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Banks record ₦1.5tr non-performing loans in 2018

Analyst links incidence to macroeconomic headwindsFollowing the adoption of IFRS 9, about 10.9 per cent of the loan book in the banking industry, representing ₦1.5trillion are in Stage 3 (impaired), as at December 2018, according to the recently released banking industry report by Agusto & Co.

The figure represents 15 per cent increase in non-performing loans (NPLs), when compared to the N1.3 trillion posted in the industry in 2017.Already, Federal Government’s bad debts company, Asset Management Corporation of Nigeria (AMCON), has already warned that it will no longer buy such debts, even as it is still struggling to recover outstanding N5trillion unpaid banks loans before its wind-down by 2023.

Debts in Stage 3 are loans with objective evidence of impairment at the reporting date. In the previous period, Stage 3 loans can be assumed to be ‘individually impaired or non-performing loans (NPLs). They also comprise credit-impaired loans, including all loans that are 90 days’ overdue.

Also, debts in this category are where the financial asset is credit impaired. This is effectively the point at which there has been an incurred loss event under the IAS 39 model.
Specifically, in 2017 non-performing loans was ₦1.3trillion, this accounted for 9.5 per cent of the loan book. The 15 per cent increase in Stage 3 loans in 2018 compared to 2017 is evidence of the deterioration of the loan assets recognised by Nigerian banks.

According to the report, the increase in NPL is largely due to the fact that most companies are yet to recover from the economic recession particularly the impact of the foreign exchange rate crises. This is also a reflection of the weak domestic operating conditions, and sluggish economic growth witnessed in the past few years.

The IFRS9 talks about how loan provisions are accounted for in an annual report whether performing or non-performing.Furthermore, the report said the industry’s Stage 2 loans and advances as at December 2018 were ₦2.9 trillion, representing 22 per cent of gross loans.

“In prior periods, Stage 2 loans can be assumed to be ‘past due but not impaired’, and it amounted to ₦793 billion in 2017.  Although Stage 2 loans do not have objective evidence of credit loss, these loans should be monitored closely to ensure that it does not deteriorate to Stage 3.

“If after 90 days, there is no longer evidence of a significant increase in credit risk, such loans could be transferred back to Stage 1. Comforting, however, the banking Industry has provided for 87.35 per cent of the industry’s non-performing loans.”

The report also revealed that the banking industry’s total loans declined by 2.8 per cent, largely due to the repayment by some customers and the cautious approach by banks towards extending further loans due to weak macro-economic climate.

“In the near term, Agusto & Co expects a reduction in NPL ratio, but this will not be significant. We also expect that there will be no significant growth in the Industry’s loan book, as banks will continue to be risk-averse in the face of harsh operating terrain.”

Speaking on the implication of the rising banks’ NPLs, the Managing Director, GTI Asset Management and Trust Limited, Amos Aladere, said this will impact negatively on lenders’ capacity to declare huge profits.  Given the rate of rise, he said the Central Bank of Nigeria (CBN), may issue a directive soon compelling banks to clean up their loan books, which would put pressure on them to make more provisioning that will ultimately impact on their profitability, as they gradually write off the loans.

Source: Guardian Ng

Nigeria counts losses as delay in ministerial appointments hits investors

There are signs of growing discomfort among investors over the delay in Nigerian President Muhammadu Buhari’s appointment of cabinet ministers and it is taking a toll on businesses and the economy.

More than a month after Buhari was sworn in for a second four-year term in the month of May, local and foreign investors are in the dark over who heads which ministry, particularly key positions like finance as well as industry, trade and investment.

Being a developing country with a history of policy inconsistencies and a public sector that is larger than life, foreign investors typically interface with high-level government officials – a category ministers fall under – to set an investment in motion. This way, they hope to get some assurance over the safety of their investment dollars.

The uncertainty over the identity of Nigeria’s next batch of ministers has led some foreign direct investors to hold off on potential big-ticket deals while portfolio investors are beginning to redirect cash to other countries that are ready for business, two chief executive officers of leading financial houses told BusinessDay.

According to them, some foreign government agencies and Development Finance Institutions (DFIs) are also staying away or not engaging because there are no ministers.

“There are people who are currently negotiating to invest in the country but they are waiting to see those that would be appointed to engage with them,” one of the CEOs whose investment firm manages over a thousand foreign clients said.

“Whenever we engage with investors, they are curious about knowing who the new minister of finance and who the new minister of trade and investment would be,” another CEO confirmed

A six-month delay in the appointment of ministers during Buhari’s first term formed part of the recipe for an economic recession in 2016 after it contributed to a steep decline in foreign investment.

Total foreign investment into the country nearly halved to $5.1 billion in 2016 from $9.6 billion in 2015, and was down 75 percent from $20.8 billion in 2014, according to NBS data.

Many Nigerians and international observers had expected President Buhari to hit the ground running in his second term.

“There is nothing to suggest that we have learnt the lessons of 2015,” an independent economist who consults for one of Nigeria’s state governments said on condition of anonymity.

“It adds like an extra 50 basis points on the country’s risk premium,” the economist said.

Yields on Nigeria’s benchmark 10-year Federal Government bond have ticked upwards, albeit by a mere 4 basis points to 14.39 percent as at July 2, from 14.35 percent at the end of May.

Traders say yields have reacted more to the movement in oil prices and the stability in the naira than the delay in ministerial appointments.

The performance of Nigeria’s publicly-quoted companies has been woeful. Stocks are down an average of 6.5 percent since the beginning of 2019. Blue chips from Dangote Cement to Guaranty Trust Bank have been hit by negative investor sentiment no thanks to the perceived lack of urgency in the implementation of reforms needed to boost economic growth.

“These delays are becoming the norm in Nigeria and it shows how unserious we are as a nation,” a former public official told BusinessDay.

The delay slows down the pace of critical reforms since action typically comes from the ministerial pool, not civil servants who want things to remain as they are to extract rent.

“That gives the impression that we are not keen on implementing the reforms that will open up the economy,” the former government official added.

At 2 percent, the economy is growing at a rate below that of the population (2.6 percent). It means per-capita GDP is on the decline which the IMF expects will last eight years if Nigeria continues to hold off on critical reforms in power and the oil sector.

Some sources, however, told BusinessDay that President Buhari is set to release a list of nominees to the Senate.

They blamed the delay on the inability of the Senate to constitute its principal officers, especially the election of the Senate Leader whose responsibility it is to announce such requests from the President.

BusinessDay findings show the President had on Monday invited the two senior special assistants in charge National Assembly Matters, Ita Enang (Senate) and Umar Yakubu (House of Representatives) to a closed door meeting.

The meeting, BusinessDay gathered, was summoned ahead of Tuesday’s resumption of the National Assembly for full legislative business.

Although the list is ready, our correspondent at the Presidential Villa was told, the President has kept the names of nominees as a top secret.

For President Buhari, forming a cabinet might not hold much weight for the economy going by a statement he made in an interview with a French TV station France 24 in 2015, where he argued that “ministers are noise makers”.

However, if examples from other countries are anything to copy from, it took South Africa’s President Cyril Ramaphosa only 96 hours from the day he was sworn in to appoint a cabinet.

Immediately the 66-year old president announced the naming of the ministerial cabinet, it sent a signal of his readiness to hit the ground running. The South African rand reacted positively, gaining some 0.5 percent against the dollar, after an initial loss of 1 percent prior to the announcement.

By LOLADE AKINMURELE & MICHAEL ANI, Lagos, & TONY AILEMEN, 

International Breweries Woes Deepen, Declares N4bn Loss

The excise duty and situation in the country, which has affected the brewery sector in Nigeria, further had negative effect on International Breweries, plunging the brewery firm into another loss in the first quarter of 2019.

The company, which released its results to the Nigerian Stock Exchange (NSE) today, recorded a 78.04 percent year-on-year loss in Q1 2019 despite the 35.17 percent year-on-year growth in the revenue generated in the period under review.

A brief analysis of the results by Business Post showed that in Q1 2019, International Breweries closed with a loss after tax of N3.99 billion, higher than the loss after tax of N2.24 billion in Q1 2018. Also, the loss before tax in the period under review was N5.09 billion against loss before tax of N2.56 billion.

During the period under consideration, the company raked N35.10 billion as revenue, higher than N25.97 billion generated in the same period of 2018.

The company further said cost of sales gulped N22.61 billion in Q1 2019, more than N15.86 billion in Q1 2018, while administrative expenses went up to N4.70 billion from N4.10 billion, with finance cost taking the sum of N5.09 billion in Q1 2019 in contrast to N3.60 billion in Q1 2018.

In addition, marketing and promotion expenses took N7.66 billion from the purse of the company in the period under review compared with N4.68 billion spent for the same purpose in Q1 2018.

In the unaudited interim financial statements, International Breweries said its gross profit in the first three months of this year was N12.49 billion against N10.11 billion in the first three months of last year.

Under the other income, the company recorded N2.93 million compared with N15.41 million a year earlier, while the finance income was about N511,000, higher than about N308,000 in Q1 2018.

Business Post reports that last year, International Breweries commissioned a new factory in Sagamu, Ogun State. The plant was built to ensure the company boost its earnings and return it to profitability.

International Breweries, a subsidiary of Anheuser-Busch InBev (ABInBev), a multinational drink and brewing holdings company based in Leuven, Belgium, faces stiff competition in Nigeria with other leading brewery companies like Nigerian Breweries, Guinness Nigeria and others.

Source: businesspostng

Capital importation into Nigeria hits $8.4 billion, rose by 216% in Q1 2019

The total value of capital importation into Nigeria in the first quarter of 2019 was estimated at a whopping $8.48 billion. This is revealed in the latest capital importation data released by the National Bureau of Statistics (NBS). 

According to the NBS data, the $8.48 billion capital importation in the first quarter represents an increase of 216.03% compared to Q4 2018 (quarter-on-quarter). Also, capital importation year-on-year into Nigeria rose by 34.61% when compared to the first quarter of 2018.

Capital Importation by type: Basically, Nigeria’s capital importation is categorized into three investment types, and these include Foreign direct investment, Portfolio investment and other investment.

The Portfolio Investment in Nigeria is made up of three items which include Equity, Bonds and Money Market instruments. During the period under review, the largest amount of capital importation by type was received through Portfolio investment, which accounted for 84.21% ($7,145.98 ) of total capital importation.

  • Money Market instruments account for 82% total portfolio investments, amounting to $5.92 billion, representing a 376.9% rise within the quarter.
  • Equity ranks second with $656.19 million or 9%, recording a 110% growth within the quarter.
  • Bonds received the lowest portfolio investment with $565.6 million or 7% of total capital. However, in terms of growth, portfolio investment into bonds rose by 173% within the quarter.

Othe Investment is broken-down into four categories which include Trade credits, Loans, Currency deposits and Other claims. However, the bureau only provided data for loans and currency deposits. In the first quarter of 2019, other investments recorded the second biggest capital importation, accounting for 12.91%  or $1.09 billion of total capital importation.

  • Loans investment was estimated at $752.2 million, rose by 2.62% within the quarter.
  • Other claims within the quarter stood at $343.8 million, indicating a 2,025% growth when compared to

Foreign Direct Investment investments in Nigeria has just two components and this includes Equity and other capital. Specifically, FDI accounted for the least of total capital importation in the first quarter with $243.36 million or 2.86% of total capital imported in 2019.

  • Equity FDI inflow in the first quarter was estimated at $242.67 million, rose by 39.97%. Equity constitutes almost 100% of the entire FDI.
  • Other Capital stood at $700,000, less than 1% of the FDI inflow.

Capital Importation by Sector: Further analysis of the capital importation shows that five of the fifteen sectors recorded a decline in capital importation. Sectors with positive growth include Banking, Financing, Production / Manufacturing, Servicing, Agriculture, Electrical, I.T Services and Consultancy. On the other hand, five sectors recorded negative growth within the quarter, the sectors include Shares, Telecomms, Oil and Gas, Construction, Brewing, Drilling and Marketing.

  • Nigerian banking sector received the biggest share of capital importation in the first quarter with $2.85 billion or 33.6% of the total capital. Also, capital importation into the banking sector grew by 141.45% within the quarter.
  • Despite negative growth in capital importation of shares, the sector record the second biggest capital inflow, with $2.40 billion or 28.32% of total capital importation.
  • Three other sectors that made the top five sectors with the biggest share of capital importation include Financing ($2.13 billion) production and manufacturing ($418 million) and Servicing ($409 million).

Capital Importation by origin: The United Kingdom emerged as the top source of capital investment in Nigeria in Q1 2019 with $4.53.22 billion. This accounted for 53.40% of the total capital inflow in Q1 2019.

Also, by the destination of Investment, Lagos state emerged as the top destination of capital investment in Nigeria in Q1 2019 with $4,773.26 million. This accounted for 56.25% of the total capital inflow in Q1 2019.

By Bank, Stanbic IBTC Bank Plc emerged at the top of capital investment in Nigeria in Q1 2019 with $3,606.09 million. This accounted for 42.50% of the total capital inflow in Q1 2019.

Nigeria’s economy is gathering growth momentum: With over 216.03% increase in the value of capital importation into the economy, it suggests Nigeria’s economy is gathering the much need momentum for sustained growth in the second half of 2019. This is a good boost for the Central Bank’s aim to achieving double-digit growth by 2020.

Basically, capital importation refers to the movement of capital into Nigeria in the form of investments in assets, bonds, shares and so on. FDI is an investment in form of a controlling ownership in a business in one country by an entity based in another country while FPI is the entry of funds into a country where foreigners deposit money in a country’s bank or make purchases in the country’s stock and bond markets, sometimes for speculative purposes.

Analysts have stressed that capital inflows into Nigeria’s economy will improve after the general election. It is evident that portfolio investment accounts for the biggest share of capital importation, this could be largely attributed to the attractive yields in the fixed income market.

Source: Nairametrics

5 Obnoxious Sales Tactics Used in Real Estate… and What to do Instead

Not every real estate agent has their clients’ best interests in mind. There are some bad apples in the industry that come across as a vocal minority much of the time.

Luckily, consumers today have the internet: a wealth of information, knowledge, and resources. It is easier than ever to see through slimy and dishonest sales tactics.

Today, honest agents are rewarded for putting their clients first. Here are five slimy sales tactics you should avoid, and some recommended alternatives:

Key Takeaways
A perfect sales pitch in real estate often involves more listening than talking
Respect your clients’ boundaries; don’t push their budget or insult their tastes
Communicate honestly when answering questions and making commitments
Source: Realvolve
Excerpt
1) Pushing them to make an offer before they’re ready.

In a competitive real estate market, you have to move fast if you’re serious about a listing. This is where some agents might be tempted to push their clients to make an offer they aren’t ready to make.

Do this instead: Inform your clients that this listing won’t last long, but also stress the importance of only making an offer on a home they LOVE.

2) Talking more than listening.

We’ve all experienced the dreaded Sales Pitch—a sales rep yammering on and on about why we need THIS product NOW! In real estate, this translates to the agent telling the buyer what they want…instead of listening.

Don’t do all the talking.

Do this instead: Learn about your client’s wants and needs so you can connect them with the perfect home. It’s not about you, and what you want them to buy. It’s about helping them find their dream home.Here’s a great blog post that might help!

3) Disregarding their budget.

When my husband was apartment hunting (way back in the day, before we were married), he asked the leasing agent for the cheapest unit they had.

The leasing agent’s reply: “Oh, you don’t want the one-bedroom. The layout is weird. You walk through the door, and the living room is RIGHT THERE.” Um, okay.

It was annoying, and even though my husband did end up living there (he was a recent college grad with no money, so he didn’t have many options), he did stay in the one-bedroom, and he did tell everyone what a crappy experience it was.

Don’t try to stretch your buyer’s budget just so you can get more commission.

Do this instead: Focus on saving them money. They’ll love you for it, and they’ll reward you with repeat and referral business.

4) Insulting them.

If they have their heart set on a galley kitchen, don’t try to push a different property on them by laughing and saying, “Really? A galley kitchen? When you could have this gorgeous open plan?” Don’t act like they’re stupid for wanting something that doesn’t have as high a resale value or isn’t as “stylish.” Don’t insult prospects’ tastes, opinions, or budgets.

Do this instead: Ask them WHY they want the galley kitchen, and LISTEN to their reasons. Then, if you feel they truly might like an open plan, tell them about the benefits of that layout, but remain objective and informative. Let them make their own decision.

5) Dodging their questions.

Let’s say your buyer client asks, “Has this house ever had water damage?” The deceptive agent will answer, “Look at these beautiful baseboards! Absolutely no evidence of water damage!”

But that’s clearly dodging the question.

Say this instead:“That’s a good question. I can understand why you might be worried about that since this is in a flood zone. I’ll find out and let you know.”

Source: Realvolve

Banks to tighten criteria on corporate loans—CBN

TheCentral Bank of Nigeria, CBN, has said banks will tighten criteria for corporate loans in the third quarter of the year. The apex bank said the criteria include more collateral, stronger loan covenants and higher fees/commissions for corporate loans. CBN disclosed this in its Credit Condition Survey, CCS, report for the second quarter. Governor, Central Bank of Nigeria (CBN), Mr Godwin Emefiele The report also indicated that though there was a decline in the availability of corporate loans  in the second quarter of the year, banks intend to reverse this trend in the third quarter. Banks to jerk up lending rate for corporates in Q1’19(Opens in a new browser tab) The report stated:

“The overall availability of credit to the corporate sector decreased in the second quarter, but was expected to increase in third. “This was driven by favourable economic conditions, changing sector-specific risks, changing appetite for risk, market share objectives and changing liquidity positions.

“Lenders reported that the prevailing commercial property prices positively influenced credit availability of the commercial real estate sector in the current quarter.

“Lenders expect the prevailing commercial property prices to positively influence secured lending to public non-financial corpora-tions in the current quarter.” “Availability of credit increased for all business sizes in Q2 2019.

Lenders expect the same trend in the next quarter. Spreads between bank rates and MPR on approved new loan applications narrowed for all business, except for small business, in Q2 2019, but were expected to widen for all business sizes in Q3 2019. “The proportion of loan applications approved for all business sizes increased in the current quarter, and are expected to further increase in Q3 2019.

“Lenders required stronger loan covenants from all firm sized businesses in the current quarter. Similarly, they reported that they would require stronger loan covenants for all firm sized businesses except for small business, which they plan to leave unchanged, in the next quarter “For the current quarter, fees/commissions on approved new loan applications fell for all firm sized businesses except for large PNFCs, while for Q3 2019 lenders expect fees/commissions on approved new loan applications to rise for all firm sized businesses except for large PNFCs.

“More collateral requirements were demanded from all firm sizes on approved new loan application in Q2 2019, except for large PNFCs. However, lenders will demand for more collateral from all firm sizes in the next quarter.”

Source: Vanguard

Nigeria’s ‘Dead capital’ Rises to $900 Billion

Latest report by the PricewaterhouseCoopers (PwC), has revealed that Nigeria needs to unlock as much as $900billion worth of dead capital to increase economic activities and stimulate growth.

In a new report titled, ‘Bringing dead capital to life – What Nigeria should do’, estimated the amount of dead capital in residential agricultural and real estate sectors in Nigeria, which it said: “holds at least $300billion or as much as $900billion worth of dead capital in residential real estate and agricultural land alone.”

The report said the high-value real estate market segment held between $230billion and $750billion in value, while the middle market carried between $60billion and $170billion.

‘Dead capital’ was coined by a Peruvian economist, Hernando de Soto, to define assets that cannot be converted to economic capital.

With Nigeria’s population projected at 200 million and 40 million families with five members each, the report said, “Approximately 95 per cent of household dwellings in Nigeria have no title or a contestable title.”

PwC said the International Monetary Fund (IMF’s) most recent report on Nigeria, concluded that the country was set to experience an incremental decline in income per capital over the next eight years, through 2022.

It said, “This decline is a result of slow GDP growth exceeded by a population growth rate that is not expected to slow in the near future. The population is expected to reach 263 million by 2030. In contrast, GDP is growing at a slower and less consistent rate, averaging 1.4 per cent since 2016.

“In order to circumvent this projected crisis, Nigeria requires more investment in critical areas that directly impact economic growth. Heavy investment in infrastructure, coupled with structural reforms, will loosen domestic and foreign capital, allowing more businesses to thrive. In the long run, investing in human capital will yield economic prosperity by overriding high unemployment in a large population.”

The PwC report also noted that lack of access to finance is a major contributor to persistent poverty.

“Presently, a large proportion of Nigeria’s population operate in the informal sector by living in informal dwellings and/or working in the informal sector. For many, the costs accrued in the formal sector outweigh the benefits. However, this creates a large stock of dormant assets. Capital is scarce in societies with a large stock of dormant assets.

“Land tenure system in Nigeria is still largely in the communal and informal sectors. Sporadic efforts by the government on the formalisation of property rights through the certificate of occupancy in cities like Lagos have yet to meet the intended goal.”

It added that land ownership had been quite a stressful process as a result of the complex land tenure system, as the Land Use Act had failed to establish a uniform land tenure system that would govern ownership in the country.

According to the report, about 97 per cent of land in Lagos is unregistered, and makes it difficult for banks to validate claims to land or for land occupants to use their land to create wealth.

Source: Guardianng

Selling a Property With Mortgage

Investing in real estate is something many people are keen about and as a result of their commitment, some investors go the extra length to secure funding to make their dream of owning their own property a reality. Sourcing for and securing funding for real estate could be a serious challenge depending on the terms and conditions of the loan.
In some countries, mortgage is easy and comes with reasonable terms and conditions. In Nigeria securing a mortgage is a herculean task for many.
For those who manage to cross that hurdle, the challenge that they still must deal with going forward is enormous.

Real estate investment requires an incubation period for it to gain value. Value in real estate takes time. While shares can gain value overnight, real estate investment usually takes time.

While a person can borrow money at a high interest and effectively gamble it speculating in shares and if it works out he or she could make enormous amount of money, the same feat will be rare in real estate. This is one reason a high interest rate regime is a disincentive for real estate investment.

In Nigeria, if you are fortunate to qualify for a mortgage you must be prepared to pay a high interest rate. The banks are not real estate investment- friendly.

Although the books may state that your interest rate is a certain percentage, if you look further and ask questions you should not be surprised that there are several add-ons that will push your interest rate and cost closer to or over twenty per cent.

This cost also comes with quarterly charges, registration and other charges that will significantly increase your cost.

This scenario makes repayment burdensome and costly for most investors who have a mortgage on their property.

In a slow economy or a recession, the above scenario could mean serious financial pressure for an investor. If there happens to be a negative change in circumstances, the investor could find it difficult to meet up with their repayment which could lead to a default in payment.

If there is a default and it is not rectified, the bank has a right to foreclose on the property and carry out a short sale in order to recover its money.

The bank is not interested in maximising profit for the investor. Their sole aim is to recover the principal loan and possibly interest. Many times, they sell under the value and for an amount that does not cover the loan obligation of the investor.

In cases like this, the investor not only lose their initial deposits, repayments made so far and the property they also end up having to pay the bank some additional costs.

Many investors who find themselves in this situation often wonder whether or not they have the right to sell the property.

An investor who has a mortgage should realise that by virtue of the mortgage agreement, he or she is no longer the owner of the property. The bank’s interest comes first. Usually the bank takes custody of all the title papers and secures the right to sell the property with or without the involvement of the owner once there is a default that leads to foreclosure.

You should also  realise that it is unethical and illegal to sell the property without disclosing to the buyer that  there is a mortgage on the property. Remember, you could be charged with fraud if you do not  disclose all the legal interests on a property or sell a property that you do not have the right to sell.

However,this does not mean that the property cannot be sold. It simply means that you must take care of the interest of the lender.

If the property has appreciated in value, it is possible to sell the property,settle the loan and still make a profit.

What some investors do is to make full disclosure to the buyer and if the buyer is convinced, they ask him or her to pay off the mortgage and receive a letter of release from the bank.The balance can then be paid to the seller.

It is also possible to have the transaction managed in such a way that the bank can release the title documents to the buyer.An investor who desires to buy a property that has a mortgage on it should insist on working with the lender and getting full details about the sum total of the obligation on the property.

It is safer to pay directly to the bank and ensure that the property documents are released to you or your lawyers.

Source: Punchng

Proposed Regulations Allow Majority of Homes to be Sold Without Human Appraisal

The battle between man and bot has a new front: your mortgage.

Federal regulators have proposed loosening real-estate appraisal requirements to enable a majority of U.S. homes to be bought and sold without being evaluated by a licensed human appraiser. That potentially opens the door for cheaper, faster, but largely untested property valuations based on computer algorithms.

The proposal was made earlier this month by the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the Federal Reserve. It would increase to $400,000, from $250,000, the value of homes that can be bought and sold without a tape-measure-toting appraiser visiting a property.

Key Takeaways
Federal regulators have proposed loosening real-estate appraisal requirements to enable a majority of U.S. homes to be bought and sold without being evaluated by a licensed human appraiser
Some worry, though, that dropping appraisal requirements would introduce new risks into the $10.7 trillion market for home loans.
“The appraisal profession is suffering a death by a thousand cuts,” said Joan Trice, chief executive of Allterra Group
More than two-thirds of U.S. homes sell for $400,000 or less, according to U.S. Census data and the National Association of Realtors. If the regulators’ proposal had been in force last year, about 214,000 additional home sales, or some $68 billion worth, could have been made without an appraisal, regulators said in their 69-page proposal.

Some worry, though, that dropping appraisal requirements would introduce new risks into the $10.7 trillion market for home loans.

“We still would prefer a human being doing the appraisal,” said Lima Ekram, a mortgage-backed securities analyst at Moody’s Investors Service.

One issue: Automated valuations done by computers are largely unregulated. The 2010 Dodd-Frank financial overhaul required regulators to propose quality control standards for so-called automated valuation models, but they have yet to do so.

“There are a lot of problems with appraisals, but there are voluminous standards,” said Ritesh Bansal, chief executive of Appraisal Inc., a New York-based provider of automated valuations. “On the AVM side, it’s a wild, wild West. And that just invites abuse of all kind.”

Regulators say the immediate effect of dropping appraisal requirements would be limited because a vast majority of home loans in that range are bought these days by mortgage giants Fannie Mae and Freddie Mac , or guaranteed by other federal agencies. Those typically require appraisals regardless of home value.

Appraisals help “ensure that the estimated value of the property supports the purchase price and the mortgage amount,” regulators wrote in their proposal. “However, the agencies also are aware that the cost and time of obtaining an appraisal can, in some cases, result in delays and higher expenses.”

Scrapping the appraisal requirement would open a swath of new turf for upstart property valuation companies, like HouseCanary Inc., which use artificial intelligence, algorithms and sometimes even drones to value homes. Jeremy Sicklick, the company’s chief executive, said that replacing appraisers with computers will speed up home sales by weeks, reduce costs for buyers and eliminate human bias and error from the process of valuing mortgage collateral.

“The technology has reached the level to where this change creates a win-win for the consumer and lender,” Mr. Sicklick said.

Although appraisals are based on criteria such as sales of recent comparable homes, they are sometimes more art than science. And appraisers came under fire following the housing crisis, shouldering much blame for inflating home prices at lenders’ behest.

Their latest turf battle comes months after a defeat at the hands of lawmakers rolling back some financial-crisis-era banking rules. That change eliminated a chunk of appraisers’ business by exempting many rural properties from appraisals.

“The appraisal profession is suffering a death by a thousand cuts,” said Joan Trice, chief executive of Allterra Group, a Maryland firm that tracks the industry.

Source: The Wall Street Journal

National Association of Realtors: ” Real Estate will continue to see growth, amid a strong economy”

National Association of Realtor’s chief economist Lawrence Yun’s remarks came during a talk at the Realtors Conference & Expo in Boston last week, where he added that in his opinion another recession seems unlikely in the short term due to the country’s sound economic fundamentals.

Yun also forecast around six million new and existing home sales by the end of this year, and slightly more in the next couple of years. The economist also believes home prices will continue to grow at a modest rate, around 4.7 percent in 2018, 3.1 percent in 2019 and 2.7 percent in 2020.

Key Takeaways

  • Yun forecast around six million new and existing home sales by the end of this year
  • New homes are being added to the market at a rate of around 1.2 million per year, but that’s below the historical average
  • Yun said there’s little chance of a recession happening as inflation remains under control, and so any interest rate increases by the Federal Reserve will likely be moderate.

However, Yun said these positive trends would only occur if homebuilders are able to keep up with demand by adding new inventory to the market. New homes are being added to the market at a rate of around 1.2 million per year, but that’s below the historical average and well off the 1.9 million homes that were built in 2004.

There are no signs of a housing bubble at least, Yun added. He said that even though home prices have been outpacing income for several years now, the overall economy in the U.S. is still fundamentally sound, that mortgage quality is high, and that due to the persisting inventory shortages in many markets, there is no danger of the overbuilding that preceded the Great Recession.

Some risks do exist though. Yun said the threat of a full-scale trade war between the U.S. would hamper economic growth, and lead to higher interest rates for long-term debt instruments. If that happened, it’s likely a recession would occur, Yun said.

One piece of good news is that Realtors themselves can help do their bit by reminding their clients that the economy is still healthy and that all signs point towards positive home price increases. Yun said there’s little chance of a recession happening as inflation remains under control, and so any interest rate increases by the Federal Reserve will likely be moderate.

In other words, it’s a good time to buy a home, Yun said.

“All indications are prices will keep moving higher, and buyers who wait risk missing out on wealth gains,” he said.

Source: Realty Biz News

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