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“Beginning in 2006, NAR’s sales numbers began to look even more inflated relative to data collected by CoreLogic, the Mortgage Bankers Association, and the U.S. Census Bureau, a trend that has “continued and become more pronounced through 2010,” CoreLogic said in the February edition of its monthly report, “U.S. Housing and Mortgage Trends.”

-Inman News

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Over the years, I have been a fairly consistent critic of the National Association of Realtors (NAR). I have accused them of being drunk, hallucinating, cheerleaders of the RE sector, regardless of the reality. I have savaged their inane promotional stunts — Recall “Its always a good time to generate a commission buy or sell a house!” (See this, this and this).

My criticism about the NAR was about the nonsensical commentary that always seem to accompany their data. I never had cause to challenge their actual reporting of Real Estate sales.

Until now.

CoreLogic, the property data aggregator, claims in a new report that “home sales fell more sharply last year than previously thought.” According to CoreLogic, statistics published by the National Association of Realtors overstate sales of existing homes by 15 to 20%.

That is the polite way to describe it; The NAR sales data showed that residential RE sales fell 5%, but according to CoreLogic’s data, the fall was actually 12%.

There are different methodologies used, and that could account for some of the different figures. The NAR bases their sales data on multiple listing services and large brokerage closings. They show in 2010, there were 4.9 million existing home sales — a drop of about 5%.  CoreLogic collects data from public sales records via county recorders and courts; they estimate that there were only 3.6 million home sales — a drop of 12%.

The impact of this could be substantial. Consider inventory — using CoreLogic;s methodology, unsold inventory in November 2010 was16 months of supply, not the 9.5 months the NAR claimed.

Inman News explains the benchmarking issue:

“CoreLogic says one reason NAR’s existing-home sales data may be inflated is because the benchmark multiplier NAR analysts use to adjust for MLSs that they aren’t getting data from hasn’t been calibrated since 2004.

But there’s been consolidation among MLSs since then, CoreLogic noted, and a decline in the number of for-sale-by-owner sales outside the MLS and brokerage process. That means NAR is now capturing a greater percentage of existing-home sales and doesn’t need to make so large an adjustment when extrapolating its results.”

Quite fascinating.

Until the NAR does their benchmark revisions to historic sales data (later this year), I will assume that there will not be any resolution of this. I am loathe to give the benefit of the doubt to the NAR, but calling them data cheats maybe premature at this time. Sure, I have called them fools and eejits over the years, mocked them mercilessly for their money-losing blatherings, but I have never had reason to believe they were purposefully fudging the data.

If that turns out to be true, I will call for a full investigation and prosecution of them, but for now, I am willing to reserve judgment.

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Source:
Decline in real estate sales greater than stated?
CoreLogic: NAR methodology appears to inflate home sales by 15-20%
Matt Carter
Inman News  February 15, 2011
http://www.inman.com/news/2011/02/15/decline-in-real-estate-sales-greater-stated

Richard Vetstein is a nationally recognized real estate attorney,  frequently quoted in the media.  He was recently named one of Inman News’ 100 Most Influential in Real Estate. Mr. Vetstein is the founder of the Vetstein Law Group and TitleHub Closing Services LLC. The  former outside claims counsel for a national title company, he has an active real estate litigation practice. He blogs at massrealestatelawblog.com

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First the robo-signing controversy. Then the U.S. Bank v. Ibanez ruling. Now the next bombshell ruling in the foreclosure mess has just come down from a New York federal bankruptcy judge.

The case is In Re Agard (click here to download), and essentially throws a huge monkey wrench into a hugely important cog of the entire U.S. mortgage market, the Mortgage Electronic Registration System, Inc. known as MERS.

What Is MERS?

MERS, even for many seasoned real estate professionals, is the most important entity you’ve never heard of. In the mid-1990s, mortgage bankers created MERS to facilitate the complex mortgage securitization system where hundreds of thousands of mortgage loans were (and still are) packaged and bundled as securities for sale on Wall Street. Each mortgage entered into the MERS system has a unique 18 digit Mortgage Identification Number (MIN) used to track a mortgage loan throughout its life, from origination to securitization to payoff or foreclosure. The MERS system was vital to the proliferation of the $10 trillion U.S. residential securitization mortgage market.

Critics say that the decision to create MERS was driven, in large part, to avoid paying recording fees charged by county registry of deeds which required that all mortgage transfers and assignments be properly recorded and indexed in publicly available registries of deeds. Thus, MERS was designed essentially as a privately run, national registry of deeds under which MERS would act as the record “owner” and depository of all mortgages participating in the system, while the mortgage notes and loans themselves were freely bought and sold on the secondary market. About 50% of all U.S. mortgages participate in the MERS system.

The Ruling: MERS Cannot Legally Transfer & Assign Mortgages

Bankruptcy court judge Robert E. Grossman’s ruling is a bombshell and appears to be the first federal ruling holding that MERS cannot legally do what it was set up to do: transfer and assign mortgages through its electronic registry. Judge Grossman ruled that the foreclosing lender had to show that it owned both the note and the mortgage — rejecting the popular theory that the “note-follows-the-mortgage” — and there was no evidence that it held the note. “By MERS’s own account, the note in this case was transferred among its members, while the mortgage remained in MERS’s name,” Grossman wrote. “MERS admits that the very foundation of its business model as described herein requires that the note and mortgage travel on divergent paths.”

The judge found that the MERS membership agreement wasn’t enough to assign the mortgage and that to do so the lender would have to give power of attorney or similar authority to MERS. MERS’s membership rules don’t create “an agency or nominee relationship” and don’t clearly grant MERS authority to take any action with respect to mortgages, including transferring them, Grossman wrote. Because the interests at issue concern “real property” — land and buildings — under state law, any transfer has to be in writing, which isn’t done under the MERS system, he said.

The judge concluded, rather harshly, that “MERS’s position that it can be both the mortgagee and an agent of the mortgagee is absurd, at best.”

Impact of the Decision

The impact of this ruling may be quite muted. First the ruling is “dicta” which means that the ruling didn’t have much to do with the case since the judge upheld the validity of the foreclosure. Second, this ruling comes from the lowest level of the federal bankruptcy court system in New York, and will surely be appealed to a federal appeals court, and then possibly to the U.S. Supreme Court. Other courts have ruled in favor of MERS on the same issues, as well. The ruling could be overturned ultimately–if it gets there. Third, Congress and state legislatures could intervene, and bless what MERS has been doing for the past decade. The judge invited lawmakers to do just that.

Thus, it’s hard to say how much, if any, impact this ruling with have in other states or nationally. Plus, any easy fix would appear to be for MERS and its lender partners to go back, and record their mortgage assignments and pay the recording fees due.

That said, the decision definitely sends a shot across the bows of MERS and its partners (Fannie and Freddie), and should be watched closely by industry experts.

More Coverage

Wall Street Journal

Bloomberg News

Mortgage Electronic Registration Systems, aka MERS, finds itself in a bit of a pickle. The bank owned entity created to facilitate mass securitization and skip out on billions in local property filing fees, has sent a directive to its membership (See MERS: Foreclosure Processing and CRMS Scheduling).

In short, the memo states:

“In recent months legal challenges have arisen regarding alleged inadequacies and improprieties in the foreclosure process including allegations of insufficient or incorrect supporting documentation and challenges to the legal capacity of parties’ right to foreclose . . . MERS is planning to shortly announce a proposed amendment to Membership Rule 8. The proposed amendment will require Members to not foreclose in MERS’ name. Consistent with the Membership Rules there will be a 90-day comment period on the proposed Rule. During this period we request that Members do not commence foreclosures in MERS’ name.” (emphasis added)

Keep in mind, that MERS has always been a legal fiction, simultaneously principle and agent. The courts are increasingly recognizing this, and finding they do not have any standing to bring foreclosure actions.

Housing Wire sums up the increasing judicial and legal antagonism MERS is facing:

The drumbeat against MERS became louder last fall as robo-signing — the signing of foreclosure affidavits of indebtedness en masse, without proper review — surfaced. The robo-signing scandal caused several large servicers to temporarily halt foreclosures as they reviewed their procedures, and prompted an investigation of lenders and their servicing shops by all 50 attorneys general. A proposed settlement could involve some of the nation’s biggest servicers.

I expect we will continue to see a ongoing reduction in the role of MERS over the next several quarters.

What follows will either be its eventual dissolution, and replacement with a legal entity — or retroactive legislation making its reckless illegality somehow legal. Watch Congress closely for signs they are rolling over for this.

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UPDATE: February 17, 2011, 6:45am
Despite writing critically about Mortgage Electronic Registration Systems for over 2 years, several emailers seem to be uncertain as to my thoughts about the legality of MERS.

Allow me to spell this out for you more specifically: MERS is an abomination, a legal blasphemy that should be destroyed before it unleashes the four horsemen of the apocalypse.

I hope that clarifies this . . .

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Sources:
MERS: Foreclosure Processing and CRMS Scheduling
Announcement Number 2011-01
MERS, February 16, 2011

MERS to members: Don’t foreclose in our name
KERRY CURRY
Housing Wire, February 17th, 2011
http://www.housingwire.com/2011/02/17/mers-to-members-don’t-foreclose-in-our-name

MERS Announcement 2011-01

See if you can spot the theme:

•  Matt Taibbi: Why Isn’t Wall Street in Jail? (Rolling Stone)

• Michael Lewis: All You Need to Know About Why Things Fell Apart (Bloomberg)

• Karl Denninger: Bernanke’s Outrages Exposed (Market-Ticker)

• Sorry Felix, but the stockmarket is still where it’s at (Ultimi Barbarorum)

• “Grapes of Wrath” Holds Lessons for Middle Class Survival (Minyanville)

• Credibility Shaken, Hedge Funds Are Punished by Investors (Dealbook)

• Fannie and Freddie aren’t going anywhere. (Slate)

• Curveball: How US was duped by Iraqi fantasist looking to topple Saddam (Guardian)

• How Skyscrapers Can Save the City (The Atlantic)

• Best of the best: 135th Westminster Kennel Club Dog Show (Big Picture)

How Egypt Disappeared From the Internet
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click for larger graphic

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Source:
Egypt Leaders Found ‘Off’ Switch for Internet
JAMES GLANZ and JOHN MARKOFF
NYT, February 15, 2011 
http://www.nytimes.com/2011/02/16/technology/16internet.html

Fed Worries about “Fewer People Looking for Work”
February 16, 2011
David R. Kotok

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“Following the loss of about 8-3/4 million jobs from 2008 through 2009, private-sector employment expanded by a little more than 1 million in 2010. However, this gain was barely sufficient to accommodate the inflow of recent graduates and other new entrants to the labor force and, therefore, not enough to significantly erode the wide margin of slack that remains in our labor market. Notable declines in the unemployment rate in December and January, together with improvement in indicators of job openings and firms’ hiring plans, do provide some grounds for optimism on the employment front. Even so, with output growth likely to be moderate for a while and with employers reportedly still reluctant to add to their payrolls, it will be several years before the unemployment rate has returned to a more normal level. Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established.”
–Ben Bernanke

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Fed Chairman Bernanke used his Feb. 9 congressional testimony to reiterate the Fed’s view about the sustainability of the economic recovery. Bernanke’s key point is that we need to see the jobs before we change the policy. Will we?

NY Fed president Bill Dudley embellished this concern in his Feb. 14 briefing. Remember Dudley is vice-chair of the FOMC and, as NY Fed president, the only regional bank president with permanent voting status. He was clear in his message.

“On the labor front, the most recent employment report for January 2011 is quite difficult to interpret. Only 36,000 nonfarm payroll jobs were added, well below expectations. Yet, we get a very different perspective from the unemployment rate, which fell by 0.4 percentage points for the second month in a row and now stands at 9.0 percent. Job growth was undoubtedly held down by the severe winter storms that affected many major cities, including our own. The decline in the jobless rate was not an unmitigated positive, as a significant part of this decline was due to fewer people looking for work.”

We agree with Dudley’s perception. In our view, it is way too soon to celebrate job recovery. The unemployment rate has dropped to 9% from a 10.1% high in October, 2009. Normally, that would be cause for celebration. However, that may not be the casein this cycle.

Let’s talk about the “fewer people looking for work.”

The drop of over a point in the unemployment rate occurred, in part, because the labor force participation rate is falling, as it has been for years. The number of folks looking for work keeps declining. It appears that the number of unemployed who have given up can be measured in the millions. The latest estimate of the participation rate is 64.2%, the lowest in a quarter century. For contrast, the labor force participation rate peaked at about 67% nearly 12 years ago.

The implications for labor income and for Fed policy are profound. The Fed has made job recovery one of its key objectives. That said, the Fed forecasts the unemployment rate and not total employment. Their target is a 7% unemployment rate, to be reached by 2013.

Nell Soss and Henry Mo (Credit Suisse) took the Fed’s target and adjusted it for changes in the participation rate. The results are dramatic. Remember, the lower the participation rate, the more it seems that the unemployment rate is declining. Dropouts are not counted as looking for jobs and the official unemployment rate counts only those who are looking for work and have not found it.

Soss and Mo projected economic outcomes using the current participation rate of 64.2% and another scenario using an improved 65.2%. The shift of 1% in the participation rate means 2.4 million jobs at the end of 2013. In other words, the Fed could see their estimated 7% targeted unemployment rate reached in a very tepid recovery if the participation rate remains low. Alternatively, the Fed could point to a successful policy outcome if the participation rate rises. The difference means a lot.

The Fed minutes released today describe the FOMC’s latest forecast as follows:

”Although participants generally expected further declines in the unemployment rate over the subsequent two years—to a central tendency of 6.8 to 7.2 percent at the end of 2013—they anticipated that, at the end of that period, unemployment would remain noticeably higher than their estimates of the longer-run rate. Many participants thought that, with appropriate monetary policy and in the absence of further shocks, the unemployment rate would continue to converge gradually toward its longer-run rate within five to six years, but a number of participants indicated that the convergence process would likely be more extended.”

So what happens if we have fewer people looking for work?

A higher participation rate generates more income for workers. It yields more tax revenues to the federal as well as state and local governments. It stimulates more housing and adds to purchasing power of consumers.

A lower participation rate means the job recovery engines of the US economy remain rusted. It means slow growth in consumer income. It means weaker housing and worsening budgets at all levels of government.

So far, in this recovery, we see the latter. That means inflation pressures from labor are muted. This has big implications for markets that are discounting heavy future inflation pressures. We may not see the inflation everyone fears.

Neil Soss ends his essay with this note: “The Fed should count jobs, not unemployment.” We agree. Furthermore, the shrinkage of the state and local government sector means that the US needs nearly 200,000 net new jobs a month to keep the true unemployment rate constant. More are needed to lower it and that only works well when more people are looking for work and not fewer.

We are not sanguine about the jobs outlook. We expect a low labor force participation rate; perhaps, it will keep falling. That will encourage the Fed to keep the policy interest rates near zero for the rest of this year and well into next year.

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David R. Kotok, Chairman and Chief Investment Officer

Minutes from the Jan FOMC meeting said the “economic recovery was firming, though the expansion had not yet been sufficient to bring about a significant improvement in labor market conditions.” They talked of a strong rise in consumer spending late ’10 and the continued expansion on spending on equipment and software. Residential and non residential construction remained weak, industrial production increased solidly and modest gains in employment continued.” On inflation, they say “Despite further increases in commodity prices, measures of underlying inflation remained subdued and longer run inflation expectations were stable.” Wage pressures were “still restrained.” They raised their ’11 GDP forecast and tightened their benign inflation expectation. Looking past ’11 for a Fed outlook, which they gave, is worthless info I believe as their forecasting ability should not be paid attention to.

With respect to their desire to further increase the Fed balance sheet, notwithstanding their acknowledgment of a continued economic recovery, they summed up why they continue to do so with, “unemployment was expected to remain above, and inflation to remain somewhat below, levels consistent with the Committee’s objectives for some time.” With Fed policy still full speed ahead and conducting a policy that I believe is wholly inappropriate for the economic circumstances we are currently in, its apparent that the Fed has only one goal in mind in dealing with the enormous debt that still overhangs this economy, inflate out of it.

Watching a sure-footed product company like Apple grope its way through the subscriptions morass, you would think that we were on completely uncharted territory. But what makes Apple’s moves to generate revenue from the platform it has created so interesting is watching the way that it ignores all other experience with the internet and retailing.

Apple seems very jealous of the value it brings to the marketplace. Steve Jobs’s statement this week underscores that. In the mind of Jobs, Apple users inhabit a sui generis Apple universe where they emerge ab nihilo from the iPhone and iPad platforms. How else to explain this point of view:

Our philosophy is simple—when Apple brings a new subscriber to the app, Apple earns a 30 percent share; when the publisher brings an existing or new subscriber to the app, the publisher keeps 100 percent and Apple earns nothing.

Of course, in the real world there is no such thing as an existing subscriber or bringing a new subscriber to the app. Or, I should say, that distinction can only apply to new companies with new apps where the discovery might take place in one venue or another but not both.

With any sort of existing media or service, the consumer’s relationship with that media is too complex to give one side or the other “origination” rights. If I sign up with Netflix because I finally have an iPad app to watch on, does that make me Apple’s customer or Netflix’s customer, especially if my knowledge of and comfort with Netflix is based upon my friends and their experience with the service.

Now, don’t get me wrong, Apple deserves to be able to generate continuing revenue from having built the iOS platform, maintaining and expanding it. The question is whether 30% is a realistic rent for that platform.

A good comparison might be the luxury mall. Apple thinks of itself–because it is–as a premium brand. Unlike Android, it deserves a premium for access to its platform. The mall business is similar. There’s a lot that goes into building a mall that appeals to bigger-ticket buyer. You acquire the land, get anchor tenants, build the amenities and so on. It’s as capital intensive–more so–as building a platform like iOS. The more foot traffic the mall attracts, the better it is for the tenants and the more the mall deserves a cut of store revenue.

Mall developers generally charge their tenants a fixed fee plus a percentage of sales as rent. So Apple is following the same model.  But the rents malls charge are under 10% of revenue.

That’s the great mystery of Apple’s subscription plan. The 30% figure makes sense for books but it hardly promotes the use of Apple’s platform for subscription-based businesses. We’ve already heard some wailing from Michael Arrington that Netflix, MOG and Rhapsody will be sunk by the 30% charge.

The story of content on the internet is one where distribution margins have collapsed. Apple, whether it wants to accept it or not, is a distributor when it comes to operating iTunes and iOS. Charging 30% for that is yearning for a lost world where retailers could mark up merchandise to generate a 50% gross margin.

Apple will inevitably wake up to this reality. The forces at work are just too big–bigger than Steve Jobs, in fact. Google has already countered with their own plan to push subscriptions at 10%. That should win out not because Apple worries about Google but because 10% makes much more sense as a fee for the distribution platform.

While we’re waiting, however, media’s transition to apps will be slowed. If porting content over to apps were a simple solution to the problems with the media’s business model, there wouldn’t be much complaint about Apple’s trading terms. But apps will require more than just a plug-and-play format change.

Media will have to be reconstructed for app distribution. Margins will be squeezed, losses incurred. Apple would be better off allowing more access to media companies that want to experiment with new products and boil the frog–slowly raise fees–later on as these develop traction.

It would be more efficient to raise rates on profitable businesses than to impose high fees that limit anyone’s ability to find out how those new profitable businesses should be structured. But Apple doesn’t seem to see it that way.