Dennis' Mortgage Blog

Question of the week:  With news that home prices are climbing are appraisals still an issue.

Answer: Yes.

This has been a topic on mortgage industry newsletters and blogs and also the topic of a conversation I had yesterday with Ken Harney, a nationally syndicated reporter with the Washington Post News Group. 

Although some areas of the country, the state and the region have shown an increase in sales and median home values, the industry is still have challenges getting appraisals reflecting what is happening with local markets.  In other words, we are still getting appraisals with low values.  It is not just a local problem to Southern California and its fractured real estate markets where going across a major thoroughfare can change values by 20-30%, but a problem nationwide.  In reports from the National Association of Realtors indicate up to one-third of transactions nationwide are being cancelled, delayed or renegotiated due to low appraisals.

Due to the current mortgage system it is no surprise that appraised values are lagging behind “real” values of actual sales.  Here are three reasons I see that are responsible for our challenges with appraisals, not in any specific order:

1) AMC Several years ago, 2008 in fact, a settlement was reached between Freddie Mac, the Federal Housing Finance Agency and the New York Attorney General called the Home Valuation Code of Conduct.  This settlement quickly became a standard for Fannie Mae as well as almost all lenders nationwide and essentially says that all appraisals delivered with a mortgage must meet the standards of the HVCC, which at its core states that loan originators can have no contact with appraisers.  Appraisers must be independently selected by someone other than the originator.  So how do we order an appraisal?  Through an AMC, or appraisal management company that is approved, or if a major bank owned by, the lender.  We submit the order to the AMC who then assigns the order to an appraiser.  The appraiser completes his/her report and returns it to the AMC who reviews it and then releases it to the lender/originator—unless it feels the report needs corrections in which case it is sent back to the appraiser.

Since the advent of the AMC process we have seen a general deterioration in the total quality of appraisals as the market no longer weeds out poor appraisers.  In the past when we had a group of seven to eight appraisers used for the vast majority of our appraisal work, Stratis Financial was known for having quality appraisals from top-notch professionals approved at every lender we worked with.  Now we do not know the quality of the appraiser being assigned by an AMC and if they know the local market where they are appraising.  Too often we receive an appraisal that has obvious flaws or low value and see the appraiser assigned was from way out of the area, say an appraiser from West Covina appraising in Lakewood.

Contributing to the deteriorating quality of the product is that AMC’s charge clients about the same fees for an appraisal that has been historically charged in our market for reports from independent appraisals, but they only pay about half the fee to the appraiser.  As a result we have reports being done by individuals willing to work at half-price to the market and rely on bulk quantity instead of quality for their income.  Prior to HVCC when I would order a report from the appraiser who did the bulk of the reports for my client it would often take ten to twelve days to get the report because he would research each of his comparables, call agents if there were some price/value anomalies and provide a well defined and supported value of the property.  Today we get an appraisal back in less than a week in most instances often with little research or understanding of the  market and the comparables.

Too often when reviewing low appraisals we find that the comparables used were all the bottom of the market and none of the higher sales were considered.  This is to the advantage of the AMC as they are providing value guarantees to the lenders, low values are easier to guarantee than high values.  When this happens we must appeal the appraisal, present the higher comps, why they should be used and request a change in value.  If the AMC and/or appraiser do not reconsider the value our next step is to the lender and their appraisal management who more times than not agree with our appeal and request a recertification of value with the comps or a new appraisal at no charge to the customer.

The purpose of the HVCC was to “protect the public and the lenders” from shoddy and possibly fraudulent appraisals.  The result has been AMCs with an interest in low values from appraisers who are working for less money and as a result put in less time and effort to establish a true market value of the property.

2) Buybacks  Almost every loan funded today is either sold to Fannie Mae or Freddie Mac (GSEs) or insured by the Federal Housing Administration.  After receiving the loan it is reviewed by the purchaser/insurer (Fannie, Freddie or FHA) who then decides if they want to put it in a pool of other mortgages to be sold on the secondary market or if there are problems with the loan send it back to the lender, what is known as a “buyback.”

A primary reason for buybacks has been appraisals that are deemed unsatisfactory by the  GSEs.  Lenders do not want buybacks as they require them to retain the mortgage and not benefit from proceeds of selling the loan they can then use to make more mortgages.  As a result lenders carefully scrutinize all appraisals to ensure they more than cover the value required for the mortgage.  If there is some doubt the underwriter may require more comparables, comments from the appraiser or they may lower the value or flat out reject the appraisal.  An instance where this may happen might be a condo that is sold for $325,000 but the highest sale in the last few months in the building was $320,000. The prior sale may have been in a less desirable location in the building, had no view and was not in pristine condition and the appraiser rightfully made adjustments to the value to support the sales price of the subject property of $325,000.  An underwriter may review the appraisal and cut the value because s/he does not want to try to have a loan sold to Fannie Mae where the subject property is the highest unit sold in the complex for concern Fannie will not buy the loan.  The sales price is perfectly justified to the buyer, the seller, the appraiser and the market, but some clerk with Fannie Mae will just see that the collateral for the loan is setting the market therefore is overvalued and a risk for Fannie.

Given the huge costs for buybacks I do not blame the lenders for their stance on appraisals, especially given how aggressive Fannie and Freddie have been in rejecting mortgages after they have been funded often for very trivial issues that have little to no bearing on the quality of the mortgage package.

3) Realtors This is an issue I have brought up to many real estate agents and it continues to plague the industry: puffery.  Too often we will have an appraisal issue with a comparable or two that is responsible for bringing down the value and the agent, either buyer or seller’s, will say, “that property was a dog, it was in horrible shape” or “I showed that property to our clients and we couldn’t get past the front door for the pet odor.” We will go to the MLS to research the property to see if we can have the comp thrown out or adjusted upward for condition and see remarks from the listing agent of the dog property, “great property in great area,” or “must see, bring your buyers and move in,” or “owner remodeled kitchen and bath” (failing to indicate they did this when they bought the property ten years ago).  These comment are used by the appraisers of future sales and refinances as determining the condition of the comparable, none of these comments would cause them to add to the closed price due to condition.  Instead they see the price and assume the property is typical for the area, in good condition and the sales price is indicative of the market---even though the family that finally bought the property bought it below the average price due to poor condition.

Many realtors have seen the poor property and seen the statement of conditions in the MLS but none have reported the misstatements to the MLS board or asked the listing agent to give a more accurate description so future values in the neighborhood will not be negatively impacted.  As a result all future mortgages in that vicinity will be negatively impacted because a listing agent “puffed” up their listing in the MLS to try to attract showings.  Instead of helping their seller the listing agent has harmed them.  Instead of attracting buyers willing to do some sweat equity to increase the value of their home the MLS statements are attracting buyers who do not really want to do any work after they buy the home. Those who are seeing the property are not those who want to buy it. By puffing the listing the agent is harming their seller and future buyers, sellers and refinance applicants with a property selling at the bottom of the market that in the appraisers’ eyes was in good condition.

When agents see a property that does not match the description in the MLS it would do their clients, the neighborhood and the profession a benefit by taking pictures with their cell phones and sending them to the listing agent and/or their local MLS board and request the description in the MLS be changed otherwise values will be dragged down with future low appraisals.

There is a definite lag between many current market seeing price increases and many of the appraisals in those markets.  Until there is a fundamental shift in the process, eliminating the HVCC requirement so originators can order with local professionals who know neighborhoods and markets, less stringent reviews by Fannie and Freddie and more active policing of MLS descriptions by agents, this lag will continue.  We will continue to generate appeals to combat low appraisals, and while we have a very high success rate it is not 100%.

Have a question?  Ask me!

After a long question of the week I will be brief on economic data impacting mortgage rates.  Difficult news that benefits rates from low retails sales in May, stagnant prices for consumers and increasing claims for unemployment insurance.  Positive news from the increase in  home sales and prices from last May, but this report had no impact on mortgage rates.

Europe is again the main factor in our markets, both bonds and stocks.  Greece votes again this weekend to try to determine who will lead their nation, choosing from candidates that will reject the bailout conditions from the rest of the European Union or candidates that will press on to implement spending cuts.  Spain is given one hundred billion Euros to bailout its banks but puts its taxpayers on the liability and it may not be enough.  And Germans continue to look at their leaders and ask, “why are we tied to these other countries/economies?”  Europe’s woes has U.S. bonds, and mortgages, benefiting as investors continue to avoid investing in European investments and staying with the “safe harbor” of U.S. investments.

Rates for Friday June 15, 2012: After a rather lackluster week for Mortgage Backed Securities we have seen a rally today as Spain’s rates top 7% and Greeks pull billions of Euros out of their bank accounts to hold as cash.  Rates do not reflect any change from last Friday but there is more pressure to lower rates than higher.  Monday will be interesting following the contests in Greece.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS

30 year conforming                               3.375%             Flat

30 year high-balance conforming           3.625%             Flat

30 year FHA*                                       3.25%               Flat

30 year FHA high-balance*                   3.5%                Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked.  Rates are based on 20% down (3.5% for FHA)  with 740 FICO score for purchase mortgages.

* Current rates include credit towards closing costs, call for quote on rate and credit.

Happy Father’s Day!

Lessons from my Dad I hope I am able to impart on my daughters.  My job is to be a parent and assist them to become productive adults able to support themselves, their families and their communities; my job is not to be their best friend.  In the long run holding my children responsible for their actions teaches them two of the most important principles they will have as adults: personal responsibility and accountability.  Actions have consequences, positive or negative, learn to deal with both.  Your generosity should be between you and the recipient and not an ego boost or vehicle for accolades.  It is better to be honest and risk someone being mad than be untruthful just to be liked.  I will always love you, that doesn’t mean I will always support or endorse your decisions or actions. 

There is no better role in life than being a parent.  It comes with laughter, tears, joy, frustration, angst, fear, challenges, pride and love like nothing else. I have been blessed to have a Dad who has been a great role model for me and my siblings---and looking at where we are in our lives a damn good father as well.

Thank you for all your lessons Dad, they have not gone unheeded.

Have a great week,

Dennis