Barry Bates is a superannuated CG appraiser with more than 36 years in the valuation corner of the mortgage industry.   Poor guy.   He knows in a very real sense that the Latin root of the word mortgage is death pledge.  He started stringing a tape in 1972 for a San Francisco thrift, managed a bank branch, worked as project manager for a couple of subdivision and apartment builders, served consecutive indeterminate sentences as Chief Appraiser for Commerce Security Bank, Wells Fargo REIG, The Money Store and Ameriquest, then moved to the secondary market with Countrywide Securities and Morgan Stanley.   His wife is fed up with being dragged all over the country, and his 3 dogs growl at him in the hallway.  He now is a principal in InsideValuation Partners LLC, which provides commercial/residential BPOs (with built-in review) on a national basis via the Web. 

BUZZ:  So, Barry, I’ve watched the Subprime PowerPoint several times. And I’ve also read all I can find on the definition of SIVs and CDOs. And frankly I still don’t understand. Please explain it to me in very simple terms.

BARRY:  Big bank buy many skins, put them together with duct tape called “financial instruments”.   Tape melt because bank leave loans in Father Sun, all skins stick together.   Hard to peel little skin from big skin, yellow skin from brown skin.   Some untanned skins in sticky pile start stinking, hard to find which ones.   It take time to find them, can’t peel them out, easy to find separated stinky skins at trading post, those long gone.   Pretty soon whole pile start attracting big birds that eat dead bodies.   Then government agent have to come in, buy pile for 20 beads on string of 100, then give to jackals for dinner, or to capitalists for resale abroad.   Of course, you could also read my big shot article, “SIVa, The Destroyer of Worlds.”  Me attach in PDF.  Old news (10/07) but still good juju, and interesting in light of what’s happened since.   Since nobody published it, SOMEbody ought to read it...

BUZZ: How many trillion will it take before somebody gets it?  I want to resurrect Susan Powter from those old infomercials “ Stop the Insanity”!

BARRY:  Please don’t mention to me bony, baldy Susan Powter. I’ve not had lunch yet (diets DO work, we just don’t stick to them).   Regarding the complex interaction and new interdependency of national economies, there’s a certain logic in whistling in the dark.   Maybe if we ignore the problem, it will go away; this is why Fox News crows about how well stocks like Google and Yahoo are doing, while not bothering to mention that bank stocks are sliding to the $1.00 level.   Since economic stability is based largely on human faith in currency, this could actually work.   While we’re all hoping that recent inventory declines are signaling the bottom of the housing market (fat chance), there are much deeper structural problems in the global economy, with oil—and war over oil—being one of them.  The other is the result of the Big Bang of history’s worst asset bubble.   It appears now that mega-corporations are realizing that they will have to absorb these writedown shocks on their balance sheets because the only alternative is a worldwide depression that would make the 30’s look like the 50’s.   My brother says the 21st Century is likely to end up looking like the 12th.

BUZZ: What role do you think appraisers played in the current housing crisis?

BARRY:  We’re all guilty of hanging our hats on appreciation; we all know that the game of musical chairs stops when the music does, but we also know that only a minority of fools are left standing.   Maybe we should eliminate the valuation principle known as the Net Present Worth of Anticipated Future Benefits, a fancy way of “betting on the come”. We appraisers are part of a long assembly line that facilitated abuse, but the real cause is that lending used to be a circle, and the circle was broken back in the 60’s.    If you were a loan officer at Household in the late 50’s, and you made a loan that went bad, you had to go knock on the borrower’s door to collect; the next time you took a loan app, you were a much wiser boy or girl.   When banks held loans in portfolio, they had a vested interest in making sure the underwriting was sound; as soon as they were able to sell them off to Fannie, Freddie and Wall Street, all hell broke loose.  

BUZZ: What message would you send to the appraisal community?

BARRY:  Wake up.   Do shorter, technology-driven reports; quit trying to cling to your precious $325 price point, it hasn’t improved in 15 years. Have more fun by doing 15 reports in two days of driving (and Starbucks laptop sessions) than by sweating through two 15-page reports that no one reads and  in which no consumer perceives any value received?  The era of three comps is coming to an end; why should I adjust 3 comps when I can pull 40 listings and 40 sales?   Who needs a valuation expert to inspect the property when a day-old infrared satellite photo can tell you exactly how many days of remaining life are in the roof?   Send the Terminix guy in to look at the inside.   Ninety percent of appraisal work is done for the mortgage industry, yet few appraisers understand that no lender cares what the value is; they care what the LOAN to value is, simply because the prospect of negative equity is one of the best predictors of default.  

BUZZ: What should lenders be doing differently going forward?

BARRY: Close the circle, make loan officers and brokers suffer the consequences of originating bad loans by making them absorb loss severity.   The Code of Conduct is a good idea, but leaves the subprime— er, excuse me, nonprime—sector alone once again to cut a bloody swath through the next generation.   Do not let big corporations create financial mechanisms offshore or off their balance sheets; do not permit investment banks to countenance deviation from sound lending principles. I mean, “stated income”—whose brilliant idea was THAT?  It turned into a federal liar’s permit...

BUZZ: Barry, I enjoy your Daily I.V. immensely. It’s almost as good as the Buzz. How might an appraiser subscribe?

BARRY:  Thanks, Joan, I enjoy writing it.   It’ll never be as good as the Buzz, because the editor is not as good-looking, but it’s free, and an email to bbates@insidevaluation.com is enough to subscribe.  I try hard to write it on a daily basis, but it’s really more like a quasi-erratic, occasionally ephemeral daily newsletter.   If I can survive long enough to retire, I’ll make it a steady part-time job. Or I’ll achieve another lifelong dream: Wal-Mart greeter with a pair of mirror shades for checkin’ out the ladies, oh, yeah.