Appraisal Scoop

When Do Distressed Homes Sales Become "The Market" ? - Using REOs for Market Value Appraisals

Guest Author:  Matt Cook, Torrance, CA

A poster to the Inland California appraiser's forum posed an appraisal problem regarding distressed sales. 

 

He stated that the market for a particular residential assignment included 88% "distressed sales of one kind or another" and thought that perhaps by dominating the market, the distressed sales would exert downward value pressure on all the properties in the market. 

 

He was wondering if and how to include these distressed sales in his analysis?

 

 

 

My response was:

 

If the distressed sales are truly making the market, then two comparable homes--one a distressed sale and one not--should sell for the same amount.  Unfortunately, there is not a monolithic "distressed market;" there are vast differences in seller motivation.  That is the difficult but essential factor that must be analyzed.

 

When you separate out the price ranges of the REOs, short sales, and "typical" sales, what do you see?  If the REOs and short sales are ALL "distressed" sales (implying below market), you should see that their value ranges will be below the 12% of typical owner sales.  On the other hand, if you see that the upper price ranges of the REOs and short sales are similar to the price ranges of the typical sales, that MAY indicate that there are REOs and short sales that are not being affected by poor condition, atypical seller motivations, or fraud, and can be used in support of your analysis and conclusion of market value. 

 

Good news!  If the ranges are not similar, this may be the first step in allowing you to derive an adjustment for distressed sales that can be used in your sales comparison analysis.  Here are some other suggestions for ferreting out sales from that 88% that can still be used.

 

REOs:  Often, distressed sales--especially REOs--are in poorer condition than typical owner-occupied, owner-sold properties, so they would have lower average sales prices.  Sometimes they are also "dumped" at below-market prices.  If you can analyze the REO sales and first separate out the ones that were in good or typical condition, then analyze these to separate out the ones that seem to have been sold without undue duress, you may have some REO comparables you can legitimately use.

 

Some clues that the REO sales MAY be below market are shorter-than-typical marketing times, sales prices above list prices, and out-of-area selling agencies.  Short marketing times may indicate a quick sale at a discount price; sales above list price may mean that the listing agent listed the property below market to begin with, and out-of-area listing agencies often handle all of a particular lender's REOs and may not know the local market, or be as available as a local agent to do the marketing, showings, etc. necessary to ensure getting the best possible price. 

 

If you set aside the REO's with those characteristics, after weeding out the ones that were in poor condition, you may be left with a pool of REO sales that have the potential to be market-value sales.  Investigate these to be sure; agent interviews are a must here.  You may find some REO sales that were in typical condition, sold in normal marketing times by a knowledgeable local agent at a typical discount from list price, verified by both listing and selling agents as being a normally-valued sale.  Viola, a comparable sale!

 

SHORT SALES:  Short sales by definition are only short sales because their MARKET VALUE is less than the mortgage balance, so if they are selling at that market value, they should have sales prices similar to otherwise comparable homes.  Unfortunately, short sales often involve protracted negotiation and settlement times that can translate into discounted sales prices, as the pool of buyers willing and able to endure the delays is smaller and likely differently motivated than the general pool of buyers.  Also, there is a lot of short-sale fraud going on so you have to be very careful.

 

Start by setting aside the short sales with long times in escrow, or the ones that have been in and out of escrow several times.  These conditions MAY reflect unreasonable, unrealistic, or difficult-to-deal-with lenders that will drive "typical" buyers away and result in below-market sales prices.  Again, set aside the sales with out-of-area listing agencies for the reasons above.  Investigate what you have left, and you may find that some of the sales were sold at market value.  A short sale with a reasonable, responsive lender, normal listing history, and an experienced local agent who markets the property correctly can result in a good, market value sale despite its being a short sale.

 

Finally, take a close look at the "typical" market, the 12% that are not REOs and short sales.  If they are priced differently than the 88%, what does it take to get one of them sold?  That is, if the "distressed" sales are selling in normal marketing times for their market but the "typical" sales have extended marketing times, or are selling with seller financing, concessions, or other conditions made necessary in order for them to compete with the lower-priced "distressed" sales, then you may want to rethink whether they are truly "market-value" sales.

 

AUTHOR: Matt Cook, Torrance, CA

103 Months to Clear "Real and Shadow" Housing Inventory? - Real Time Economics - WSJ

 103: The number of months it would take to sell off all the foreclosed homes in banks’ possession, plus all the homes likely to end up there over the next couple years, at the current rate of sales.

As of March, banks had an inventory of about 1.1 million foreclosed homes, up 20% from a year earlier, according to estimates from LPS Applied Analytics. Another 4.8 million mortgage holders were at least 60 days behind on their payments or in the foreclosure process, meaning their homes were well on their way to the inventory pile. That “shadow inventory” was up 30% from a year earlier.

 via blogs.wsj.com

Re-Engineering The Appraisal Process - Are We Ready Yet? - LiveValuation Magazine

Appraiser Lee Trice has snagged the cover story of the inaugural issue of LiveValuation Magazine.  Lee Trice began his appraisal career in 1985.  He currently serves as Principal of the Trice Group, a regional provider of residential and commercial appraisal services in the Mid Atlantic region.

"Almost two years have passed and I think it is time to revisit this topic and assess where we are as an industry today. I have been an appraiser for my entire adult life, having started while attending the University of Maryland. Real Estate is in my family genes and my educational background is Economics and Computer Science. All of this has influenced my passion to blend Technology and analytics with traditional valuation processes"

Lee's article Download Re-Engineering The Appraisal Process  provides his opinion of where we should be headed as an appraisal industry . . . .

New FHA Mortgagee Letter 2010-15: FHA Case Number and FHA Roster Appraiser Assignments

 

This Mortgagee Letter provides guidance on ordering Federal Housing Administration (FHA) case numbers and selecting FHA Roster appraisers in FHA Connection. 

Specifically, this Mortgagee Letter: 

1. informs mortgagees of changes to data entry requirements in FHA Connection; 
2. permits mortgagees to obtain a case number in FHA Connection without first having to select an appraiser from the FHA Appraiser Roster and input the appraiser’s information in the Case Number Assignment screen; and,
3. requires that the effective date of the appraisal be after the case number assignment date except in certain limited circumstances. 

Effective Date 

Provisions in this Mortgagee Letter became effective for all case numbers assigned on or after February 15, 2010. 

Case Number Assignment and Appraisal Logging Screen Changes 

1.  The Case Number Assignment screen in FHA Connection will no longer capture appraiser information (assignment choice, license ID and assignment date). However, the following information fields in the case number assignment screen will continue to require input: 

• General Information 
• “As Required” Fields (pertaining to streamline refinances, 203k loans and condo indicators, etc.) 
• ADP (automated data processing) Code Characteristics 
• Property Address 2 
• Compliance Inspection Fields (if applicable) 
• Borrower Information 

2.  The Appraisal Logging Screen in FHA Connection will capture the appraiser information along with the following information fields:

• Appraiser’s License ID 
• Property Information 
• Neighborhood Information 
• Site Information 
• Physical Improvement Information 
• Reconciliation Information 

Note: Mortgagees are required to input the appraiser’s information, as well as the relevant appraisal information, into FHA Connection prior to loan closing. 

Appraiser/Appraisal Eligibility 

• Mortgagees are reminded to ensure that the FHA Roster appraiser selected to perform an appraisal is listed as being active on the FHA Appraiser Roster at the time of selection. 
• FHA Roster appraisers are reminded that appraisals cannot be performed for purposes of FHA insured financing unless the appraiser is listed as being active on the FHA Appraiser Roster during the time period in which the appraisal is performed. 
• Mortgages predicated upon appraisals that are performed by appraisers who are not current on the FHA Appraiser Roster at the time of the effective date of the appraisal will not be insured. 
• The case number assignment date cannot be prior to the effective date of the appraisal unless the lender certifies, via the certification field in the Appraiser Logging Screen in FHA Connection, the appraisal was ordered for conventional lending, HUD REO or government guaranteed loan purposes but was performed by a FHA Roster Appraiser and is being converted to a FHA-insured mortgage. The mortgagee must retain documentation in the case binder substantiating conversion of the mortgage to FHA. 
• If the appraisal was ordered for conventional lending or government guaranteed loan purposes but was performed by a FHA Roster Appraiser, the mortgagee must ensure that the appraisal was performed in accordance with FHA appraisal reporting requirements as detailed in Handbook 4150.2, CHG-1, Valuation Analysis for Home Mortgage Insurance for Single Family One – to Four – Unit Dwellings, and subsequent mortgagee letters. Ensuring compliance with this requirement may entail a re-inspection of the property by the appraiser.

To read mortgagee letters and any attachments in their entirety, please visit: http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/ view the 2010 letters and click on the letter of your choice. Mortgagee Letters from previous years can be found on the same page
 

For FHA technical support regarding this Mortgagee Letter, please contact the FHA Resource Center at: info@fhaoutreach.com or phone FHA toll-free between 8:00 a.m. and 8:00 p.m. ET (5:00 a.m. to 5:00 p.m. PT) at: (800) CALLFHA or (800) 225-5342.

SOURCE: This is the HUD national homeownership center reference guide mailing list for real estate industry professionals that are interested in updates to HUD Mortgagee letters, notices and guidebooks, & FHA Housing Industry Training. Please visit our homepage at: http://www.hud.gov/offices/hsg/sfh/hsgsingle.cfm  Servicing lenders can visit HUD's National Servicing Center at: http://www.hud.gov/offices/hsg/sfh/nsc/nschome.cfm 

The Single Biggest Liability Threat to Appraisers: the FDIC

The Single Biggest Liability Threat to Appraisers: the FDIC By Peter Christensen of the Appraiser Law Blog

The single biggest liability threat to both residential and commercial appraisers is the Federal Deposit Insurance Corporation. The FDIC held a conference last week in Chicago for law firms interested in representing the FDIC. What came out of that conference made me very anxious for appraisers, but it's much more than just a threat to individual appraisers. What the FDIC is doing hampers the ability of the appraisal profession to deliver accurate valuations going forward.

The reason is: if you're an appraiser doing work for a lender (which may or may not be one of the 700+ troubled banks on the FDIC's watch list), you know your risk of being sued by the FDIC for overvaluation in hindsight is eliminated by "coming in low" on the appraisal. That means more loans don't get made.

The FDIC has taken over more than 200 banks since the beginning of the mortgage crisis. When the FDIC takes over a failed bank, it usually sells off the banking assets to an existing lender but retains all of the potential legal claims against the failed lender's directors, officers, mortgage brokers, accountants, lawyers, appraisers, AMCs, etc. The FDIC is now in the business of suing these parties, blaming them for its failed banks' bad lending practices.

To show the wide scope of the claims that may be pursued by the FDIC, I have attached an excerpt from the FDIC's agreement to sell the assets of failed Downey Savings to U.S. Bank in 2008. In this agreement, which is very typical, the FDIC specifically retained the right to sue any person "whose action or inaction may be related to any loss . . . incurred by the Failed Bank." This means appraisers -- and many others -- to the FDIC.

At the conference for law firms interested in FDIC work, the FDIC made it very clear that pursuing professional liability claims is a major part of their intended course of action in the next two years. The FDIC is hiring hundreds of law firms do this work and plans to award contracts totaling more than $2 billion in 2010 for its various recovery efforts (not just professional liability). The FDIC's in-house lawyers stated that their efforts are going to resemble what the RTC did in the early 90's following the savings and loan crisis. Suing professionals and blaming them for failed banks' losses is such a significant part of the FDIC's plan that the division within the corporation has a special acronym: they refer to it as "PLG" for Professional Liability Group. At least from the conference, it was very clear that the FDIC has no conscience as to the impact that its "blame game" will have on the targeted individuals or, moreover, on the affected professions. If it makes individual appraisers feel any better, however, when it comes to appraisal issues, it is not just appraisers who have targets on their backs -- AMCs are on the radar screen too.

What can appraisers do? In my lawyer, non-appraiser opinion, it comes down again to appraisers supporting professional associations such as the Appraisal Institute and NAIFA to apply organized political pressure. It's not just "bad apple" appraisers who are being affected by the FDIC's actions -- good appraisers are being entangled too and, if unrestrained, the FDIC will have a negative impact on the profession as a whole.

Regulators and lawmakers need to understand why it's bad public policy for a quasi-government agency like the FDIC to be deputizing private law firms and launching unrestrained attacks on individual appraisers. Appraisers are professionals who render opinions of value -- they are not guarantors of collateral value or mortgage insurers for loans extended by the FDIC's failed banks at the peak of the bubble.

The threat of draconian, high volume litigation by the FDIC hampers the present ability of appraisers to give accurate valuations. In the current state of the real estate markets, the only way an appraiser can guarantee that he or she will avoid a later FDIC claim about over-valuation is to "come in low" on value.

Source: Appraisal Legal Defense and Insurance Blog by Peter Christensen and Robert Wiley - Legal issues and insurance matters affecting residential and commercial real estate appraisers

New HVCC Appraiser Talkback Survey: One Year On

 Working RE Magazine and OREP have created a new survey - HVCC Talkback Survey: One Year On. Please make your voice heard and please spread the word .

http://www.surveymonkey.com/s/Y5X3MMD

Working RE Magazine Editor's Note: After a year of turmoil since the Home Valuation Code of Conduct (HVCC) was implemented, we know at least one thing: that you are being heard and that your feedback does make a difference. Don't give up now. It's up to you to let regulators and lawmakers know what is working and what isn't.

• Is the FHA mandate, that appraisers be paid "customary and reasonable fees," working? 
• Has appraisal quality improved? 
• Should Appraiser Management Companies (AMCs) be regulated? 
• Are you feeling less pressure today to "make a deal work"? 
• Are appraisers hired based on low fees rather than competency? 

 Click here to take the New HVCC Talkback Survey: One Year On.  

Calyx Point Integrates a non-AMC Appraisal Firewall - HVCC & FHA Compliant

 Spokane, Wash.-based SharperLending LLC, a provider of appraisal and settlement services technology solutions, says its Appraisal Firewall product has been integrated into San Jose, Calif.-based Calyx Software's Point software. 

Through the integration, Point users can access the Appraisal Firewall valuation technology from within their familiar Calyx Point system. Appraisal Firewall is a non-appraisal management company tool that is Federal Housing Administration- and Home Valuation Code of Conduct-compliant, SharperLending says. 

"The goal of Appraisal Firewall is to lessen the impact of appraisal regulations on lender business, which it does by allowing lenders to keep working with their trusted appraisers while being HVCC and FHA compliant,” says Dave Black, president and CEO of SharperLending. “Now that we’ve worked with Calyx to extend appraisal access into Point, this promotes our focus by allowing Point users to stay in their current [loan origination software] package - further lessening the impact of appraisal regulations.” Learn More 

SOURCES: Calyx Software, SharperLending LLC and MortgageOrb.com

Video: FHA the Toothless Dog? - From Think Big Work Small

• FHA set and forgets the rules.
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• Goldman Sachs ripple begins.
• HVCC rally went well with the NAIHP.
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•  Let your voice be heard on financial reform.  

Video Marketing and Mortgage News Designed for Mortgage and Real Estate Sales.

FHA the Toothless Dog?

Excess Inventory May Impede Housing Recovery: Fannie Mae

Although housing is beginning to stabilize, excess inventory and shadow supply may hinder continued recovery, according to the April 2010 Economic Outlook released Monday by Fannie Mae’s Economics & Mortgage Market Analysis Group.

via www.dsnews.com

Probe Finds WaMu's Demise in Subprime Lending, Regulatory Turf War

 A federal investigation into Wall Street and the economic crisis has honed in on Washington Mutual, making the bank that was absorbed by New York’s JPMorgan Chase in 2008 the poster child for what went wrong with the nation’s financial system.

via www.dsnews.com

The bank securitized over $77 billion in subprime mortgages and billions more in other high-risk home loans. At times, WaMu selected and securitized loans that it had identified as likely to go delinquent, without disclosing its analysis to investors, the panel said. 

The bank also securitized loans tainted by fraudulent information, without notifying purchasers of the fraud that was discovered, according to the panel’s report. The senators determined that WaMu’s compensation system rewarded loan officers for originating large volumes of high risk loans, and paid bonuses to loan officers who overcharged borrowers or added stiff prepayment penalties.

Click here for the complete article