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 2nd 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.
Follow me on Twitter for market updates throughout the day.
Question of the week: As a broker you have access to different lenders, who are they and why do you use several lenders?
Answer: Second part first, why do we use several different lenders? Borrowers, properties and transactions are not all the same, neither are mortgage lenders. Every lender has some area they specialize in or do a little bit better than someone else. Also on any given day some have better pricing than others for the same mortgage product. Having different lenders available allows us to balance the peculiarities of client qualifications, property, price and loan amount, mortgage interest rate and cost and the service of the lender and ability to close. With the contraction in the mortgage market the number of options available has shrunk, so far in 2009 we have funded at least one mortgage through 18 different lenders, in 2008 that number was 29.
As an added advantage to the variety of lenders available to most brokers, with Stratis Financial we also are a direct lender on approximately 50% of the mortgages we fund. Using the same methods of financing and funding as major lenders we are able to fund mortgages as Stratis Financial.
Here is a partial list of the major banks and lenders used by Stratis Financial; they provide quality service, pricing and sufficient mortgage products for our clients. Some of the names you will recognize and some you will not, but in mortgage lending name recognition is not as important as service and pricing.
In alphabetical order our major wholesale partners: Bank of America, Chase Mortgage, Citi Mortgage, Flagstar Bank, ING, Met Life, Sierra Pacific Mortgage, SunTrust Mortgage, Union Bank and Wells Fargo. These ten lenders fund almost 95% of our business.
Why then not just go directly to one of the lenders? Because they may or may not have the right product for you. If problems arise you are in a position of having to start all over again with another lender. You are not afforded a range of options on pricing when it is time to lock in your price and rate. And finally, they are not able to provide the service and experience I have available after over twenty years in the industry.
As a vibrant and growing company we are always looking for other relationships that will assist us in providing better service, pricing and quality to our clients. In a rapidly changing industry we need to be flexible and have a breadth of sources to ensure our clients are able to purchase homes and refinance and manage existing mortgages and debt.
Our business is not based on direct mail, cold calls or other mass advertising, but instead through referrals from past clients, real estate professionals, and members of the financial and legal industries. Referrals for which we are very grateful. Critical to this are the wholesale lenders with whom we partner to provide the best products, service and pricing to our clients.
Our commitment to our motto Serious About Service™ allows us to have not only survived the current industry crisis but actually grow our operations with the support of our clients, referral sources and lenders.
Mortgage Backed Securities (MBS) have had another bouncy week. With a big spread between resistance and support the market tested both. Early in the week MBS continued last week’s slide finally stopping at the support floor. Mid-week they started climbing again until the came up against resistance. Today market started off strong and then lost steam and going negative again. As I said last week, rates are very volatile right now. Those who are able to lock but decide to float their rates are engaging in risky behavior.
Economic news this week gave us inflation data. We started with Citi and then Wells Fargo announcing repayment of TARP funds, joining Chase and BofA. While the overall program will cost the taxpayers, current estimate about $140 billion, the costs are less than initially thought and it appears the program worked. Note the costs would have been less had the automakers not been put into the program. On Tuesday markets got a jolt with the Producer’s Price Index (PPI) came out much higher than expected. PPI measures wholesale prices and the number was 1.8% for November (0.5% without food and energy—which I never understood why those are taken out). While the Consumer Price Index on Wednesday was lower, 0.4% (1.8% year over year), that was not unexpected since CPI lags PPI. Overall inflation percolating but tame enough that the Fed is not making any interest rate moves.
Bonds and mortgage rates got a jolt on Thursday morning with unemployment claims. Initial claims for the prior week showed 480,000 new filings, much higher than expected, continuing claims are now at 5.19 Americans receiving unemployment. As you know bad economic news means good mortgage rates so the MBS jumped higher and we saw a dip in rates regaining the losses from the inflation data. Not to last however, as mentioned above, the MBS market hit some resistance, could not maintain those levels and slipped back down today.
Looking ahead the Fed announced it foresees low rates for quite a while, but also reiterated it will end its mortgage purchase program on March 31, 2010. April 1st begins a new mortgage market with no government support or intervention. As we get nearer to that day we can expect upward pressure on mortgage rates.
Proceed with caution. Volatile and fluctuating markets require education, communication and preparation. Make sure you are.
While daily volatility exists week over week we see no change with rates at the same level for three Fridays in a row now.
Rates for Friday December 18, 2009:
30 year conventional 4.75% FLAT
30 year conforming-jumbo 5.00% FLAT
30 year FHA 4.75% FLAT
30 year FHA jumbo 5.00% FLAT
An exciting day as it is the last day of school in 2009! For those in the Long Beach area I believe there may still be some tickets available for the region’s best performance of “The Nutcracker” stage by the Long Beach Ballet Saturday afternoon and evening. If you go pay particular attention to the incredible performance by the girls in the “Mother Ginger” scene—one of them is Blaire.
Please note that this will be the last Rate and Market Update until January 8, 2010 with Christmas and then New Year’s following on the next two Fridays.
Thank you to everyone who has supported our business and made 2009 another fun and wild year in the mortgage industry!
And finally, to my wonderful wife and partner, Happy Anniversary of your 39th Birthday on Monday! I love you and look forward to many more years of celebrating your 39 years plus anniversaries!
Merry Christmas everyone!
Question of the week: What is different for loan applications today than say four or five years ago?
Answer: Co-worker David and I had a bit of a chuckle over this one yesterday. For a complete loan package today we need at a minimum:
· Driver’s license
· Most recent paystub
· Most recent W2, probably 2 years
· If self-employed or file any additional schedules (Schedule C, K-1, unreimbursed business expenses, Schedule E-income property) most recent year’s, and probably two, Federal Tax Returns
· Asset statement(s) verifying funds to close and reserves
· Insurance agent information
· If condominium HO6 insurance coverage
· Appraisal
For many loan programs, including Fannie Mae and Freddie Mac, in 2006 we needed at a minimum:
· Insurance information
That’s right, for Fannie and Freddie loans, piggy-backs, we would just need a driver’s license. Income was accepted as stated on the application, assets were accepted as stated on the application and often no appraisal was required because the Fannie or Freddie Automated Underwriting System (AUS) would validate the value entered for the property. You just needed to prove who you were and that the collateral would be insured. Congratulations, you’re a homeowner.
Any wonder at the foreclosure numbers the past few years?
Speaking of Fannie Mae tomorrow Fannie Mae 8.0 hits the streets and with it many guideline changes. Debt to income limits get dropped to 45%. Loan to value limits for income properties and second homes drop significantly. FICO score requirements increase. Loan to value limits on hi-balance loans drop on certain FICO scores. This is the biggest revision to Fannie Mae guidelines since it began using the AUS approval system. Look at the lists above and you’ll know why the new guidelines.
I do not know what to define this, stupid, idiotic, asinine, ridiculous, or just typical of our beloved Federal Government and its bureaucrats making regulations. Effective January 1, 2010 HUD will implement new RESPA (Real Estate Settlement and Procedures Act) regulations that will require new forms and added paperwork for the borrower. The previous one page Good Faith Estimate breaking down all costs was evidently not easy enough to understand so HUD is instituting a new 3 page form, we’ll need to keep the old form to be in compliance with the Federal Reserve.
The purpose of the new GFE is to provide clarity to borrowers, transparency for fees, and encourage borrowers to shop lenders. Things that occurred in California with the combination of the GFE and the California specific Mortgage Loan Disclosure Statement. Ultimately the new GFE 2010 is intended to eliminate surprises in closing costs at settlement, i.e. when loan documents are signed, and HUD feels the new GFE 2010 will get rid of unscrupulous mortgage originators who lie to borrowers to get a loan application started and then at closing rates, programs, costs are significantly different. This is a great purpose and one I support and wish HUD would pursue under existing laws. But HUD feels overhauling RESPA will do the trick.
HUD ain’t bright as evidenced by the fact that no where on the new Good Faith Estimate, version 2010, is there a place for the borrower to sign and acknowledge receipt of the disclosure. Seriously, HUD is making huge changes to our industry, setting up new regulations that are in conflict with existing regulations but not rescinding the old regulations all in an effort to prevent deceptive lending practices and they fail to include any form of acknowledgement that borrower received the disclosures! Sure, that will stop unscrupulous and crooked originators from continuing their practices. Your Federal tax dollars at work once again.
Mortgage Backed Securities get hammered this week. Treasury auctions have gone poorly, retail sales better than anticipated, and other factors have pushed MBS to their lowest levels since November 12th. There is a lot of room for the prices to drop further, which means more room for rates to increase as well. After the lows on November 11th, MBS went on an eleven day run of mostly increases in pricing, peaking last Monday. Since then it has been down, down, down.
There is a lot of uncertainty and negative pressure on bonds. Uncertainty by corporations over future business costs and rules with changing regulations that may result from health care reform, banking regulations being debated in Congress and environmental issues has them holding back from expending funds and investing; basically preserving cash. Banks are hording as well to ensure they are not put on a Fed watch list, are able to meet higher premiums (and 3 year pre-paid premiums) from FDIC. International investors are not certain which way our economy is going yet, nor their own. These factors lead to lack of investing in bonds and mortgages.
The biggest drag however is the national debt. This number is growing and growing, just yesterday Congress passed a $1.1 Trillion spending bill. President Obama is talking about taking about $225 billion unspent TARP funds and re-allocating to spend it somewhere. Members of a certain party in Congress and Obama are discussing spending an additional $250-300 billion in Stimulus II, although they won’t call it that because of the negative association. And on top of all that is the possibility of another Trillion dollars or more as a result of any health care bill that may come out of Congress.
As I discussed before rates hate inflation, as inflation increases, or the hint of inflation appears, interest rates rise. Our government is behaving as if its purpose is to fuel and feed inflation in our economy, racking up huge deficits which pumps excessive money into the economy and borrowing massive amounts of money which pulls money out of private investments and drives up rates.
Despite the dump in mortgage backed securities market this week rates have held their own vis-à-vis last Friday.
Rates for Friday December 11, 2009:
Anyone going to the big Dog Show in Long Beach this weekend? It was from watching the Eukanuba Dog Show on Animal Planet (Discovery?) last year after our beloved Cooper died that spurred us to finding a new pet. Watching the show led me to investigate several breeds and finally settling on the Collie, smooth coated Collie to be specific. That led to our bringing Harrison home in February. A perfect match for the Smiths!
Have a great weekend,
Dennis C. Smith, California Dept. of Real Estate Broker #00966315 Stratis Financial Corporation, California Dept. of Real Estate Broker #01269597
Dennis C. Smith, California Dept. of Real Estate Broker #00966315
Stratis Financial Corporation, California Dept. of Real Estate Broker #01269597
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