My New Blog

I received several emails this morning that has just started my Friday on the right foot.  It appears that the House Financial Services Committee passed a new bill to introduce to the House that will put HVCC on hold till things can be better figured out.

This is the most encouraging news I have received in a long time.  I hope it will give you some encouragement too.  While the HVCC has reduced value pressure, it has brought on a whole lot of other, what I feel, negative issues.  I have previously posted about this, feel free to read that post.

In the meanwhile, please check out this link where you can watch a very quick video on the details of this bill and a brief interview with NAMB President Jim Pair concerning this.  A big thanks to NAMB and the NAR, and all other folks and organizations that are helping get the HVCC put on hold to find more viable alternatives.

The End of the HVCC?

UPDATE: Since I first made this particular blog post, the President and CEO of a small community bank sent me an email, to which I absolutely feel terrible about.  Here is what he said:

"Read your blog concerning the HVCC. Your rant about banks loving the downward spiral in home prices and being glad they don’t have to make loans is wrong, ridiculous and offensive. “Bank gets appraisal and is ecstatic because they don't have to give the loan now, but still made $300 on the appraisal fee.” Do you understand that we can’t stay in business if we don’t do business, and that a key part of our business is making loans? To suggest we’re glad when we can find an excuse to not make a loan, and to suggest we lack integrity and want to nickel and dime folks for fees on loans we don’t expect to make is inane. You should know better."

I quoted some of his email, because he is right, and I feel bad about painting the whole "banking" industry in one broad stroke, when in fact, there are many banks out there that do care about how they do business, have ethics, and strive hard to keep a good reputation and create/keep good customers.  In an effort to convey to the reader the frustration the industry, and espeically me as an Appraiser, is feeling, I over illustrated the process.

With hat in hands, and my apologies to him, his bank, and all other banks and lenders that are not responsible for the current distasteful situation, I have reworded and added some things to my original blog.  This is done in hopes to better define the difference between some very large banks that own the largest AMC's- that are in large part responsible for the meltdown this country has suffered-and the other banks that have been honest, forthwright and upstanding, like his bank.

Finally to make it clear.  The banks and lenders that have to abide by the HVCC are ones in which plan on selling the loan to Fannie Mae and Freddie Mac.  The HVCC only applies to Fannie and Freddie funded loans.  Many banks and lenders do their own lending and keep the loans in house.  In addition, banks and lenders that do sell their loans to Fannie Mae and Freddie Mae are not all "the villains".  In fact, most of them are frustrated with the whole process just as much as the rest of us.   

Some AMC's also deserve the benefit of the doubt.  The ones that do their best to compensate the Appraiser fairly, not gouge the borrower, are willing to allow enough time for the Appraiser to do a competant job on the assignment, and that genuinely care about providing a good product to their clients get a thumbs up from me.  I work for a few of them and have enjoyed the relationships I have with these type of AMC's.

Been a long time since I blogged, since business is really slow lately I have the time.  I have only the HVCC to thank.

On May 1, 2008 the HVCC (Home Valuation Code of Conduct) became mandatory.  If you don't know what that means (no it is not heating and air conditioning- that is HVAC) please click here.  Essentially it says that a mortgage broker cannot order an appraisal directly from an appraiser anymore.  This has wiped out my major clentele, and has severly hamstrung my opportunity to run a business in the free enterprise system. 

Bottom line, appraisers hate it, mortgage brokers hate it, borrowers hate it, and some banks that own their own AMC love it.  Why?  Here is how an appraisal is ordered now a days (please note that this is a scenario in which a lender or broker that has to comply with the HVCC goes through.  And is meant as tongue in cheek to relay the frustration everyone is having.  There are many banks and lenders that do their own funding that don't have to do this, and are just as upset about being grouped into the large category as "the banks" because they have not, and are not, responsible for the negative stigmatizm that the connotation of the word "bank" currently brings out):

1- mortgage broker submits loan application to lender

2- lender either finds a middle man (AMC- Appraisal Management Company) to find an appraiser, or creates their own AMC (which may be a great added profit center for them.

3- lender tells broker the appraisal will cost $550 (varies, but usually more than what appraisals cost if ordered directly from the appraiser).

3- broker calls borrower and tells them they need $550 for the appraisal.

4- borrower asks if their house will appraise for as much as they need it to, and if the broker does not use that particular lender can they use that same appraisal with a different lender.

5- broker tells borrower that he/she is sorry.  He/she does not know if it will appraise for the needed value.  If it doesn't, the borrower is out the money.  Additionally, if they switch lenders, the borrower will need to cough up $550 more to order another appraisal because the appraisal cannot be portable.

6- borrower gets angry, swears for awhile, and coughs up the $550.

7- broker sends money to lender.  Lender orders appraisal through AMC.

8- AMC starts calling appraisers within the vicinity of the house being appraised and asks the following "we have an appraisal order for such and such address.  How much do you charge, and how fast can you get it done?".

9- Appraiser says, "hold on let me look up the property".  "OK, I see that it is a standard, non difficult assignment.  The cost will be $350 and I need 4 business days to set the inspection, inspect the property, and type up the report.  So you can have it in 4 business days."

10- AMC (usually someone hired by the AMC that is located in India and cannot speak very good english) says: "ok, we'll get back to you, good bye".

11- AMC calls the next appraiser, and the next, and the next.  You get the idea.  Finally the AMC finds an appraiser that will do the appraisal for $225 and do it within 2 days.

12- AMC assigns the appraisal to the cheapest, quickest (read- not the most competant or professional) appraiser.

13- Appraiser finishes appraisal and value is $100k below what is needed.  Comps are all foreclosures or bank owned properties, or properties that aren't really comparable.

14- Bank gets appraisal and is ecstatic because they don't have to give the loan now, but still made $300 on the appraisal fee.  They promptly let the broker know that the appraisal came in too low, but if the broker wants to dispute the appraisal, the broker can cough up another $300 for an appraisal review.

14- Broker coughs up another $300 for the review.  Lender orders a review with the AMC.  AMC goes through the process of calling appraisers again.  Finally finds one that will do it for $100.  The appraiser reviewer breezes over the appraisal and puts his/her stamp of approval on it (because they are not getting paid enough to actually do an in depth review of the original appraisal). 

15- AMC is ecstatic again because they don't have to loan the money and made another $200.

16- Broker finds another lender and the process starts over again.  The borrower ends up paying over $1000 for appraisals they can't use. 

17- The borrower can't refi. and quits making payments.  The house is foreclosed on.  The market continues to spriral downward.

That was kinda long, but summarizes what generally happens (keep in mind that sarcasm is being used to make the emotional point that the way things currently are is frustrating to Appraisers, Mortgage Brokers, and some lenders and banks).  The kicker to this is that most of the major lenders (who have to comply with the HVCC) own their own AMC's.  So it is a whole new profit center for them.  They are so excited (tongue in cheek).  Not only have they gotten free money from the bailouts, they are making more money now on the backs of appraisers and potential borrowers, in the form of appraisal fees.  However, competant appraisers are dropping the profession like vomit on a shirt, because they can't pay the bills anymore at the cut rates AMC's are expecting to pay.  The borrowers are spending more money,they ususally don't have, for appraisals that aren't always very good.  Mortgage Brokers are dropping and leaving the business just like the appraisers because they can't get a loan closed.  And several local and national banks that do their own lending and that do not have to comply with the HVCC are frustrated about getting a bad wrap and being blamed for something they are not responsible for, but are accused because they are a "bank".

Bottom line, I don't like it.  It is not only hurting appraisers, but it is costing the public billions.  Someday I will have to figure out what the cost of this is in the form of economic loss to the states.  Hopefully the state senators and congressman will crunch some numbers and realize that this is hurting their voters and local economies big time.

NOTE:  I am slow because I am refusing to accept cut rate fees.  I don't feel like I can do a legitimate and fair job for the fees being offered by the major AMC's.  Hopefully other appraisers are doing the same thing.  And hopefully, we as the public can somehow band together to put an end to the HVCC.  It was well intentioned, but terrible, terrible execution.  Furthermore, don't lump in the good banks from the banks that are actually responsible for this mess.  The good banks, and from my experience they are usually local, smaller banks, that do their own in house lending and care about their relationships with their customers, as well as their appraisers, and are visably just as upset.

It seems that there are big, big changes in the lending and appraisal industry much more often than what used to be the norm.  Today is no different.  Today is the first day that any appraisal done for an FHA insured loan has to be done by a Certified Residential Appraiser.  To explain a little further, I will explain the different level of Appraisers.

When it comes to state licensing levels there are three categories of Real Estate Apprasiers:Licensed Appraiser, a Certified Appraiser, and a Certified General Appraiser. 

A Licensed Appraiser can do residential appraisals for values up to $1,000,000 and can do up to four plex's with a value of no greater than $250,000. 

A Certified Appraiser can do residential appraisals for a property of any value, and do four plexes regardless of the value.  Any property that has more than four units, is considered a commercial property.

A Certified General Appraiser can do any residential and commercial appraisal, regardless of value.

Prior to today, a Licensed Appraiser could do FHA Appraisals, provided they had been approved by FHA.  After today, only Certified Residential and/or Certified General Appraisers can do FHA Appraisals (provided of course that they have been FHA approved).

The net effect of this is that there are now fewer Appraisers that can do FHA Appraisals.  All the Appraisers that were Licensed, but not Certified, now have to scramble to become Certified, or lose the FHA business forever.  Mortgage Brokers that relied on Licensed Appraisers to do their FHA appraisals, now have to find different Appraisers that are at least Certified and FHA approved.

Fortunately we are Certified Residential Appraisers that are also FHA approved.  I do feel bad for the Licensed guys though that just lost some FHA work.  I hope they can become Certified and recover that business in the near future.

If you need an FHA Appraisal done, please don't hesitate to contact us.  We can help.

Yesterday I spoke to a friend who is applying for a mortgage to purchase a home for he and his family.  His experience really brought to light the current housing and lending nightmare to me.  My friend is no slouch.  His credit score is good, and he can show an average income for the past 2 years of over $100k.  He is trying to buy a new home for $450k.  In his conversation with the mortgage broker on how much income he needed to show to qualify for the loan, and how much money he would have to put down on the property, he came away very dissappointed, and him qualifying for the loan was marginal at best.  Here is a guy who makes well over what the average US income is, and is buying a home at an average price, and he is having a hard time qualifying!  He related to me that he asked the mortgage broker about how can all of these people around here, that he knows makes less than he does, live in homes that required mortgage amounts far and above what he was trying to get.  The mortgage broker responded that had he applied 8 months to a year ago, or more, he could have easily qualified, just like all of his friends had.  Back then, a person could get a loan without averaging two years worth of reported income, put very little money down, and there were three times the amount of lenders and programs that could be drawn upon, at the least.

So now the question, is the current depressed housing market a result of over supply, or a result of lender's having a stranglehold on current lending guidelines- thus making it virtually impossible for folks to buy or refinance?  And what is going to have to happen to make the real estate market recover?  Kind of like the chicken and the egg question.  There are all sorts of opinons on which of these caused the problem, but from my point of view, the biggest solution is going to have to be the lender's being willing to loosen guidelines a little to allow a larger demographic to actually qualify.  In my day to day appraisal experience, I see plenty of demand and desire from potential buyers, but the range of folks that could actually qualify for a loan is almost nil.  The result is that homes and vacant lots sit on the market for much a much longer time period, with several price drops.  I really don't think it is a price point question-ie. lower the price till someone gets interested.  I think that most of the population does not have enough cash to put down on a house to qualify for a smaller loan.  If a person cannot find a bank to borrow from, those properties are going to continue to decrease and decrease and sit and sit. 

A person could reason that this is an inventory problem and that as prices get lower and lower the spectrum of potential borrowers will broaden because the loan amounts will be lower.  This may be true, but at what price range will things have to be at to use up the inventory?  But then the predicament arises that at what point do values drop before people that can afford their current payments, but now see the value of their home drop so precipitously, determine it isn't worth it and just walk away, thus causing more foreclosures and defaults. I know this is already happening in certain parts of the country. Projecting that amount is disconcerting at best, and illustrates a definition of a downword spiral.

I don't know what will happen, but it appears to me, from my friend's experience this week, that if the lender's loosened up a little, the value drop would be much less in both time and values.  But do the lender's even have the capital to loosen up with?

I wish I had better news to blog about.  Currently, most of my appraisal orders are for where values are less than $300k.  I do occassionally get some orders where values are over the million dollar mark.  The owners and buyers of million dollar properties either have so much cash and/or income that qualifying for a loan is still obtainable.  Matching up this observation with current inventories on the MLS shows that the majority of people cannot buy homes between these price ranges (300k to 1 million).  Interesting because this price range was where the majority of values fell into pre mortgage and real estate meltdown.

I get a lot of the same questions from Lenders on how the appraisal business did in 2007.  I would assume for most appraisers who do work mostly for lending transactions (which would be the bulk of our business), the answer is generally "probably the same as your business".  When the mortgage shakeup really hit around last May or June, our business volume dropped by about 50%, overnight, and lasted this way for about three months.  The last quarter of 2007 saw an increase in business, but still short of what it was the first two quarters of 2007.  I would speculate that the increase in volume in the last quarter, despite the holidays, was because lenders got the learning curve behind them on what type of client to market to, and what loan product would work, in light of all of the loss of subprime lending, and tightening of underwriting guidelines.  This is only speculation on my part though. 

As far as a more in depth disclosure on lending competition goes, there has been a significant drop, and those of you still in business have lost a significant amount of competition-which is great if you are sticking it out.  Quite a few of our clients from the beginning of 2007 no longer are in business.  Case in point: while delivering presents to our clients before Christmas, I was surprised to show up at several offices to deliver the present, only to find that it was vacant, or reoccupied already.  Additionally, collection accounts have gone way up, and this is unfortunate.  We never had to take anyone to court prior to this month for non payment.  This month alone we have 5 past clients scheduled for court dates, and most of them are for small amounts, but are over 6 months delinquent.  Please understand that this is disconcerting to me, as I understand that a lot of us are still reeling from a significant drop in income this year.  The really unfortuate thing is that all these clients have/had to do was to respond to our calls and letters and work it out, instead of ignoring us altogether.  If there are any lenders out there who are reading this, please understand that most appraisers are in the same financial boat as you are and are more than happy to make payment arrangements that will work.  I personally would rather keep positive relationships in tact, and it is not all about the money.  I will speak for myself and say that we are not like a credit card company, we won't raise the interest rate, we won't sock you with late fees, we won't hammer your credit, etc., etc. If we can communicate, we will show you some heart.

Well, hopefully that will enlighten some on an appraiser's point of view.  Looking forward, I hope 2008 is not as cataclysmic as 2007 was.  I will just report on what is currently going on out there.  Currently, here in Northern Utah, things are pretty flat.  The price ranges from 400 to 1 mil. has seen some significantly longer times on the market, with values coming down slowly.  Price ranges below 400k are still rising, or relatively flat, depending on the county.  Buildable lots have seen significant decreases in value, and increases in inventory and market time.  I have not interviewed all county planners, but it appears that the application for subdivisions has gone down-which is a good sign, as this will allow existing inventories to be absorbed, and a stabalization in market values, and decrease in marketing times.  I know we in Utah are fairing much better than the folks down in Arizona.  I personally have had a condo, priced at 139k, in Phoenix for sale for over 4 months, and the volume of traffic and calls has been almost nothing.  It is competitively priced, has been gutted and remodeled, and is in an attractive area.  I am just at a loss on how something this low priced is taking so long to create interest, let alone sell.

Till next time, as one of my mentors always said "keep your head in the clouds, and your feet on the ground".

5-year mortgage rate freeze looms

By MARTIN CRUTSINGER and ALAN ZIBEL, Associated Press Writers

The Bush administration has hammered out an agreement to freeze interest rates for certain subprime mortgages for five years to combat a soaring tide of foreclosures, congressional aides said Wednesday.