On 'Faulty' Loan Appraisals, and IMF's Gold Dump

Those Were the Days
I do not cover the housing sales and price numbers much anymore because we all already know how they are going to go. I still get a kick that after 2 years of terrible number, the pundits still try to get excited about rising sales going into the spring and summer. Barry Ritholtz highlights the silliness of this idea here.

What caught my attention Tuesday were the statements by National Association of Realtors (NAR) chief Larry Yun who basically was whining that appraisals are now having some basis in reality, and this is problematic come loan closing time (via Clusterstock):

Pending home sales indicated much stronger activity, but some contracts are falling through from faulty valuations that keep buyers from getting a loan.
"Lenders are using appraisers who may not be familiar with a neighborhood, or who compare traditional homes with distressed and discounted sales,” [Yun} said. “In the past month, stories of appraisal problems have been snowballing from across the country with many contracts falling through at the last moment. There is danger of a delayed housing market recovery and a further rise in foreclosures if the appraisal problems are not quickly corrected."

Of course, Mr. Yun and his predecessor David Lereah had no issue when appraisal fraud was showing 25% price gains in 3 months during the bubble. Those appraisals were in no way "faulty", just the more recent ones that show home prices are falling.

It is like the line form the intro song to the classic TV show "All in the Family" where they finish "Those were the days." Oh, to have a free hand in appraisals. That was a good time. It speaks volumes about our current lack of real ability to feel anything that Mr. Yun both said this out loud and was then not asked to step down.

I have Mr. Ritholtz's new book "Bailout Nation" on tap for reading tonight and tomorrow and I hope to have a quick review up later in the week.

Jesse's Cafe Follow Up

Last post I linked to an article that I wish I had written. The post at Jesse's Cafe Americain really fleshed out that inflation and deflation are in fact choices by a government in a fiat system.

Of course, this discussion is very heated right now, and I imagine Jesse got quite a bit of input on the piece, as I do when I write about this topic. Jesse must have had quite a bit of feedback because there was a follow up story Tuesday that even further develops the thesis. As was the case Monday, you really should read the whole thing. (Side note: Stagflationary Mark, Jesse sees the risk of Stagflation as very high. No word on Negflation however, but only those in "the know" really have that on their plate.)

Another forward looking fellow is Ilargi at The Automatic Earth. In his last post I think Ilargi offers up some advice that should be taken into consideration, especially as the "green shoot" bombardment has mellowed quite a bit:

The mortally wounded banks that play healthy with the help of the government will get to do so even more if Obama's regulatory reforms plans are accepted. But it's just the most expensive exercise in futility the world has ever known. Not that that comes as a surprise to you anymore, I’m sure. The losses will keep on piling on, and they will come from all sides. Credit cards defaults, commercial real estate, which is plunging at a 30-50% clip as we speak, and has much further downward to go, speculative corporate bonds that are closing in on a 10% default rate.
The World Bank, meanwhile, wants the rich world to cough up $1 trillion to help the poor in other countries. Don't worry, they don't really believe it either. The rich world will have more than enough poor of its own to take care of. Please don't you believe that it will.
And don't believe that there will be a recovery any time soon. Make your decisions based on the assumption that there'll be no recovery for at least a generation. That will save you a lot of hardship.
Makes you think all the world's a sunny day, doesn't it?

If indeed the current crisis is the largest debt debacle in history (I believe it is) then truer words have never been spoken.

Gold Sales on Tap Because it is Useless

The word out Tuesday was that the US Congress has passed a bill (link via Mish's site) which included the US approval for the IMF to sell some 400 tons of gold. The IMF is the second leading gold holder with a marker of 3217 tons of gold valued at around 100 Billion dollars.

Mish has some thoughts on the sale:

Some may think that the IMF dumping gold is part of the vast conspiracy to suppress the price of gold. Instead, I propose the IMF sale of gold is sheer stupidity on the part of the IMF. However, given that I do not like the IMF or its meddling, I am glad they are doing it.
Reasons To Cheer IMF Gold Sales
1) If the IMF wants to dump gold in favor of paper assets diminishing in value over time, it's fine by me. I hope they dump it all. It will reduce the amount of meddling they can do down the road.
2) IMF gold sales are a bull market phenomenon. The UK dumping gold at $250 marked the bottom.
3) China is a possible recipient of the gold. If the real reason for this move is to allow China to get rid of some US dollars or treasuries in return for gold I view that as good thing.

Bretton Woods II is coming to an end. That we know. What we do not know is the timeframe or the replacement. However, China may need to accumulate gold for whatever the next agreement might be. IMF gold sales may be a small step down that path.
Gold is consolidating recent gains now. Bear in mind that March to August is generally a seasonally unfavorable period. That is not a prediction of a further pullback, although it is likely. Further consolidation is a good thing that will add fuel for the next leg higher.

I agree on all points though I would say that the Fed has on many occasions stated in various minutes and other sources that the price of gold is taken into consideration by them in regards to inflation expectations. When you consider that the Fed has now gone "whole hog" along with the Treasury in regards to overt market manipulations, it is no stretch to think they would target gold as well. This is not conspiracy theory, just a logical step forward.

Thinking about Mish's observation that the IMF gold dump "...will reduce the amount of meddling they can do down the road" really got the wheels turning.

"I had a dream, I had an awesome dream " - Lionel Richie "Say You, Say Me"

I too have had a dream, but this was a waking dream, so the sleeper has awoken. (obscure reference)

The Dump Gold It's Worthless Campaign

I would like to invite the entire blogosphere and the mainstream media to get as negative on gold as possible. You can use charts, scare tactics, hand puppets or whatever you like but spread the word that gold is useless. Even worse, it is worthless. Sell now, sell all you can. I would ask the holders of gold (physical, or however) to go along and keep all the cash you get, it comes into play in a moment.

After a protracted campaign, which should scare the countries of the world (well maybe not the Asian nations, they do love their gold) into dumping their reserves, I would hope to hit a downside target of say $5-$15 dollars an ounce. You do not want to know what silver will be at that point. And now here is stage two...

Goldbugs unite. Deflation callers join hands with the inflation dreamers. Any and all that would see a return to real economics and real responsibility can get on board.

Then we buy it all. Every single ounce. Everything.

The dollar amount required certainly could be attained, well maybe not every single ounce, but the vast share. Then all we have to do is watch the fiat currencies collapse and then WE will have the power. It's simple. It's beautiful.

I just cannot get around how we go about convincing everyone to first sell all their gold, then want it back later. Petty details I say. Who is with me?

For more fun with gold, consider this Onion News Network clip,

US To Trade Gold Reserves For Cash Through Cash4Gold.com:

Funny in an uncomfortable-because-it-is-so-true sort of way.

Comments

[long roh:]

I disagree with the unsupported assertion about "faulty" appraisals -- this could be a real problem. My neighbor just refinanced and had to pay an extra point because the appraisal came in too low. Turns out that the appraisal was affected by the fact that the old lady down the street recently sold her crappy house (it had not been updated since the '40s) when she left for a nursing home. In this environment that dumpy house sat and sat and had to be reduced, re-reduced and sold for a song before someone saw it as a renovation opportunity. It should be obvious that such a sale has little relevance to what my neighbor's well-cared for home would sell, but of course, the lazy appraiser just sees it as a "comp." (Zillow marked down the whole street in sympathy with that sale as well.) I'm sure some foreclosure sales are having a similar effect on properties that don't deserve the comparison. Foreclosures and regular sales are truly two different markets (even in the same zip code), and if appraisers don't account for that, then they are doing their clients a disservice.

Jun 24 01:52 PM

[Donald Ingram:]

Where were all the whistle blowers of "faulty loan appraisals" when the 'ninja' sub-prime mortgages were handed out? Kinda like closing the barn door after the horse is long gone!
IMF gold sales? I will believe that when the Chinese are sailing away with the bullion! How many times in the past have we heard this old 'herring'. IMF to SELL GOLD! I'll believe it when I see it.

Jun 24 02:09 PM

[Economic Di...:]

long roh,
During the boom the old ladies house you mentioned would have sold for the same price (+/- 5%) as your neighbors better condition one. I saw it with my own two eyes for years when I was looking for a house in the 2002-2005 years. Now certainly her home is worth less, but it is still a comp. You cannot simply have two markets the foreclosure market and the "real market", doesn't work like that. If you are worried, get another neighbor to sell at the "real market price" and then your street should be all set.

Jun 24 03:40 PM

[The Geoffster:]

Gold, the archaic relic, is once again proving its mettle (pun intended). I don't think there is any doubt about central bankers' desire to suppress the price of gold. As I have noted before, Paul Volcker lamented that he wished he had done more to devalue gold when he was FED chair. Now that western currencies are being debased as never before, it won't be long before we see gold as part of any basket of currencies in the new reserve currency.

Jun 24 03:46 PM

[buddhabill:]

I am now convinced of PM's value. I currently hold none (kicking myself for not picking up a few 1000 oz silver @ $11 when I almost pulled the trigger), and have been trying to figure it all out:

Variables seem to be:

1. Inflation vs deflation
2. The state of the dollar
3. PM's growth as investments vs jewelry and other consumption
4. Central Bank policies.

I am now convinced that PMs ARE relevant, and therefore good if not essential long-term investments/hedges. China is flush with cash, yet is on record for wanting to increase gold holdings. Why? To get a non-inflatable asset, and to counter other Central Bank moves on currency and commodity markets is my guess.

IMF is selling gold. Why? To save DB's hide according to some, to suppress prices and bolster confidence in the fiat system too.

Last year I saw a great series on Youtube about the day the dollar crashed, binding-up global markets. That was before the added TRILLIONS of borrowing and quant easing announced over the last year.

The fundamentals and contra-indicators are shouting to buy and hold gold and silver, (I don't know enough about platinum and othe PMs), and that's good enough for me.

Jun 24 05:22 PM

[conceptwizard:]

To late. The Chinese and Russians are buying up gold to deversify out of the dollar. The tonnage has gone up substansially.

From the Financial Post: “China revealed on April 24th, 2009 that it had secretly raised its gold reserves by three-quarters since 2003, increasing its holdings to 1,054 tons — or a pot worth about $30.9-billion — and confirming years of speculation it had been buying.”

This comes after China began reducing its purchase of U.S. debt.

The newspaper also reported: “Hou Huimin, vice general secretary of the China Gold Association, said China should build its reserves to 5,000 tons.”

Jun 24 06:52 PM

[long roh:]

response to the author:

Substitutability is a necessary condition for two products to be in the same market. In no sense was the dumpy house substitutable for the quality home, except to a limited group of buyers with the tolerance for renovation. The appraiser was simply lazy/wrong to place emphasis on this sale because of its recency/proximity.

I could be wrong about this, but I believe that buyers of MLS-listed homes do not shop the foreclosure market. REO properties are the closest they come to it. Thus, I don't think it is far-fetched to suggest that foreclosure sales prices are not indicative of what non-distressed sellers can fetch for quality homes. To the extent appraisers ignore this distinction and it prevents a sale (and one that was going to occur at an "above-market" price!), they are shooting the recovery in the foot.

Jun 24 10:15 PM

[Bob Mayo:]

Clearly the value of the dumpy house plus the cost of renovations should equal the value of the nice house. No?

I don't see how you can put them into separate markets. If they are, perhaps somebody could sell me a 2009 BMW with a flat tire for $20,000 less that the price of one with good tires. There's almost no market for BMWs with flat tires. You can't even drive them.

Jun 25 02:19 AM

[Economic Di...:]

long roh and Bob Mayo,
I really would not disagree that foreclosure sales are different than regular sales; that said the whirlwind offers no "reason". Back in the heady days of the bubble a new kitchen (cost $8000-14,000) would command a sale price increase of $40-$60,000 which obviously made no sense at all either. Now the downside will be just as retarded. That said, home prices are still very much above where a real bottom based on income ratios and rents are concerned (not everywhere I know) so no "recovery" in housing will be sustained until that price is reached.

Jun 25 07:36 AM

[Moon Kil Woong:]

Gee the IMF will dump gold and the US approves. I wonder what currency and bonds they will buy with it? Hint: the money is green. So why would the US disapprove. Since some of those bonds most likely will be bought from the Chinese who is left to disagree?

The great saide effect is it makes it harder for the IMF to float a competing currency against the dollar. I guess the Chinese can't complain since they will get a minor hedge to their vast holding of US Tasuries that they are starting to believe can rot over time like a load of cabbage.

Jun 25 09:04 AM

[dragonpaw:]

Housing -gold ; gold-China ; China -IMF; great disconnect: Love non-sequitors??!! For whom are you plugging??

Jun 26 06:06 PM

[dragonpaw:]

Oh by the way; saw yesterday on an "Alpha" article that the total gold owned by "GLD" and the futures on Comex was 140x the actual gold above ground and in the vaults. Say... gold jumps to $2K/ ounce and all the grouppies bail????.....the Comex position defaults (read "goes bankrupt") and (golly gee...) we're back in the derivatives market!!
Think We'll get a bailout???!!!! NOTT!!!!

Jun 26 06:18 PM