Do new mortgage rules change the things for the home buyers?
Appraisals performed for mortgages do not usually become news worthy, but buzz in the real estate industry about the new appraisal rules has spilled over into the popular press. If you can recall, one issue that helped fuel the problems which led to the housing crisis was that appraisers were seen as being to closely tied to the mortgage industry providing valuations that were seen as inaccurate. New codes of conducts were established to help ensure that appraisals were accurate by not being influenced by another party. Unfortunately, as the real estate industry deals with the aftermath of the housing bubble’s bust, we are trying to find ways to be fair to all involved while doing the job well. This has caused some home buyers to be faced with problems when it comes to the appraisals of their potential home.
Let us look at a home buyer purchasing a newly built home. The builder calculates his costs and adds his profit to determine how much a home’s price should be. Sounds simple, but homes are major purchases, which require the buyer to obtain a loan. Here is where the appraiser steps into the picture. The lender wants to know that if you default on the loan, will they get their money back? They ask for an appraisal to see how much the home is worth. This is where a disconnect occurs. The appraiser is not going to check with the builder as to how much the material cost, or how much profit is acceptable. The appraiser works with a different set of data. Looking at details of the completed home with other data, the appraiser develops an amount ascribed as the home’s value.
The issue becomes cloudier when you consider how the appraisal is performed. We imagine that the appraiser is going out to the home to check it. Measuring it. Checking the general condition. Looking at the materials used. All of this goes into formulas based on data to produce the value number. This type of appraisal does happen, and it is the most expensive. A common type of appraisal is called the desk appraisal, and this is quite acceptable for a mortgage. In the desk appraisal all of the work is performed without ever going to the house. The information is gathered from the builder and other sources to produce a value. In theory, this value should be the same, but there can always be slight differences.
You may have noticed that I have been a bit vague about where data may come from for an appraisal. This vagueness leads to another problem that has arisen this year for many buyers. In an effort to make appraisals more honest, the Federal Housing Finance Agency (Freddie Mac) put a rule to effect on May 1, 2009 that does not allow Realtors and builders to provide information about the surrounding neighborhood. The idea is to stop the communication between various parties involved in a home sale from having input into a home’s value. The idea being that the builder, Realtor, and lender would all want a higher value for the home, because they all earn more money if that was the case. Price of an object is not solely based upon cost of producing it and the amount of reasonable profit added together; it is based upon the value we also give to it. If people really love a neighborhood, they are willing to pay more to live there. Think of a neighborhood in transition. Lower valued homes next to newly built larger homes. It becomes a variable that could greatly swing an appraisal in either direction.
This disconnect of communication lines makes matters more difficult, but it does not make the situation hopeless. An appraiser could rely upon his own knowledge, or on touring the neighborhood. However, we have those desk appraisals to contend with. What if I am buying a home here in Houston, and the appraisal is performed by a firm in San Diego. That appraiser may be great at his job, but he does not have access to data from the Realtor or builder; can he really provide an accurate assessment of the value? Remember that value is subjective, and he does not have all of the data to make that subjective assumption.
How does this effect the home buyer? The builder and Realtor are telling you that a home is worth $250,000, and the appraiser produces the value of $175,000. The lender does not want to loose money if you default, and the lender may have a real concern. According to a recent report, around a quarter of homeowners in Houston may be in trouble with their mortgages. The lender offers to loan you the $175,000, which means that you need the down payment and the difference between the loan and the sale price. Lets say 10% down payment, which gives us $17,500 down payment with $75,000 difference. How many buyers have $92,500? Without the loan, they cannot buy the house, and the builder faces this same circumstance with the next buyer, even though he has set a fair price.
This is where the buyer may wish to do a little leg work. Lenders are not unreasonable by nature. If you qualify for the full amount of the loan, they will have no problem loaning it to you. You may want to check if you can hire the appraiser yourself. You are paying for the appraiser after all. The lender will want to ensure that the appraiser is qualified, but there should not be resistance to you hiring your own for the mortgage. Find a local appraiser who may be able to produce a more accurate desk appraisal (if you are trying to save money) or to go to the home to perform the valuation. Maybe because of the new rules he may come up with the same value, but some one familiar with an area is more likely to produce a more accurate figure.