We in the “biz” have been wrestling for most of 2009 with the product of the Home Valuation Code of Conduct (HVCC), Andrew Cuomo’s settlement with Fannie Mae and Freddie Mac.  That settlement produced a new middle-man in the home appraisal process–the Appraisal Management Companies (AMCs)–that resemble nothing so much as the ‘managed care’ companies that were inserted into the health insurance system two decades or so ago.

And just like that mess, the AMCs have failed to improve things for the consumer.  In fact, it can be convincingly argued that they have made things far worse.  The new protocol has consistently produced poor quality appraisals performed often by the least qualified and frequently out-of-the area appraisers, at dramatically increased costs to the consumer.  But in terms of creating new profits for banks who have now created their own internal AMCs, it’s been a resounding success.

Until now, this new process impacted only conventional loans.  Since most of the market activity has required FHA financing, this hasn’t been as debilitating as it might have otherwise been.  However as of January 1, 2010, it applies to FHA loans as well.  What does this mean for you?

It means that on FHA loans, your lender will now have:

• no control over scheduling of the appraisal
• no ability to communicate directly with the appraiser
• no ability to receive notification from the appraiser when there is a value or repair issue
• severely constrained ability to dispute bad appraisals
• higher appraisal costs
• slower appraisal turn around times
• longer escrows

The best thing you can do in the short-term is to plan for longer escrow periods.  I recognize that short-sale banks are not very cooperative on this issue.  But if you don’t attempt to educate them and plan in advance, you’ll be begging for extensions on the other end.  In the long-run, let your voice be heard and contact your congressperson and let them know what you think.

The new Home Valuation Code of Conduct (HVCC) appraisal rules went into effect here in Sacramento on May 1 and the sh*t is hitting the fan.  They are a nightmare and a perfect example of the law of unintended consequences.   What started as an investigation by New York Attorney General Andrew Cuomo of Washington Mutual and eAppraiseIT,  ultimately entangled Fannie Mae and Freddie Mac.  To stop further scrutiny into their business practices, Fannie & Freddie agreed to adopt the new appraisal code which professed to isolate appraisers from the unwelcome influence of interested parties (the Realtor and the lender) and allow appraisers to come up with more objective and reliable conclusions.

While it is unfortunately true that too many lenders adopted a coercive approach to handing out appraisal orders, there were certainly other ways to tighten things up.   And, at the same time that these new rules were being put into effect, HUD was loosening the criteria by which appraisers were able to become certified to do FHA appraisals.   How does that make sense?   Well, it doesn’t.

Now we have a new parasitic and profit hungry private beaurocracy–the Appraisal Management Companies (AMCs)–to obstruct deals.   All conventional and some government appraisals must now be ordered through a specific bank who in turn orders the appraisal through one of their “approved” AMCs.  The AMCs pay a fraction of what appraisers are accustomed to earning, extracting the difference for their profit while attracting  the least qualified and geographically most distant appraisers. The results are awful.

Ironically, the banks seem to trust these new HVCC appraisals even less then before.   They subject them to computerized valuation methods that frequently result in a requirement for an appraisal “review” that creates at additional expense to the consumer and delays on the transaction.  Oh and delays often cost the consumer further in the form of “per diem” penalties for closing late.

So, to summarize, HVCC frequently attracts appraisers willing to work cheap, produces very poor quality work that the banks don’t trust, costs the consumer more, causes delays,  and drives seasoned appraisal professionals out of work.    Nice work boys.

With foreclosures and short sales in the bullseye, property repairs are a big issue.  Many foreclosed homes are in desperate need of TLC; some appear to have been ground zero of angry evictions.  And many buyers actually want “fixers” where the price might be lower  and they can do some work themselves.  Whatever the cause, the banks have a double standard.  When selling, they don’t want to fix them first, but they also don’t want to finance them either, at least until they’re fixed up a bit.

FHA vs. Conventional Financing

Many people believe that FHA financing will impose tougher repair conditions than will Conventional financing.  This notion is a holdover from the pre-reform days of HUD.  My recent observation is that one isn’t any worse than the other.  The banks are fussy about everything these days, and one cannot safely predict with certainty where the bank will dig in its heals.  Some don’t care about the dishwasher is missing, others want to know what caused the stain in the carpet (true story).   To confirm whether they have expressly different repair standards for FHA vs. Conventional financing, I contacted a number of banks today to ask this question:

“With all of these semi-ratty REO properties for sale, do you see much difference in the way your underwriters address property issues on FHA vs. Conventional loans? I have an “as is” sale with some issues that many would consider cosmetic in nature, while others might consider them more serious.  From my viewpoint, the underwriting responses are unpredictable whether FHA or Conventional.”

Here are seven responses from different banks:

“I don’t see much difference. We are directed by our corp office which is quite strict. All sinks, toilets etc need to be in place even you have 1 fully functional bathroom. All built in appliances need to be in place. If carpet has been pulled but tack strips left then you need to replace the carpet. You can have a hole in a wall, as long as the insulation isn’t oozing out of it. Exposed wiring is an issue. Give you an idea?”

“My experience has been that there is no difference between the two.  It sounds like we are more flexible than most lenders with items that need to be repaired.  Call me case-by-case and I can let you know what we will be able to fund without having done.”

“I echo your thoughts on this. I’ve really not seen any uniformity to draw a fair assessment of what we can realistically try to predict. (How is that for double talk). I’d be interested to hear what you find.”

“Yes case by case that’s why the answers are all over.  If cosmetic in nature, we are trying to go with that on REO’s only.  If things like missing stoves, sometimes we are accepting the paid receipt for the purchase of the stove and let it close to install afterwards.  It really does depend on each transaction.”

“Conventional is easier as we are allowing some holdbacks now.  See attached, this is new.  Watch out for the part about seller paying and us escrowing (actually, we hold the funds) 1.5% x’s and any overage of the actual amount to cure goes back to borrower in the form of principal paydown.  It’s Fannie’s rule and crazy but we’ve confirmed it.  That’s the only sticky part. We don’t do holdbacks on govies.”    

“Fha is more strict then Conventional.  The main issues are health and safety.  Broken windows (not cracked).  Exposed wiring, pool so green you can’t see the bottom etc.   I will ask Lynne her opinion as well.”

“Marc, probably reason that you can’t nail it down is that there are investor overlays. Our investors do not want properties that have to have anything done to them beyond paint, carpet cleaning etc.  Regardless of what fha’s guidelines are, we have to follow the investor overlays.   I guess to answer your question, there is not much difference between fha & conventional in regards to the condition of the property. –Lynne”

So there you have it.  Three say FHA and Conventional are the same.  Two say conventional is easier–one because they do holdbacks again; the other because FHA is theoretically tighter.  A sixth says says “case by case,” in other words no difference.  And the last one–a seasoned underwriter I’ve known for many years–nails it perfectly:  the investors are calling the shots, and what they say goes.   It doesn’t matter what FHA or Conventional guidelines require, the investors who are the ultimate owners of these loans paper do not want ratty properties as collateral.  And they’re the “deciders” now.

Bottom Line?

Don’t turn FHA buyers away or avoid FHA financing because you think a conventional loan will be easier.  But do be cautious when buying a beat up property.  Call your lender to discuss its condition before you write the offer. An ounce of prevention is worth a pound of cure.  And remember that a mortgage banker like me, who can broker your loan to a variety of banks, may be able to find the one who won’t object to your repair issue.

During the sellers’ market of the early 2000’s, FHA loans were the forgotten stepchild of the mortgage business.  No seller would even talk to a buyer approved through FHA or VA.  One big reason for that avoidance was the FHA appraisal and related property issues.  

All that has changed.

While an FHA approved appraiser must still be used, the rest of FHA’s appraisal requirements have been brought into parity with those of conventional loans.   Here are some key improvements:

• Pest reports:  No longer required.  Pest reports used to be an FHA fact of life, and every structure on the property—the broken down shed in the back forty included—had to be inspected.  The seller was required to fix or tear down that shed and repair all Section I & Section II inspection items.  Today, even if a pest report is written into the Contract as a condition of purchase, the lender will likely only ask for a letter signed by the buyer confirming that all conditions of the Contract have been met.  The only time a pest report will be required is when the appraisal calls for it.

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I posted my Friday article about appraisals and “declining markets” over on Active Rain. It was popular enough to achieve “featured post” status and a good discussion ensued. To read those comments click the Active Rain link.

….was the heading on yesterday’s email from Wells Fargo Wholesale. This is a heads-up to Realtors and home buyers…

Fast Rewind

In mid July, FannieMae issued Announcement 07–11, entitled Collateral Valuation Practices and Declining Markets. Here are several key points from the memo:

• FannieMae’s Desktop Underwriter (DU) Version 5.7 released July 22, will now generate a message when it thinks that a property is located in a declining market.
• The appraiser must also indicate when the property is in a declining market.
• The lender is responsible for ensuring the accuracy of the appraiser’s work.
• Any pressure by the lender on an appraiser will cause the mortgage loan to be subject to immediate repurchase by the lender.

What’s The Big Deal?

The appearance of that term—declining market— in an appraisal has thrown a monkey wrench into many a loan approval. Appraisers avoid saying it, and lenders discourage the use of the term. However, FannieMae is tightening its jaws on past practice with this announcement. The teeth in those jaws are threat of immediate loan repurchase by the lender.

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It’s an ugly fact of life in a declining real estate market. Real estate appraisers are under pressure from all sides. Here’s a recent article I saved.

Daily Real Estate News | February 2, 2007

Appraisers Get Pressured to Falsify Findings

The pressure is on property appraisers to come up with the right number, say 90 percent of appraisers surveyed by October Research Corp., which publishes Valuation Review, an industry newsletter.

That percentage is much higher than it was in 2003, the last time the survey was conducted, when only 55 percent of appraisers reported attempts by others to influence their findings.

The current survey found that 68 percent of appraisers lost the client when they…

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