Push to cut back on home appraisals sparks controversy


November 30, 2018

WASHINGTON — The Trump administration wants to eliminate professional appraisals on a large number of home-sale transactions — a move that critics say could push the country back toward the see-no-evil days of mortgage lending that preceded the housing crash.

Just before Thanksgiving, the administration’s top financial regulators — the Federal Deposit Insurance Corp., the Federal Reserve and the Treasury Department’s Office of the Comptroller of the Currency — issued a joint proposal that would make traditional appraisals unnecessary for many new mortgages originated for less than $400,000. Instead of a formal appraisal, these homes would receive an “evaluation” by individuals who have no appraisal licenses or certification and would not be subject to current state regulatory oversight requirements that govern appraisers. The evaluators could be an “independent bank employee” or unnamed “third part(ies).” They would, however, have to be “competent” and possess “knowledge of the market, location and type of real property being valued.”

The goal in loosening standards is to lower costs and reduce time in home-mortgage transactions, according to the agencies. There is already an exemption from mandatory appraisals for new mortgages less than $250,000 when a loan is not intended to be sold to government-backed investors such as Fannie Mae or Freddie Mac, insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA).

The new proposal would increase the $250,000 ceiling to $400,000, significantly expanding the reach of the no-appraisal approach. The agencies estimate that if their plan had been in place during 2017, approximately 214,000 home transactions would have been affected. The median existing home price nationwide in October was $255,400, according to the National Association of Realtors, far below the proposed $400,000 threshold.

Appraisers are reacting to the regulators’ plan with outrage — not surprising given the dent it could leave in their incomes. But appraisers say the issue goes far beyond money and instead gets to the “safety and soundness” responsibilities the federal agencies have concerning banks and mortgage lenders. Without a truly independent, professional valuation of a home — its interior, exterior and recent comparable sales — the door could be open to more loans on houses with inflated appraisals designed to “hit the number” needed by the lender to close the deal.

James L. Murrett, president of the Appraisal Institute, the country’s largest group representing appraisers, says adoption of the plan would represent “a return to the loan production-driven environment seen during the leadup to the financial crisis, when appraisal and risk management were thrown aside to make more — not better — loans. Apparently, the nation’s bank regulators have learned nothing from that experience.”

Ryan Lundquist, an appraiser in Sacramento, California, says the financial regulators’ claim that cost is a motivating factor in their proposal is bogus. “In reality,” he says, “the appraisal is one of the least expensive elements in a transaction, especially when compared to what loan officers and the banks make.” Yet at the same time, it is one of the most important for consumers. On a $350,000 home purchase, a $500 appraisal represents 0.0014 of the cost. For a home buyer, a professional opinion of value serves as a check on whether the house is priced too high.

Pat Turner, an appraiser active in the Richmond, Virginia, market, told me if the regulators’ goal is to reduce time and costs, they should cut back on the role of “appraisal management companies,” middlemen who add anywhere from 40 percent to 50 percent or more to what the home buyer pays. Management companies are involved in the majority of new mortgage transactions; they choose the appraisers for assignments, review the valuation and send it to their lender clients. When the home buyer is charged $500, Turner says, the appraiser may only be receiving $250, while the management company pockets the other half. Without the middleman, the appraiser might charge $350 -and that’s all the buyer would pay, a $150 saving.

Equally relevant, he says, is that the presence of management companies in the transaction inevitably adds “days to the whole process.” Turner also notes that evaluations typically do not involve interior inspections, so the value estimate is missing a crucial set of observations. The house might have serious interior or structural damage that lowers its true market value. But if a bank only sees an “evaluation” with no interior inspection, it might well have no clue.

Cooling trend could bode well for home buyers

Cooling trend could bode well for home buyers Kenneth R. Harney on Nov 16, 2018 WASHINGTON – Don’t call it a “buyer’s market.” Don’t call it a “correction.” But the fact is that a sobering change is taking shape in the housing market – an unmistakable cooling trend that defies an economy that is showing impressive growth, has the lowest unemployment rate in years and the highest home-equity levels on record. Anyone thinking of selling or buying a home shouldn’t ignore it. Doing so could cost you money, time and maybe a great opportunity. Call it a re-balancing. For years since the end of the financial crisis, prices in most markets have increased steadily – by single digits annually in most places, double digits in cities like Seattle, San Francisco, Denver and others that have vibrant employment growth plus persistent and deep shortages of homes for sale. Sellers were in the saddle. That was then. This is now- – Sales of existing and new homes have been sagging for half a year. According to data from the National Association of Realtors, resales have been dropping since the spring compared with year-earlier levels. At the end of the third quarter, resales were 2.4 percent below their level at the end of the same quarter in 2017. That’s despite growing inventories of homes available for sale in some areas, reversing the boom-time pattern of bidding wars that pushed prices to record levels and drove buyers batty. – Mortgage rates hit their highest level in nearly eight years in early November – 5.15 percent for a conventional 30-year fixed-rate loan – according to the Mortgage Bankers Association. Lending Tree, an online network that pairs mortgage applicants with lenders, reported last week that the average annual percentage rate quoted to shoppers was 5.27 percent. Buyers with good scores between 680 and 719 were quoted 5.42 percent. Though rates in the 5′s may sound reasonable to people who purchased or refinanced a home a decade ago, they are disturbingly high to millennials and other young buyers and magnify the affordability challenges they already face. Higher rates are also daunting to the millions of owners who have mortgages with rates in the mid-3-percent to 4-percent range. Rather than pursuing a move-up or downsizing purchase – requiring a new mortgage at today’s rates – many of them prefer to hunker down on the sidelines, further reducing sales activity. – Sellers are cutting their list prices. According to research by realty brokerage Redfin, 28.7 percent of prices of homes listed for sale in major markets during the month ending October 14 saw reductions. That’s the highest share of homes with price drops recorded since Redfin began tracking this metric in 2010. One of the key reasons for the cuts- Demand by shoppers is down by more than 10 percent compared with a year earlier. Consumer psychology is shifting as well- A national survey by Fannie Mae released last week found that the net share of Americans who believe it’s a good time to buy has fallen to just 21 percent, while the net share who say it’s a good time to sell is 35 percent. There are other signs of cooling underway that could be cited, but you get the point. The cycle has moved from seller-advantage to at least mildly purchaser-advantage in many parts of the U.S. Bear in mind, of course, that the cooling trend nationwide may not mean the same things are happening in your neighborhood. In fact, some cities with moderate housing costs are seeing price increases, homes selling above list, and tightening inventories. According to Redfin, nearly 40 percent of homes in Buffalo, New York, are selling above list at median prices 8.5 percent higher than last year’s. In Richmond, Virginia, 29 percent of homes are selling above list; in Akron, Ohio, 22 percent are selling for more than the original asking price, as are 23.2 percent in Greensboro, North Carolina. So what does this mean to you as a potential seller or buyer? Top of the list- Speak to multiple realty professionals to get a good handle on where your local market is relative to the national cool-down. If you’re a seller, the key to your transaction will be getting your list pricing right. If you’re a buyer, take your time but keep in mind- If you shop diligently, this fall could be a smart time to catch a deal – a marked-down price on the house you really want.

Fannie and Freddie programs offer options to retirees seeking home loans

Fannie and Freddie programs offer options to retirees seeking home loans Kenneth R. Harney on Nov 2, 2018 WASHINGTON – It’s a common problem for retirees seeking to refinance or get a new mortgage- After their regular employment earnings stop flowing, their monthly incomes drop. They might have hundreds of thousands of dollars stored away in IRAs or 401(k) plans and other investments, but for mortgage purposes, they don’t have enough monthly income to qualify for the loan they want. They look asset rich, income poor. In some cases, that impression can create serious problems – even rejections of applications by loan officers who don’t know how to work with pre-retiree and retired applicants. Take the case of Jim Slaney. He’s a retired industrial real estate broker, lives in a home valued around $1 million in Glenview, Illinois, near Chicago, and has accumulated substantial retirement funds after a 40-year career. He and his wife have stellar credit scores in the 800s and decided to refinance their existing mortgage, an adjustable-rate loan that was about to shift to a higher interest rate. Slaney assumed that his application would be a slam dunk. Not only did he have significant home equity as well as a flawless history of on-time payments to his bank, he even planned to reduce the principal balance on his mortgage from around $600,000 to $400,000. What he ran into shocked him. The bank’s loan personnel “didn’t know anything” about handling mortgage applications from retirees, he told me last week, and they questioned whether his post-retirement income would support a new mortgage at today’s interest rates. His application contained detailed documentation on his substantial financial assets, but the loan officers at his bank were clueless about what to do with them. Most importantly, they were in the dark about program options offered by investors Freddie Mac and Fannie Mae and some private lenders for retirees and pre-retirees. The options essentially recharacterize retirement assets into qualified income for mortgage purposes, sometimes without requiring actual withdrawals of funds. Had the bank personnel been better trained and had more experience, Slaney could have been approved in a matter of days rather than the eight weeks it ultimately took him to get a run-of-the-mill refi. The programs generally take two forms- One treats ongoing distributions from IRAs, 401(k) accounts and similar funds as income that’s acceptable for home-mortgage applications, provided the withdrawals plus other income are adequate to amortize the loan and are likely to continue for at least the next three years. The second option is designed for people who have retirement funds that haven’t been tapped yet. Loan officers can use retirement-account balances as the basis for what functions essentially as imputed income – money that is or will be available to the borrower to supplement regular monthly income when needed to make repayments on the loan. Steve Stamets, a senior loan officer at The Mortgage Link, LLC, in Rockville, Maryland, has used these options periodically, and considers them “a great alternative” when clients have assets but don’t quite fit the traditional rules that define eligible income. He offered a simplified example of how it works- A client had $2 million in mutual funds but not enough regular income to qualify for the size mortgage he sought. The client didn’t want to withdraw money or be forced to liquidate securities. Using Fannie Mae’s program option, he was able to produce qualifying income for mortgage purposes of $3,889 per month using a formula that discounts the fund balances by 30 percent to protect against market fluctuations that might devalue them. This amount was then added to other income the client had to total the amount he needed to support the mortgage application. John Meussner, a loan officer for Mason-McDuffie Mortgage Corp. in San Ramon, California, says that although Fannie’s and Freddie’s options can be helpful, they come with their own complications as well. One of the biggest- The assets in some seniors’ investment or retirement accounts may not qualify if they’re derived from ineligible non-employment-related earnings. Another issue- Loan terms for seniors may be just 10 or 15 years. Monthly payments on such mortgages are higher than those with standard 30-year terms. Not all clients can afford them. Bottom line- If your assets are tied up in retirement and investment funds, and you’re seeking a mortgage based on your post-retirement income, ask lenders about the Fannie and Freddie options as well as alternatives offered by some private lenders. If the loan officer pleads ignorance, you’ll know it’s amateur hour. Shop elsewhere.