Appraisal Scoop

U.S. Senate passes bill to expand FHA programs

On July 11, the proposed $8,000 homebuyer tax credit and the FHA and GSE reform and mortgage rescue legislation (H.R. 3221 - Foreclosure Prevention Act of 2008) passed the Senate and, according to NAR reports, heads back to the House for what legislators hope will be a binding revision that can pass the House and Senate before the end of July.

FRB Approved Final Rule Amending Regulation Z (Truth in Lending)

The Federal Reserve Board on Monday approved a final rule for home mortgage loans to better protect consumers and facilitate responsible lending.  The rule prohibits unfair, abusive or deceptive home mortgage lending practices and restricts certain other mortgage practices.  The final rule also establishes advertising standards and requires certain mortgage disclosures to be given to consumers earlier in the transaction. 

The final rule, which amends Regulation Z (Truth in Lending) and was adopted under the Home Ownership and Equity Protection Act (HOEPA), largely follows a proposal released by the Board in December 2007, with enhancements that address ensuing public comments, consumer testing, and further analysis. Draft Federal Register Notice (1.2 MB PDF)

"The proposed final rules are intended to protect consumers from unfair or deceptive acts and practices in mortgage lending, while keeping credit available to qualified borrowers and supporting sustainable homeownership," said Federal Reserve Chairman Ben S. Bernanke.  "Importantly, the new rules will apply to all mortgage lenders, not just those supervised and examined by the Federal Reserve.  Besides offering broader protection for consumers, a uniform set of rules will level the playing field for lenders and increase competition in the mortgage market, to the ultimate benefit of borrowers," the Chairman said.   

The final rule adds four key protections for a newly defined category of "higher-priced mortgage loans" secured by a consumer's principal dwelling.  For loans in this category, these protections will:

• Prohibit a lender from making a loan without regard to borrowers' ability to repay the loan from income and assets other than the home's value.  A lender complies, in part, by assessing repayment ability based on the highest scheduled payment in the first seven years of the loan. To show that a lender violated this prohibition, a borrower does not need to demonstrate that it is part of a "pattern or practice."
• Require creditors to verify the income and assets they rely upon to determine repayment ability.
• Ban any prepayment penalty if the payment can change in the initial four years.  For other higher-priced loans, a prepayment penalty period cannot last for more than two years. This rule is substantially more restrictive than originally proposed.
• Require creditors to establish escrow accounts for property taxes and homeowner's insurance for all first-lien mortgage loans.

"These changes have made for better rules that will go far in protecting consumers from unfair practices and restoring confidence in our mortgage system," said Governor Randall S. Kroszner.

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Adventures in Reviewing New Construction Appraisals

AUTHOR: Anthony Blackburn is a Certified Residential Appraiser in Martinez, CA and one of the co-owners of Apple Appraisal, Inc. -  811A Ferry Street, Martinez, CA 94553 - Apple Appraisal, Inc. does Appraisals and Reviews Throughout California.

So many times, when I am reviewing an appraisal of proposed new residential construction, I find that appraisers don’t put the necessary information in the appraisal for me to make a good judgement about the quality of their work.

There are several key pieces of information in an appraisal of a new home in a tract, that must be included in the report.

1.       Base price of the subject and comparables.

Being able to compare the base price of the subject and sales of the same model, is the best way to track prices over time, discounts and incentives notwithstanding. For example, with all else being equal, if the subject’s base price is $200,000 and the same model, with a different contract date has a base price of $190,000, then the difference in base price of -$10,000 is a time adjustment.

2.       Lot Premiums.

Because buyers in new subdivisions pay for difference between properties on a dollar for dollar basis, the lot premiums paid for things like views, large lots, cul-de-sac locations, etc., become the site size or location adjustments. If your subject has a $2,000 lot premium for it’s larger lot, as compared to a comparable in the same tract with no lot premium, then your lot size adjustment to your comparable would be $2,000. Remember, that $2,000 is exactly what the buyer paid for that larger lot. By definition, the adjustment is $2,000. What could be easier?

3.       Upgrades.

Here again, the adjustments, or differences between the subject and comparables in the same tract are on a dollar for dollar basis. I usually make this adjustment at the bottom of the grid, where I can put my own line title of “Upgrades”, but putting it in the “Quality of Construction” field works too, as long as you explain that the adjustment is for upgrades and not the overall quality of the home.

4.       Incentives

This is the most difficult item in a new home appraisal to quantify. IF you can get the builder to fully and accurately disclose all the incentives, sometimes it can take some work to see where they fit in the appraisal. Incentives can be loan related, like rate buy-downs, prepaid payments, closing costs and more. Other incentives can be a little easier to quantify, like free upgrades. Sometimes an incentive is just a discount on the total package. The best way to handle adjusting for these is to find out the total incentive, what it was made up of, like free upgrades or discount points being paid, and split them up into their proper places in the adjustment grid.

5.       Prices of different models in the same tract.

The difference in base price, in the same time period, of one model, vs. another, is generally related to size. If you have model A in a tract that is a 3/2 and 1,200 sf, base price of $200,000 and Model B, which is a 4/2 and 16,00 sf, base price of $215,000, then your total “Size” adjustment is $15,000.

There are other pitfalls to watch out for. Sometimes a builder will have homes in “Standing Inventory” and need to move them. These can be great deals for home buyers, but tricky for an appraiser, as many of the options are pre-decided by the builder and the incentives or discounts can be greater than on other homes.

What does FNMA say about appraising new construction?

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US Feds Spell Out Fannie-Freddie Bailout

The Federal Reserve and the Treasury announced steps Sunday to shore up mortgage giants Fannie Mae and Freddie Mac, whose shares have plunged as losses from their mortgage holdings threatened their financial survival.  (BusinessWeek - click here)

"The steps are also intended to send a signal to nervous investors worldwide that the government is prepared to take all necessary steps to prevent the credit market troubles that started last year from engulfing financial markets and further weakening the economy and housing markets."

Senate Passes Comprehensive GSE Regulatory Reform Bill

According to an article by CNN last Thursday, (click here) the Senate had recently reached new strides in the plans to pass a comprehensive bill on housing and foreclosure prevention, after months of debate. The bill would create a new government-backed foreclosure prevention program, as well as bolster the oversight of Freddie Mac and Fannie Mae. Before the housing bill is actually passed and completed, a final debate is still likely to take place in the House

By Friday July 11th, The U.S. Senate passed an extensive package of housing legislation, reacting to the continuing erosion of home prices and growing foreclosures by taking their most aggressive step yet to address the housing crisis.  According to the Wall Street Journal's article (click here):

"Despite the vote, which came after weeks of political wrangling, House and Senate lawmakers will still need to overcome a number of impediments before President George W. Bush can sign the bill into law."

"Senators voted 63-5 in favor of the package of tax relief for homeowners, changes to the Federal Housing Administration, and a $300 billion program to refinance mortgages headed toward foreclosure into affordable loans."

James B. Lockhart, OFHEO Director said in their press release:

“I congratulate and thank Chairman Dodd, Ranking Member Shelby and the Senate for passing a sound and comprehensive GSE regulatory reform bill. This bill should help restore confidence in the housing markets by creating, on passage, a new, stronger regulator with all the necessary tools to oversee Fannie Mae, Freddie Mac and the Federal Home Loan Banks. I am hopeful the House will act quickly and the bill will soon be enacted into law.

With this very turbulent market it is important to strengthen the regulator of Fannie Mae and Freddie Mac and combine it with the regulator of the Federal Home Loan Banks as soon as possible as all of these GSEs are being asked to do more and more to support the mortgage market.”

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Press Release: FDIC says IndyMac's conversion has been largely a non-event

July 13, 2008 - FDIC Chairman Sheila C. Bair, today issued the following statement about IndyMac Federal Bank, FSB, the conservatorship created by the FDIC to continue to provide banking services in communities served by the former IndyMac Bank, F.S.B.

FDIC Chairman Sheila C. Bair said, "Over the past weekend, I have seen news reports which have fairly and accurately reported on the conversion of Indy Mac Bank into a conservatorship operated by the FDIC."

"I have also seen inaccurate and inflammatory reporting which could well cause needless, unnecessary worry and angst among bank depositors throughout the country."

The fact is that for insured depositors, IndyMac's conversion has been largely a non-event.  The more than 200,000 customers of IndyMac with deposits of $18 billion are fully protected. It's important to keep in mind that the small percentage of uninsured are still covered for their insured amounts and half of their uninsured money. As assets of IndyMac are sold, they may receive even more. They have had continued access to their funds through ATMs, debit cards, and writing checks over the weekend, and on Monday morning, it will be business as usual.

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IndyMac Bank Closed by OTS - FDIC Named Conservator

IndyMac Bank, F.S.B., Pasadena, CA, was closed today (7/11/2008) by the Office of Thrift Supervision. The Federal Deposit Insurance Corporation (FDIC) was named conservator. The FDIC will transfer insured deposits and substantially all the assets of IndyMac Bank, F.S.B., Pasadena, CA, to IndyMac Federal Bank, FSB.

Brokered deposits will be held by the FDIC and those insured deposits will be paid off when the insurance determination is complete. IndyMac Bank, FSB had total assets of $32.01 billion and total deposits of $19.06 billion as of March 31, 2008.

As conservator, the FDIC will operate IndyMac Federal Bank, FSB to maximize the value of the institution for a future sale and to maintain banking services in the communities formerly served by IndyMac Bank, F.S.B.

At the time of closing, IndyMac Bank, F.S.B. had about $1 billion of potentially uninsured deposits held by approximately 10,000 depositors. The FDIC will begin contacting customers with uninsured deposits to arrange an appointment with an FDIC claims agent by Monday. Customers can contact the FDIC for an appointment using the toll-free number above. The FDIC will pay uninsured depositors an advance dividend equal to 50 percent of the uninsured amount.

Based on preliminary analysis, the estimated cost of the resolution to the Deposit Insurance Fund is between $4 and $8 billion.

IndyMac Bank, F.S.B. is the fifth FDIC-insured failure of the year. The last FDIC-insured failure in California was the Southern Pacific Bank, Torrance, on February 7, 2003.

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S. 2860, Fair Value and Independent Appraisal Act - Amends the Truth in Lending Act

The proposed Fair Value and Independent Appraisal Act , introduced by Sen. Robert Casey [D-Pa] amends the Truth in Lending Act to prohibit a creditor from extending a mortgage to any consumer without first obtaining a written appraisal of the property to be mortgaged, prepared in accordance with specified requirements.  Download S2860_Fair_Value_and_Independent_Appraisal_Act.pdf

Appraisal Scoop reported on this bill when it was first introduced in April (click here) but I think this is one of those bills that appraisers should really take a look at again and voice their opinions using the poll at the bottom of this post or on the sidebar of this blog.

One of the more interesting provisions of the S. 2860 Act is Sec. 2. Property Appraisal Requirements.  Under that section it would amend Sec. 129 of the Truth in Lending Act (15 U.S.C. 1639) to require a written appraisal performed by a qualified appraiser that visits the interior of the mortgaged property.

The proposed Act also requires a creditor to provide a copy of each such appraisal to the consumer without charge, at least three days prior to the transaction closing date.

Another extremely important Sec. 2 sub-section deals with what copies of appraisals the mortgage applicant should receive and when. 

The Act directs that "Each creditor shall furnish to an applicant, a copy of all appraisal reports and valuations developed in connection with the applicant's application for a loan that is or would have been secured by a lien on residential real property.

Why is it important that ALL reports be provided?  This would be a giant step in eliminating the practice of "Appraisal Shopping" and "AVM Shopping" until the lender finds the highest value.  If an AVM is ordered as part of a mortgage transaction . . .the applicant would receive a copy! 

The Act also declares unfair or deceptive specified property appraisal practices in the provision of: (1) mortgage lending services for a consumer credit transaction secured by the consumer's principal dwelling; or (2) any mortgage brokerage services for such a transaction. Establishes civil monetary penalties for such practices.

It further directs the Board of Governors of the Federal Reserve System and the Federal Trade Commission to jointly prescribe regulations defining such unfair or deceptive acts or practices.  Download S2860_Fair_Value_and_Independent_Appraisal_Act.pdf

Are YOU licensed to appraise that property?

As someone that does a lot of reviews, I see some interesting appraisals come across my desk. Some give me pause to wonder. And some just give me pause.

One issue that has come up more and more of late, is appraisers not being licensed to appraise the property in question.  Specifically, I’m speaking to the license limitations of a “Licensed” or “Residential” appraiser.

Here in California, we have 4 licensing levels. Other states have similar licensing, however, the designations may differ.

• AT-Trainee Appraiser - Can appraise any property the supervising appraiser is licensed to appraise.
• AL-Residential Appraiser - Can appraise any “NON-COMPLEX” 1-4 family property with a transaction value up to $1,000,000
• AR-Certified Residential - Can appraise any 1-4 family property without regard to transaction value
• AG-Certified General - Can appraise all real estate without regard to transaction value or complexity.

The sticking point that I see is the “NON-COMPLEX” issue.  Many AL or Residential Appraisers here in CA appraise complex properties as a part of their regular business. I talked to a few about this issue and the consensus is that they feel they are capable of appraising “complex” properties with a transaction value under $1,000,000 and that the definition of “complex” is so vague, that they feel they can justifiably do it. They may be right. Federal Reserve Regulations, from which USPAP was born and which state define a “Complex” appraisal as “…one in which the property to be appraised, the form of ownership, or market conditions are atypical.”

Can you say “Vague”?  I called my state office of real estate appraisers and spoke to an investigator about this issue.   While I didn’t ask them to go on record or put it in writing, I was told the CA OREA considers examples of “complex” to be anything that has

• Functional Obsolescence
• External Obsolescence
• Acreage
• Views

That takes a whole lot of properties out of the pool of homes a residential appraiser, or AL level appraiser, here in CA, can appraise.

I recently did a field review of an appraisal on a home that was a lakefront property, on a few acres of steeply sloping property, in an area where there are very few similar sales and the few that there are, were up to 26 miles away, by road.

OK, now that is definitely complex by anyone’s standard. Even the appraiser admitted it was very complex when I called her. The problem I had with the appraisal is that she is an AL or residential appraisal, as is her supervisor, that signed on the URAR.

When I asked her why she completed an admittedly complex appraisal that is outside the scope of her license, she had a few reasons.

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An Appraiser Bites Back!

Mike Lefebvre, a licensed real estate agent and certified residential real estate appraiser recently reviewed a very controversial Real Estate Radio USA interview with Realtor Jennifer Allan. 

I've listened to the entire interview (click here) and overall the investor-interviewers were very pro-appraiser as the interview turned from "How do you justify your listing commission?" to "How do you price a home to sell?"   Kudos to Mike for trying to set the record straight!

Here's a small portion of Mike's article:

The conversation eventually turned to pricing properties and appraisers and then the fangs came out. To be honest, I wasn’t prepared at all for what I was about to hear. It was appraiser hate-speak! I’m sure Jennifer would tell us that “some of her very best friends are appraisers” but I certainly wasn’t feeling the love yesterday afternoon.

• Jennifer claims that appraisers can or do not factor in things like “appeal, smells and the ugly house next door.”
• She also said, “The appraised price is irrelevant to the market value of a home.”
• Jennifer went on to say, “An appraisal is a justification of the sales price.”
• “I don’t think appraisers have any business pricing homes for market.”

You'll want to read Mike Lefebvre's full blog post (click here) as he Bites Back!

Mike Lefebvre, The "Uncommon Agent", is a Massachusetts licensed real estate agent with Century 21 Commonwealth, New England's largest C21 firm. In addition, he is also a certified residential real estate appraiser and the owner/chief appraiser at MeetingHouse Appraisals. Mike wields a double-edged sword, combining his appraisal expertise with his sales and marketing prowess to maximize benefits and profits for both his buyer and seller clients.