P hiladelphia ~ May 16 & 17, 2006 2006 PLU S 2006 PLU S E& O Sym posium E& O Sym posium Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market Slowdown on the Frequency and Severity of Claims BY GLEN D. KIMBALL, ESQUIRE AND THOMAS J. GREGORY, ESQUIRE MURPHY & O’CONNOR, LLP
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Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market.
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Ramifications of the Ramifications of the Real Estate BubbleReal Estate Bubble
Presented by:Mike W Smith, President
Axis Insurance Services, LLC Franklin Lakes, New Jersey
201-847-9175www.axisins.com
Is the Market Frozen?Is the Market Frozen?
Dateline NY TimesDateline NY TimesMay 9, 2006May 9, 2006
Concerns Expressed by Concerns Expressed by My Clients About the MarketMy Clients About the Market
• Revenues Are Down • Properties Take Longer to Sell• Less Bidders • Damages May No Longer Be Mitigated by
Other Available Buyers • Increased Insurance Requirements (SOX)• Business People Making Buying Decisions
Concerns Expressed by Concerns Expressed by My Clients About their Liability My Clients About their Liability
• Personal Liability
• Misrepresentations by Client
• Insurer Always Looking for a Way Out
• Independent Contractors (cutting corners)
Concerns Expressed about Concerns Expressed about Liability Liability
• Bad Appraisals
• High Debt to Equity Ratios
• Inability to Move Product
• Increased Disclosure Requirements
• Increased Responsibility for Client Actions
Who is most likely at Risk?Who is most likely at Risk?
• Appraisers
• Mortgage Brokers
• Inspectors
• Title Agents
• Residential & Commercial
Real Estate Agents
• Dual Agents
From WhatFrom What
• Banks and Financial Institutions for Loans in Default
• Sellers Unable to Unload Properties
• Sellers Can’t Close on New Properties
• Buyers Who Purchased Inflated Properties
• Failure to Disclose….Anything!!!!!
Case StudiesCase StudiesMortgage BrokerMortgage Broker
• Mortgage broker sued because client could not make mortgage payments Client took out home equity loan >100% of equity Ran up credit cards Defaulted on Mortgage and Home Equity Loan Returned for another loan - didn’t qualify Advised to sue mortgage broker Settled for $27,000
Case Study Case Study Commercial Real Estate AgentCommercial Real Estate Agent
Broker sued because tenant could not make payments on lease 300,000 square foot space, internet bubble
tenant defaulted on $117 M lease Broker sued because they should have
screened tenant better Over $500,000 in legal and still going
Case Study AppraiserCase Study Appraiser
Appraiser sued for overvalue of appraisals New construction single family housing complex.
Over 50 houses Interest rates up, market prices down. Houses
aren’t moving very fast Several defaults… Houses are selling for 30%
less than purchased 4 suits so far with payout over $250,000 More to follow ($600 appraisers policy) Our office will not sell a policy with a financial
institutions exclusion
Case Study Case Study Home InspectorHome Inspector
Home Inspector sued for losing sale• Home inspector report said roof 15 years
old (the roof was actually replaced three years ago)
• Buyer thought owner might be lying about other stuff (furnace, water damage, etc)
• Buyer walked. No other buyers at that price. In a hot market, the seller would have other options
• Case is in the initial stages
What Do We See?What Do We See?
• #1 You now can lose money in real estate
• Ability to mitigate damages with other buyers is limited
• Many people getting out of the business
• Revenues down (in underwriting that usually means lower rates, but is that actuarially correct )
What Do We See?What Do We See?
• A Changing Market Place
• Brokers more aware of their coverages
• Higher degree of responsibility for real estate professionals
• Need to enhance coverages
• Opportunity for the insurers to support the industry