The U.S. Department of Housing and Urban Development (HUD) just revised appraisal guidelines for REO properties they own. All appraisals done to establish the listing price with an effective date on or after April 1, 2010 will now be valid for only 120 days. This update is a change from the current 6 month period.

The rule regarding second appraisals to support a higher purchase price has also been modified. HUD now says that when a buyer is using FHA financing to purchase a HUD REO property, the appraisal that was used to determine the list price will remain effective when obtaining the FHA mortgage. A second appraisal can’t be ordered just to support a higher purchase price. It can only be ordered to support a higher sales price if there are material deficiencies with the current appraisal, or if the current appraisal won’t be valid on the date of contract ratification.

The Federal Deposit Insurance Corporation expects more banks to fail in 2010, increasing the operating budget 35% to $4 billion dollars. Over 1,600 new staff members will also be added to the payroll. Luckily the FDIC sees this as more of a short-term problem since only 84 of these are permanent positions.

133 banks have already failed this year, and there’s no evidence to suggest the 134th is far away. The FDIC keeps a tight lip on the health of the nation’s 8,300 banks. So a website run by MSNBC and American University helps to check the status of your your bank. BankTracker for banks or credit unions offers a large US map, making them easy to find. Or just type the name in their search bar and look at the troubled-asset ratio. The BankTracker site says:

While it is not an official FDIC statistic, nor is it intended as a definitive predictor of the likelihood of bank failure, the troubled asset ratio apparently is a strong indicator of severe stress inside a bank because it shows the bank’s ability to withstand loan losses. Of the 92 banks that have failed so far this year, 84 had troubled asset ratios of 100 percent or greater in the final quarter they reported data before they closed.

Look at these recently failed Minnesota banks and notice how the asset ratio is well above 100%

A majority of loans today are FHA loans, so the Department of Housing and Urban Development (HUD) is taking steps to ensure the program doesn’t fall victim to the bad economy. These are some changes being implemented in the appraisal ordering process:

• Appraiser changes are effective as of Jan. 1, 2010.
• Mortgage brokers and commission-based lender staffers will be prohibited from selecting the FHA appraiser.
• Lenders are not required to use appraisal management companies (AMCs), but may do so.
• When a borrower switches to another lender, FHA prohibits the second lender from ordering additional appraisals to obtain a higher value, unless:
  • The Direct Endorsement (DE) Underwriter determines the first appraisal is deficient;

  • The appraiser of first appraisal is on second lender’s exclusionary list; or
  • The first lender delayed the appraisal transfer to the second lender so as to cause harm to the borrower (e.g. missing a closing date or expiration of a rate lock).
• Appraisals are now valid for only 120 days for all existing, proposed or under-construction properties.

The Federal Housing Administration repealed the second appraisal requirement for loans exceeding $417,000 in declining markets, and for cash-out refinances. The two appraisal mandate initially went into effect on April 1, 2008 and was strongly opposed by the National Association of Realtors.

The second appraisal requirement will remain when a property is re-sold between 91 and 180 days following acquisition by the seller if the resale price is 100% higher (or more) than the price paid by the seller when the property was acquired.

“We haven’t noticed any benefit and it really slowed down the process,” FHA Commissioner David Stevens told Mortgage Wire at the (NAR) convention in San Diego.

I can’t recall the last time I saw an FHA borrower come close to the $417,000 limit, but it’s probably more common in New York, California, Florida, etc. Even though it took 1.5 years, it’s good to see that HUD realizes the second appraisal requirement didn’t help the process.

Many properties can exhibit some form of obsolescence – either functional, external or both. Don’t know what that it means? You’re not alone. Real estate classes often dart past these terms because real life situations that occur nationwide are difficult to cite. Yet as an appraiser I encounter homes with one or more of the following examples every week.

External Obsolescence

Easier to explain and observe, external obsolescence refers to an undesirable factor outside the property and is generally not curable. This can include:

• Highways: Unless you’re a NASCAR fan, having traffic buzz past your front yard at 55 mph isn’t the most desirable situation.
• Power Lines: Not the small feed directly to a home, but rather the high voltage towers that supply an entire town. Even if you don’t believe scientific studies they’re still unsightly.
• Commercial Buildings: Gas stations, shopping malls, 24 hour pharmacies – generally any business with non-neighborhood traffic.
• Railroad: Similar to highway traffic but without the NASCAR effect.

Functional Obsolescence

This occurs when the interior of a property suffers from reduced usefulness. It can be cured as long as the cost is less than the added value.

• Odd Floorplan: I inspected a single family home recently that had no bedrooms and only a half bath above grade. There was a room with a bed but it lacked a closet. That room was only accessible through another den, which in itself was only accessible through the half bathroom. Can you say ‘remodel gone horribly wrong?’ Plus the only shower in the home was in the lower level laundry room, which had a sink but no toilet so it wasn’t considered a bathroom.
• One Bedroom: A condo in a building where many units have one bedroom doesn’t apply. But a one bedroom single family home in an area where others have 3 or 4 is not typical.
• One Bathroom: Again, this might be ok for a property with only two bedrooms. However, just imagine the joy of getting ready in the morning when you share the 1 bathroom with 10 people.
• Poor Design: Many 100+ year old homes have character but often lack amenities of newer construction. Small closets, only 4 kitchen cabinets, the kitchen sink not actually IN the kitchen but around the corner in the laundry room. Unfortunately not only did I see this house – I purchased and lived in it for three years.

While functional obsolescence is a real thing, it can be easily overlooked by someone who doesn’t live in the home. It’s also more difficult to find a similar comparable for an appraisal.

The Home Valuation Code of Conduct (HVCC) has been solely blamed for all appraisal values are low. While it definitely hasn’t helped the situation, it doesn’t hold true for every home. There are other ways to negatively impact the appraisal:

Let There Be Light

Having a home show well isn’t only for buyers. Open windows to let in sunlight and make the house feel bigger. Get rid of any unwanted odors as it could lead the appraiser to believe there are underlying issues.

Cleaning Up

Appraisers can easily look past minimal clutter or boxes being packed. But having storage areas or entire bedrooms that aren’t accessible just won’t fly. A clean and de-cluttered home will leave a good impression, which can translate into a higher value.

Not Fixing Problems

Depending on the type of loan the home may need to be checked for additional items. Generally speaking for an FHA loan, anything that represents a health or safety issue will need to be remedied. In today’s market a lot of foreclosed homes are missing pipes or have broken windows. Some even have the utilities turned off but these need to be operable. The loan won’t be approved without these issues being handled prior to closing.

Minor cosmetic issues won’t usually be a problem. But peeling paint might be lead-based if the home was built prior to 1978. To see all the FHA appraisal guidelines visit HUD’s website.

Annoying the Appraiser

Yeah I said it – just leave them alone. Many homeowners feel the need to follow the appraiser around like a lost puppy. Asking a few questions is fine, just don’t go overboard by trying to learn the entire appraisal process in 30 minutes.

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According to a recent press release from the Mortgage Bankers Association, government insured loan applications (FHA & VA) dramatically increased to 35.9% for the month of June. That’s more than a 10 percent increase from the prior month. Since the survey’s inception nearly 20 years ago, the lowest recorded share of FHA & VA applications was 5.8 percent in August 2005.

“A primary reason government-insured loans have retained a high share of the purchase market is that these loans typically require lower down payments than conventional loans,” said Orawin Velz, MBA’s Associate Vice President of Economic Forecasting. “In addition, lending standards tend to be tighter for conventional loans, especially for loans that require private mortgage insurance.”

“While the government-insured share of purchase applications has remained elevated, the government-insured share of refinance applications has been volatile. The share hit a record high of 38.4 percent in October 2008. As mortgage rates fell sharply between mid-November through early May, refinance activity surged for conventional loans. This surge in conventional refinance applications dominated the market, causing the share of FHA refinance applications to fall below 20 percent for most of this year. Recent increases in mortgage rates have caused conventional refinance activity to drop much more sharply than government-insured refinance activity due to a combination of credit and LTV requirements. As a result, the government-insured share of refinance applications climbed to 33.6 percent in June,” Velz said.

While this may all be true, I suspect the MBA is omitting another reason these applications have increased.

The Home Valuation Code of Conduct

The HVCC has greatly impacted the way lenders and appraisers work together. However, at the time of the press release the code didn’t apply to FHA or VA loans.

Obviously these loans have their pros and cons and not everybody (or every property) qualifies. At the end of the day I hope the LO’s are doing what’s best for their clients and not pushing these programs because they have more control of the appraisal process.

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It isn’t hot-off-the-presses news anymore that the Home Valuation Code of Conduct (HVCC) has really affected real estate transactions. But the National Association of Realtors wanted to find out how serious the problem really is. Here are the results:

• Approximately 76 percent of Realtors® representing buyers or sellers indicated that the time to obtain a completed appraisal increased after May 1; 69 percent of those reporting increased appraisal times reported an increase of over 8 days.
• Lost sales were reported by 37 percent of Realtors® attempting to complete home sales, with 17 percent reporting one lost sale and 20 percent reporting more than one lost sale.
• Reports of lost sales will impact the fallout rate in Pending Home Sales, although some of the sales may ultimately be completed on a delayed basis.
• An increased use of out-of-area Appraisers was reported by 70 percent of Realtors® seeking to complete a sale.
• The number of NAR Appraiser members reporting that they obtain over 50% of assignments from AMCs increased from 14 percent to 39 percent after May 1.
• Approximately half of NAR Appraiser members reported a reduction in fees received by them, and 70 percent of NAR Appraiser members reported that consumers were paying higher fees.
• Time for an appraiser to submit an appraisal to the AMC decreased, as reported by 71 percent of NAR Appraiser members.
• Approximately 85 percent of NAR Appraiser members reported a perceived reduction in appraisal quality.
• Among Realtor® respondents obtaining an appraisal for a client, 55 percent reported a perceived decrease in appraisal quality.
• NAR Appraiser members reported a significant number of assignments in unfamiliar geographic areas: for example, 16 percent reported that more than 11 percent of their assignments were in unfamiliar areas.

Probably not real surprising to anyone who hasn’t been living under a rock for the last few months. At least now when there are complaints about the HVCC, there are factual numbers to back up the statements.

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The Home Valuation Code of Conduct (HVCC) between lenders and appraisers went into effect June 1st. There’s been many comments recently about how real estate transactions have been affected. But when there’s a problem with someone not following HVCC guidelines, who enforces the complaint?

NOBODY

That’s right, nobody currently enforces the HVCC. An entity called the Independent Valuation Protection Institute (IVPP) handles complaints. According to the code:

An Independent Valuation Protection Institute (Institute) shall be created as approved by the parties. Subject to section IX, when the Institute is established, the lender will provide information to appraisers and borrowers regarding the availability of the Institute’s services, which are expected to include: (1) a telephone hotline and email address to receive any complaints of Code of Conduct non-compliance, including complaints from appraisers, individuals, or other entities concerning the improper influencing or attempted improper influencing of appraisers or the appraisal process, which the Institute will review and report as provided in IV.B(8) and IV.C(2) of this Code of Conduct; and (2) the publication and promotion of best practices for independent valuation. The lender shall not retaliate, in any manner or method, against the person or entity that makes a complaint to the Institute.

But months later it still doesn’t exist. Even Fannie Mae and Freddie Mac acknowledge this fact:

The structure of the IVPI has not yet been determined and the IVPI has not yet been established. Therefore, the provisions regarding it in the Code are not yet effective.

So right now HVCC regulation is like speeding on the Autobahn – there’s nobody to tell you not to do it.

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The appraisal management company StreetLinks has established a $1,000,000 fund to pay a performance guarantee to its clients, saying that it ensures their appraisals are consistent and accurate.

With any guarantee you have to make sure and read the fine print. To qualify, a lender simply has to stick to the following rules:

• Minimum volume: 50+ full conventional and/or FHA products per month
• Established and typical state, regional or national lending footprint
• Adherence to StreetLinks, HVCC and FHA appraiser independence process
• Utilization of StreetLinks “IntelAssign” appraiser selection process
• Volume, footprint & reporting equality must be established to derive a fair comparison if the performance guarantee is constructed around a competing AMC or lender “in-house” process

Why waste money starting a million dollar fund? Just throw $500 into a separate bank account, call it a performance guarantee and make it nearly impossible to meet the criteria – because that’s really what they’ve done here. It’s a failed attempt to differentiate themselves from the typical AMC.

The late Chris Farley said it best in the movie Tommy Boy:

…they know all they sold ya was a guaranteed piece of s***. That’s all it is, isn’t it? Hey, if you want me to take a dump in a box and mark it guaranteed, I will. I’ve got spare time. But for now, for your customer’s sake, for your daughter’s sake, ya might wanna think about buying a quality product from me.

In a related story, I read a Businessweek article that talks about NovaStar Financial, a large subprime lender during the housing boom.

NovaStar was disciplined by three states—Massachusetts, Nevada, and Washington—for such infractions as employing unlicensed brokers and charging unlawful fees. Without admitting wrongdoing, the company paid $5.1 million in 2007 to settle similar allegations in a class action brought on behalf of borrowers. After its mortgage business collapsed, NovaStar morphed into an AMC last year by acquiring another company and renaming it StreetLinks National Appraisal Services.

Steve Haslam, NovaStar’s former chief of retail lending, is now CEO of StreetLinks.