Are you in a “what if” position when it comes to your home, its value and equity? Have you recently applied for a simple refinance or homebuyer’s loan and been turned down, even though you have no financial problems? If so, you’re not alone. While value is always relative, understanding the current market appraisal process and how the lenders and government operate in today’s real estate market can help you understand what is happening.
Follow the money and it will always lead you to the culprit. In this case, the banking industry. They overextended themselves with high lending practices and then packaged the loans as products and sold them to other institutions – essentially spreading the infection. In the year Despite the 3-year low in total lending rates beginning in early 2008 with the dramatic rise in oil costs, these high non-market lending rates increased as credit tightened and the entry-level adjustment period ended. Increased borrowing costs, higher personal expenses and tighter credit caused the house of cards to collapse in 4Q08.
The banks couldn’t refinance everyone because they didn’t have any real money against the loan. No money = no loan. No credit means anything that can be used to finance revolving credit, such as credit cards, small businesses, large retailers and home owners/buyers. The core of the economic engine literally fell off the wheel and the ripple effects created the worst economic situation in 80 years.
The government has decided that the best way to solve this problem is to flood the banks that created the problem with money. They illogically assumed that institutions that had not served their shareholders’ interests would suddenly change, and even former chairman Greenspan was surprised by the bank’s duplicity. The bank has you covered for anyone in dire financial straits – they’ve got themselves covered. First, to celebrate their good fortune with “performance” bonuses and salary increases; Then property exchange/sale and finally saving the remaining money.
This is why credit remains very tight and most financial institutions remain in a precarious position. They are not actively putting the money back into driving the economic engine. Less credit = fewer loans – it doesn’t mean banks don’t have the money.
Several high-risk mortgages that were restructured went into foreclosure. The other shoes are fixed in the next 24 months. As foreclosures increase, home sales increase – this does not indicate an improvement in market conditions, as some buyers are taking properties that banks and individuals are putting on the market. Home prices will not begin to recover until this inventory is removed and credit becomes more available.
HVCC and the Law of Goodwill
To help us all, the government sees the problem as the next big part of the problem is not the property appraised loan, but the loan process. New York Attorney General Andrew Cuomo has adopted the “Housing Value Code of Conduct” (HVCC). This changed appraisal practices in an attempt to improve the current housing market. Specifically, the HVCC prohibits mortgage brokers and real estate agents from selecting an appraiser in a real estate transaction. The code is intended to ensure fair and impartial appraisals, but it reduces appraisal quality and costs homebuyers by creating more intermediaries, appraisal management companies (AMCs), and more red tape. The HVCC also allows Fannie Mae, Freddie Mac and the FAA to stop buying single-family loans from lenders that don’t accept the code. There is no pressure.
Basically, the top of the food chain (banks) got billions in cash and bonuses, and at the bottom, small business, fee-based independent appraisers got higher costs, reduced fees and confusing regulations and business. It is estimated that tens of thousands of consumers were denied the opportunity to enjoy historically low rates. This is a classic example of the Law of Goodwill – something done in the right spirit unfortunately backfires.
Real estate appraisers are typically licensed in the state they work in and appraise within a specific geography, so they develop a good “feel” for market value over time. Often independent traders work on paid assessments – no assessment = no money. Appraisal fees for standard homes can range from $200 – $400 depending on the location and the amount of work involved. Sounds OK until you consider the costs of doing business – insurance, MLS, etc., then you need 12-20 reviews a month to make any money.
Since Cuomo’s rule, “unbiased” AMCs are taking up to 50% of the total assessment fee. Unlicensed or inexperienced individuals are conducting property inspections and their appraisals are “signed off” by 3rd parties who have never seen the property in person. And that means 12 – 20 reviews to make any money – now you need 24 – 40. Doing the same thing you were doing 60 days ago and in a perfect world it would take around 2 days (live appointment, comparison, research, paper, etc.) review. To do – now there is a high probability that you will start losing money in your business.
By law, no person involved in the transaction can transfer any matters directly to the assessee. So real estate transactions that could have been closed are now falling through, because values are being determined in the dark and someone who can support the environment, the appraiser, can’t help. The result – continued destruction of property.
As mortgage loans are rejected due to inaccurate appraisals, borrowers are being forced to apply to other lenders, who must charge the consumer another appraisal fee to proceed with the transaction. advantage – AMC – Loser – The consumer and the reviewer.
Until the credit mix cools, which can be solved by crippling government regulation and consumer confidence – appraisals and mortgages will continue to have problems. The first step is to remove new government regulations to keep loans moving through the system, which boosts consumer confidence. There is no reason why good cannot come from the bottom up rather than bad from the top down.