Dennis' Mortgage Blog

Question of the week:  Next year when/if FHA changes appraisal practices, what effect do you think this will have on values, if any ?

Answer:  On January 1, 2010 FHA will require the Home Valuation Code of Conduct (HVCC) process for all appraisals, falling in line with Fannie Mae and Freddie Mac.  For a multitude of reasons this will be tremendously negative for the market, for buyers and for sellers.  It will further depress property values, it will hinder sellers ability to get open offers and most importantly it will prohibit many FHA buyers from even having their offers looked at by sellers in multiple offer situations—even if they have higher offers.

When FHA converts to HVCC there will be a negative impact on property values that will be more deleterious to the real estate markets than HVCC is currently.  A quick review of the HVCC process: originator is randomly assigned an Appraisal Management Company (AMC), AMC randomly assigns appraiser from region, appraiser submits appraisal to AMC who forwards to originator.  No one is allowed to communicate with the appraiser except the AMC. Any appeals must go through the AMC and appraiser can agree or disagree with the appeal.  Appeals can only be to provide additional comps, they cannot appeal the adjustments appraiser has made; such as no subtraction for location for a home on a major artery versus a home on the interior of a neighborhood.  Finally, the most important part: the AMC is guaranteeing the provided value to the lender.  This guarantee creates an incentive for the AMCs to encourage low value appraisals, encourages appraisers to select the bottom comps in a market rather than fresher, higher comps.  Note as well the AMC and appraiser have already been paid regardless of the outcome.

What makes the situation even worse for FHA is the case number.  Every FHA appraisal is assigned a case number. That case number, and therefore appraisal, stays with the property for six months. Example: Tamara and George offer $325,000 to buy 36 Birdsong Way and the FHA appraisal returns at $300,000.  Seller says no way and the deal is cancelled.  For the next six months any buyer who wants to purchase the property with FHA financing must use that $300,000 appraisal.  Seller’s choices are to only sell it with conventional financing or wait six months, or sell the property with FHA financing for $300,000.  Regardless of additional comps provided showing the market solidly supports a value of $325,000 if the original appraiser refuses to accept those comps, again all being filtered through the AMC which is guaranteeing the value, then the FHA value stays.

Under the current HVCC process a new appraisal can be done either by going to another lender, or if the information being provided in the appeal is compelling enough to show the appraiser is being stubborn, or ignorant, in not re-assessing the value, the AMC can agree to send out a different appraiser for a new evaluation.  I recently had a transaction where we went through three appraisers and appraisals until we were provided with a quality appraisal that used comparable properties in the subject properties market area.  It took two and a half months but finally the AMC was able to locate a competent appraiser to provide a quality appraisal.  The property is a detached single family residence with a Planned Urban Development designation (PUD); typically used for townhome style properties.  This property has no common walls, its own small parcel of land, is part of a semi-private community with its own pool and recreation area.  The first appraiser used only condominiums with common walls as comps—one comp was a middle unit on the 2^nd floor of a three story comples, common walls on two sides, neighbors directly above and below.  She refused to adjust and use any single family detached residences for comparing the property.  The second appraiser did use PUDs for comps, the closest was 3 miles away and all the comps were attached with at least one common wall and in huge complexes with hundreds of units.  He refused to use any single family residences in proximity to the subject property for comps.  The third appraiser took detached single family residences within a half mile to mile for comps and made adjustments for lot size, association dues, etc.

We finally were able to close the transaction because we had a fair appraisal that was adequately comparing the property.  Had the buyer and seller not been willing to stick it out and work through the arduous appeal process we would have either had a cancelled sale, damaging buyer and seller, or a sale at less than fair market value on the market—a new comp for the next sale, depressing the market because of shoddy appraisal work originally supported by the AMC.

Had this been an FHA sale not only would we have been stuck with the original appraisal that used condominiums to establish value for a detached single family residence, but every future FHA buyer would have also had that appraisal as the basis for their financing. 

This is just one of the myriad of appraisal stories in our office alone, it is not unique to the market or the industry since the HVCC has become the standard beginning in May 2009.  For its intent to “protect the consumer” Congress has once again let its good intention have the exact opposite impact on the consumer.  We are unable to refinance families into lower rate mortgages, we are unable to put young families into their first homes, we are unable to assist families in distress sale situations from getting out of their mortgages and moving on, all because of poor appraisals being provided by the HVCC process.  The HVCC policy is far more harmful to Americans than it is helpful, with six months of data and experience there are tens of thousands of testimonials across the country that can attest to this.

Finally regarding FHA, because of the case number assigning the appraisal to the property, the process is sticking a value on a homeowners property that the homeowner has no control or say over other than, “yes we agree to let you pursue FHA financing.”  The seller who may become burdened with a below true market value has no appeal, has no rights to communicate to the appraiser or FHA to re-assess the value, and is put in a six month box because of one person in the process.  Because of this risk any multiple offer situation that includes an FHA offer will see the non-FHA buyer win the bid, even if the offer is lower.  A buyer with conventional financing will be able to offer less than an FHA buyer and buy the home, making the process uncompetitive and depressing values.

How will FHA moving to the HVCC process impact values?  Negatively.

Have a question for me?  Ask me!

WOW!  The Department of Labor data this morning says 11,000 Americans lost their jobs in November.  Eleven thousand.  The consensus for this number was approximately 125,000 jobs lost in November.  This is a huge number because of how small it is and mortgage backed securities, already selling off all week after being overbought and running up last week, have dived.  Selling has pushed the bond prices through two levels of support and a long way down to the next level. 

As long time readers know positive employment numbers mean negative mortgage rate numbers.  With the timing of the numbers after a long run up in mortgage backed security prices the combination has not been good for rates today.  Next week the Treasury is going back to market to sell more U.S. debt (about $75 billion in various notes).  Recent auctions have been very well received.  If next weeks auctions go well, and if there is perceived value in the large drop in mortgage bond prices we could see a little bounce in prices and a window to capture a lower rate.  Key words in that sentence? “If” and “could.”

I can’t let the week go by without my two cents on the “Job Summit” and President Obama’s “Job Tour.”  This was all set up before the shockingly low unemployment figures for November came out so the spin is now, “it’s working…” instead of “we need to have more government…”  The summit was a show from my perspective, a few CEOs, several major labor organizations, some non-profits and no Chamber of Commerce at the table.  The major consensus I heard was that banks need to lend more money to small businesses, they need to “free up credit.”

Perhaps the missed the news that the FDIC is requiring banks to pre-pay their FDIC premiums through 2012, that is three years worth of premiums.  The reason is to have banks that have successfully weathered the financial storm to pay for the failures of their previous competition.  Knowing this has been coming banks have prudently been sitting on cash waiting to see what the Federal Reserve, Treasury or other regulators would require of them.  Opening up credit to risky small businesses puts liabilities on their books that a Fed auditor could question, putting the bank on their “risky” list, and requiring them to follow TARP regulations.  Credit has not been freed up for small businesses because banks are fearful if they do free up that credit the risk of penalties and increased regulation (takeover?) by the Federal Government is greater than the risk of the small business not paying.

Another “ooops” from HUD Earlier this year HUD announced that it was doing away with spot approvals on condominium complexes that did not have FHA approval.  As well moving forward FHA would not approve, i.e. warrant, condo complexes and HOAs and that duty would be given to individual banks.  So if Sunny Seashore HOA wants to be eligible for its units to sell with FHA financing then it has to get BofA, Wells Fargo, Chase, etc. to approve their HOA and complex.  Moving forward every FHA loan done in the complex is given a warranty by BofA, Wells Fargo, Chase or whoever approved the HOA—giving them risk on loans they will not be funding.

Not surprising given our HUD Secretary, who has now a proven record of policies that are in contrary to policies, HUD has pushed this new policy from December to January and now until February.  Expect it to silently go away after someone at HUD finally convinces Secretary Donovan that no bank will stick its neck out on an entire condo association.

Now if only…someone can get him to see the folly of the new Good Faith Estimate 2010 and the HVCC restrictions that will dampen FHA lending to Americans who wish to become homeowners….

Rates jump this week, with most of it coming before us West Coaster got out of bed (well most of you probably since I’m up before 5!). 

Rates for Friday November 27, 2009:

FIXED RATE MORTGAGES AT COST OF 1 POINT*

30 year conventional 4.75%                              UP 0.25%

30 year conforming-jumbo 5.00%                     UP 0.125%

30 year FHA    4.75%                                      UP 0.25%

30 year FHA jumbo 5.00%                              UP 0.25%

Remember we have true, honest to goodness quality Jumbo rates again! Call for quotes as they vary depending on LTV, FICO and loan amount. 

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, and period rate is locked (i.e 45 days instead of 30 days).

Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

December is here, have started planning for 2010?

We have a pretty busy weekend in the Smith home, give a call if you need my assistance and I will try to get back to you.  Note that on Sunday I am unavailable from about noon on and will return calls Monday morning.

Until next Friday,   

Dennis

Remember this update is posted weekly on My Blog at www.DennisCSmith.com ; feel free to forward the link to family and friends who may be interested in past commentaries.

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