Realtors and the housing finance industry,' said Steve Brown, the President of the National Association of Realtors. I don't know about the consumers, but the new Brown is absolutely right about the new QRM rules being a win for realtors and mortgage lenders. But heck, two out of three ain't bad... right? By the way, the three politicians most responsible for the new QRM rules are Senators Johnny Isakson (R-GA), Kay Hagan (D-NC), and Mary Landrieu (D-LA).

"Senator Isakson of Georgia, by the way, was president of Northside Realty for 22 years before going into politics. Yup, enough to make you puke, but that's standard operating procedure for Washington, DC. Will these relaxed lending rules light a fire underneath the real estate market? So far... no! Of course, mortgage rates are a lot lower today than they were in the 1990s. What's the problem then? Not only are wages stagnant in nominal terms, wages are actually lower-a lot lower-in real, purchasing-power terms. Just in October, the median household income in the US dropped by -0.6%, or $318. And Americans seem to be less inclined to abuse credit as they have in the past. The total amount of revolving credit (credit cards) has plunged.

And finally, "You see, people make borrowing decisions based on their confidence in future earnings and perceived strength of the economy, and Americans are clearly not confident about their economic futures. The new QRM rules aren't going to give the big banks and realtors the jump in income they're hoping for. So what does this mean for investors? The real estate food chain is so deep that there's no shortage of potential trouble spots, but I'd be particularly leery of the giant bond guarantors, like MBIA and Assured Guaranty, as well as big mortgage lenders."

Mark W. writes, "I remember the agencies telling a crowd of 1000 mortgage peeps about the new automated underwriting engine in the early 2000's. Follow the findings. No reason to document anything if the computer doesn't ask for it. This is what they said. Thousands of originators follow the rules and then one day someone says you can't do this anymore and the blame game begins. My questions are: Why blame the man/woman on the street? Were they not following the rules provided to them by investors that created these guidelines? And why didn't the borrowers complain then? And where was the due diligence when these loans were purchased? Here is a new book title: 'Blame the minnows when the sharks eat the whales.'"

And is there a reason for anyone under 30 to enter residential lending? I see plenty of folks in their 60's waxing on about the lack of youth entering the business, yet the speakers rarely talk about their own retirement plans. But Luke Slivkoff with Primary Residential pens, "With the cost of college skyrocketing, baby boomers remaining in the workforce longer, our government open-door policy to import labor, and the fact that nobody has had a pay raise since 1987 (inflation adjusted figures I saw on the news) should be a motivating factor for a young person to enter the mortgage business. At its core, the mortgage industry is still an honorable profession and one that can provide someone with unlimited income potential, flexible schedules, autonomy, and a balance between personal interactions and detailed analysis. I do believe that the industry needs to change the entire compensation model to mirror today's social anxieties and related industry norms, such as: non-recoverable base salaries, respectable commissions, benefits, unit production bonuses, and a residual income component for retained servicing loans-up to 10 years. This will provide the licensed professional with an incentive to service their clients and to retain them in their database while giving a company a big carrot to dangle in their recruiting and retention efforts.  Young people today want stability of employment, flexible schedules, and a sense of income security; hence, the once coveted 100% commission income just doesn't match the workforce needs of today."

But from the Eastern Seaboard comes, "And this: "The bigger point is that there are no young people coming into this business. We need to focus on how to get them to want to come into this industry. We used to get massive requests for interns, and now we rarely get asked. As originators, we used to brag about our industry at dinner parties, and I doubt that is happening any more. The greatest salesmen for the mortgage industry used to be the originator, but now they are clearly having a hard time and disenchanted by our industry. What is going to happen in 10 years when a huge number of originators are retiring?"  The unfortunate truth is that in 10 years there will not be a need to replace them... There will not be loan originators (at least not in the capacity we have today). Technology will replace the function within 5 years (if not less) and regulation will remove them completely 2-3 years after that. Getting younger folks into our industry should certainly not be focused on the origination side. It should be in technological development...