Appraisals & Underwriting

A full 12-16 months ago, the process of appraising and underwriting, in the course of properly vetting a home loan, was pretty cut and dry. An appraiser's work needed to conform to his or her industry's standards, and closed comparables could be no older than 12 months prior to the sale date. An appraiser's report is then reviewed by an underwriter. Underwriters are the gods of mortgage lending, as they get the final say on whether a loan is approved or disapproved, and they have typically been appraisers or loan officers for many years before getting the nod.



"Underwriting has one more contingency they need to clear..." or "My underwriter wants to see [insert unexpected document]..." These are the sorts of things that lenders tell us, and their clients, in the final hours of putting together, or declining, a loan. Today, the things they ask for have changed.



Appraisers are now allowed only 3 months or newer closed comparables to a property. Where they were previously required 3 closed comparables, they often must produce 5, 6, even 7 comps. Underwriters may not want the best comps, but they want to push liability for botched loans onto someone other than the note-holder. In a market where fewer homes are selling, finding more comps within a shorter time frame is often a beguiling task. Read on about declining values and the havoc they've wrought upon the numerous deals they affect. As you can see, by following the link, the Realtor PAC is working hard to strike back at declining value lending policies, with some early success.

The Bubble Blame Game

I stumbled across a fascinating article this week, in which a British writer evokes the virtues of falling housing values. On the other side of the pond, however, our attitude is not so chipper, despite what Wauchovia is indicating as a drastic improvement on the housing affordability curve. I would have to admit that it is certainly one way we could avoiding blaming anyone for the present real estate funk. In fact, I might be willing to step forward to claim that it was us Realtors who were responsible for such unheralded affordability!

Allow me to take one step backwards, for the time being. Since there isn't exactly a Franz Ferdinand "moment" for the real estate boom, there is, instead, plentiful blame to spread around. It took place over period of at least 3 years, which is the time frame of appreciation gains that we are presently undoing. It's not a matter of who is at fault, but more so, what could participants have done differently: what would have made a difference?

The basic blame alleged against each profession seems to run along the lines of the following:

Realtors - Bought into the notion of invincibly appreciating home values; encouraged home buyers who were trying to buy beyond their apparent means; some acted as the "glue" in transactions that truly should not have happened.

Mortgage Brokers (the salesperson who brokers an individual loan to a home purchaser)- Many advocated for adjustable, reverse amortizing, interest only, 100%, and other higher risk mortgage products; often "filled in the blank" for Stated amounts [income, asset, job, you name it...] for subprime and Alt-A loan products; coached appraisers as to values; coached clients, and all involved parties, as to what they needed to say, or do, in order to get a deal done.

Appraisers - Valuing properties at contract prices, often well above list prices, and in spite of obvious comparables.

Mortgage Lenders (the institutions originating the mortgages sold to investors)- Often knew full well what mortgage brokers were doing to put together deals; uninterested in rehiring any appraiser who had under-appraised a property; collateralizing made sense, at the time.

The list goes on, surely, but this is only the ones responsible on the professional side of the coin. The consumers, be they real estate investors (i.e. - flippers, developers, speculators), first time buyers, million dollar buyers or even corporate relocation companies, have guilt on their hands as well. And builders is a whole other chapter...

My favorite scapegoat of all, however, is THE GOVERNMENT. Municipalities, in particular, are a fabulous party for ridicule. Did your city or county do anything particularly profitable during the boom? Perhaps something that might have backfired into the drastic drop in revenue at the local level? Or maybe we should thank everyone for such terribly affordable homes.

Are Foreclosures in your Neighborhood Worrying you about your Home's Value?

As well they should. Foreclosures, short sales, tax sales, and generally "distressed" sales are obviously negative impacts on your neighborhood's home values. If your neighbor's foreclosure just sold for $250,000, and your home was valued at $300,000, one would worry about whether yours is now worth only what your defaulting neighbor's home sold for. There are two aspects of this concern - The difference between "today's foreclosure" and the prevailing appraisal guidelines of the present market.

Today's Foreclosure v. Yesterday's Foreclosure

In real estate's not so distant past, foreclosures were an ugly, ugly beast. Horror stories floated around that discouraging many home buyers from even considering foreclosed properties in their house-hunts. Before home buyers were evicted from their homes they often left a stinging reminder of their emotional loss. Foreclosures were renowned for being hazardous waste sites - deserving of HAZMAT teams that came in the form of eager, hard-working rehabbers. Every fixture or valuable material was extracted from properties - entire copper plumbing systems, furnaces, faucets, electrical conduit, mill work, toilets and ceiling fans. Filth of every type was left behind - pet feces, pet bodies, months of garbage, unplugged refrigerators brimming with food, walls spray-painted with expletives, the list went on. In the past, most of these properties were purchased sight unseen - perhaps an investor would be able to peek in through windows to understand the mess they might be buying into.

Today, foreclosures are a different animal, entirely. Sure, the ugly ducklings exist, and they go for a severe discount. Some properties have boarded up windows, but most do not. In fact, most foreclosures need such undaunting work as new carpeting in select rooms, some paint, and maybe a door or two that has been punched into, or drywall needing to be patched. In some occasions these properties have been very poorly maintained. In other scenarios, however, the reason home owner's are in a financial bind is because of recent renovation of their home. I recently sold one that had a newly installed furnace, central air conditioning, and a perma-sealed crawl space.

The plus side of this contrast is that neighboring homes that are in foreclosures are not stigmatizing neighborhoods in the manner they have in the past. The negative side is that foreclosures are indeed more similar to resale homes than ever before.

Appraisal Standards

Appraisers utilize comparable properties to your home when they appraise a property for a mortgage lender - be it for a purchase mortgage or a refinance. Presently, appraisers classify foreclosures, short sales, and bank owned properties differently than resale single family homes. The homeowner looking to refinance does not need to judge their property directly against the foreclosure down the street, but may still have trouble finding recent enough sold properties in the area. While foreclosures do not "count against you" directly, appraisers are now restricted more than ever before in what they can, or cannot, utilize in their "comparative analysis" approach. Some lenders require sold properties to be 3 months or more recent - almost all require comparables to be no more than 6 months old. Finding properties that weight in your favor can still be a challenge.

While foreclosures are not a good thing for anyone looking to sell their home, they are not direct comparables to your home. They will compete better than ever when it comes to the attention of home buyers, but a move-in ready home, in great condition, will command an entirely different price point.