Thursday, June 11, 2009

Conventional Lending: Gov't Siege Engines Attack

Although this is not a political blog, there are a few issues economically speaking that are becoming political in nature. Currently, government's hand in private sector business is growing. The ultimate effects of this will be inefficiency on a broad scale.

The reason I mention this is because more evidence of this government hand showed up in Freddie Mac's appraisal guidelines recently. You can read their new Home Valuation Code of Conduct here. This code applies to all financing EXCEPT FHA/VA, Native American Loans, and 502 Rural Loan. Those exceptions are already government sponsored and heavily regulated. These guidelines can be seen as cutting conventional lending down to FHA/VA restrictive standards.

The new requirements are significant. One provision is to essentially prevent contact between loan officers and appraisers. This barrier impedes business and prevents professionals from problem solving. Often, material information that will help an appraiser in his assessment of property is had by loan officers and realtors. This window of communication is now closed so appraisers must make "best guesses" based on hard market data. What this translates into is fewer appraisals satisfying the needs of the loan conditions and therefore less business being transacted.

One may suggest this is reaction to fraud and abuse that was found in the appraisal arena. Or, it might be just another sign of government's growing hand of control over our economic system and our ultimate dependence on that hand for subsistence. My guess is it's likely both.


Shawn Watkins called me this afternoon to tell me about an appraisal he just got back today on one of his investment properties. He was doing a refi and the lender was connected with the next appraiser in queue in "the rotation". Here is the break down on Shawn's property:

1. It has a current CMA of about $105K.
2. Shawn paid $77k for it as a short sale 18 months ago.
3. Shawn spent $17K in rehab and upgrades.

So what did this appraiser do? He used three BANK OWNED comparables (WHOA!?) to establish value for the property. There were plenty of other non-distressed homes available to look at. For some reason, this appraiser chose to grab his comps from the slimy bottom of the trough. His opinion of value? $70,000!

This appraiser is from out of the area. This rediculous HVCC rule just cost Shawn $450 and will cost him another $450 to play Apprasier Roulette again so he get his loan done . Lets keep our fingers crossed.

1 comment:

Jeremy said...

HVCC is no picnic for the appraisers either.

My wife works part time as a residential appraiser. She has signed up with several appraisal management companies in hopes that she'll continue to get some work under the new rules. She can no longer market herself directly to the people who would benefit from her professionalism and reliability and is left hoping the intermediaries she has signed up with have enough customers to ensure she will remain busy.

Lenders did have too much influence over appraisers in recent years. The appraisal report often ended up being little more than red tape rather than the essential tool for underwriting it should have been. That said, I agree with your argument that HVCC as a cure is worse than the original disease.