AUTHOR: Micheal W. Armentrout, VP AM Appraisals, Inc. Mike has been involved in full time real estate valuation since early 1992 and has experience in numerous Central Ohio markets.
The days of common sense lending have been long gone for many years and in retrospect were replaced by an aggressive feeding frenzy that subsequently drove home ownership to record levels. Now the lending industry finds itself knee deep in a fear-based climate at the opposite end of the spectrum.
With most of the large financial institutions following Fannie Mae and Freddie Mac’s lead, quality borrowers are more frequently finding themselves the victim of the mortgage fallout rather than the beneficiary. A
fter being told that unqualified borrowers and over-inflated appraisals were some of the primary contributors to the financial crisis, it seems as though their prescribed remedy is to scrutinize well qualified borrowers while first time and low down payment borrowers skate through the same process.
My practice has seen a dramatic increase in underwriting conditions on appraisals where the borrower had a high credit score and more than adequate equity. One particular case involved a high credit score borrower applying for a refinance on a property with nearly 50% equity. Yes, the appraisal was solid and yielded a conclusion that was in the mid range for the market and cited current listing activity. Only after three addendums and a plethora of supporting market data, was the loan reportedly granted.
I am not a lender and do not profess to know every aspect of that field, but this simply makes little sense. What would be logical and justified is a tightening of loan to value ratios or perhaps revised quality control measures even if it resulted in less loans being completed.
Recent policies have been adopted that change LTV ratios if an area is reported to be in a declining market or there is an oversupply of properties but tightening down on “good risk” borrowers seems to be a waste of resources that should be focused in areas which caused the mortgage meltdown in the first place.
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The appraisal review process is also a worth-while investment for lenders to analyze risk and collateral but only if it is done in a proper manner. Every agency wants to save money but AVM’s and particularly BPO’s are not the way to cut overhead. Independent peer review is preferred to an in-house appraiser who despite their claims, are often paid to advocate for the lender.
Another area of concern is the borrower who has a soon to expire adjustable rate. There are reports of these borrowers calling the lender to renegotiate or refinance into a fixed rate product, only to be told that there is nothing they can do until the borrower is already late on payments. Have the lenders decided that the risk of foreclosure is less than the take-back fees and principle loss they will incur upon a loan default, or do they know that many will continue to pay the increased payments because of the current difficulty in obtaining a loan?
Recent Realtor blogs have also indicated that lender short sales could be artificially driving the markets lower because of their desire to price inventory at or below the low price point in their markets. It is understandable that they just want to sell these properties quickly but this is not indicative of the typical buyers in most markets.
Lenders do provide an incredibly valuable resource and have made it possible for the majority of Americans to own a home. They too have a right to be profitable and the appraisal industry has an interest in their success but overreaction seldom does any party good.
Real estate markets are standing at a precipice, meanwhile a 10 ton truck (the lender) is speeding toward them preoccupied with what is behind them. Hopefully the truck sees what is about to happen and neither the markets nor the lenders go over the cliff to their death.
AUTHOR: Micheal W. Armentrout, VP AM Appraisals, Inc. Mike has been involved in full time real estate valuation since early 1992 and has experience in numerous Central Ohio markets.
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