Fannie Mae, the quasi-governmental agency that buys bundled mortgages from mortgage lenders, issued new appraisal guidelines that went into effect January 1. For the most part, this is a good thing, and way overdue. Inflated appraisals are part of the reason house prices ballooned beyond reason.
Appraisers must now note incomplete additions and renovations, as well as conditions that affect the livability, soundness or structural integrity of the building. The property must be appraised subject to completion of the additions or needed repairs. This sure would have prevented me from closing a few sales last year.
The sales contract must be provided to the appraiser so the appraiser will know whether the seller is paying the buyer's closing costs or making repairs. These circumstances result in a lower net to the seller, and may result in a lower appraised value.
Now that 100% financing is no longer available, buyers with limited funds are routinely asking the seller to pay the buyer's closing costs and make repairs. So if a seller has to pay $4,000 in buyer's closing costs and $5,000 in repairs to get his house sold for $200,000, in effect, the sale price was $200,000 minus the seller concessions, or $191,000.
When there are no comparable sales near the property being appraised, and the appraiser has to look more than a mile away for "comps", the appraiser has to explain why the comps are outside the usual mile radius. The appraiser can not ignore nearby comps just because they are foreclosures or were sold under duress.
The appraiser must analyze market trends, and if home sale prices are declining in a neighborhood, time adjustments to the values of the "comps" may be required.
This is what the new appraisal form looks like.
Sunday, February 8, 2009
How to Save the Housing Market
While deregulation and fraud have their place in calamity that is our economy, the housing market plays a central role in our current mess. Mortgage money was too easy to get. The competition for houses, combined with "irrational exuberance", as Alan Greenspan so aptly named it, drove house prices out of reach of working people. In 2005, a large percentage of the home sales were to investors who expected a quick profit. Many owner-occupants who had no down payment were willing to spend too much of their monthly income on a mortgage payment. Most people believed (or hoped) that home prices would continue to rise at a rapid rate indefinitely.
We all know where that got us. Now at least a third and maybe more of the sales in Tucson are foreclosures. This is hurting everyone, even people who are still making their mortage payments on time. Even the people who own their homes free and clear should be alarmed about this situation.
When a seller who is not in financial distress wants to sell his house, he is faced with the disheartening news that his house will have to appraise for the sale price, or the buyer will not be able to get a loan. An extremely busy loan officer recently told me that half of her clients, whether they are refinancing a house or trying to buy a new one, are unable to get a loan because of appraisal problems. Lending standards are much higher than they were in the go-go days, but even people with stellar credit are finding that the appraisal prevents them from getting a mortgage.
Why are appraisers not appraising houses at sale price anymore? New appraisal guidelines went into effect last month. See the above post, "New Appraisal Guidelines". As a result of these guidelines, appraisers must use foreclosed properties on their appraisals as comparable sales ("comps"), if those properties are the nearest sales, geographically and in size, to the property being appraised.
Of course, foreclosures sell for below market value. Way below. When they are included as comps on an appraisal of a house that is not being sold under duress, the foreclosures drag down the value of the subject property. A reduction in the average home price that puts homeownership back into the reach of the average family is a good thing. Unfortunately, using foreclosures as comps is dragging the average sale price way too low. Some people who bought at a reasonable price, with significant downpayment, and who made their payments on time, can no longer sell for enough to pay off their mortgages. This horrifying situation will increase the number of foreclosures. Prices will continue to spiral downward. It's a vicious cycle. Nobody wins.
The part of this whole foreclosure nightmare that I can't understand is how these lenders can write off so much bad debt. A lender will foreclose on a homeowner and kick him out of his home. Then the lender sells the property to a jubilent buyer who pays $100,000 less than the lender loaned on the property. If the lender is able to write off that debt, then why don't they renegotiate the mortage with the mortgage holder, and let the person who owes the debt stay in the house? We would have far fewer foreclosures, a lot less misery, and home values would not be dragged down by using these foreclosures as comparable sales.
We are all in agreement that our government stimulus program should not continue to reward the wealthiest individuals in our society, who should be in jail for what they've done to the economy. What I can't understand is this: why can't lenders work with people who can not make their mortgage payments, and keep these people in their homes, instead of foreclosing and selling these houses at a fire sale?
We need to start thinking beyond quarterly profits to long term sustainability and economic recovery.
We all know where that got us. Now at least a third and maybe more of the sales in Tucson are foreclosures. This is hurting everyone, even people who are still making their mortage payments on time. Even the people who own their homes free and clear should be alarmed about this situation.
When a seller who is not in financial distress wants to sell his house, he is faced with the disheartening news that his house will have to appraise for the sale price, or the buyer will not be able to get a loan. An extremely busy loan officer recently told me that half of her clients, whether they are refinancing a house or trying to buy a new one, are unable to get a loan because of appraisal problems. Lending standards are much higher than they were in the go-go days, but even people with stellar credit are finding that the appraisal prevents them from getting a mortgage.
Why are appraisers not appraising houses at sale price anymore? New appraisal guidelines went into effect last month. See the above post, "New Appraisal Guidelines". As a result of these guidelines, appraisers must use foreclosed properties on their appraisals as comparable sales ("comps"), if those properties are the nearest sales, geographically and in size, to the property being appraised.
Of course, foreclosures sell for below market value. Way below. When they are included as comps on an appraisal of a house that is not being sold under duress, the foreclosures drag down the value of the subject property. A reduction in the average home price that puts homeownership back into the reach of the average family is a good thing. Unfortunately, using foreclosures as comps is dragging the average sale price way too low. Some people who bought at a reasonable price, with significant downpayment, and who made their payments on time, can no longer sell for enough to pay off their mortgages. This horrifying situation will increase the number of foreclosures. Prices will continue to spiral downward. It's a vicious cycle. Nobody wins.
The part of this whole foreclosure nightmare that I can't understand is how these lenders can write off so much bad debt. A lender will foreclose on a homeowner and kick him out of his home. Then the lender sells the property to a jubilent buyer who pays $100,000 less than the lender loaned on the property. If the lender is able to write off that debt, then why don't they renegotiate the mortage with the mortgage holder, and let the person who owes the debt stay in the house? We would have far fewer foreclosures, a lot less misery, and home values would not be dragged down by using these foreclosures as comparable sales.
We are all in agreement that our government stimulus program should not continue to reward the wealthiest individuals in our society, who should be in jail for what they've done to the economy. What I can't understand is this: why can't lenders work with people who can not make their mortgage payments, and keep these people in their homes, instead of foreclosing and selling these houses at a fire sale?
We need to start thinking beyond quarterly profits to long term sustainability and economic recovery.
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