We think of being a renter as a diminished state, yet rental has the tremendous advantage of low entry and exit costs, meaning greater flexibility.  In a down market, we should spare a moment’s pity for people used to labor and household mobility, who find their unsold former home nothing but a headache, as explored in this Wall Street Journal article:

Is it – an unsold property, or just a bleeding albatross?

With housing prices still in the dumps, many Americans are finding themselves in the uncomfortable position of landlord.

[1] Some have been forced to relocate for a job and can’t sell their houses.

By far the more common type.

[2] Others have moved, but are holding on to their previous homes, hoping for prices to rebound before selling.

Many are finding that rent checks don’t come close to covering their mortgage payments.

Help my economy – rent my house!

Usually they will not; homeownership is generally speaking a higher-cost use than rental.  But that’s a false choice – the right choice is between renting (for whatever income and work are involved) and keeping the property vacant (and, presumably, secured):

“The number of rental homes available is greater today than it was a year ago due to the foreclosure crisis,” says Mike Nelson, current president of Rental Home Professionals Inc., a multiple listing service of rental homes owned by the National Association of Residential Property Managers in Chesapeake, Va.

In Frederick, Md., Realtor Jim Bass says that because of rising demand, a couple of months ago his real-estate group started offering property-management services, tending to the rented homes of absent owners. Mr. Bass says a client recently rented out his 4,700-square-foot house after failing to sell his home, which he listed for $790,000. Now a tenant pays $2,995 per month—a shortfall of $2,000 from the $4,995 mortgage payment.

House for rent, Atlanta

Reluctant landlords become such by owning a house already; as such, they have to carry its costs, particularly real estate taxes and property insurance, even if it’s vacant.  For simplicity, let’s assume all those are identical in both scenarios.  If so, then compared with a vacant and boarded-up house, the net rental income is ‘found money.’

The homeowner “feels that two years from now, the market will improve to the point where he can recapture that,” Mr. Bass says.

What is renting worth?  Let’s do the arithmetic.

The net rental income is $3,000 per month x 12 x 90% (95% occupancy minus 5% management fee), or $32,400 per year.  Versus a $790,000 value, that’s a 4.1% yield on the home –assuming that all the operating costs are paid by the resident, and that there is no real obsolescence other than the normal wear and tear that the homeowner would be paying anyway.

Guess how much is normal wear and tear, kid

Before you get too cheerful, remember this: if you sold the property as rental, the new buyer will look only at the NOI, and to derive NOI will subtract those selfsame real estate taxes and hazard insurance.  Let’s figure taxes at 1.5% of sale value (high, and you could get a revaluation downward, but it’s a starting point), and insurance at 0.5% of replacement cost (which we’ll assume is the listing price).  Between them they consume $15,800, leaving $16,600 of Net Operating Income as a rental.  Capitalize that at 7.0% (say) and you’re left with $237,000 of value as a rental – or a painful 70% discount from the listing price.

Better sell your client’s house, Mr. Bass.

Experts generally advise against becoming a landlord in hopes of recouping lost home value.

The Journal’s statement here is a non sequitur.  You don’t convert a single-family home to a rental as an exit strategy; you do it as an interim-holding strategy.

In some hard-hit parts of the country, such as Florida, Nevada, Arizona and parts of Ohio, prices may not climb back to mid-2000s levels anytime soon.

Until it’s worth what I paid, maybe you’ll rent it?

So what?  The price you paid is a sunk cost; now your only question is relative value going forward.

Meanwhile, demand for rentals in many parts of the U.S. isn’t strong: Apartment vacancy rates nationally are the highest in more than two decades and rents are falling in some areas, compounding the difficulty of finding a good, steady tenant.

Again, that’s no argument to do nothing; it’s an argument to become a landlord only if you intend to be professional about it.

Homeowners who owe more than a house is worth in very depressed areas may be better off selling even in a short sale, whereby the bank agrees to accept less than the full amount owed on the mortgage, says economist Edward Leamer, director of the UCLA Anderson Forecast.

Lender, would you rather I sit empty?

Another non sequitur.  If you can negotiate an exit with the bank, then you need to compare (1) the incremental NOI you gain from being a landlord versus (2) the debt relief offered by your lender in exchange for your cooperative deed-in-lieu of foreclosure.  If Item 2 is much bigger than Item 1, being a landlord means you’re managing the property for the bank, not for yourself.

Your credit rating takes a serious hit, but, he says, “better to take your losses and move on.”

Kyle Becker, 27 years old, and his wife didn’t feel they had much of a choice in becoming landlords. The couple and their infant son moved from Columbia, Mo., to Winchester, Va., last year so that Mr. Becker could attend pharmacy school at Shenandoah University.

Either way, the decision dilemma of holding-versus-exiting is painful.  For some, moving house is mandatory because they are building their careers and their earning power, so they go where their future income is.

In a normal markets, houses clear, so relocation carries with it only a manageable transaction cost.  When the market freezes, the carry gets expensive:

Before they moved, they listed their three bedroom, two-bath ranch-style home in May 2008 for $139,000. They had bought it in 2005 for $110,000 and put $30,000 into roofing and siding. By February, they hadn’t received a single bid.

“We had only seven lookers over the course of a year,” Mr. Becker says.

If you’re just looking, why not rent?

Now, Mr. and Ms. Becker could have chosen to return to Columbia, either continuing his education at the University of Missouri or finding one or two jobs.  Staying in Winchester represents a monthly investment of both lost income (his) and incremental expense (rent differential):

Meanwhile, the couple was paying $1,200 a month in rent for a Virginia house. Last spring, the Beckers finally leased the Missouri house for $675 a month—$225 less than their mortgage payment.

Well, okay, how bad is that compared with their expectation?  There are four scenarios:

The largest expense the Beckers incurred in their move is the loss of Mr. Becker’s income.  (For simplicity, we’ll assume that Ms. Becker’s employment status and income are unchanged by the shift of location; more probably, she has greater earning potential in the higher-rent community.)  Out of thin air we’ve invented a net income for Mr. Becker, pre-move, of $3,500, all of which is gone as he studies in Winchester.  That is the lion’s share of the investment they are making in Mr. Becker’s education when compared against the $300 differential between their Columbia mortgage payment and their Winchester rent.  [You're ignoring the forced savings of paying principal on the Columbia home. – Ed.  Yes, for simplicity – Auth.]  Renting the Columbia home makes the difference between them being 6% worse off (now) and 24% worse off (before they rented) than they expected at the time of the move.

If he had to do it all over again, Mr. Becker says, he might have chopped the price of his Missouri house, where sales have been stagnant—with the exception of “distressed” properties in some stage of default.

The Journal helpfully offers ten tips for prospective and potentially reluctant landlords:

He wondered about the security deposit policy

All the foregoing calculation omits the time cost or psychic burden of owning a remote house for which one is the landlord, or the potential impairment in value resulting from having a renter in the house.

The calculation isn’t the same for all homeowners. Those who have paid off their home or have a small mortgage balance may be able to wait out the market.

Unlikely.  People who have paid off their mortgage are far less likely to make a distant relocation like the Beckers have done.  The people who move are those pursuing increased income:

Teshika Holmes, 36, says she received no bids for her three-bedroom house in Huntsville, Ala., after a job loss forced her to relocate to Montgomery, Ala. She’s renting it out for about $800 a month.

Ms. Holmes hired a property manager who charges 10% of the rent. Typically rates run from 3% to 12%. She also pays an increased premium of $500 a year for landlord insurance. Among other things, a landlord policy covers the loss of rental income if a fire makes the house uninhabitable. It costs about 25% more than a standard homeowners policy, according to the Insurance Information Institute.

$500 a year is less than $45 a month; take away the $80 monthly for the management fee and Ms. Holmes is still clearing $675 a month of net rental income.

Ms. Holmes says she has negative cash flow each month from her Huntsville house, but the rent allows her to stay current with her mortgage and preserve her good credit.  “The only thing I wanted was the house note paid,” she says.

There’s only one hiccup: the tax man.

Not just a good idea

Rental income is taxable, but can be offset with business expenses–including mortgage interest, real-estate taxes and homeowners insurance–and depreciation. Expenses in excess of rental income also can be deducted, up to a limit.

These are concerns but not show-stoppers.  Nobody ever went broke paying taxes on found money.  But there is a bigger tax danger:

Renting for an extended period can eliminate or diminish the value of capital-gains tax exclusions. Federal tax law requires you to live in the house at least two years of the previous five in order to qualify for the full capital-gains tax exclusion upon sale of $250,000 for a single person or $500,000 for a couple, with some exceptions.

So, prospective landlords, don’t rent your home longer than three years.

Time to sell

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As part of the multi-day World Habitat Day activities, AHI, along with the National Housing Conference and the Housing Partnership Network, will be sponsoring a presentation and panel discussion on a topic that we think has great relevance, both in the Global South and back home in America.

Being hosted in Washington for the first time

Mission Entrepreneurial Entities:

Essential Actors in Affordable Housing Delivery

Thursday, October 8, 2009 ? 9:00 am to 10:30 am

National Housing Conference ? 1801 K. Street Suite M-100 ? Washington, DC

Attendance is free, but space is limited.

[For those impatient among you, click here to register. – Ed.]

We’ve organized the panel (which I’ll be moderating) to announce the publication and present the principal findings of AHI’s landmark new study, Mission Entrepreneurial Entities: Essential Actors in Affordable Housing Delivery, which examines MEEs’ characteristics, role in housing delivery, importance, and principles of success.  Using extensive case analysis of US and UK MEEs, it develops a theory of what makes successful MEEs or puts this ‘keystone species’ at risk, in which environments MEEs can flourish, and where lie today’s challenges and opportunities.  These insights apply not just in the US and UK but around the world, including the Global South.

I’ve previously posted about Mission entrepreneurial entities; we see MEEs as a distinctive species in the ecosystem, whose role is critical to ecosystemic success.

A definition that reveals a new species and opens a new field of inquiry

Other terms (e.g. Non-Governmental Organization, Community Development Corporation, Housing Association) are imprecise and obscure fundamental similarities of this distinct species.

We commissioned the study more than a year ago, and in that time an extraordinary amount has changed globally and in the UK and US housing finance ecosystems. 

Today’s affordable housing sector is undergoing great change.  Even as need is rising, the current delivery system – the value chains by which policy and resources are converted into tangible properties and successful outcomes – is under pressure, in the UK and here in the US. 

The UK has restructured its housing regulatory scheme. 

Formerly known by many names

The US LIHTC pipeline is disrupted by demand drops.  This sea change is redefining not just how individual deals are done, but which types of actors are most effective at doing them.  Effective MEEs represent innovation platforms that can deliver transit-oriented development, energy sustainability, and asset recovery – activities that urgently need to be converted from intangible goals to tangible properties and results.  Embracing the MEEs’ distinctive role can bring palpable value to funders, policy makers, and government agencies.

Our study is built around detailed profiles of more than twenty MEEs in both countries, compiled and analyzed by our two principal authors, one from each side of the Atlantic:

Ray Christman, former CEO Federal Home Loan Bank of Atlanta

Ray Christman, study principal co-author

Ray Christman is a business leader and senior executive whose thirty-year career spans all aspects of affordable housing and community development, including leading and managing large and complex financial services, housing and economic development organizations. 

Appointed by Mayor Shirley Franklin as chair of the Peachtree Corridor Partnership, Mr. Christman is leading Atlanta’s public-private partnership to implement the first phase of proposed $1 billion investment program to transform Atlanta’s main corridor into one of America’s great streets.  As interim president and CEO of the Georgia Trust for Historic Preservation, he is providing day-to-day leadership and management for the nation’s second largest statewide historic preservation organization, while search occurs for permanent head. 

For nearly a decade, Mr. Christman was president and CEO of the Federal Home Loan Bank of Atlanta, one of a dozen such federally chartered, for-profit companies that provide funding and liquidity to the nation’s retail banks, thrifts and credit unions. 

Gaynor Asquith, Principal, arc⁴ Consulting, Manchester UK

Gaynor Asquith, study principal co-author, arc4

Gaynor is a co-founder of arc4, a housing and regeneration agency that works with the public, social and private sectors to find solutions to any regeneration challenge. She leads work in areas from innovative research and stakeholder consultation through the development of fresh policies and strategies– all to make sure good changes happen.

Gaynor had over 25 years experience before setting up her own company, abra, in 2002.  This, she merged with DCHR in 2007.   Gaynor has since helped to create one of the largest independent specialist consultancies of its kind in the UK.  arc4 helps organisations and individuals to help secure sustainable communities through:

We particularly sought out parallel expertise in two countries to enable paired comparisons.  When two nations have convergent evolution or similar forms, that tells us something.  When they have evolved in highly different ways, that tells us something as well.

The topic’s importance and relevance is highlighted by the remarkable group of panelists we’ve assembled to discuss the report and its finding, including two MEE experts, and two national experts involved in working with, funding, and growing MEEs:

Carol J. Galante, Deputy Assistant Secretary for Multifamily Programs, HUD

I was a DAS before she was a DAS:

Carol Galante, Deputy Assistant Secretary (DAS) for Multifamily Housing Programs

As Deputy Assistant Secretary for Multifamily Housing, Ms. Galante spans the critical new production and refinancing insurance programs; is responsible for the multifamily inventory; and leads HUD’s efforts on multifamily preservation (a current portfolio of over $58 billion).  She is also integral to several new initiatives that promote sustainable development.

Before joining HUD, she spent 22 years at BRIDGE Housing, the largest nonprofit developer of affordable apartments and homes in California, specializing in the development of family and senior affordable apartments, rental and ownership housing, and an array of revitalization, transit-oriented, urban infill, and mixed-use/mixed-income developments.  She joined as Vice President from 1987 and President from 1996. Prior to BRIDGE, she was the Executive Director of Eden Housing, Inc., where she developed affordable homes and formed a property management subsidiary. She has also worked for the cities of Santa Barbara, Richmond and Philadelphia.

Galante has received many honors including: Multifamily Executive magazine’s 2008 Executive of the Year, California Homebuilding Foundation Hall of Fame 2008, Builder magazine’s Top 50 Most Influential People in Home Building 2006, San Francisco Business Times 2003 Deal Maker of the Year, Most Influential Women in the Bay Area, and the 2002 U.C. Berkeley College of Environmental Design Distinguished Alumna Award. She is a licensed real estate broker and holds a B.A. from Ohio Wesleyan and a Master of City Planning from U.C. Berkeley.

Debra Schwartz, Director of Program Related Investments, MacArthur Foundation

Social lender to the multifamily arena: Debra D. Schwartz, MacArthur

Debra D. Schwartz is Director of Program-related Investments for the John D. and Catherine T. MacArthur Foundation where she oversees a $300-million portfolio of below-market loans and investments used principally by economic development and affordable housing organizations. She also co-leads the Foundation’s $150-million national initiative, Window of Opportunity: Preserving Affordable Rental Housing.

Schwartz joined MacArthur in 1995 as Senior Associate to the President.  She became a member of the Program on Human and Community Development in 2000 and assumed her current post in 2002.  Previously, Schwartz was an investment banker in public finance for John Nuveen & Co. where she structured tax-exempt bond issues for municipalities and nonprofit health care organizations.  From 2002 through 2006, she served as one of nine presidential appointees to the US Treasury Department’s Community Development Advisory Board.  She is a founding member of the national PRI Makers Network steering committee and frequently speaks at philanthropy-related meetings on the topics of social enterprise, nonprofit sustainability and program-related investments.

Schwartz graduated summa cum laude from Yale University with a bachelor’s degree in history. She earned a master’s degree in finance and nonprofit management from the Kellogg Graduate School of Management at Northwestern University.

In addition to the two benefactor/ regulatory entities with perspective on MEEs, we’re featuring two MEE representatives, one from a network perspective, one a direct actor:

Thomas Bledsoe, President, Housing Partnership Network

A man who envisioned and oversaw creation of a network:

Tom Bledsoe, Housing Partnership Network

Tom Bledsoe is the chief executive officer of the Housing Partnership Network and three affiliates – the Housing Partnership Fund, Housing Partnership Ventures, and Housing Partnership Insurance.

Founded in 1990, the Network currently has 95 members, all of which are mature nonprofit housing partnerships with strong track records in development, financing, and management. Collectively, they have developed or financed more than 500,000 affordable homes, helped lower-income families improve and repair 175,000 homes, and served as homeownership counselors to 400,000 families.

Under his leadership, the Network has become the leading voice for the high-capacity, partnership-based nonprofits in the affordable housing industry; has launched innovative, high-impact efforts and business enterprises; and been repeatedly recognized by Fast Company magazine as one of the leading social capitalists in the country.

Prior to joining the Network, Mr. Bledsoe was the executive director of the Metropolitan Boston Housing Partnership (MBHP), one of the nation’s first public/private housing partnerships. He facilitated the merger of two nonprofit housing agencies, creating a comprehensive regional organization that operates a continuum of programs from services for the homeless to homeownership.  He holds a BA from Wesleyan University (CT) and a master’s degree in public policy from the John F. Kennedy School of Government at Harvard University.

J. Michael Pitchford, President and CEO, Community Preservation and Development Corporation

Acquiring and developing in metro Washington DC: Mike Pitchford, CPDC

J. Michael Pitchford, President and CEO, is responsible for the overall strategic direction and management of the real estate development and community development programs of our affordable housing communities.   Since 1989, CPDC has developed 27 properties, over 4,000 apartments, with over $300 million in real estate value.

Having spent a decade serving on the Board of the National Housing Conference, including a three-year stint as its president, Pitchford has developed a strong understanding of how national and local policy impact housing affordability. This, along with his leadership skills in generating a shared vision with employees, has helped him build infrastructure for stable and rapid growth.

Pitchford also has participated in or led associations, workshops, conferences, and forums on policy, networking, and the sharing of best practices. He has served in leadership roles with the National Equity Fund, the Urban Land Institute, the Washington Area Housing Partnership, the District of Columbia, Northern Virginia, and Maryland Building Industry Associations, and the Old Dominion University Board of Visitors.

Previously Pitchford led the Community Development Equity Group at Bank of America Corporation in Charlotte, NC. The Group developed or rehabilitated 23,000 units of affordable housing since 1994 and increased equity commitments 3,000%. The development of these affordable housing communities included Make A Difference Centers , community life programs tailored to the needs of the resident population. These programs included computer training for residents of all ages, career and academic mentoring, and on-site health clinics.

And then there’s myself, whom I list for completeness:

David Smith, Founder, Affordable Housing Institute, and CEO, CAS Financial Advisory Services

This is an event you won’t want to miss.  Attendance is free but space is limited.  Click here to register.

It’s a good thing I’m speaking or I might not be able to get in

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Itself) of three bidders for the money-flushing newspaper:

An investment firm that recently purchased a San Diego newspaper has emerged as a third bidder for The Boston Globe, according to people briefed on offers submitted to the paper’s owner, The New York Times Co.

The suitors have arrived, dowries in hand, despite the parent company’s newly professed indifference to the sale process it had started:

In an interview with the Globe this week, Times Co. publisher and chairman Arthur O. Sulzberger Jr. said the company was “exploring’’ a sale of the Globe, but doing so “does not mean that will absolutely be the case.’’

President Thomas ‘Tug’ Benson: Every time I give an order, it gets screwed up!

Appoint an ambassador, he leaves the country.

Alert blog readers [Nothing but the best readers here! – Ed.] will recall that three months back, in Better dead than read, I speculated that not only the Globe’s sale inevitable, so too is a dramatic change in use, because the land on which the newspaper sits is worth vastly more if used for something else.

Ramada Rodham Hayman: I had to come. It was a sequel.

In other words, a newspaper plant on that site is a negative-value use, for two reasons:

1. In modern cities, well-located urban land is best used for high-density high-end residential, not manufacturing.

2. Newspapers are increasingly intangible and Web-based, not physical.

In other words, we have a rising use (residential) crossing with a falling use (manufacturing), and the gap (reuse value minus current value) is widening.  The Globe’s eviction from its current site is inevitable, and it’s astonishing to me that so few people see it, but then, often we see only what we expect to see.

A Man from Mars could see it instantly:

Look at that location: close to down, on the waterfront, right on the Expressway

Boston and the Federal government have completed the Big Dig, the world’s most expensive single construction project, greatly improving transportation into downtown and to the South Shore.  One of my little mental experiments is this: Pretend the contrary, would you do it?  If you were a Man from Mars, would you look at that location and think, Of course, this is the site for a newspaper plant?

Zooming a bit closer, what do we see?  Underused land area.

Low-rise, not mid-rise

Looks like a campus, doesn’t it? 

Throughout the developing world, we face the challenge of slow market eviction, where slum dwellers who occupy well-located land are suffered to squat there so long as the land is legally impaired or environmentally questionable.  When the land or property is improved, market forces move them out: voluntarily, and with transfer or relocation payments, but movement nevertheless.  

[Dexter is being rescued]
Dexter: You don’t understand. I can’t walk… they’ve tied my shoelaces together.
Topper Harley: A knot. Bastards!

That is now happening to the Globe, which is better dead than read?

The combined assessed value of that property and the 20 acres of real estate at its printing plant in Billerica is $65 million, according to assessor records in Boston and Billerica. The New York Times Company also could parcel out Boston.com for an estimated $20 million according to estimates from analysts.

If the logo has value, why do we need a physical presence?

Compared with the newspaper as a business, the real estate also has multiple other huge advantages as a corporate asset:

1. The real estate has minimal holding costs.

Shuttering the paper would preserve liquidity at the Times, which faces a debt refinancing crunch in a few years.

2. More people are likely to be interested in buying the real estate than in running the newspaper.

In an outright sale of the Globe, Barclays Capital analyst Craig Huber estimates the paper would fetch only $113.3 million. But that’s only if the paper can find a buyer. He uses a multiple of 0.3 on an estimated 2009 Globe revenue of $377.8 million. In years past it was not uncommon to see major newspaper companies sell for 2 to 3.5 times revenue.

Note that the multiple-of-gross-revenue model presupposes profitability is more or less constant regardless of sales. The tenfold drop in pricing (from 3.5x sales to 0.3x sales) reflects the imploding business model.

Undone by economic obsolescence and over-reliance on physical structures

3. Cash flow immediately improves, yielding capital for more critical businesses … like the Times

“While closing down the Globe won’t be a popular decision from a local perspective, improving (cash flow) by $50 million-plus annually could help NYT stock,” said John Janedis, a newspaper analyst at Wachovia Capital Markets LLC.

Is shuttering or relocating the Globe what the buyers have in mind? 

Topper Harley: I’m not saying I don’t trust you, and I’m not saying I do. But I don’t.

Let’s meet the suitors:

[1] Platinum Equity, of Beverly Hills, Calif., which bought the San Diego Union-Tribune newspaper in May, made an offer to the Times Co. last week, the sources said.

[2] One of the local groups is led by Stephen Pagliuca, co-owner of the Boston Celtics and a private equity executive at Bain Capital, and former advertising executive Jack Connors.

[3] The other is led by Stephen E. Taylor, a member of the family that sold the Globe to the Times Co. in 1993 for $1.1 billion.

Two private-equity buyers – whose strategy is never buy-and-hold, always buy-transform-and-sell – and one family that’s playing with house money, and may have sentimental reasons for submitting a bid, even  if it’s undecided.

Harbinger: War …it’s fan-tastic!

Platinum’s offer is $35 million, plus the assumption of $59 million in pension liabilities, something the Times Co. asked all potential buyers to include in their bids, the people said.

When a property is encumbered by long-term liabilities, the buyer takes it subject to those liabilities.  Thus Platinum’s price is effectively $94 million, which is suspiciously close to our better dead than read $65 million minimum liquidation value of the property:

Taylor’s bid is believed to be in a similar range, according to the sources.

 Topper Harley: You’re joking.
Ramada Rodham Hayman: I’m not.

Topper Harley: You’ve got to be.
Ramada Rodham Hayman: If I was joking I would say: “A horse walks into a bar. The bartender says, ‘Why the long face?’”

Pagliuca and Connors, who are proposing a model with a nonprofit component, are believed to have offered significantly less.

Doubtless they expect the non-profit structure to give them financing or real estate taxation advantages.

Topper Harley: These men have taken a supreme vow of celibacy, like their fathers, and their fathers before them…

Meanwhile, the original business model is extinct – it just doesn’t know that yet.

The SEC filing also said the Globe and the T&G have been hurt by the forces pummeling traditional media companies, including the migration of readers and advertisers to the Internet and a deep recession.

Thank you, Topper. I can kill again! You’ve given me a reason to live.

But the papers have also put in place strategic financial turnaround plans. The Globe, for instance, has:

[1] Shuttered its Billerica printing plant

[2] Raised subscription prices

[3] Reduced costs, including getting $20 million in union concessions.

For the Globe, here’s the self-evident end state: it becomes a regional outlet of the New York Times.  Once upon a time, we had a First National Bank of Boston, which became Bank of Boston, which became Fleet Boston, which became Bank of America. 

Founded in 1784, consolidated 2004

As value goes intangible, operating platforms consolidate and businesses distribute their functions across electronic networks.

It is unclear how low a bid the Times Co. is willing to accept.

In a separate development in the news industry yesterday, Cox Media Group said it was taking the Austin American-Statesman off the market, after receiving bids it considered to be too low, according to published reports.

Warren Buffett has said that he would not buy any newspaper at any price; he thinks the business model is entirely broken, and permanently so.

Platinum, run by billionaire Tom Gores, is best known for buying distressed businesses, largely in technology.  Three days after buying the San Diego Union Tribune, Platinum laid off 18% of the staff, or 192 positions.

Nor does such a move preclude further layoffs.  Private equity does not like to throw good money after bad.

Michelle Huddleson: Now we have to go in to get the men who went in to get the men who went in to get the men.

“What’s important here is that the Globe be maintained as a viable business entity, whether it’s sold or we continue to operate it, and make sure that it has the financial stability to ensure its continuity,’’ said [Times Co. publisher and chairman Arthur O. Sulzberger]. “We’re committed to that.’’

“We’re committed to that.”

You may be, Mr. Sulzberger, but neither what you say nor what you believe will bind any buyer.  That’s just a lullaby for the employees.  Meanwhile, the Globe may be applying a neck tourniquet to itself: the Globe may start charging for its online content.

Loved you in Wall Street!

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You’ve got to try harder

In the aftermath of the subprime meltdown, fingers are being pointed every which way, among them at the appraisal community, which led to a systemic change brought about by new York’s aggressive Attorney General, Andrew Cuomo, who pressured the GSEs into an agreement about which I recently posted:

[The Home Valuation Code of Conduct (HVCC), which applies to mortgages placed via Fannie Mae and Freddie Mac, bars loan officers, mortgage brokers or real-estate agents from any role in selecting appraisers.]

This has encouraged lenders to outsource the selection to appraisal-management companies, or AMCs, which take a sizable cut of the appraisal fee.

This is value-chain re-engineering. If the link between commissioner and appraiser is too cozy, then it’s necessary to add a link. Adding a link adds costs. The first-order systemic response is simple:

As a result, appraisers are under pressure to “do it faster, do it cheaper,” said Bill Garber, a spokesman for the Appraisal Institute, a trade group.

It takes all the cycle-time shrinking you can do just to stay ahead of the workload

Faster, cheaper leads to an easy second prediction:

With costs cut, we have the second-order reaction – adverse selection by quality. Premium providers are pushed out of the business.

Now, to judge by this Banker & Tradesman article, that prediction is already coming true:

Mortgage brokers and appraisers predicted headaches and worse with the advent of the new appraisal rules that hit the mortgage business on May 1, and now they say that’s just what they’ve found – with a few extra aggravations thrown in.

As if you haven’t got enough to worry about

Appraisers say it’s just as they feared:

Under the new Home Valuation Code of Conduct:

[1] They’re making less for each job

[2] Consumers are paying more

[3] For an inferior appraisal.

Outcome 1 was self-evident; outcome 2 was the inevitable corollary.

Appraisers are also complaining appraisal management companies take a chunk out of their fees as payment for arranging the assignment.

What about the third, inferior quality? Two weeks ago I extracted this risible quote:

Funny, by George

Jeff Schurman, executive director of the Title/Appraisal Vendor Management Association, said AMCs typically take about 40% of the fees and appraisers get the rest.

Two-fifths isn’t exorbitant, but it’s not minuscule either.

Mr. Schurman said he has seen no evidence that AMCs’ practices lead to lower quality.

At that I laughed out loud. “The head of an association that takes 40% of another’s fees said he has seen no evidence that cutting what’s paid for actual work leads to lower quality.”

A four-year-old child could make it out!
Quick, get me a four-year-old child, I can’t make head or tail of it

More significant for consumers are these disruptions in the value chain:

Don’t break the value chain; use the Force

Meanwhile, brokers can’t easily make good on locked-in interest rates because new rules gum up the application process, said David Black, president of First New England Mortgage in Newton.

Also, brokers now often struggle to transfer appraisals between lenders, leaving them unable to easily transfer the application to a more favorable lender.

“We could keep banks honest,” he said. “If we can’t get our job done, we’ll disappear.”

This argument is intriguing. Mortgage brokers can shop for different lenders, and if they can take a single appraisal to multiple lenders, they can get better apples-to-apples price comparison.

When mortgage brokers ordered the appraisals, they could take those numbers to a variety of lenders, ideally shopping around for the best terms on behalf of the borrower.

This leaves unanswered the challenging question of who the mortgage broker actually works for, about which readers may be forgiven for being skeptical.

The National Association of Mortgage Brokers, which tried to prevent the rules from taking effect, is now urging brokers to direct their uproar toward The Federal Housing Finance Agency and other organizations.

No namby-pamby lobbyists these!

NAMB has also succeeded in persuading two representatives to introduce HR 3044, legislation proposing an 18-month moratorium on HVCC.

But that fight truly began last year, when FHFA announced that Fannie Mae and Freddie Mac would not back mortgages in which brokers had contact with appraisers, and issued the new code to prevent that.

As I posted previously, contact between an interested and a disinterested party isn’t necessarily improper; it may be the lifeblood of accuracy.

Avoid impermissible contact, okay?

At my for-profit company, we do valuations of complex structured interests. After making our initial data request, which includes a comprehensive checklist of information we think relevant, we also invite our customers to provide any information they think worthwhile for us to know. Unless the circumstances are unusual, we also give our customers a chance to look at and comment upon our draft, and to provide additional evidence. This creates an intellectual argumentation, where the client is advocate for its view of the right value, and we are judge and jury of what we think is the right value.

Such contact also allows influence to be brought to bear:

Make up your own mind

Previously, brokers order the appraisal before submitting the loan application to the lender – and often, critics say, those brokers would pressure appraisers to come back with higher valuations.

Get it?

Naturally that pressure will be applied, and the expert has to be intellectually and morally tough:

For this tension to yield improved (more accurate, more thoughtful) results, we as valuation experts have to be strong enough to repel improper suggestions and to resist flimsy or unsubstantiated argumentation.

Evidently, many appraisers were suspected of being weaklings.

And proud of it!

Now the appraisal comes through the lender, and critics say if consumers want to shop around, they’ll have to order a new appraisal for each lender they try out.

Ironically, the cozy relationship of in-house commissioned appraisals – being proposed as a reform – is among the sins of which Countrywide’s Angelo Mozilo was accused.

“There’s a real competitive issue here,’ said Stephen Sousa, executive vice president of the Massachusetts Board of Real Estate Appraisers.

Hoping to put your financial house in order

The lender who ordered the first appraisal has to certify it in order to pass it along to another lender, Sousa said, and it’s doubtful lenders will want to shoulder the liability – with no potential reward – that comes with certifying an appraisal for a loan they’re not going to make.

Absolutely right. Why should I take a risk that helps you make money I’m not going to?

“On top of that, other lenders don’t want to accept the other guy’s appraisal anyway, and will request another – at hundreds of dollars of cost to the consumer.”

“That was one competitive advantage [for brokers]: We could take the loan to a new lender,” Black said. “Now we can’t do that.”

A valid point.

Another in the list of complaints: The new code prevents brokers from successfully locking in borrowers at lower rates, says Richard Shapiro, principal of Asset Mortgage Group in Natick.

Because the appraisal is completely out of the mortgage brokers’ hands and another layer of management is inserted in the process, everything just takes longer and 30-day lock-ins are likely to expire before the application is complete.

This, by contrast, strikes me as simply growing pains. Give the system time and it’ll get faster.

Longer lock-ins are possible, but are more expensive to the consumer.

Any growing value chain is inherently less efficient until it achieves stabilization and scale.

Many appraisers were upset that their work was being shuttled through appraisal management companies because the new system broke professional ties they’d established with brokers, who would refer them to jobs in their area. Now management companies just cast around for whoever will do the job cheaply and quickly, they say.

What’s quality worth? Does it compensate for cozy relationships?

We’re not cozy, it just looks that way

Sousa said his organization sent out a survey on the new code that – so far – has 55% of appraisers saying the number of assignments they’ve received has declined, and 39% said their assignments have decreased more than 10% since HVCC kicked in on May 1.

Foolish statistic; all appraisals are probably down.

What is the future of these regulations? The HVCC is a set of guidelines laid out by Fannie and Freddie, not legislation; David Bunton, president of Appraisal Institute, speculates the HVCC is merely “placeholder” rules that will be swept away in the spate of new regulations coming out of Washington.

We saw above that the NAMB got legislation introduced requesting an 18-month delay – but that’s a long, long way from it becoming law.

Others aren’t as optimistic.

“The longer it’s in place, the more it becomes entrenched,” Sousa said.

Think you can shoot down that legislation, boys?

He’s right; HVCC is here to stay.

Lenders are spending time and money to engineer the new processes, and would kick up a fuss if someone suggested change. Chris Kelley, sales manager at First New England Mortgage, noted that the mortgage brokers’ Washington lobby can’t match the powerful banking machine in place.

And with all due quivering respect to the mighty banking machine versus the plucky mortgage broker machine, the case for repealing HVCC is far from proven. Certainly the value-chain problems cited above are relevant, but they sound transitional, and by the time Congress gets around to considering whether to suspend the HVCC, the system will probably be operating more efficiently.

Still, the brokers keep hoping:

Shapiro theorized that they’d need a politician or well-connected lobbyist to get fired up on their behalf: “I’m just hoping that the right big shot gets their loan all screwed up because of this and says, ‘Why are we even doing it?’”

It’s more fun than being depressed

E-mail: lschreier@thewarrengroup.com

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