Are you in the “what happened” place 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’re not financially challenged? If so, you are not alone. While value is always relative, understanding the valuation process in today’s market and how lenders and the government work in today’s real estate market can help you figure out what’s going on.
Banks
Follow the money and it will always lead you to the culprit. In this case the banking industry. They literally overreached through high-risk lending practices and then packaged the loans as products and sold them to other institutions, essentially spreading the infection. While general lending rates remained low for the previous 3 years with fuel costs rising dramatically in early 2008, credit became tighter and these higher non-market-based lending rates increased when it ended. your entry level adjustable period. The confluence of higher borrowing costs, higher personal expenses and credit crunch toppled the house of cards in 4Q08.
The banks couldn’t refinance everyone because they had no real money and no creditworthiness compared to the debt on the loans. No money = no credit. No credit meant that everything that used revolving credit to finance itself—credit cards, small businesses, large retailers, and homeowners/buyers—was out of business. The core of the economic engine literally fell off its wheels and the cascading effects created the worst economic environment in almost 80 years.
The government decided that the best way to deal with this was to flood the banks that created the problem with money. They illogically assumed that institutions that had not acted in the best interest of their shareholders would now suddenly turn around, even former Chairman Greenspan was astounded by the bank’s duplicity. The bank did exactly what you would expect anyone in financial distress to get bailed out: they covered themselves. First with “performance” bonuses and pay raises to celebrate your good luck; then the reorganization/sale of assets and finally hoarding the remaining cash.
This is why credit remains so tight and most financial institutions remain in a precarious position. They are not actively putting money back into circulation to fuel the economic engine. Less credit = fewer loans – doesn’t mean banks don’t have the money.
foreclosures
Several subprime loans that have been adjusted have gone into foreclosure. The other shoe are the ones that will be adjusted over the next 24 months. As foreclosures increase, home sales will increase; This does not indicate that market conditions are improving, just that some buyers are buying properties that banks and individuals are throwing on the market. Home values won’t start to recover until this inventory is absorbed and credit becomes more available.
HVCC and the Law of Good Intentions
To help us all, the government saw the problem as the appraised value of the properties, not the lending practices as the next big piece of the problem. They adopted New York Attorney General Andrew Cuomo’s “Home Valuation Code of Conduct” (HVCC). This changed appraisal practices with the intention of improving the current real estate market. Specifically, the HVCC prohibits mortgage brokers and real estate agents from choosing the appraiser in a real estate transaction. The code is meant to ensure fair and neutral appraisals, but it actually reduces the quality of appraisals and increases costs for homebuyers by creating additional intermediaries known as Appraisal Management Companies (AMCs) and more red tape. The HVCC also allows Fannie Mae, Freddie Mac, and the FHA to stop buying mortgages from lenders that do not adopt the code with respect to single-family mortgages. No pressure.
Essentially the top of the food chain (banks) got billions for bailouts and bonuses and at the bottom end small businesses, independent fee based adjusters got higher costs, reduced fees, regulations puzzling and small business. It is estimated that tens of thousands of consumers have already been denied the opportunity to enjoy historically low rates. This is a classic example of the Law of Good Intentions: something done in the right spirit that unfortunately backfires.
appraisers
Real estate appraisers are traditionally licensed by the state in which they operate and appraise within a given geography, so over time they develop an excellent “feel” for market value. They are usually independent business people who perform appraisals for a fee: no appraisals = no money. Appraisal fees for regular homes can range from $200-$400 depending on the area and amount of work. Sounds good until you calculate business costs – insurance, MLS, etc. So you need 12-20 appraisals a month to make money.
With the advent of the Cuomo legislation, “impartial” AMCs are pocketing up to 50% of the total assessment rate. Inspections of the property are being performed by unlicensed or inexperienced individuals and their appraisals are being “approved” by third parties who have never physically seen/inspected the property. This also means that instead of 12 to 20 appraisals to make money, you now need 24 to 40. Doing the exact same thing you were doing 60 days ago and since it takes about 2 days in a perfect world (live quote, comparison, research, paperwork, etc.) to do an appraisal – you are now more likely to start losing money in your business.
By law, no one involved in the transaction can report any problems directly to the adjuster. So real estate transactions that could have closed are now failing, because values are determined in the dark and the only person who could support a local circumstance, the appraiser, can’t help. The result – continued devaluation of the property.
With home loans being denied due to inaccurate appraisals, borrowers are forced to apply with other lenders who, in turn, have to charge the consumer ANOTHER APPRAISAL FEE to proceed with the transaction. Benefit -AMC- Loser – the consumer and the appraiser.
Until the confluence of the credit freeze, aggressive government regulation, and consumer confidence can crumble: valuations and lending will continue to struggle. Step One: Eliminate new government regulation so more loans flow through the system increasing consumer confidence. There’s no reason good things can’t come from the bottom up instead of bad things from the top down.
