The State of Arizona issued this statement today to all lenders across Maricopa County:
RE: Funding availability for Maricopa County
Allocated funding for the above referenced County has been expended. Therefore, no additional Commitments will be issued for this County. If and when there is a change in the status of funds for this County an announcement will be sent out.
Friday, November 20, 2009
Monday, November 9, 2009
FHA Condo Update
This update contains the temporary changes to the FHA Condo Approval Process as outlined in Mortgage Letter 2009-46 B.
Here are the 5 things you need to know about these changes:
1. These temporary changes are effective on December 7th, 2009 through December 31st 2010; except for Spot Loan Approvals.
2. Spot Loan Approvals will be eliminated as of February 1st, 2010.
3. FHA loan concentration may be increased to 100% if the following criteria are met:
Here are the 5 things you need to know about these changes:
1. These temporary changes are effective on December 7th, 2009 through December 31st 2010; except for Spot Loan Approvals.
2. Spot Loan Approvals will be eliminated as of February 1st, 2010.
3. FHA loan concentration may be increased to 100% if the following criteria are met:
- Project construction has been 100% complete for at least 1 year
- All units have been sold and no single entity owns more than 10% of the units
- Project holds 10% of the budget in reserves for capital expenditures and deferred maintenance
- Control of Home Owner's Association has been transferred to the owners, and e. Owner-occupancy is at least 50%
4. FHA requires a 50% owner-occupant ratio but bank-owned units that are either vacant or tenant-occupied are not required to be included the calculation.
5. New construction pre-sale requirement is temporarily reduced to 30%.
Homebuyer Tax Credit Update
Last week, President Obama signed a bill to extend the tax credit for first-time homebuyers (FTHBs) through June 30, 2010. The bill also opens up opportunities for others who are not buying a home for the first time.
To learn what the new tax credit means to you and your clients, take a look at the concise overview below.
Who Gets What?
First-Time Homebuyers (FTHBs): First-time homebuyers (that is, people who have not owned a home within the last three years) may be eligible for the tax credit. The credit for FTHBs is 10% of the purchase price of the home, with a maximum available credit of $8,000
Single taxpayers and married couples filing a joint return may qualify for the full tax credit amount.
Current Owners: The tax credit program now gives those who already own a residence some additional reasons to move to a new home. This incentive comes in the form of a tax credit of up to $6,500 for qualified purchasers who have owned and occupied a primary residence for a period of five consecutive years during the last eight years.
Single taxpayers and married couples filing a joint return may qualify for the full tax credit amount.
What are the New Deadlines?
In order to qualify for the credit, all contracts need to be in effect no later than April 30, 2010 and close no later than June 30, 2010.
What are the Income Caps?
The amount of income someone can earn and qualify for the full amount of the credit has been increased.
Single tax filers who earn up to $125,000 are eligible for the total credit amount. Those who earn more than this cap can receive a partial credit. However, single filers who earn $145,000 and above are ineligible
Joint filers who earn up to $225,000 are eligible for the total credit amount. Those who earn more than this cap can receive a partial credit. However, joint filers who earn $245,000 and above are ineligible.
What is the Maximum Purchase Price?
Qualifying buyers may purchase a property with a maximum sale price of $800,000.
What is a Tax Credit?
A tax credit is a direct reduction in tax liability owed by an individual to the Internal Revenue Service (IRS). In the event no taxes are owed, the IRS will issue a check for the amount of the tax credit an individual is owed. Unlike the tax credit that existed in 2008, this credit does not require repayment unless the home, at any time in the first 36 months of ownership, is no longer an individual’s primary residence.
How Much are First-Time Homebuyers (FTHB) Eligible to Receive?
An eligible homebuyer may request from the IRS a tax credit of up to $8,000 or 10% of the purchase price for a home. If the amount of the home purchased is $75,000, the maximum amount the credit can be is $7,500. If the amount of the home purchased is $100,000, the amount of the credit may not exceed $8,000.
Who is Eligible fort FTHB Tax Credit?
Anyone who has not owned a primary residence in the previous 36 months, prior to closing and the transfer of title, is eligible.
This applies both to single taxpayers and married couples. In the case where there is a married couple, if either spouse has owned a primary residence in the last 36 months, neither would qualify. In the case where an individual has owned property that has not been a primary residence, such as a second home or investment property, that individual would be eligible.
As mentioned above, the tax credit has been expanded so that existing homeowners who have owned and occupied a primary residence for a period of five consecutive years during the last eight years are now eligible for a tax credit of up to $6,500.
How Much are Current Home Owners Eligible to Receive?
The tax credit program includes a tax credit of up to $6,500 for qualified purchasers who have owned and occupied a primary residence for a period of five consecutive years during the last eight years.
Can Homebuyers Claim the Tax Credit in Advance of Purchasing a Property?
No. The IRS has recently begun prosecuting people who have claimed credits where a purchase had not taken place.
Can a Taxpayer Claim a Credit if the Property is Purchased from a Seller with Seller Financing and the Seller Retains Title to the Property?
Yes. In situations where the buyer purchases the property, even though the seller retains legal title, the taxpayer may file for the credit. Some examples of this would include a land contract or a contract for deed.
According to the IRS, factors that would demonstrate the ownership of the property would include:
1. Right of possession
2. Right to obtain legal title upon full payment of the purchase price
3. Right to construct improvements
4. Obligation to pay property taxes
5. Risk of loss
6. Responsibility to insure the property
7. Duty to maintain the property
Are There Other Restrictions to Taking the FTHB Credit?
Yes. According to the IRS, if any of the following describe a homebuyer’s situation, a credit would not be due:
Yes. As long as the person they buy the home from is not a direct blood relative, the purchase would be allowed.
If a Parent (Who Will Not Live In The Property) Cosigns for a Mortgage, Will Their Child Still be Eligible for the Credit?
Yes, provided that the child meets the other requirements for the tax credit.
To learn what the new tax credit means to you and your clients, take a look at the concise overview below.
Who Gets What?
First-Time Homebuyers (FTHBs): First-time homebuyers (that is, people who have not owned a home within the last three years) may be eligible for the tax credit. The credit for FTHBs is 10% of the purchase price of the home, with a maximum available credit of $8,000
Single taxpayers and married couples filing a joint return may qualify for the full tax credit amount.
Current Owners: The tax credit program now gives those who already own a residence some additional reasons to move to a new home. This incentive comes in the form of a tax credit of up to $6,500 for qualified purchasers who have owned and occupied a primary residence for a period of five consecutive years during the last eight years.
Single taxpayers and married couples filing a joint return may qualify for the full tax credit amount.
What are the New Deadlines?
In order to qualify for the credit, all contracts need to be in effect no later than April 30, 2010 and close no later than June 30, 2010.
What are the Income Caps?
The amount of income someone can earn and qualify for the full amount of the credit has been increased.
Single tax filers who earn up to $125,000 are eligible for the total credit amount. Those who earn more than this cap can receive a partial credit. However, single filers who earn $145,000 and above are ineligible
Joint filers who earn up to $225,000 are eligible for the total credit amount. Those who earn more than this cap can receive a partial credit. However, joint filers who earn $245,000 and above are ineligible.
What is the Maximum Purchase Price?
Qualifying buyers may purchase a property with a maximum sale price of $800,000.
What is a Tax Credit?
A tax credit is a direct reduction in tax liability owed by an individual to the Internal Revenue Service (IRS). In the event no taxes are owed, the IRS will issue a check for the amount of the tax credit an individual is owed. Unlike the tax credit that existed in 2008, this credit does not require repayment unless the home, at any time in the first 36 months of ownership, is no longer an individual’s primary residence.
How Much are First-Time Homebuyers (FTHB) Eligible to Receive?
An eligible homebuyer may request from the IRS a tax credit of up to $8,000 or 10% of the purchase price for a home. If the amount of the home purchased is $75,000, the maximum amount the credit can be is $7,500. If the amount of the home purchased is $100,000, the amount of the credit may not exceed $8,000.
Who is Eligible fort FTHB Tax Credit?
Anyone who has not owned a primary residence in the previous 36 months, prior to closing and the transfer of title, is eligible.
This applies both to single taxpayers and married couples. In the case where there is a married couple, if either spouse has owned a primary residence in the last 36 months, neither would qualify. In the case where an individual has owned property that has not been a primary residence, such as a second home or investment property, that individual would be eligible.
As mentioned above, the tax credit has been expanded so that existing homeowners who have owned and occupied a primary residence for a period of five consecutive years during the last eight years are now eligible for a tax credit of up to $6,500.
How Much are Current Home Owners Eligible to Receive?
The tax credit program includes a tax credit of up to $6,500 for qualified purchasers who have owned and occupied a primary residence for a period of five consecutive years during the last eight years.
Can Homebuyers Claim the Tax Credit in Advance of Purchasing a Property?
No. The IRS has recently begun prosecuting people who have claimed credits where a purchase had not taken place.
Can a Taxpayer Claim a Credit if the Property is Purchased from a Seller with Seller Financing and the Seller Retains Title to the Property?
Yes. In situations where the buyer purchases the property, even though the seller retains legal title, the taxpayer may file for the credit. Some examples of this would include a land contract or a contract for deed.
According to the IRS, factors that would demonstrate the ownership of the property would include:
1. Right of possession
2. Right to obtain legal title upon full payment of the purchase price
3. Right to construct improvements
4. Obligation to pay property taxes
5. Risk of loss
6. Responsibility to insure the property
7. Duty to maintain the property
Are There Other Restrictions to Taking the FTHB Credit?
Yes. According to the IRS, if any of the following describe a homebuyer’s situation, a credit would not be due:
- They buy the home from a close relative. This includes a spouse, parent, grandparent, child or grandchild. (Please see the question below for details regarding purchases from “step-relatives.”)
- They do not use the home as your principal residence.
- They sell their home before the end of the year.
- They are a nonresident alien.
- They are, or were, eligible to claim the District of Columbia first-time homebuyer credit for any taxable year. (This does not apply for a home purchased in 2009.)
- Their home financing comes from tax-exempt mortgage revenue bonds. (This does not apply for a home purchased in 2009.)
- They owned a principal residence at any time during the three years prior to the date of purchase of your new home. For example, if you bought a home on July 1, 2008, you cannot take the credit for that home if you owned, or had an ownership interest in, another principal residence at any time from July 2, 2005, through July 1, 2008.
Yes. As long as the person they buy the home from is not a direct blood relative, the purchase would be allowed.
If a Parent (Who Will Not Live In The Property) Cosigns for a Mortgage, Will Their Child Still be Eligible for the Credit?
Yes, provided that the child meets the other requirements for the tax credit.
Saturday, November 7, 2009
MY 203K FHA LOAN CLOSED - WHAT HAPPENS NOW?
Are you purchasing a home in Phoenix? Is the house bank-owned, does it need some TLC, or would you just like to paint, carpet and put in some new appliances? The FHA 203k Streamline loan is the perfect solution. For a more detailed guide on specifics on how the 203k loan works...call me today!
FHA's Streamline 203(k) mortgage program allows Phoenix homebuyers to finance up to an additional $35,000 into their mortgage, to improve or upgrade their home before they move-in. Phoenix homebuyers can use this type of loan to pay for property repairs, such as those identified by a home inspector or FHA appraiser. These improvements are not just limited to repairs and can also be cosmetic upgrades to the existing property.
Now that you have gone through the whole financing process and you have reached your closing date, what happens next? Rehabilitation construction should begin within 30 days after closing, and all work must be completed within six (6) months from the closing date.
How does your General Contractor get paid? After the closing, your loan is typically sold to a servicing company, like Bank of America. This process normally takes 7-10 days, but is currently taking approximately 21 days. This is due to an influx of new loans being purchased from the recent closure of various mortgage lenders. After the loan is sold, 50 percent of the rehabilitation funds are disbursed immediately to the borrower and/or contractor. Included with the initial disbursement is an instruction letter that explains how the final disbursement will be made upon completion and provides the necessary contact information. The balance is disbursed upon completion of all work. If the cost of the renovation is over $15,000, an inspection by the original appraiser is required.
For borrowers working with a contractor, a W-9 must be provided to set up the contractor, and a two-party check is made out to the borrower and the contractor and sent to the borrower. If multiple contractors are being used, 50 percent of the cost of the repairs for each contractor is disbursed up front. For borrowers performing work themselves, a self-help agreement must be signed before the funds are disbursed. The check is then made out directly to the borrower. A borrower is typically only allowed to perform work themselves if they have experience in that line of work.
Who handles all of the disbursements and other requirements during the rehabilitation process? The servicing company handles all rehabilitation disbursements and project inspections. The amount designated for repairs and improvements, including the contingency reserve, holdback, and PITI, if applicable, are deposited into an interest-bearing repair escrow account, insured by the Federal Deposit Insurance Corporation (FDIC).
What happens if your repairs have unexpected costs? The contingency reserve is required to cover unexpected repairs. The reserve is usually only required if the repairs exceed $7,500 and is typically 10 percent of the total repair amount. The contingency reserve can only be used on those changes that affect the borrowers health and safety, or is due to an increase in cost for an item of necessity. If a change order results in a decrease in costs, the amount will be added to the contingency reserve. Additional improvements that do not affect the health and safety, or an increase in cost due to a necessity item, must be paid for directly by the borrower and not paid out of the contingency reserve fund. The remaining balance in the contingency fund, after all work has been completed, will be used to pay down the principal balance of your loan.
Congratulations! It's time relax and enjoy yourself.
If you're considering purchasing a home that may need some cosmetic upgrades or repairs, please contact the Jim Barnett Home Financing Team to get pre-approved. Jim can be reached at 602-616-5469, 877-594-7600 or Jim.Barnett@WJBradley.com.
* These are guidelines for loans funded by W.J. Bradley Mortgage Capital Corporation and may not be the same as other lenders. You should consult your mortgage company to see if the same rules apply.
FHA's Streamline 203(k) mortgage program allows Phoenix homebuyers to finance up to an additional $35,000 into their mortgage, to improve or upgrade their home before they move-in. Phoenix homebuyers can use this type of loan to pay for property repairs, such as those identified by a home inspector or FHA appraiser. These improvements are not just limited to repairs and can also be cosmetic upgrades to the existing property.
Now that you have gone through the whole financing process and you have reached your closing date, what happens next? Rehabilitation construction should begin within 30 days after closing, and all work must be completed within six (6) months from the closing date.
How does your General Contractor get paid? After the closing, your loan is typically sold to a servicing company, like Bank of America. This process normally takes 7-10 days, but is currently taking approximately 21 days. This is due to an influx of new loans being purchased from the recent closure of various mortgage lenders. After the loan is sold, 50 percent of the rehabilitation funds are disbursed immediately to the borrower and/or contractor. Included with the initial disbursement is an instruction letter that explains how the final disbursement will be made upon completion and provides the necessary contact information. The balance is disbursed upon completion of all work. If the cost of the renovation is over $15,000, an inspection by the original appraiser is required.
For borrowers working with a contractor, a W-9 must be provided to set up the contractor, and a two-party check is made out to the borrower and the contractor and sent to the borrower. If multiple contractors are being used, 50 percent of the cost of the repairs for each contractor is disbursed up front. For borrowers performing work themselves, a self-help agreement must be signed before the funds are disbursed. The check is then made out directly to the borrower. A borrower is typically only allowed to perform work themselves if they have experience in that line of work.
Who handles all of the disbursements and other requirements during the rehabilitation process? The servicing company handles all rehabilitation disbursements and project inspections. The amount designated for repairs and improvements, including the contingency reserve, holdback, and PITI, if applicable, are deposited into an interest-bearing repair escrow account, insured by the Federal Deposit Insurance Corporation (FDIC).
What happens if your repairs have unexpected costs? The contingency reserve is required to cover unexpected repairs. The reserve is usually only required if the repairs exceed $7,500 and is typically 10 percent of the total repair amount. The contingency reserve can only be used on those changes that affect the borrowers health and safety, or is due to an increase in cost for an item of necessity. If a change order results in a decrease in costs, the amount will be added to the contingency reserve. Additional improvements that do not affect the health and safety, or an increase in cost due to a necessity item, must be paid for directly by the borrower and not paid out of the contingency reserve fund. The remaining balance in the contingency fund, after all work has been completed, will be used to pay down the principal balance of your loan.
Congratulations! It's time relax and enjoy yourself.
If you're considering purchasing a home that may need some cosmetic upgrades or repairs, please contact the Jim Barnett Home Financing Team to get pre-approved. Jim can be reached at 602-616-5469, 877-594-7600 or Jim.Barnett@WJBradley.com.
* These are guidelines for loans funded by W.J. Bradley Mortgage Capital Corporation and may not be the same as other lenders. You should consult your mortgage company to see if the same rules apply.
Tuesday, June 30, 2009
Thoughts on the King of Pop and others...
I must have forgotten how young Michael Jackson started his music career because I was fairly certain he was older than fifty. It was a tough week in Celebrity Hills with Ed McMahon, Farrah Fawcett...and Jackson. And I think I even heard yesterday the infomercial guy passed too? What is going on? I thought these type things come in "3's"...or so I once heard. The passing of Michael Jackson is absolutely shocking to me, as it was for the bulk of the world I am sure. When I first heard, I was walking out of my office and our receptionist said, "Look at the TV on CNN...Michael Jackson just died." Stuff is weird. I didn't cry or nothing, but as I got into the car and turned on news radio, I did give some of my drive time to the thought of Michael Jackson and his music. In fact, I think I brought it up on my iPod in the car. I thought of several things: (1) You know that country song 19 Something by Mark Wills? In that song there is a line that talks about the past in the 1970's and he says "I was a kid when Elvis died, and my momma cried..." Well, strangely, I thought about my daughter Alexandra saying "I was kid when Michael Jackson died...etc." I mean, this is huge. Michael Jackson is WAY bigger than Elvis ever was. Sure, a different era and time and place and Elvis died very young, not able to carry on more. I even got into a debate over who's loss of life would be more significant, Jackson's or that of Paul McCartney. Without a doubt, Michael Jackson. Jackson is way bigger in stature than any one Beatle, any of them. The Beatles group is massive and I understand the impact regardless. Anyways...(2) I also thought about the first time I ever happened to listen to Michael Jackson's music. It was his Off The Wall album that my father owned. I didn't listen to it much because I was very young, however...Don't Stop 'Til You Get Enough is one of my all-time favorites to this day. As I have been watching all the Michael Jackson tribute shows on TV the last few days...I sit back and reminisce about how much that guy accomplished! How many hits, how many stories (bad and good), all the images (his hair being burned during that Pepsi commerical comes to mind, as well as him holding the baby off that balcony). Mostly I remember the video's. All of them were fantastic. While all are good in their own way, I sort of liked Smooth Criminal and Leave Me Alone. Smooth Criminal because I sit there and can watch it to this day and be awed by that man's dancing moves. How the heck did he do that? When he leaned over...amazing! I liked Leave Me Alone because of the deeper messages mixed up in not only the song lyrics, but also the way it portrayed in a video. It was profound on how Michael Jackson really must have felt about his life. Can anyone in normal circumstances imagine what his life was like day to day? Toss away your feelings about whether he was a pedifile (debateable) and all that garbage and just think about how sheltered he was as a child, never experiencing childhood for what it really was, and then never to be able to go anywhere, ANYWHERE IN THE WORLD, and have his own space and thoughts and privacy. He was sheltered. Sure, many of us have thought, "Give me a break, I don't feel sorry for someone making millions of dollars, etc. etc. etc." But don't you? I feel sorry for Michael honestly. The man, quite frankly, could change the world through his music, his humanitarian efforts...His music was inspiring to me and although my daughter doesn't understand the impact of his music or life, I certainly do.
Tuesday, May 26, 2009
Five Ways the New Housing Law Benefits Home Owners
May 26, 2009 – The Helping Families Save Their Homes Act (S. 896) was recently passed by Congress and signed into law by President Obama last week. “There are five primary sections of the new law that will benefit home owners and consumers,” said Gibran Nicholas, Chairman of the CMPS Institute, an organization that certifies mortgage bankers and brokers.
Benefit #1 – Loan Modifications and Short Sales Should Get Easier
“Most mortgage loan modification plans announced by the government to date have been voluntary, meaning that mortgage companies do not have any legal obligation to participate,” Nicholas said. The new law changes that by requiring servicers to modify loans and approve short sales for consumers as long as three requirements are met:
- Default on the mortgage needs to be reasonably foreseeable
- The home owner must occupy the property as their primary residence
- The mortgage company needs to be able to recover more from the loan modification or short sale than they would by sending the home into foreclosure
“These three requirements were also present in legislation that was signed into law in 2008,” Nicholas said. “However, this new law is more effective because it specifically states that servicers must consider any of the plans that have been endorsed by the US Treasury Secretary – including the Obama administration’s Making Home Affordable plan – when making their decisions. This means that home owners should find it easier to qualify for a loan modification or short sale because their mortgage servicers are finally obligated by law to consider some of these new plans that have been completely voluntary up until this point. It may take several weeks for servicers to start implementing the new law, but the bottom line here is that help is finally on the way.”
Benefit #2 – New and Improved FHA Hope for Homeowners Program
“It has been reported that only one family has qualified for the FHA Hope for Homeowners program since it was launched last year,” Nicholas said. The new version of the program should generate a lot more participation from lenders due to four major updates:
- The current mortgage lien holder is allowed to share in any appreciation in home value that occurs over time. Previously, first lien holders were excluded from equity sharing and they had little incentive to participate in the program.
- The FHA premiums are reduced to “not more than” 3% up front and 1.5% annually. This means that the current lender may only need to reduce the principal to 90% of the current home value instead of the 87% that was required under the old plan.
- This program can now be used in conjunction with the Obama administration’s Making Home Affordable program that pays servicers a fee to reduce the mortgage balance.
- Borrowers are no longer required to document their income through tax returns. The Department of Housing and Urban Development (HUD) will issue income documentation guidelines that may make it easier for some borrowers to qualify using alternative sources of income documentation.
Benefit #3 – $250,000 FDIC Insurance Limit Extended to December 31, 2013
“The $250,000 limit was set to expire at the end of 2009 and revert back to $100,000,” Nicholas said. “The new law prevents another large scale panic by extending the higher $250,000 limit for another four years. Also, the FDIC is now allowed to borrow up to $100 billion from the US Treasury in case of emergencies. This is significant because insured deposits have tripled since the FDIC’s old borrowing limit of $30 billion was set during the 1990s. The FDIC is funded by the banking system and has never been funded by the US government. They only borrowed once from the Treasury during the 1990s and paid back all the money in full with interest. As a temporary measure, the FDIC is allowed to borrow up to $500 billion from the US Treasury throughout the end of 2009 as long as this is approved by a two-thirds majority vote of the FDIC Board of Directors and the Fed Board of Governors in consultation with the President and the US Treasury Secretary.”
Benefit #4 – Borrowers Must be Notified When Ownership of Their Mortgage Changes
“This is significant because previously, borrowers were only notified when their servicer changed,” Nicholas said. “The current mortgage crisis has proven that the owners of the mortgage – not the servicers that collect the monthly payments - are the real decision makers when it comes to approving loan modifications and short sales.”
Benefit #5 – Tenants are Better Protected in the Event of Their Landlord’s Foreclosure
“Many renters have been forced to leave their homes because of their landlord going through foreclosure,” Nicholas said. The new law provides two minimum guidelines that protect tenants:
- Tenants are now allowed to occupy the property until the end of their lease term (even after the landlord goes through foreclosure) as long as the new buyer does not intend to occupy the new home as their own primary residence
- If the new buyer intends to occupy the home as their own primary residence, the tenant must be given a 90 day notice before being forced to leave
Friday, May 22, 2009
The Misconduct of the Home Valuation Code of Conduct (HVCC)
HVCC, as currently written, will be kicking a housing market that’s already on its knees.
Despite the efforts of the real estate and lending industries, the Home Valuation Code of Conduct went into effect May 1, 2009, bringing a dramatic change to the home financing process. HVCC is the result of a 2007 lawsuit brought against an appraisal division of First American Corp. by the New York Attorney General, Andrew Cuomo, for allegedly inflating appraisal values on an estimated 260,000 WAMU mortgages. So now, in typical government fashion, we go from one extreme to the other – unmonitored appraisal inflation replaced with bureaucratic appraisal deflation.
The intent of HVCC is to prevent loan originators from having undue influence over appraisers on the valuation of homes and prevent inflated appraisals. Appraisals for mortgages on 1-4 family homes to be sold to FNMA or FHLMC, will no longer allowed to be directly ordered by loan originators. They must be ordered through Appraisal Management Companies (AMC) that act as middlemen between appraisers and loan originators. Sounds great in theory, but the reality is far from perfect.
In several discussions I have had in mastermind groups regarding this subject, the main topic ended up being the HVCC and what it’ll mean to the process of financing a home. The consensus was that there are going to be a lot of unhappy people – homeowners, homebuyers, sellers, real estate agents, loan originators and more.
Was there a problem with inflated appraisals?
Yes, but HVCC in its current version, creates more problems than it solves. Underwriting departments at most lenders were already using advanced computer programs to address the problem of inflated appraisals. Appraisers found to be providing questionable values and work, were banned by that lender. Why is the industry so up in arms over HVCC? Well, let’s look at how the system is supposed to work:
Despite the efforts of the real estate and lending industries, the Home Valuation Code of Conduct went into effect May 1, 2009, bringing a dramatic change to the home financing process. HVCC is the result of a 2007 lawsuit brought against an appraisal division of First American Corp. by the New York Attorney General, Andrew Cuomo, for allegedly inflating appraisal values on an estimated 260,000 WAMU mortgages. So now, in typical government fashion, we go from one extreme to the other – unmonitored appraisal inflation replaced with bureaucratic appraisal deflation.
The intent of HVCC is to prevent loan originators from having undue influence over appraisers on the valuation of homes and prevent inflated appraisals. Appraisals for mortgages on 1-4 family homes to be sold to FNMA or FHLMC, will no longer allowed to be directly ordered by loan originators. They must be ordered through Appraisal Management Companies (AMC) that act as middlemen between appraisers and loan originators. Sounds great in theory, but the reality is far from perfect.
In several discussions I have had in mastermind groups regarding this subject, the main topic ended up being the HVCC and what it’ll mean to the process of financing a home. The consensus was that there are going to be a lot of unhappy people – homeowners, homebuyers, sellers, real estate agents, loan originators and more.
Was there a problem with inflated appraisals?
Yes, but HVCC in its current version, creates more problems than it solves. Underwriting departments at most lenders were already using advanced computer programs to address the problem of inflated appraisals. Appraisers found to be providing questionable values and work, were banned by that lender. Why is the industry so up in arms over HVCC? Well, let’s look at how the system is supposed to work:
- Loan originator orders appraisal from AMC (usually via internet)
- Payment must be made when the order is placed to avoid appraisers being forced to bring in a specific value in order to get paid.
- AMC randomly assigns the appraisal order to one of the appraisers on its list of approved appraisers
- Appraiser is typically required to complete & deliver the appraisal within 48 hours.
Sounds easy doesn’t it! So what’s the problem?
- There are no requirements concerning the proximity of an appraiser to a property or their knowledge of an area. I know of a recent occurrence where an appraiser from Phoenix was assigned to appraise a home in Tucson. Not surprisingly, the value came in significantly under what local real estate agents estimated it to be.
- The cost of appraisals has gone up. Our appraisers typically charged $300-$350, now the AMC’s charge $450 or more. Instead of an appraiser getting their full $300, AMC’s only pay them $175-$250 of the $450 charged. So, appraisers will have to do more appraisals to earn the same amount they have in the past. This will lead to shoddy work.
- The AMC doesn’t care if data for the appraisal is difficult to find and would normally take longer to provide an accurate value. They want them ALL back in 48 hours, failure to do so could exclude the appraiser from their list. Again, this will lead to shoddy work. Many high end homes sold in the past recorded the sales price as $1 in the MLS. Normally, an appraiser would go to county records to research the actual sales price. The 48 hour turn time requirement will now lead to appraisers just ignoring these sales, which could negatively impact the appraised value.
- There is very little anyone can do to challenge a low valuation at this time. Oh sure, there are forms you can fill out to do so, but the real chances of an override occurring are slim. The only option then is changing lenders and paying for another appraisal, while still hoping for a better value. This will all have to be paid by borrowers and mean longer application timelines.
- Each lender has their own approved AMC. There is nothing in HVCC requiring lenders to honor each other’s appraisals, so switching lenders could mean paying for another appraisal.
- I haven’t seen anything in writing about how AMC’s will monitor and rate appraisers for the quality of their work. Will it be any surprise that appraisers will just use the first three comparables that pop up on their computer searches? What incentive do they have to put more time into making sure an appraisal reflects the best and most accurate value possible?
These are not the type of challenges you want to hear when real estate values are dropping, especially for those trying to refinance.
Should we blame the appraisers when their valuations start affecting transactions? I don’t think we should. None of the appraisers I know have anything good to say about HVCC. Many of them have spent years building their businesses by establishing relationships through providing great service. Now those relationships are all being taken away from them. They’re also not happy about the time constraints the AMC’s are placing on them. HVCC and the AMC’s treat appraisers like they’re a commodity and 100% the same. It’ll create a race to the bottom and reward appraisers who work the cheapest and fastest at the expense of quality.
I’m going on record here advising real estate agents to pull their own comparables and hand them to the appraiser when you meet them at a property. Maybe even go one step further and do a mini Broker Price Opinion! Otherwise you’re leaving the fate of your transaction in the hands of an appraiser who really may not care if your deal closes or not.
If you’re a homeowner looking to refinance, you may want to get back in contact with the real estate agent that sold you your home and have them do what I suggested for a purchase transaction in the paragraph above.
By the way, anyone thinking that going to a bank or a certain lender will avoid the problem, is seriously mistaken. Everyone in the industry will be facing the same problems. Homeowners trying to refinance won’t be able to threaten to go to their banks to avoid the problem. Real estate agents won’t be able to blame loan originators if a sales price is not met. It’s a new reality we’ll all have to learn to deal with.
A BETTER SOLUTION?
Obviously, there was a problem with inflated appraisals. HVCC is a step in the right direction to address the problem, but several logical modifications can be made to improve it.
- Create a nationwide, central database where all appraisers have to register, so “bad eggs” can be identified by all. The federal government required it for loan originators due to fraud issues, so why not appraisers? The same mechanism can also be used.
- Require any and all owners of AMC’s to pass a background check. Currently, an appraiser, lender or real estate agent could have their license revoked, but still open an AMC.
- Create a national system to randomly review the work of appraisers and address complaints. HVCC as it is, leaves this to the AMC’s themselves. Self-regulation really worked in the banking industry, didn’t it?
- Require all lenders to use independent AMC’s. Banks are currently allowed to own AMC’s, which makes absolutely no sense - unless you’re a politician getting bribed by the banking industry.
- Standardize the AMC’s appraiser approval process and require that they all accept each other’s appraisals.
- Create penalties for AMC’s that pressure appraisers to work on unrealistic deadlines to stay on their approved lists. The 48 hours that most AMC’s require is foolhardy. A week is more realistic. Pressuring appraisers to rush their work is really no different than pressuring them to inflate values.
- There should be geographic proximity requirements for assigning appraisals. Is it reasonable to expect an appraiser desperate for work to turn down an order in an area they don’t know?
- Create a standardized system of review, so shoddy appraisal reports can be properly addressed. Since any review system takes time, which could cause a transaction to fall apart, the review system should provide a borrower the option of ordering and paying for a 2nd appraisal, but then require a full refund of the 1st appraisal if it’s found to be suspect.
The improvements suggested above won’t create a perfect solution as that’s impossible in the real world. They could dramatically improve a seriously flawed HVCC though.
Please keep in mind that we’re all in this together, both borrowers and industry professionals. We have a government that’s giving out hundreds of billions in bailout relief to those at the top that caused the housing crisis – while seeming to make everything harder for the average homeowner. We have to stick together to find our way through this new challenge.
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