Are some realty agents hyping their numbers?

Are some realty agents hyping their numbers?

Kenneth R. Harney on Jan 29, 2016

WASHINGTON – Are some realty agents hyping the pricing information on closed sales they report to their local multiple listing services? And if so, should you care?

A first-of-its-kind study by appraisal and real estate experts suggests that maybe you should. Researchers compared closing documents – which are supposed to indicate the final price in sales transactions – with the prices that agents actually reported to their local MLS and found that in nearly one of every 11 cases (8.75 percent) there were discrepancies. Overstatements of final price exceeded understatements by a ratio of nearly three to one. In one case, the price reported to the MLS was 21.4 percent above the actual closing price.

The study, published in the latest issue of the Appraisal Journal, is unusual because settlement statements (traditionally the “HUD-1″ form, now the “Closing Document”) are not public. The researchers, three professors at Florida Gulf State University, obtained the HUD-1 statements from two banks that had extended mortgages on the properties. They then matched them up with the prices reported by realty agents to the local MLS. A total of 115 listing agents or brokers made the reports on the 400 sales in the statistical sample.

One of the co-authors, Kenneth M. Lusht, a past president of the American Real Estate and Urban Economics Association, told me that some of the errors could simply be clerical mistakes – “typing errors” – but others could be the result of agents “purposely inflating” the prices they reported to the MLS.

Though the average overstatement was not huge, 6.7 percent, the authors expressed concern that because the home appraisal system depends on accurate price reporting to MLSs, errors can distort appraisers’ valuations. Appraisers use MLS pricing data to identify “comparable” houses to help estimate the values of homes on the market for sale.

Accurate appraisals are important to home buyers because lenders use them to help decide whether to approve their applications. Inaccurate appraisals also pose potential risks for lenders – if values are overstated, they may have less true “collateral” backing the mortgages they make, as they found to their horror during the housing bust of the last decade.

Multiple listing services exist to share property data among member realty brokers, appraisers and other real estate professionals. According to the Council of Multiple Listing Services there are more than 800 MLSs in the U.S., typically with rules emphasizing “data integrity.” Individual agents are supposed to report pricing and other property information to the MLS so that it can be viewed and used by other members.

Realty brokers, agents, appraisers and MLS officials I spoke with last week had starkly different interpretations of the study results. Several brokers and agents said they observe inaccuracies in pricing reports to their MLS frequently or occasionally. Several appraisers agreed. Others said they encounter little or none.

Joshua Hunt, founder and CEO of Trelora, a Denver realty brokerage, said “many agents aim to show a higher closed sale price to show that their list-versus-sold percentage is higher (and) they will use this in their listing pitch to show how great they are.” They do this, Hunt said, by omitting seller concessions – adjustments to the final price that reflect either repairs or closing costs the seller has agreed to fund – from the price they report to the MLS. The MLS doesn’t pick up these intentional misreportings, he said, because “there really is no audit system in place” to spot them.

Alexis Eldorrado, managing broker at Eldorrado Chicago Real Estate, says this “is not common in Chicago,” mainly because the local MLS has “an anonymous violation reporting system” that allows agents who observe misreporting of final prices to flag them for disciplinary action by the MLS if not quickly corrected.

Kathy Condon, president of the Council of MLSs and CEO of Massachusetts’ largest MLS, agreed. In an interview, she said “most MLSs do self-policing” rigorously to guard against inaccurate data. At her MLS, five staffers monitor reports and search for errors.

Bottom line- The jury is out on this one. Maybe the pricing errors found in the study sample were not typical. But maybe errors are more common than MLSs care to admit. As one Virginia appraiser told me, “we find inaccuracies quite often and have to verify information (on prices, square footage, etc.) before we use it.” He said he has seen pricing inaccuracies “more than two dozen times in the past year” alone.

Keeping your home deal on track in the new year

Keeping your home deal on track in the new year

Kenneth R. Harney on Jan 22, 2016

WASHINGTON – So you’re selling or buying a house in 2016 and you want to make sure your transaction goes to closing without glitches. Is there any guide to the potential problems most likely to disrupt deals or delay them? If you know the major pitfall areas, maybe you could take steps in advance to avoid them.

Absolutely. New research pinpoints the biggest causes of home real estate delays and contract terminations. In an internal survey of 2,643 realty agents conducted last month but covering sales and purchases during the previous three months, the National Association of Realtors found that 32 percent – nearly one third – of all transactions encountered delays of some sort. That’s probably higher than you imagined.

The big three-

- Buyer financing setbacks.

- Home inspection issues.

- Appraisals that diverge from the agreed upon contract price.

According to the study, of the 32 percent that experienced delays, 46 percent were triggered by “financing issues,” which is up from 40 percent during the first half of 2015. Appraisal-related problems caused delays in 21 percent of transactions and home-inspection issues in 14 percent. Of the nearly one of every 16 (6 percent) of deals that turned into total disasters and fell through, home inspection and financing were the primary culprits. Sixteen percent went south because of the appraisal.

Here’s a quick look at each. Whitney Watson, a loan officer for First Heritage Mortgage in Glen Allen, Virginia, says financing falls apart for myriad reasons, some of them readily preventable. For example, credit scores can change between loan approval and closing – enough to render the would-be buyer ineligible for the mortgage. Though she warns clients not to incur any additional credit during this period – no new car purchases, no new furniture on credit, no new credit activity whatsoever – she gets phone calls from buyers with pending home purchase contracts pleading for an OK ((okay)) to lease a new auto or buy furnishings for the new house.

Debt-to-income ratios also can change when an underwriter discovers that a buyer failed to disclose ongoing payment obligations such as child support and no longer has acceptable debt ratios. Watson’s advice- “Tell your loan officer everything at application,” and avoid new debt or anything that could affect your qualifying income like changing your employment.

Home inspections are another quicksand pit. When an inspector finds defects in the property under contract, things can get tricky. Will the seller make the repairs before closing, cut the price or set aside escrowed funds to cover the costs? Are the problems found by the inspector as serious or expensive as the inspector alleges?

Diana Dahlberg, broker and owner of 1 Month Realty south of Milwaukee, recounted a situation where an inspector left both the home sellers and buyers in utter shock. While the seller was nursing her new baby and the buyers standing nearby, the inspector warned that there was a serious defect in the home’s furnace. He looked straight at the nursing mother and said, “If you don’t want to kill your baby, you better get a new furnace right away!”

The buyers “were totally freaked” by the inspector’s remark and bailed out of the contract, Dahlberg told me last week. Subsequent examination by a different inspector found nothing wrong with the furnace – no safety threats to the child or buyers – but the sale was dead.

Deal-killer inspectors may not be avoidable by sellers, but one way to be ready for them is to get a pre-listing inspection by a reputable professional before you put the house on the market. That allows you as a seller to fix anything important in advance and at the very least have defenses against inspection findings that might be at least partly aimed at lowering the price to the buyers’ advantage.

The same goes for appraisals. You can hire a top-notch local appraiser to do a pre-listing valuation of your home for a modest fee. Not only will that provide useful information for the listing price, but can be a counterweight when an appraiser with inadequate knowledge of local market conditions comes in with a low-ball number that threatens the whole deal. With the pre-listing valuation in hand, you can appeal to the lender to reassign the work to a second appraiser with local knowledge and experience. All this may delay the deal a little – that may be unavoidable – but it could also save it.

Updated credit scoring could open window for more buyers

Updated credit scoring could open window for more buyers

Kenneth R. Harney on Jan 8, 2016

WASHINGTON – If you’ve been frustrated that the credit scoring system has prevented you from getting a home mortgage, 2016 could be a watershed year. Important changes are in the works.

The biggest players in the mortgage field are under pressure by federal regulators and Congress to adopt more inclusive and updated credit scoring models that incorporate non-banking forms of credit, such as rent, utilities and cellphone payments to supplement what’s in consumers’ standard credit files. For people who have “thin” files with minimal data at the national credit bureaus – or no files at all – the changes could bring tangible improvements.

In mid-December, the federal agency that oversees giant mortgage investors Fannie Mae and Freddie Mac ordered both companies to wrap up their plans for adopting “alternate or updated credit scores” this year and move ahead with putting them into action “as appropriate.”

At roughly the same time, legislation was introduced with bipartisan support in the House called the Credit Score Competition Act. Its goal, sponsors said, is to expand access to mortgage money for large numbers of creditworthy loan applicants – especially first-time buyers and minorities – who currently are shut out of consideration by the two companies’ credit scoring practices.

“Fannie Mae and Freddie Mac are the largest mortgage purchasers in the nation,” said Rep. Terri Sewell (D-Alabama), co-sponsor of the bill with Rep. Ed Royce (R-California), “but they rely on credit score models that don’t necessarily take into account something as simple as whether borrowers have paid their rent on time. Homeownership is an integral part of the American Dream that shouldn’t be out of reach for low-income, rural and minority borrowers who lack access to traditional forms of credit.”

Royce said the bill would eliminate “the credit score monopoly at Fannie and Freddie,” ending “an unfair practice that stifles competition and innovation in credit scoring.”

Both Fannie Mae and Freddie Mac rely on credit scoring tools from FICO, the dominant supplier of credit analytics for the mortgage industry and best known for its three-digit FICO scores that run from 300 (terrible credit) to 850 (outstanding credit, low risk of default).

The scoring models used by Fannie’s and Freddie’s automated underwriting systems have been in place for years without major updates, critics complain, and do not incorporate more recent, consumer-friendly improvements designed by FICO itself and by competitor VantageScore. FICO Score 9, introduced in the summer of 2014 but never adopted by Fannie or Freddie, provides fairer treatment for millions of consumers whose scores currently are depressed by medical bill collection accounts in their credit files or who have files with scant information because they make little or no use of the traditional banking system. Mortgage applicants whose only major negatives in their credit bureau files are medical collections stand to see their FICO scores improve by a median 25 points, according to the company.

VantageScore LLC, a joint venture started by the national credit bureaus – Equifax, Experian and TransUnion – to compete with FICO, has introduced its “3.0″ model that it claims can provide scores on as many as 35 million “previously unscoreable consumers.” The new score is widely used by banks and credit card companies but is frozen out at Fannie Mae and Freddie Mac. The Vantage scoring model incorporates information on a consumer’s rent, utilities and telecommunications payment histories that get reported to one or more of the national credit bureaus. Studies have shown that inclusion of alternative credit data such as rents can significantly improve consumers’ scoring outcomes.

One study by Experian found that out of a sample of 20,000 tenants living in government-subsidized apartment buildings, 100 percent of previously “unscoreable” tenants became scoreable once their rent payment histories were used in calculating their credit scores. Furthermore, the results showed that 97 percent had scores in the “prime” (average 688) and “non-prime” (average 649). Both score categories could help qualify these current renters to obtain home mortgages, provided their income, employment and debt ratios meet Fannie Mae or Freddie Mac underwriting requirements. But that won’t happen until both companies update their scoring models.

What’s the prospect for that? Fannie Mae officials say scoring system changes involve significant costs, not only for the company itself but for the lenders who sell them mortgages. But when Fannie’s and Freddie’s regulator – and maybe Congress – tell them to get moving on it, the odds increase that something good will happen, sooner rather than later.