My New Blog

My Blog returns after a short hiatus due to the extraordinary events of the past 2 months. Who could have predicted the volatile financial markets as the credit markets melted down and then froze up. The past 4 weeks have seen a virtual stand-still in home sales and refinancing as nervous buyers and sellers wait to see what is next!

So I was very interested in Saturday’s Washington Post article by Kenneth Harney in his The Nation’s Housing column titled “Surrounded by Ruins, Mortgage Market Remains Intact”. Harney contends that the mortgage market has been effectively “federalized” for the time being. He notes that 90% of new loans are being made through the FHA, plus Fannie Mae and Freddie Mac. These agencies have “unfettered access to global capital at rock-bottom costs” because they are insuring the loans backed by the federal government.

Although loan terms and underwriting standards have been tightened, low down payments of 3% are still available through FHA, whose credit standards are “generous and forgiving” according to Harney. FHA backed loans have come to dominate the mortgage market and there appears to be no decline to that in the future.

Harney also states that the historically low mortgage rates (currently 6.4%) continue to be attractive. Along with the increased maximum loan amounts, $729,750 through the end of the year and $625,000 starting next year, qualified borrowers are still positioned to benefit. Home prices have fallen to levels not seen since 2003/04 making the housing market available to many first time buyers.

So what does it all mean to those of us who make their living serving the housing industry? The best case scenario would be that market interventions would impact the level where realtors, banks, mortgage companies and appraisers can begin to serve consumers again. The basic but critical element of Trust must be returned to everyone involved in the system. Home buyers will re-enter the market when they feel they can trust what is going on. Not only in the areas of home value, but in doing business with those of us that provide them with professional services that they count on. Regaining that Trust may cost more then the $750 billion set aside to stabilize the credit markets.

If you read or listen to the news lately, you might begin to worry that the banking system is near collapse because of the housing downturn. There are news stories daily about different major banks that are struggling with losses from bad mortgages (or bad management).

On the other hand, if you look at the real estate market in the metropolitan Washington DC area we are getting busy! Over the past 3 months sales have risen dramatically and foreclosed properties are starting to sell and move off the market.

Casey Margenau, a well known realtor in Northern Virginia, states in the July 22 Fairfax County Times that “Fairfax County is always the first to do better, so it’s sales are up nearly 20%.” He also notes that “Prince William County prices have dropped 33% in the past year but sales of house under $500,000 are up 89% from a year ago.” Margenau identifies that houses at the lower end of the price range are currently moving the most. Overall in Fairfax County, “sales have increased 19% from May 2007 to May 2008”.

Several agents I talked to believe there is a pent-up demand for houses in our area. The current problem is not home prices, but home financing. Until the banks can get themselves right, they will negatively impact the housing recovery in our area.

Which creates an unusual scenario; Banks don’t like to own houses they like to own money. Banks make money by lending money, but if they can’t lend money due to reserve shortages, then they can’t make money. When banks are losing money credit becomes tighter, hence negatively impacting home financing.

The ‘BIG HOUSING BILL’ passed the Senate Saturday and full passage seems imminent. Will this solve all the problems in the housing industry? No one seems to think so, but in an election year congress decided they had to do something.

In spite of the headlines, those of us on the front lines of the Metro DC real estate market will go about our daily business and be a part of the recovery that has begun here. Remember every market is local.

In Sunday’s Washington Post, Alec Klein and Zachary Goldfarb begin a 3 part series on the housing industry troubles. For anyone who is unclear about how the housing market got into it’s current condition, this first installment gives some great historical background about the conditions in the economy that preceded today’s situation.

Following the Technology boom and bust in the late 90’s, in an effort to stimulate the economy and help bring the country out of a recession, efforts to lower interest rates and make credit available to more people triggered waves of ‘creative investments’ that packaged mortgage securities. Mortgages had been thought of as the best, sure-bet investment anyone could have. Investors, looking for a place to put their money and investment bankers, looking for a way to sell securities, were soon married into a very profitable product called “CMO’s”, collateralized mortgage obligations.

Having a vehicle where everyone could make a lot of money, the industry soon began expanding. With easy credit and lots of willing home sellers and buyers, the industry exploded in mortgage sales and investments. The subprime mortgage market was born

The Post story chronicles Pinnacle Mortgage, a now defunct mortgage company that I and many other appraisers in this area worked for from time to time. In describing the boom, Jeffrey Vrantanina, one of Pinnacle’s founders is quoted as saying “Quite candidly, it all boils down to one word, greed.” Pinnacle’s ‘emerging markets division’ led the way in working with subprime borrowers that later would become casualties in the foreclosure crisis. They made a lot of money in a short period of time, but the collateral damage has been extensive.

Interesting stuff. The next part of the series in Monday’s paper begins to chronicle the bust, when ARM’s begin to reset with higher interest rates and foreclosures increase. Stay tuned!

Is FHA the savior of the housing and mortgage crisis? In today’s Washington Post Business section, Dina ElBoghdady explores the newly significant role the FHA finds itself in. Those in Congress are looking for a way to solve the mortgage crisis and are trying to find a mechanism to impact the mortgage and credit markets in order to help homeowners and buyers. The Federal Reserve has attempted to provide the credit markets with some support and stability. Now Congress is working to do the same with the housing markets.

Since the Federal Housing Administration insures mortgages and even though they have $21 billion dollars in reserves, there are new concerns that if they take on more “at-risk” mortgages they may need $1.4 billion in new appropriations to protect it from future losses. The current plan in Congress is to increase the size of loans it insures and modernize the agency to become a more effective player in the broader mortgage marketplace. Congress appears to be divided along party lines in support of the plan.

So how does this impact you and me? First, for the 1^st quarter of 2008 FHA loans for purchases and re-fi’s increased 126% from the same period in 2007. The article notes that the bulk of these new loans are “coming from solid borrowers who want to refinance their conventional loans into cheaper FHA mortgages”. This group is different from FHA’s traditional constituency of “first-time buyers, minorities and moderate to low income families”.

Companies that are FHA approved, both loan officers and appraisers, are benefiting from this increase in business.

Secondly, if the plans for FHA are approved in some fashion, then some of the pressure that currently constrains the market may be eased. Houses will start to sell, values will stabilize and buyers and sellers will become confident in the market again. All of this will help with improving the business climate for people like us.

In talking to a number of loan officers around the area, FHA loans are becoming the loan of choice for many and informed customers are taking advantage of the low rate programs offered. Some loan officers are doing almost 100% FHA work now. For appraisers, FHA work has increased significantly over the past 6 months and appears to be the fastest growing area of business.

Is FHA the savior of the housing crisis? Probably not, but it will play an important role in the housing market's recovery process. For now, working with FHA insured loans seems to be good business for everyone.

To read the entire article in the Washington Post, here’s the link: http://www.washingtonpost.com/wp-dyn/content/article/2008/05/06/AR2008050602985.html?hpid%3Dsec-business&sub=AR

One of the most controversial topics among appraisers and loan officers these days is whether or not a property is located in a “declining market”. The question that is often not answered is what determines a declining market.

Is it the Case Schiller Index? Is it the number of foreclosure properties in the neighborhood? Is it the MRIS zip code statistical summary of average sale price or median sale price changes over the past year? Is it the newspaper reports that say “county officials” (unnamed) report that property values are down 3%, 7% or 12% and that is why they must raise the tax rate? Is it the big Lenders who issue notices that certain markets are now considered “soft” so loans must be depreciated by 5%? Or is it some secret formula appraisers use to come up with these widely varying conclusions?

There are a variety of opinions and, to be sure, it is not a simple explanation. I have this conversation about once a week with loan officers and underwriters who are trying to make a loan to serve their client and meet all the myriad of requirements that lenders have for borrowers today.

Here are a few thoughts that might help us understand the issue.

• Location is everything. A subdivision may have declining values but another one, within the same county a few miles away, may be stable. Looking at local neighborhoods and the recent sales trends is critical in determining values. In the Washington metro region, areas closer to the city have maintained strong value. The farther away from the city, declines in values have had a greater impact.

• Statistics are important. When I look at an area I review the recent sales and re-sales to see what kind of changes occur (+ & -). I use the MRIS statistical summaries for zip codes to look at trends and volume. I also look at current listings and DOM (days on market) to see what houses sell and what houses sit on the market for months. Price is usually a big factor. Using the technology available today is important in gathering the data needed for determining market value.

• Market factors are intertwined. When new home builders want to move inventory they can cut prices, sometimes by $100,000. The re-sale market seller does not have that same perspective on selling their house. And yet, the competition from new homes and their lowered prices has the same effect on the re-sale market forcing those prices down as well. When borrowers default on their home loans and banks end up with the property, the perspective on value is different for the bank then a homeowner wanting to re-finance their house. The bank does not want to own houses, they want to own the loan. Banks are not very good at marketing real estate so prices fluctuate around decisions involving risk and exposure for the bank. All these factors can make estimating value a challenge. When lending is tight people can afford less house. This also drives values down. All these market factors are swirling around and can be quite confusing to the casual observer.

That is just a brief summary of some very complicated issues. You probably have your own perspective and insights as well. I would love to hear them!

These are interesting times in the housing industry with pressures coming from every side. Maintaining our integrity and professional standards as we make fair and objective assessments for our clients is what McGraw Appraisals strives for every day. Thanks for taking the time to read My Blog!

Jim

Kenneth Harney’s column in Saturday’s Washington Post caught my attention, “Fighting Back Against Corrupt Appraisals”. I expected another simplistic blaming tirade against the appraiser’s role in the current housing downturn. I was pleasantly surprised that he presented a fairly balanced report on the illegal influence that some loan officers had put on appraisers to “hit the number”.

The bulk of the article was about the new proposed guidelines from Fannie and Freddie for appraisals. Harney notes five keys components of the guidelines:

• Lenders must guarantee that the property valuations they use are free from influence or pressure and conform to a new national code of ethics.

• Appraisers and consumers will have a complaint hotline to report any impropriety by loan officers, real estate agents or others.

• Lenders that have in-house appraisal staffs or financial interest in appraisal management firms won’t be allowed to use valuations generated by these companies.

• Mortgage brokers will be cut out of the appraiser selection process altogether.

• A new “Independent Protection Institute” will be developed the oversee appraisers and monitor the accuracy of home appraisals and automated valuations. They will also mediate complaints.

These guidelines are supposed to go into effect January 1, 2009, pending comment from the public and the Mortgage Industry.

Cary Barker, Assistant Editor, Working RE, www.workingre.com, reports in his article “Turning Tide, Appraiser Independence” that “Nine states have also passed legislation that will protect appraisers from being influenced by brokers and lenders. Many other House bills and state bills are pending.”

So what does this mean to you and me? Is it the end to the personal relationship and service that independent appraisers like me provide to loan officers all over the area? Will everyone in the housing industry now be under ‘Big Brothers’ increased scrutiny and control? Who will be in control of the “Independent Protection Institute”, appraisers, lenders, government bureaucrats?

Before we all panic, let’s take a breath and pause. The tough market that we have been dealing with for the past 2 years has made all of us a ‘little’ stressed. We all know many people that were in the industry 2 years ago that have moved onto other careers. All of our jobs have become more difficult. How many of these proposals become actual practice and what modifications are added after all the review and political maneuvering we will have to wait and see.

Here’s what we do know. People want to buy and re-finance houses. Banks need to lend money to make money. Someone needs to facilitate the loan and valuation process. Our jobs may be changing, but if we remain flexible and alert we can adapt to the new world of real estate and be successful.

What can we do? Contact our national and local professional organizations to lobby for our positions and for input into the final decision making process. We must speak out and add our ‘common sense’ experience to the bureaucratic thinking.

The next year will be really interesting!

To read the whole article by Harney here’s the link: http://www.washingtonpost.com/wp-dyn/content/article/2008/03/14/AR2008031402007.html

Thank You Elizabeth Razzi! In Sunday’s Washington Post Real Estate section, in her weekly column Local Address, Razzi correctly sums up the current pressures and complications that consumers, appraisers and lenders find themselves in with many areas of the local market declining in value. Lenders and underwriters need to protect their investment and they depend on appraisers to give them a reliable estimate of value. Sounds simple but in today’s market it has become difficult.

Razzi points out that appraisals now include much more then just 3 comps and a value in a report. Lenders are interested in as much information about that local market as they can get. Besides closed sales we now in factor in properties under contract, active listings, DOM (days on market) and seller or builder incentives to help us make the best value estimate we can. Review of market statistics for trends is important. Foreclosures in an area can also impact values. Today’s appraisal reflects the analysis of much more information then many people realize. AVM’s become even less reliable in these changing markets and a full appraisal is the best way to go.

Low value is the most common complaint today. We all want deals to work but the appraisal must have current data to be reliable. In the current changing market, valuations become more difficult. Good appraisers work hard to explore all the available information and use their best judgment to estimate value.

Two other points that Razzi covers are important. She mentions the proposed new appraisal standards by Fannie and Freddie and I like her summary: “The proposed standards simply call for fair play. It’s not fair for lenders to withhold payment for appraisals they don’t like. It’s not fair to kick an appraiser out of the game if he doesn’t play along.” Enough said.

Her second point is that “Appraisers should be free from pressure to hit a preordained target”. Consumers typically overestimate the value of their home and in a re-fi they expect more then is sometimes realistic. Lenders have become much more cautious in working with re-fi customers to avoid some of these pitfalls.

Appraisers don’t want to “kill” deals, but are ethically obligated to be objective, independent and impartial. Current appraisers must walk a fine line in today’s market.

To read her whole article here’s the link: http://www.washingtonpost.com/wp-dyn/content/article/2008/03/07/AR2008030703907.html

The foreclosure situation continues to make news, raise concerns and impact the stock market. In today’s Washington Post, the Business page headline is "Mortgage Foreclosures Reach All-Time High". The bad news referred to is the report by the Mortgage Banker's Association stating that "2.04% of outstanding mortgages were in foreclosure in the 4th quarter last year, an all-time high".

California and Florida account for 30% of the foreclosures. These areas are particularly hard hit. Nationally, 42% of the foreclosures were for subprime ARMs and 20% were prime ARMs. Is there any good news out there?

One glimmer of hope is that the impact appears to be localized, meaning some areas are worse off and other areas are doing better then average. In the Washington DC Metro area things are noticeably better. Foreclosures in Virginia at 1.01%, in DC 1.0% and in Maryland they are 1.22%, nearly half the national average. So basically 1 mortgage in 100 in is default.

So what is the prognosis for our area? Some unqualified buyers bought bad loans for houses they couldn't afford. Unfortunately, everyone suffers. Until lenders can clear the loans and relieve the market glut, prices will continue to fall as sellers compete with each other and the banks to sell houses.

The good news is the Washington Metro area is doing better then most and should rebound quicker then most. When? Nobody really knows. We are monitoring values closely.

Heres the link to the article: http://www.washingtonpost.com/wp-dyn/content/article/2008/03/06/AR2008030601447.html

I never imagined that I would become a blogger, but here I go. As an Appraiser I am constantly looking at new and updated information on the housing market and local values. The newspapers provide a lot of information that the public looks at, maybe understands maybe not, makes an impression and moves on. Todays Washington Post is such an example.

The headline reads "Fannie, Freddie Agree to Tighten Appraisal Rules". The first impression is that those 'wild and crazy' appraisers need to be reigned in. But the real thrust of the article is the recent agreement between New York Attorney General Andrew Cuomo and Fannie Mae and Freddie Mac on protecting appraisers from lenders who pressure them to make specific values. These new rules are really guidelines that prohibit lenders from influencing appraisers by threatening to withhold business and limiting lenders from using 'in-house' appraisers that might not be objective. These new rules would also restrict the lenders from owning the appraisal companies that they use for similar potential conflict of interest problems.

What is interesting to me is that appraisers have always had to follow the USPAP (Uniform Standards of Professional Appraisal Practice) guidelines that clearly prohibit attempts to influence or pressure appraisers by outside parties. In that situation appraisers should refuse the assignment and report the offense.

Hopefully, as dishonest loan officers, lenders and appraisers are weeded out of the market by the recent downturn, those of us that are still working to service the public and provide honest valuations that lenders and borrowers can have confidence in, won't have to be "reigned in". Then the perception of the appraisal field will return to that of the integrity and objectivity the profession projected when it was created. 

If you'd like to read the whole article here's the link: http://www.washingtonpost.com/wp-dyn/content/article/2008/03/03/AR2008030301374.html