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May 11, 1990
The combination of a surprise .3% tumble in Producer Prices, Retail Sales down .6%, and successful Treasury auctions have the bond market in a strong recovery this morning.
Though the economy may be weak enough to drive mortgage rates back into the high nines, a period of relative stability around 10.25% is more likely in the short run. Fears of 11% mortgages are as gone as winter. William Seidman, outgoing chief of the FDIC, announced that the RTC has at last decided to mark down the prices of its real estate to as little as 80% of appraised value.
While not yet a fire sale, let's just say the trucks, hoses, and hydrants should be on standby. Keep an eye out for Dalmations in your neighborhood.
The RTC has been under pressure to sell no cheaper than appraised value not just because high prices are good business, but to protect shaky real estate markets from a wildfire of selling.
In justifiable fear of Congress, the RTC and predecessor regulators have responded to any property decision with "Let's get a new appraisal." Thousands of RTC properties have been appraised a dozen times or more: when loans were first made; pending, during, and after foreclosure; then during and after the failure of the given S&L, and a few more times after RTC seized the asset.
Though appraisals are regulators' traditional value determination, in extreme liquidations appraisal science tends to break down. If you've got $100,000,000,000 of real estate to sell in a hurry, an appraisal is meaningless if the analysis doesn't address the likely length of time necessary to sell, or the impact of cash terms demanded by the seller.
Many appraisers, frustrated with the regulatory overreliance on appraisals, now generate a "fair market value," a "liquidation value," and a "cash value" for each property.
There isn't much that's clear about the RTC but it's a lead pipe cinch that they are not selling much of anything at appraised value. The Fairy Godmother is not coming to visit, and carrying costs mount every day.
No one yet knows what the final bailout cost will be because no one knows what discount from "appraised value" will be necessary to move the wreckage.
The guess here holds that Seidman's 20% Memorial Day Sale won't get buyers off the golf course. RTC will be lucky to get half price.
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