A Look at Disposition Value & Liquidation Value

A common instruction in an engagement letter in these times might include wording such as:

"Please provide both the current market value and the disposition value based on a 9 month market period for the fee simple interest."

As compliance reviewers, my colleague, Richard Rexroad, SRA, and I have noted on numerous occasions what appears to be total confusion among the ranks of appraisers as to what exactly is meant by "disposition value". Certainly, the definition of disposition value is easily found for, and cited in, their reports, but the summary statements that include their opinions of disposition value may be of marginal use -- or worse, no use at all -- to the client.

To try to ascertain the resources available to appraisers for reference on the subject, a search was made of all media in the Appraisal Institute's Lum Library using the keywords "disposition value". The search returned one resource, Appraisal Institute Special Task Force on Value Definitions, June 1992 by Schultz, Featherston, Gibbons, LeGrand, and Parson. That work proposed definitions of disposition value and liquidation value, both of which appear to have subsequently been defined following their proposal. No further modern references could be located in the Lum Library.

Perhaps the best starting point for the discussion would lie in examining the Assignment Type and Intended Use of the report. After the highjacking of the URAR form by Fannie and Freddie in 2005, and the hardcoding of the Intended Use ("The intended use of this appraisal report is for the lender/client to evaluate the property that is the subject of this appraisal for a mortgage finance transaction."), most residential appraisers gave no further thought to that matter. For the most part, the assignments were for either purchases or refinances; no other discussion of the intended use was needed.

With the increase in inventory of REO properties and the periodic need to analyze the value of the collateral with a view toward asset disposition, lenders holding residential properties in their portfolios have been ordering large numbers of appraisals for the purpose of collateral analysis rather than mortgage finance. The AI Reports forms (which would be a much better choice for the task) have been ignored by the lending community. Appraisals for collateral analysis have been ordered, almost without exception, on the FNMA 2005 series of forms, most likely because that is what the lenders are most familiar with.

Because the FNMA/FHLMC forms are intended to be used for mortgage finance rather than disposition of the asset, the change in Intended Use is in direct conflict with the hard-coded statement in the report, and very few residential appraisers (even among those holding various designations from professional associations) have seen fit to add language in the addenda to the report which will supercede the hard-coded verbiage.

[Note: The forms do state that "Modifications, additions, or deletions to the intended use, intended user, definition of market value, or assumptions and limiting conditions are not permitted.", and then two exceptions are cited. However, that restriction applies ONLY to the use of the form for a FNMA/FHLMC mortgage transaction. The GSEs cannot prohibit the use of the form for other purposes; the key to their USPAP-compliant use in such situations is to adequately provide overriding verbiage in an addendum regarding the intended use, intended user, definition of value (and the source of the definition), assumptions, conditions, limitations, and certifications. ]

This discussion does not purport to address all forms of deviation from the hardcoded verbiage in the FNMA/FHLMC forms, but appraisers using those forms for other than a mortgage finance transaction need to keep the above factors under consideration.

When the assignment stipulates that the purpose is in the nature of collateral analysis for disposition of the asset, the client will frequently request either a disposition or liquidation value opinion along with the current market value opinion. In doing so, the client is first looking for the present value of the asset as though it had been offered on the open market at competitive terms with all other properties comparable to it. The typical exposure time for the subject must be analyzed and reported for the current market value. In that analysis, the appraiser will also be analyzing the market supply and pricing trends of competitive homes; all these factors are supposed to be summarized on page 1 of the FNMA report form.

Development of current market value is a straightforward process for most residential appraisers. Their major concern with the neighborhood market trend information is to develop adequate adjustments for the comparable sales, based on their distance in time from the effective date of the report. When the assignment adds the requirement to develop an opinion of disposition or liquidation value, however, there will be an application of the trends to the stated marketing period along with additional consideration of the motivation of the seller.

An examination of the definitions of these values is in order:

Market Value	Disposition Value	Liquidation Value
12 CRF 323.2(g)	Dict. of RE Appraisal (4th Ed)	Dict. of RE Appraisal (4th Ed)
Consummation of a sale as of a specified date.	Consummation of a sale will occur within a limited future marketing period specified by the client.	Consummation of a sale will occur within a severely limited future marketing period specified by the client.
Competitive and open market under all conditions requisite to a fair sale.	The actual market conditions currently prevailing are those to which the appraised property interest is subject.	The actual market conditions currently prevailing are those to which the appraised property interest is subject.
The buyer and seller each acting prudently and knowledgeably.	The buyer and seller each acting prudently and knowledgeably.	The buyer acting prudently and knowledgeably.
Assuming the price is not affected by undue stimulus, buyer and seller are typically motivated.	The seller is under compulsion to sell, the buyer is typically motivated.	The seller is under extreme compulsion to sell, the buyer is typically motivated.
Both parties are well informed or well advised, and acting in what they consider their own best interests.	Both parties are acting in what they consider their best interests.	The buyer is acting in what he or she considers his or her best interest.
A reasonable time is allowed for exposure in the open market.	An adequate marketing effort will be made in the limited time allowed for the completion of a sale.	A limited marketing effort and time will be allowed for the completion of a sale.
Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto.	Payment will be made in cash in U.S. dollars or in terms of financial arrangements comparable thereto.	Payment will be made in cash in U.S. dollars or in terms of financial arrangements comparable thereto.
The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.	The price represents the normal consideration for the property sold, unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.	The price represents the normal consideration for the property sold, unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

Standards Rule 1-2 requires that the appraiser identify the Intended Use of the appraisal. It seems to be a difficult thing for appraisers to ask clients, "What do you intend to do with my opinion?", yet that is critical to understanding how the problem must be approached. The appraiser cannot render a useful opinion of value without understanding the motivation of the participants in the market. We seem to clearly understand that a market value opinion will be used to make a decision regarding underwriting a mortgage loan. Sadly, there seems to be a failure to understand why a client would request a disposition or liquidation value; the client assumes we know, and we assume they understand what we are about to deliver.

Let us step into the shoes of the lender with an asset which needs to be sold. The lender first wishes to know what his collateral is worth today -- the current market value. That value assumes that the subject has been on the market for its reasonable exposure period. In studying that exposure period, the appraiser will note the change in the market from the beginning of the exposure period to the effective date of the appraisal; that market change information will be critical in making adjustments to the comparable sales.

Unfortunately for the client, he is holding the subject in his inventory today, without a sales contract. He realizes that in order to get a contract, he will have to market the property. He has certain parameters for market time. Let us assume that the market is slow and the reasonable exposure period for the subject might be 6 months. The client knows that it will take time to sell the subject; acting prudently (see the definition of disposition value) he is willing to extend the market time to a maximum of 9 months, and orders a disposition value based on a 9 month market period. What is he telling us he wants? Have we really learned the definition of the value type?

Perhaps the client tells us his intent is to know what the property will be worth 9 months from now by asking for a disposition value based on a 9 month market period. That is a prospective value opinion which the appraiser will need to develop by adjusting the current market value for any anticipated change in the market over the 9 month period, as well as his knowledge, perhaps gleaned from anecdotal evidence in talking with sales brokers, of typical discounts in the subject market when properties sell under compulsion. Similarly to forecasting in a relocation appraisal, the 9-month disposition value thus arrived at gives the client a far end of a range (current market value is the near end) within which he can hope to sell the property during that time period. If an offer comes in within that range, the client now has a tool he can use to judge the acceptability of the offer. As the 1992 Task Force noted, in a declining market, the disposition value opinion would probably be lower than current market value, but in a rising market, it possibly could be higher.

Development of a liquidation value opinion would follow the same general pattern, with a subtle difference -- the factor of extreme compulsion to sell, coupled with the facts that the marketing effort would be limited and the seller might not be acting prudently. In such a situation, the place to turn for the anecdotal market conditions would be the auctioneer who specializes in absolute auctions with no reserve. Such an opinion would need to be formed with the mindset that the specified market period for the subject would anticipate an absolute auction at its termination, with a view toward informing the client that any offer he received within that time period which fell into the range would likely be one to which serious consideration should be given.

Nevertheless, regardless the trend of pricing in the marketplace, the anecdotal evidence will be crucial to the development of either type of value. There simply is not enough reliable statistical information readily available to the average residential appraiser for this purpose. The subjective nature of anecdotal data should not be viewed as lacking validity; the decisions behind the motivation and actions of the typical seller in disposition or liquidation scenarios are similarly subjective and valid. The appraiser is not being misleading as long as full disclosure of the kind of data source is made.

What is not valid, and is indeed unethical, is to postulate an opinion of value without understanding the intended use of the appraisal, or acknowledging the conditions explicit in the definition of that value.

So Prove Me Wrong

On Tuesday, after the nefarious Beltway Bozos passed the largest debt increase in American history -- a 16.78% increase which the greedy spenders will utilize to its fullest extent -- the stock market reacted with its sharpest loss in months. I said then that worse was to come; that the Asian markets at midday were down about 2%, foreshadowing a continuing Wall Street decline.

Wednesday morning the slide from Tuesday afternoon continued until the afternoon, when the tide turned and the market began to rise. The Dow clawed its way back to +26 for the day, and I began to wonder what had happened. I think I know.

Wednesday afternoon the heaviest volume came from heavy buying of Standard & Poor's industrial fund. That fund deals mainly in the 500 top industrial stocks on the exchange (most people have at least heard of the S&P 500). When money is pumped into the S&P 500, the fund managers must deal with it; they buy industrial stocks. This creates a feedback mechanism, driving the market ever higher. This feedback is enhanced by computer trading, since the computers are not programmed for fear.

All you need is a catalyst, and it is my belief that the catalyst was the Fed's private member banks -- a sinking stock market was the opposite of what their political masters needed, so they began buying to shore up the market. Without doubt, the need for a "sucker rally" was also a powerful motivator. The industrials rose on the coattails of that buying.

This morning the outlook was a bit bleaker. The Asian markets did not follow Wall Street; they continued to drop. Standard & Poors was the top loser of the day in terms of volume. Apparently the rallyers from Wednesday also got cold feet, and the sell-off began again in earnest. Traders wanting to retain relative liquidity are moving to cash in anticipation of rising interest rates. This is putting a strain on the banks, which, while paying minimal interest, are still being hurt by having to hold funds which they dare not place in the market.

It is no wonder that instead of paying interest, banks are starting to charge large depositors a fee for holding their cash, as announced by BNY Mellon today. "The northern lights have seen strange sights...", but we are about to fall down the rabbit hole.

I have digressed. Today, the Dow dropped over 500 points, down 4.31% in a single day. At this writing (10:30 PM Thursday here, 10:30 AM Friday in Hong Kong), the Hang Seng is down over 4%. It could rebound, but the threat of a weekend, and worries over the U.S. unemployment figures pointing upward, make an Asian rebound very tentative.

So, to the geniuses in Washington, I say, the worst possible thing you could have done to our economy was to increase the President's credit card limit. Prove me wrong. I'm waiting.

WHAT? No UP?

There are some stunned people this evening who were jubilant that the House and Senate and President came together on a deal that would hopefully avert default. They were expecting that the stock market would rise and everyone would be cheerful about the wonderful new future we faced.

But -- the market tanked. It lost 265 points, over 2%, for the day. This may seem counterintuitive to government figures, public employees, and newscasters, but there is a very logical reason for what happened. Unless I have misread what appears to be an obvious reaction, I predict that the next few days may show that it will continue to happen. In fact, as I write this, the Asian markets (on which the sun has risen and which are already in tomorrowland)are down over 2% -- a harbinger of tomorrow's Wall Street adventure.

What the Washington Klutzes have done over the past several decades has been the steady erosion of the worth of the US dollar. In order to score political points by artificially generating an "economic recovery", the gummint, through the evil genies at the Federal Reserve, has held interest rates at levels that are artificially low. My question for some time has been, "If it costs nearly nothing to borrow a dollar, then what is that dollar really worth?"

The panic over possible default was engineered by the Administration, the Fed, and the lapdog press, with the overt participation of the folks who make their living through usury -- the bond traders. In the last hours of the panic, there were those who moaned that if the US gummints credit limit was not increased, the gummint would not be able to pay its creditors.

That fiction ignored the fact that the President, via the Secretary of the Treasury, has the responsibility of prioritizing spending. He has put a high priority lately on bombing Libya, but such a low priority on such things as Social Security and Medicare as to threaten that those latter checks might not go out if he didn't get his way.

The usurious bond traders were particularly worried. If the credit limit were capped at the current rate, there could be no new borrowing. Because they make their money on the commissions from bond sales, capping the credit limit might cap their incomes. They needed an influx of new borrowing.

There are unintended consequences to every evil under the sun. The US dollar, already weakened by the stupid Quantitative Easing policies of the Fed, is about to get even weaker. Currency inflation has one side effect that the markets understand, and that is, that when money is devalued through printing, interest rates must rise.

When interest rates are held artificially low, and stock dividend yields outpace bond interest, stock prices rise due to higher demand. That was the scenario during the rounds of Quantitative Easing, and the reason for the interest in the stock market over the past year. I expect that this scenario is ending. Cheap money is risky money. Risk-takers demand higher compensation for higher risk, and interest rates are about to rise.

Classically, when interest rates rise, and their rate of return begins to exceed the rate of return for stocks, the market flees stocks and buys bonds. When savvy investors realize that everyone else in the marketplace will sooner or later get the same idea, panic selling sets in. Nobody wants to be the last guy to trade before the market hits bottom.

I have been wrong before, and am willing to concede that I may not be entirely on the right track. I will, however, predict that the stock market is in for a decline to a sustainable level, at say around 8500, maybe a little lower. That will be caused by an expectation that cheaper money will be seen as higher risk with higher returns, with the gummint selling economic snake oil in an effort to charm bond buyers. This will lead to a drawdown in capital invested in plans to expand operations and payrolls, with an accompanying depression of the employment figures.

The American people elected new Representatives who promised to hold to Tea Party principles. Instead, those Representatives appear to have been eating the Washington Establishment's magic mushrooms.

The Rosy Crystal Ball

I've been too busy to publicly express my perspective on the economy lately but several items are making me curious as to how much manipulation the markets can handle before they correct themselves. The future, as presented by the US government and its monetary master, the Federal Reserve, appears quite well, and "market analysts" seem to be predicting a gradual strengthening which supposedly began when the "recession" ended over a year ago.

I have often spoken out against the use of statistical correlation with regard to attempting proof of a concept. Correlation, however, allows visualization of a composite picture of events. Such correlation helps to avoid tunnel vision, where fixation on a particular goal blinds the observer to other inputs. The analysis of correlated events will then provide a view with more depth perspective, and add "color" to a "black and white" picture.

The Fed has embarked on a course of Quantitative Easing (QE). QE is another term for printing money without increasing its backing. It "eases" the ability of member banks to lend money at low interest rates, and consequently, devalues the currency in which the money is issued.

I have a question for the wizards : if interest rates are at a historic low, and yet the lenders are having difficulty interesting businesses in borrowing more (because the businesses appear wary of overextending themselves), what are the banks going to do with the additional currency? Will they, themselves, take the opportunity to purchase additional assets at low interest rates?

A related area is the trend in consumer prices. If the Consumer Price Index has risen for the past 3 months at only fractions of a percent, this is perceived as a sign that inflation of the currency is under control. However, when the index rate for July and August combined was only 0.3 percent, yet the increase in August alone for fruits and vegetables (at the peak of harvest when prices should fall) was 0.4 percent, does this indicate that the composite index is understating the inflation of the core items which affect the largest numbers of consumers?

Another area being watched is the trend in retail sales. One prediction which I saw, credited to JP Morgan Chase, was that retail sales would be up 0.6 percent in September, but if autos are excluded, would be up only 0.4 percent. Question : if retail sales are measured by dollar expenditures, and they roughly parallel the rise in consumer prices, does this indicate that they are in reality flat or even slightly negative?

A third area being considered is the report on business inventories. The prediction (again attributed to JP Morgan Chase) is that the government will announce business inventories up 0.6 percent in August. This has been interpreted to mean that confidence is increasing. In view of the rise in consumer prices, coupled with the increase in retail sales roughly paralleling the price increases, could it also mean that perhaps people have stopped or slowed their buying?

I don't know. I confess to being an amateur in matters of complex macrofinances. Nevertheless, there is something smelly that the newspaper has been wrapped around. Looking at only one part of the data could make me hopeful. Correlating the data makes me skeptical.

Change in Operations

To my readers : I had to make a change in comment moderation due to a comment being placed which could have redirected readers to a website with questionable content. Sorry, but there are skunks in every woodpile, I suppose.

Calling All Lollipops?

My famous pessimism (OK, infamous, if you will) with regard to things economic when they just don't make sense got a jolt today with a FOX News article The Dow's up but trades are scarce, worrying bulls which pointed out that the DJIA has been rising while the trading volume has been declining. So I jumped into Yahoo! and pulled a graph:



Yup. The prices are up about 70% from last year, while the number of trades is down about 25%. You would think that if the market is recovering and prices are rising, there would be an increase in the number of players trying to expand their holdings.

Do you smell something burning?

A few commenters on the article want to pin the scam (yes, I do think there is an attempt being made to create a sucker rally) on the Administration, but I hesitate to go that far. Invoking Occam, I would tend to say that some of the major banks and fund managers are behind this phenomenon, hoping to draw broad enough support in the market to allow them to dump their more toxic assets on the unwary.

The NYSE volume today was 4,511,569,000, of which 995,307,699 shares (22%) were Citibank (662,164,923), Ambac Financial (195,367,197), and Bank of America (134,825,884) -- the top 3 issues traded. This makes me deeply suspicious when almost 1/4 of the trades involved stocks which have negative P/E ratios and which are anticipated to pay no dividends. Remember that someone has to sell in order for someone else to buy, and it is the selling that first makes the buying possible; who is dumping these stocks? (I won't bother myself with who might be stupid enough to be buying them.)

Open letter to Tim Crawford

The following email was sent to the listed recipients. It seems that failure to listen to constituents is not a unique feature of the Beltway Gang.

March 20, 2010
Open letter to Tim Crawford,
Summit County Council District 7

Dear Tim,

As a fellow campaigner in the past for addressing problems of representation in local government, I am appealing for your attention in the matter of the hostility that exists between the government of Summit County and the Barberton-Norton Mosquito Abatement District.

As you are probably aware, the Barberton-Norton Mosquito Abatement District (MAD), organized under Chapter 6115 of the Ohio Revised Code, came into existence after the Barberton City Health Department (BCHD) ended its long-standing mosquito control program. Nuisance control of mosquitoes is not a mandated function of health districts, and the regular spraying for mosquitoes was considered a luxury that could not be maintained under the BCHD's limited budget.

Both the Barberton and Norton City Councils were approached with the idea of forming a special sanitary district to reduce the population of biting arthropods under Chapter 6115. When neither council took action to form such a district, citizens from both communities circulated petitions and presented them to the Summit County Common Pleas Court as required by the statute. The Court agreed that formation of the special sanitary district would "be conducive to the public health, safety, comfort, convenience, or welfare" of the affected communities, and ordered that the Barberton-Norton Mosquito Abatement District be established.

There have been complaints by certain disaffected persons that the organization and operation of the MAD, with assessments levied by the Board of Directors (BOD), is an example of "taxation without representation". Such an accusation is no more true than one which would state that levies by the State Legislature are also "taxation without representation". This is so because the landowners in the district are represented by the BOD, who are appointed by their elected officials. Those Directors are required to be residents of the MAD, and can be contacted by any landowner; the meetings of the MAD Board of Directors are also open public meetings at which the public can address the Board directly with its concerns.

At the request of residents in surrounding areas, the MAD undertook efforts to expand. This expansion was opposed by the Summit County Health District (SCHD), which took the position that the activities of the MAD were an unnecessary duplication of the sporadic spraying done by the SCHD. In fact, the activities of the MAD are directed at nuisance control for the comfort and convenience of the residents; possible control of arthropod-vectored diseases are a secondary benefit from the standpoint of the MAD. The SCHD mosquito control program is oriented toward preventing outbreaks of arthropod-vectored diseases; the "comfort and convenience" of the residents is not emphasized by their program.

Despite the different goals of these two entities, SCHD has actively and aggressively worked to eliminate the MAD. In the summer of 2009, the MAD sent out a survey to the landowners of Norton, and nearly a thousand of the recipients replied (22%) with postcards to Norton City Council, the vast majority of which were supportive of the MAD. They did not want their mosquito abatement program to end.

As mentioned above, the landowners of Barberton and Norton are represented by the BOD. The political subdivisions in which the MAD is located (Barberton, BCHD, Norton, Summit County Executive, SCHD) are represented by the District Advisory Council (DAC). The Summit County Executive had a representative on the DAC from the beginning, and upon the City of Norton ending its agreement with the BCHD and contracting with the SCHD, the SCHD was entitled to choose a DAC member.

It is my concern that neither of the DAC members representing Summit County are residents of the MAD. This situation, coupled with the antagonism of the SCHD toward the MAD, is a recipe for mischief. The citizens of Barberton and Norton are looking to you, our representative on the Summit County Council, and a resident of Norton who benefits from the work of the MAD, to protect our right to enjoy our property comfortably.

Thanks for listening to an old Norton Neighbor.

--Jim Hrubik

cc: Dave Koontz, Mike Zita, Scott Pelot, Todd Bergstrom, Don Nicolard, Bill Mowery, Ken Braman, Brenda Hlas, Bob Genet, Kevin Coughlin, Tom Sawyer, Brian G. Williams, John Otterman, various Internet sites.

Repeal 17 : Restore I-3
-------------------------------
http://www.linkedin.com/pub/james-c-hrubik-sr/12/7a4/a58

The MAD website is Barberton-Norton Mosquito Abatement District

Angry messages can be sent to:

• Tim Crawford, Summit County Council, District 7


• Bob Genet, Mayor of Barberton


• Dave Koontz, Mayor of Norton


• Todd Bergstrom, Norton Ward 1


• Don Nicolard, Norton Ward 2


• Bill Mowery, Norton Ward 3


• Ken Braman, Norton Ward 4


• Mike Zita, Norton At-Large


• Scott Pelot, Norton At-Large


• Brenda Hlas, Norton At-Large

Let them know how you feel about spending City tax dollars to oppose the Mosquito Abatement District.