Volume 31, Number 12

June 19, 2009

Dear Client:

One of the least-discussed aspects of getting a home loan is becoming an impediment to an efficient closing of a home sale in the Austin area between a willing seller and a willing buyer.

This scenario is being replicated daily in the Austin area: A home seller and a home buyer go through the normal negotiations and agree on a price. The home buyer is pre-approved for a loan to cover the purchase. The home is inspected and the seller and buyer once again agree to make the deal. The lender requires a 3^rd-party appraisal. All well and good, so far. But the appraisal process is turning out to be a big hitch in the closing process.

Appraisals in and of themselves are a good thing. But the process is causing real problems for Austin buyers and sellers. It ratcheted up to a new level 5/1/09, when a new national Home Valuation Code was adopted. The Code bars loan officers, mortgage brokers or real estate agents from any role in selecting appraisers for mortgages that will be owned or guaranteed by Fannie Mae and Freddie Mac

As a result, many lenders are outsourcing the selection to appraisal-management companies (that take a big slice of the appraisal fee). Some companies put appraisers under pressure to do it faster and do it cheaper. Experienced appraisers are turning down requests to pay them only 50% to 70% of their fees and may also include a requirement the appraisal be completed in as little as 48 hours.

This process has resulted in such anomalies as appraisers being hired from outside Travis County to conduct appraisals in neighborhoods they don’t know very well. The end result: less accuracy and certainty about a property’s true value.

And no one can discuss the appraisal with the appraiser under this new Code.

Anecdotally, you can find examples where some of these appraisals are challenged regularly. (No hard numbers are available) Home values differ from neighborhood to neighborhood, street-by-street. And in many cases no current comparable sales exist. This is where an appraiser who knows the area can more accurately appraise the home’s true value – more so than an appraiser from out-of-area who is charged with doing a “quick” turnaround.

This causes a number of problems, including the possibility a buyer must seek another appraisal. It is slowing sales and as the sales pace picks up, the problems may increase.

Ok. check my post previously where one of my clients got rogered… HVCC rant I hate to say it, but, “I told you so.”

joe

There are a number of factors to consider when setting the price for a property and appraisal is just one of those factors. While a home owner would want the appraised value to be low, thus keeping the taxes on the property low, the same home owner, if trying to sell the property, wants this appraisal to be high, thus allowing them to set the price a bit higher. It’s a contradiction that must be overcome when setting the price on a property.

According to this article in Community Impact Newspaper, “the market value of real estate is know to be the value that a ready, willing and able buyer is willing to pay for a property that has been adequately marketed for an appropriate length of time, in an arms-length transaction, with a ready, willing and able seller.”

Translated, that means someone who likes the property and has the resources to purchase it on the open market can and will do so from a seller who really wants to release ownership and has the means to do so.

First, a real estate agent prepares a comparative market analysis (CMA). This will include the selling prices of properties similar in size, condition, and features to the property in question. Average days on market (DOM) are then considered, along with the absorption rate of the neighborhood.

One burning question that should be considered very closely in real estate, as with any large transaction, is why are they selling it? Does the seller need to unload the property quickly or are they unconcerned with DOM? This could have a huge effect on the price and also open the door for negotiation.

Federal Reserve Proposal Addresses Appraisal Coercion Excerpt from Appraisal Institute’s Appraiser News Online Vol. 9, No. 1, January 15, 2008 The Federal Reserve Board recently proposed prohibiting creditors and mortgage brokers from coercing real estate appraisers to misstate a home’s value on all mortgages. The announcement was part of the Fed’s December 18 proposed changes to Regulation Z (Truth in Lending), which would restrict certain practices and require certain mortgage disclosures to be provided earlier in the transaction. … In addition to prohibiting creditors and mortgage brokers from coercing appraisers, the Board also proposes to prohibit creditors from extending credit when creditors know or have reason to know, at or before loan consummation, that an appraiser has misstated a dwelling’s value. The regulation would apply to all consumer credit transactions secured by a consumer’s principal dwelling. In its discussion on the topic, the Board said, “Pressuring an appraiser to overstate, or understate, the value of a consumer’s dwelling distorts the lending process and harms consumers… Inflated appraisals of homes concentrated in a neighborhood may affect other appraisals, since appraisers factor the value of comparable properties into their property valuation. For the same reason, understated appraisals may affect appraisals of neighboring properties. Thus, inflated or understated appraisals can harm consumers other than those who are party to the transaction with the inflated appraisal. Moreover, these consumers are not in a position to know of the practice or avoid it.” The proposed regulation defines the term “appraiser” as a person who engages in the business of providing – or offering to provide – assessments of the value of dwellings. The commentary to the proposed regulation gives examples of acts that would violate the regulation: implying to an appraiser that retention of the appraiser depends on the amount at which the appraiser values a consumer’s principal dwelling; failing to compensate an appraiser or to retain the appraiser in the future because the appraiser does not value a consumer’s principal dwelling at or above a certain amount; and conditioning an appraiser’s compensation on loan consummation. The commentary also lists examples of acts that would not violate the regulation: requesting that an appraiser consider additional information for, provide additional information about, or correct factual errors in a valuation; obtaining multiple appraisals of a dwelling (provided that the creditor or mortgage broker selects appraisals based on reliability rather than on the value stated); withholding compensation from an appraiser for breach of contract or substandard performance of services or terminating a relationship for violation of legal or ethical standards; and taking action permitted or required by applicable federal or state statute, regulation, or agency guidance. …

The Nation’s Housing

Appraiser’s Lawsuit Puts Lenders on Notice

By Kenneth R. Harney Saturday, January 26, 2008; Page F01 Real estate appraisers have complained for years about demands from loan officers that they fudge and inflate numbers to allow mortgage deals to close. Now a California appraiser has sued the country’s largest thrift institution, Washington Mutual Bank, charging that she was blacklisted for refusing to provide favorable appraised values despite declining market conditions. The lawsuit, by Jennifer Wertz, comes just two months after the state of New York sued an appraisal management company, First American eAppraiseIT, for allegedly giving in to pressure from Washington Mutual to inflate property values for loan applications — contributing to mortgage-market losses. EAppraiseIT and LSI, a unit of Fidelity National Information Services, were also cited in Wertz’s suit as contractors to Washington Mutual. Wertz said in her complaint that she began performing appraisals for Washington Mutual in 2001 and earned “in excess of $100,000 a year” from her work for the bank. But last May, according to the suit, a Washington Mutual manager upbraided her for describing local property values in an appraisal as “declining.” The manager “insisted that [Wertz] change her report to indicate ’stable’ conditions so that the loan could be approved.” All the relevant data suggested otherwise, however, and Wertz refused. The manager then allegedly told Wertz that she would be banned from all further assignments from Washington Mutual if she did not cooperate. Wertz declined to do so — citing federal, state and professional rules requiring her to provide objective and accurate reports free of outside influence. According to the lawsuit, Wertz was then cut off from Washington Mutual business through the appraisal management companies. Wertz’s lawsuit, filed in California Superior Court in Sacramento, charges breach of contract, unfair business practices, interference with her ability to earn a living, fraud, conspiracy and slander, among other alleged violations. …