Reader OG writes:
I just found out my house is worth what I paid for it in 1998! I paid $500K for, did a $500K renovation for an all in cost of ONE MILLION DOLLARS (added a master suite, tripled the size of the kitchen, moved some walls around, all new Marvin windows, siding, new bathrooms, etc)! Similar houses in my neighborhood have sold for $2-2.6mm range a couple of years ago (these same houses sold for $1.3mm when I bought my fixer-upper in ’98). Today I got a letter from Chase telling me that my $500K home equity line of credit has been reduced to a $232K line because my estimated home value is only $1,021,000 using a “proven valuation method”. Thankfully, I have never drawn on this line of credit, and honestly don’t even need it. But I am a bit shocked to think their appraisal is so low? They must be wrong. We are talking about 3900 sq ft in OG in a good location.
This is laughable because it was these same “proven valuation methods” that the banks used to get themselves (and us) in the mess we’re in now. I spent much of the day with a builder friend today and in our conversation I asked him how, say, 5 Meadow Wood, could have received a $5 million mortgage when it was a horrible piece of junk with the I-95 sound barrier as its backyard. “7,000 sq. ft. right?” he asked, “then easy: they appraised new construction in Greenwich at $1,000 a square foot and passed out money on that basis. So $7 million, less 20% and you’re at $5.”
This house, now in foreclosure, will never sell for more than $2 million and I’d be astonished it it fetched half that sum. But the town is littered with failed spec houses all with money loaned at a value that was achieved in only a handful of sales, ever. So now, burned, the banks are going the other way. Picture a pilot in one of those WWII movies with his engine shot up and his windshield covered with oil, blinding him as he spins to earth, doomed. The banks are those pilots.
Congress has demanded that the Accounting Standards Board get rid of the “mark to market” rule and, probably as early as today, banks will now be able to value their toxic assets at whatever they say they’re worth.
This is the same philosophy that drives so many of my fine colleagues in this town when dealing with real estate: if you don’t like what the market says your client’s house is worth, just come up with a value they do like. When it doesn’t sell, look around for someone to blame.
If he hasn’t retired by then, look for Chris Dodd to be in front of the cameras three years from now, face red, finger jabbing, demanding to know why bankers lied to the American public. In this case, since it is the bankers who have asked to discard the rule, they’ll deserve everything that slimy blowhard sends their way.
UPDATE: The NYT’s Floyd Norris is on the story:
Under intense political pressure, the board that sets accounting rules in the United States will meet on Thursday to complete changes in accounting rules that are aimed at reducing the losses banks have been forced to report as the values of their mortgage-backed securities have crumbled.
The changes, proposed two weeks ago after a Congressional hearing in which Robert H. Herz, the chairman of the Financial Accounting Standards Board, was essentially ordered to change the rules or face Congressional action, are generally supported by banks, although some want the board to go even further.
But they have produced a strong reaction from some investors, with one investor group complaining that the changes would “effectively gut the transparent application of fair value measurement.” The group also says changes would delay the recovery of the banking system.
UPDATE II: Lest we forget, three years from now, Barney, “There’s nothing wrong with Fannie Mae!” , Frank is also behind this rule change.
Apparently not all bankers are as forthright as my new friends at Patriot. Dealbreaker reports that Bank of America’s Ken Lewis seems to be back-tracking on his earlier assurances that all was fine. Gosh, who’d have suspected duplicity from a banker?
As you’re aware, Ken Lewis sent an email blast out a couple weeks ago letting everyone know that Bank of Amerillwide was profitable for January and February (not mentioning anything like writedowns or shizzle like that). Just now when asked by Burns how the firm’s been doing of late, K to the L said trading wasn’t “as good” in March, then paused when EB wondered if they were still profitable, said some stuff about deposit flows, got flustered, and was all, “uhh, we’re too far into the quarter to discuss, gotta go, k bye!”
UPDATE: None of the big three banks are doing well, according to ZeroHedge.
…[T] he plane is back to crashing into the mountain. After vociferous pledges that business has never been more stellar, the big 3 banks are starting to hit retraction mode. Enter Jamie Dimon, who in a interview with the lovely Erin Burnett stated sheepishly and under his breath that “March was a little tougher.” Talk about read between the lines understatements! If the pillar of stable banks that is JPM is saying things are back to normal, read horrendous, we can’t wait to see Vikram tell people he was really drunk or high or both when he said that the January-February trend was his friend (only exception if copious amounts of roofies were involved).