Appraisal Idea That Could Limit Declining Values!
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Pretty good ideas fellas. Ways have to be found to include the self-employed again. I feel discriminated against. This market segment is only going to grow in the next five years. I know plenty of mid and upper executives that have been looking for employment on par with their last “real” job going on two years. Why am I a greater credit risk? As far as the “Appraisal Idea”, as an appraiser I don’t have a problem with it in principal. I would have to see the details and implementation. Appraisers don’t need any more “gotcha” legislation or regulations.
I agree with you guys on loosening the guidelines for self employed borrowers so much so that we now have a local bank that is offering a 12 month bank statement program for self employed borrowers. They must have a 720 fico. The bank looks at 3 years of tax returns and if they can not qualify off of that they go off of 12 months personal or business bank statements. They will allow for a 70% LTV with a 80% CLTV guideline and this can be on purchase/refinance of primary and second homes. They will even go up to $1 Million loan amount. They do not offer any fixed amortizations with this program only a 7/1 ARM as this is a portfolio product.
Gotta say I agree with you Brian. Stated income loans, for Self Employed borrowers who have a history of cash flow (not tax returns showing a large net) and a history of paying as agreed at the right LTV with sufficient reserves are not bad loans. I repeat they are not bad loans. Stated income loans for elderly people on social security, those are bad loans. Stated income loans for someone who is say a postal worker on an hourly wage, that’s a bad loan. While we are on the subject, The Old World Savings Pick A Pay loan, also not a bad loan. In fact, I still have one! Guess what? It’s performing and working exactly as it was intended. My payments are lower than any other product I could have looked at, they are stable, and I actually have reduced principal on within the first 5 years of the loan. What made these negative amortization loans was not the overal design of the loan, it was the fact that lenders allowed way to much YSP towards the end in order to seize more market and intice brokers to use them by offering a retarted incentive of 4%-5% YSP which in turn increased the margins to the point where the loan never had any chance of performing or working as it was originally intended. The key to any of those products was to keep the margins lower, as that would have limited the amount the loan would have potentially deffered or gone negative. In a loan scenario like World Savings, having a low margin coupled with a true bi-weekly payment actually meant that the loan would start reducing principal within the first 5 years, without the risk of recast or “Payment Shock”.
So let’s see, a loan where the payments over the first 5 years were significantly lower that any other product I could have looked at, principal that was actually reduced in the first 5 years of the loan more so than what a 30 year fixed loan would have done, and payment that increased ever so slightly but still remains lower than a 30 years fixed I could have gotten at the time would have been. NOT A BAD LOAN! THERE I SAID IT, NOW WHAT?
Totally believe we need to bring back stated income loans–we just shouldn’t hand them out like candy to everyone. In my opinion they should be for self-employed people only with a 720 credit score or above. The other thing we need to do–TAKE AWAY THE 10 MORTGAGE MAX LIMIT!!! If you have an investor (which I do!!!) who has plenty of money in the bank, is putting 25% down or more, and ready to buy real estate in a HOT investor market with lower than ever mortgage rates and will qualify to afford all 10 mortgages and then some–why put a cap on it??? This is the time to invest. Smart people want to put their money in the market and at a time when buyers are needed, houses are cheap, and rates are lower than ever before–why limit them?
Forget Stated Income and go with “No Income Doc Loans” with reserve requirements.
Lets stick to basics. What creates and maintains stability in a real estate market is equity and primarily that of skin in the game upfront by the borrower as well as assets in the bank. The rest is all hopefull nonsense. Stated income is just asking for people to lie when it is unnecessary. After all, what is the borrower stating???????? Nothing in an stated income loan is fundamentally more sound than a No Income Doc loan with verifiable assets of 6 months stated income. It’s strict but it worked before and had next to a zero fallout rate.
Let make this less complicated. Start off making the equity down payment at 30% or even higher. Let the stability of each market area determine the amount of down payment required. Obviously the stability of an areas real estate market is an extrememly important fact. It might not seem fair to someone wanting to purchase a property in a less populated area with less demand but there are reasons why a Stockton CA., Riverside CA, Las Vegas Nevada, Most of Michigan, so much of Florida etc.. are not as stable as many parts of Los Angeles, San Francisco, or Manhattan NY. The less stable and less demand the higher the down payment. There is nothing wrong with a tiered program for a No Doc Loan.
As far as the appraisals are concerned I disagree strongly with Franks case. It doesn’t make sense. For appraisals to be done properly we need to have the breaks put on increasing values that are not substantiated by significant increases by down payments. That is how it used to be and it worked fine. But then we had lenders like Wells Fargo and WAMU stretching their appraisals to get the loans and we have the problems we have now.
A market doesn’t appreciate because a couple of home sold recently. It appreciates because demand increases and the amount of equity used to compensate the difference between an appraised value and their desired purchase price comes out of their pocket. AS IT USED TO BE!!!!
It isn’t important that properties appreciate overnight. It is important that stability in the market allows for steady appreciation that is not subjective.
We obviously need to have something that is somewhere between what we did when the market was hot verses what we now have, which is deer in the headlights syndrome. It was too loose, now it is too tight – time to get it RIGHT!
There is sooo many jobs tied up directly & indirectly to the real estate market, that America can not afford to get this wrong for much longer without imploding!
The numbers don’t look good…
I have two thoughts on trying to stop the decline in value.
Why couldn’t local governing bodies pass an ordinance stating a home can not be listed, the key word here is listed, for less then the S.E.V. You can’t control sale price. Mark a point for minumum list price. No more $5000. homes dumped on the market by banks when the mortgage was for 100,000.
Second. In this market the cost approach (cost to reconstruct) and the market approach (distress sales) are not reliable. The only approach to value that has enough market data to be reliable is the Income Approach to value. Value is equal to the income the property can produce in this market. Rent $1000.00 a month is equal to a value of $100,000.
For years appraisers have been backing into the cost approach to value. Use the same concept only with the income approach.
Let me put it another way……if it was YOUR money, would you rather lend 95% LTV money to a 640 FICO/45% DTI/full doc loan/2 months reserves borrower who’s been back on a job for 6 months……or an 80% LTV loan to a 780 FICO/40% DTI based on stated income/12 months reserves who’s been self-employed for 16 years.
Now, assume the latter has as house and has a perfect payment history on his 5.75% interest rate……..and can’t refinance. I know where I’d put my money. My point is, it’s the COMBINATION of factors that needs to be considered.
Repeal Dodd/Frank and throw out Obama in the next election! Vote out the scammers in the Senate & Congress (including Pelosi & Reid) and maybe then…and only then… will we have the ability to turn around the economic disaster that is tearing this country apart!
WOW, Lori… I do not even know you but I think you are amazing!!!
I like how you think!!!
Funny thing is commercial lenders look at tax returns much differently then we do. They understand all the rightoffs and allow them back in so they get the true picture of the individual’s income.
If residential underwriters review the taxes the same way, we would solve the “can they truly afford it” question without jeopordizing the system or the deal.
Forget all this tinkering around the edges, we need to take a blowtorch to this entire industry.
I was thinking more along the lines of several hundred tons of C-4. This industry is no longer recognizable, or fun for that matter.
We’ve come a long way from simple hand shakes. Through out the tax code, through out the lawyers, go back to simplier times. I don’t know if we can bring back “common sense”, but it would be a great idea.
Problem I see as an appraiser is too much weight is placed on the appraisal. The appraisal is just another piece of the puzzle. It’s information. Loans should be based on the ability to pay! Give a variance of 5% on either side of the appraised value, and see what happens, as long as the borrower has the ability to pay. In an ideal world I would like to see appraisals showing a reasonable market range. If the sale falls within the range go for it. As someone said appraising is not a science! You can have 10 appraisers appraise the same house and all can have a slightly different opinion of value, does that make the appraisers wrong? No, but because of this imperfection in the system, a range of value would be more accurate.
Recently I’ve changed my mind a little about stated loans. At the beginning of this year I did a FHA Refi (FULL DOC) for a self employed couple. In order to expedite the file, they had me hand deliver their IRS income tax check directly to a local office. The check was for $170,000.
My point is, they actually, TRULY qualified for the mortgage!
#1-If we use stated, how do we really know what their TRUE income is, therefore what their true DTI is and, therefore, if they can truly afford the home. WE ARE BACK TO THE LIARS LOAN. Bad for the industry
#2- Per my CPA, the only reason the IRS is not going after stated buyers is because it would give the Gvt. a really bad reputation. Think about it, IRS looks up self employed people who bought a home in those “certain years” looks at the 1003 and says “TAX FRAUD-you owe us $20K!
I’ve pre-qualed dozens of Truck Drivers who make great money but happen to be missing a couple of 1099′s. I tell them Either (Amend)pay the taxes and own a home or keep more money in the bank and rent. Those are the only choices.
All the comments were thoughtful and had some merit but one held the answer.
Repeal Dodd/Frank.
Don’t bail out the investors next time. It will all work out, the market will force it, if the market is not being manipulated by government social engineering.
Lets simply take the words “stated income” out of the loan program. This way there will be no possibility of fraud when taxes don’t match the income stated and lenders are looking for a buyback loophole. Instead, the self employed program should mirror the way hard money lenders structure their loans. Assets/reserves/credit/LTV based lending…no income listed! Credit, employment via CPA, and appraisal will all still be done and verified. Just don’t list income if all the other pieces fit the puzzle.
Stated income loans absolutely need and have to come back. There’s no reason that a borrower with great credit and reasonable LTV can’t get a mortgage. The comments below are correct; they should never have been made available to wage earners nor to fixed income borrowers, but there are a lot of self employed and service industry (ie tip/cash income) borrowers that are not being able to take advantage of these great rates and low purchase prices.
You mean they should have been kept around for those how don’t pay their taxes ie they CHEAT on their taxes. Claim your income and you will qualify for a loan.
Dan, why do you automatically assume that these people are cheating? There are legal ways to reduce income, and thus the taxes that are owed. If you want to change that, then take it up with congress and the IRS, but don’t punish those who are working WITHIN the system. I know many self employed people are much better credit risks than someone with a job that could be fired tomorrow. If you put larger reserve requirements, slightly higher rates, tougher credit standards, and lower LTV’s in place, there’s no reasonable reason why these people should not be getting loans. What most people don’t realize is that these products were in place for years, and worked extremely well, before the restrictions were relaxed to allow wage earners and fixed income folks to get them. Many of those programs had lower delinquency rates than standard “qualifying” mortgages due to the credit and reserves that were required.
Hey I am with you Frank and Brian, Lets look back a few short years ago… When was it that we all had money in our pockets??? People were working because home depot needed to keep their warehouse stocked with good from manufacturing everything from the sones in the front yard to the kitchen sink. In turn there was manufacturing jobs, workers needed to buy food so there was jobs in the grocery stores, etc… etc… So unless you like being broke let’s get back to getting the housing market back on track… After all the housing market is the foundation of our economy. Lastley I would like to ad… Home buyers did not default because they wanted to, they defaulted because the banks were told by our Gov.t to give loans to anyone by any means possible and that includes W2 wage earners working for some mom and pop shop and stating income at say 10,000 a month… Accorn told the Gov.t do it or else!!! and in turn the Gov.t told the banks…do it or else!!!
Are you kidding me!?!? Allow stated income for self employed borrowers??? You might as well stop considering a borrowers liabilities too!
If a person is willing to proclaim to the federal government that they make $$$ a year, that is the amount that should be considered by lenders too. You can’t have your cake and eat it too, guys.
So you’re saying that people with great credit scores, money in the bank, and better equity positions are a bad risk??? Those are the borrowers that should be getting loans. I cringe every time I do a loan for someone with a 680 or lower score and live paycheck to paycheck with no money in the bank, but according to the guidelines these are the folks who qualify. Give me a break! Two months of being unemployed and those are the ones that become delinquent. The stated programs were in place for years, and had very low delinquency rates, before lenders starting relaxing their guidelines and allowing anyone and their dog to get a stated income loan. It was only when they allowed people who earn a regular paycheck to get stated income loans that things went awry. I’ve had clients who could have paid cash two or three times over for a home not be able to qualify because they work WITHIN THE RULES to legally reduce their taxes. If you don’t like the tax code, then fix that, but don’t add more misery to the housing market.
Dumb ideas. Stated should exist like it did in the 90′s, but there is no appetite to purchase that paper except by some hard equity investors. And no, stated is not illegal. It is only not allowed on the primary residence.
Appraisal idea is just silly. Did you guys go to nickel tequila night last night?
Toby, I think there would be an appetite for it if the guidelines were stringent enough and the yield was slightly better. After all, there’s always a trade off between risk and yield. As an investor, I think I would rather hold some of that paper than some of the GNMA paper that’s available. Sure the GNMA stuff is government backed, but with the state of our government’s debt is that supposed to make me feel better or worse?
I would like to see concessions left out of the recorded sales price. Even though we rarely adjust for these concessions, if they are fairly utilized in a specific market, they artificially bump up the actual sales price of every home. The recorded sales prices are then in an upwards trend even if the housing market is truly stable and/or declining. There should be another way to have this money taken out of the seller’s final hud settlement and transferred over the borrower’s side without recording $200,000 when the sales price was truly only $190,000.
There was never anything wrong with stated income loans! They just got creative and that wrecked it for everyone! The original stated was stated income verified assets. 80% LTV with six months income in reserves. DUH! Anyone with that much skin in the game isn’t going to walk away. World Savings model was great– they had their own appraisal department and was very conservative. They got into trouble when they started raising their ARM margins followed by raising their LTV limits. But right before the market started it’s decline they sold– brilliant!!
Oh, did I mention repeal Dodd/Frank? Did I mention throw those two scammers in jail? Read their bios! Finally– audit the Fed and elect Ron Paul– Power to the People!!
Hi Guys,
I would agree with the partially state loans for the SE. At least with 1099′s being produced you would be sure of gross income.
Sorry guys, the problem with the appraisel idea is when the real estate agents go to sell the REO’s with a high appraisel using owner/occ comps, then we unload the properties to the investors that wish to fix them up
I want to email you a topic brought up on my linkedin forum that you guys may want to do a show about. The article ran in Housingwire and was titled
Haven’t had self employed qualify yet. Last self employed with 50k in bank did not qualify for 140K house. UW did not allow schedule E, but used write off from schedule C. Cash flow was showing about 80K per year. Only allow income that was taxed. Just give up on the self employed until some sanity returns.
Regarding stated loans, I don’t think anyone is saying distribute money without any guidelines. All loans are risk based. Loan factors determine terms, ie, rate, LTV, credit score, reserves, time in occupation, experience managing properties, all manner of compensating factors, etc. If it fits defined parameters, then a loan is made. If it doesn’t no loan is made, just like they do it now.
Brian,
How about instead of saying stated for self employed borrowers. Why don’t the lenders bring back bank statements for self employed borrowers only, because at least they can show that they do make money with their business and they have been depositing their money in their bank account. The lending industry is probably to afraid of the word stated. I’m just saying.
Hey! I have a mortgage broker that has 3 banks that are doing just that “STATED” income. Requirements are a little steep. i.e. 30% down. etc. but interest rates are 5% up to 2 million. no tax returns. No 4506t.. I think 6 mos. reserves are required. If you would like his name… I’d be glad to get it to you!
he has 3 banks that are doing this… So they are out there~
what a perfect solution for the Realtor that has property that may want to refi? eh?
thanks for your updates~!
Yes Lauren I’d love to know the banks doing the stated income loans. Please email me directly at erika@bmcmn.com
I would like to see the stated for self/employed come back. 25-30% down 6 months PITI…I really think the 24 month bank statement program was a great option for self-employed clients as well.
Showing their personal bank statements, using 24 month average of deposits…isn’t that the same as averaging their ‘net income’? We use gross income for qualifying the traditional employee !
Yes, please! I have a potential fall out that could be saved that is exactly this scenario. Self employed, 800 score, 30% down, $750K loan amount. There still may be time – with your help.
Yes, please email me the information. Thank you.
Please send me the info on the banks doing stated income as well.
Like! how you opened up with a suggestion for less paperwork at closing. Every time I go to a closing there is yet another new form for the borrower to sign! i.e, a new form giving the lender permission to pull tax records if they get audited. Duh, isn’t that what the 4506 is for?
Even worse – my files by the time I get to closing are easy 2X bigger than a year ago. Depressing waste of natural resources!
Somewhere out there,yes, there should be some programs for well qualified borrowers. I think that could be called manual underwriting.
Right now, all the LLPA’s are preventing a lot of people from refi’ing.
Nah Baby Nah on the stated income idea. Stock market type value tracking can also lead to panic toward the downside, exacerbating problems. What might work is 1. Replacing HVCC with something like VA’s TAS, in fact use TAS 2. Temporary (expires when REO is equal to or lower than pre 2006 levels for two quarters) Emergency Housing Lending Authority provisions for HUD and Fannie Mae to grant 100% loans at today’s low property values (not so much downside risk anymore you know) underwritten to ensure adequate residual income (ala VA) and 3. An vehicle for FANNIE MAE to pool these 100% loans and 80% investor loans straight up – no derivatives, tranches or synthetic securities (allowing for more than current limits per investor) not guaranteed mortgage back paper (Investor Caveat Emptor) 4. Providing a way to refinance the first mortgages of the non conforming 80/20s that are not assisted with current programs. Seriously guys there are some workable strategies available.
Great ideas however the are a few problems that were ignored.
1 Stated loans are against the law and who is going to buy the paper.
2 Most underwrites, Loan officers, office managers, AEs, underwriters, closers, title reps, etc have never read ALL the documents presented at a closing to a borrower. Do you really think the borrower wants to. Regulations require the borrower have the opportunity to review documents 24 hours before the closing. Let them know they have this option.
3 Option Arms? Great idea but do you really think there are investors for the most misrepresented product our industry ever sold?
4 The appraisal idea does not work. The stock market is a lot different that the Real Estate market.
The two of you have come up with great ideas in the past. Today, not very Pratical.
Repeal Frank n’ Dodd so stated loans are not illegal.
“The dude abides”
When I think stated loans I think Investors and all the documentation it saves, not so much business owners, Stated loans would help sop up inventory. Repeal Frank n’ Dodd! It’s a monster!
Bruce…can you say 9-9-9?
I agree. Stated income and neg am’s were not bad loans…
World Savings Neg Ams foreclosure rate was………ZERO, prior to Wachovia and Wall Street getting a hold of those loans. When they were portfolio loans, they were underwritten on the borrower and the home (odd concept), not a computer analyzing a credit report and some manipulated inputted data.
As for stated income, I have seen borrowers with 780 ficos and 50% down payments that have millions in earnings have the income slashed due to a 1120 Sch L to where they earn less than a W2 guy scraping by. It’s tuff to decline those folks. As Eddie Murphy said in Trading Places…the worst thing you can do to a rich guy is make him poor.
There are many reasons why market values cannot rise under the current regulatory environment. One of the major problems with appraisals is that when you appraise a nice home in a declining market, the appraiser cannot appraise the house for more than the highest priced sale in that neighborhood, if confined to MLS sales (the ones most trusted by underwriters) then it becomes almost impossible to see values increase. All the houses in the neighborhood are selling for 160-220K and the house that is being refinanced is as nice as or nicer than the ones recently sold, distressed owners, pre-foreclosure sales to avoid forclosure and the like. Then the appraiser who has to bracket the selling prices of the comparables to the appraised price of the home cannot appraise for greater than the recent sales. Banks won’t let you go back too far in time for the comps. In a local, really strong, diverse housing market it is fairly easy to find sales of similar homes that run the gamut of the price range and you can always find a higher priced home that then can allow the appraiser to bracket and be within the guidelines, however in softer markets and when there are fewer sales it becomes almost impossible. If you are selling the nicest house in the area, not one that is outside of the norm for the neighborhood, but one of the nicer ones, it is difficult for the appraiser to find other homes and/or to do the extra due diligence and the extra writing within the report to justify your methodology in arriving at the opinion of value. Short of doing all the extra work the appraiser being paid $225 or $250 is going to take the existing few sales shimmy them into the report make all the regular adjustments and submit the report. Value will not reflect the true value of the home.
Where to start? Brian: your idea of a “circuit-breaker” to limit home value declines is a good one in theory, but falls short in practice. The “flash-crash” comparison is an invalid one because the glitch that caused it was an error and not market forces. Yes, we’ve had a large decline in home values, but there are legitimate market reasons for that. To implement a circuit-breaker in home appraisals is simply to put in yet another artificial barrier to delay us finding the bottom in this market – a homebuyer tax credit or blanket loan mod program in a different form. If one subscribes to free-market economic theory, which I know you guys do, then one must accept that the markets will cause pain from time to time. The other “circuit breaker” in some stock markets – suspension of trading of a certain issue prior to news or after a large drop in price – is only done for a short period of time. To implement something like this in home appraisals would require a long intervention and would render the home appraiser (and USPAP) meaningless because it would ignore legitimate market decisions made by rational people Finally, the time to do the appraising equivalent of suspending mark-to-market accounting rules (like they should have done for a short-time pre-TARP for financial firms) is long past. The way to fix the system – or at least assure that it’s able to heal on it’s own when the time comes – is to ensure that the appraiser inspecting the property has market knowledge for the area (eliminate the post-HVCC appraiser independence guidelines) and eliminate the appraisal dichotomy in lending – having an appraiser with years of training and experience preparing a report, but making an underwriter with no formal appraisal training (beyond an appraisal-underwriting class) responsible for the accuracy of the appraisal report. I’ve been talking about this for over a year in my classes.
Your stated income idea is spot-on and the logic is sound. For the people that worry about the “liar” situation, it would be very simple to instute a “reasonableness” test by obtaining business tax returns (1120, 1065, 1120S, but NOT the K-1s) and doing a simple analysis of the gross receipts and gross sales data. The writeoffs are where people will try to shelter income, not the gross data. Plus, underwriters should be comfortable with these numbers anyway, since they have to examine them in a standard self-employed analysis. Very good post and food for thought.
On another note, how about a post on the huge short-term risk in LIBOR for folks with floating ARM’s? If Greece rolls over next month, it could get real ugly, real quick. Think 2008 on steroids with the French banks exposure to Greek debt. I don’t think the ECB has enough cash to inject into those institutions to save them from a Greek default and the likely Italian default that will follow.
Keep up the good work!
I have tried four times now to post a lenghty discussion of the appraised value problems within the industry. But it will not post my thoughts
me too.
The post says it was already submitted but it does nt show up so I am trying again
There are many reason why market values can not rise under the current regulatory environment. One of the major problems with appraisals is that when you appraise a nice home in a declining market, the appraiser can not appraise the house for more than the highest priced sale in that neighborhood, if confined to MLS sales (the ones most trusted by underwriters) then it becomes almost impossible to see values increase. All the houses in the neighborhood are selling for 160-220K and the house that is being refinanced is as nice or nicer than the ones recently sold. distressed owners, preforclosure sales to avoid forclosure and the like. Then the appraiser who has to bracket the selling prices of the comparables to the appraised price of the home can not appraise for greater than the recent sales. Banks won’t let you go back too far in time for the comps. In a local, really strong, diverse housing market it is fairly easy to find sales of similar homes that run the gamut of the price range and you can always find a higher priced home that then can allow the appraiser to bracket and be within the guidelines, however in softer markets and when there are fewer sales it becomes almost impossible. If you are selling the nicest house in the area, not one that is outside of the norm for the neighborhood but one of the nicer ones. it is difficult for the appraiser to find other homes and/or to do the extra due diligence and the extra writing within the report to justify your methodolgy in arriving at the opinion of value. Short of doing all the extra work the appraiser being paid $225 or $250 is going to take the existing few sales shimmie them into the report make all the regular adjustments and submit the report. Value will not reflect the true value of the home. No appraiser is going to add several hours to the report process just to give the seller the $$$ amount they need on the appraisal. Not worth the time at $250.00 when there is no incentive to do the job right. When values become stable, that’s where they will remain, unless the undewriters allow a broader view of the market. As long as the banks will not allow the appraised value to exceeed the highest (unadjusted) sales price then you are stuck. I believe the banks, if justified should allow a maximum of five percent over and above the highest priced sale in the neighborhood, as long as it can be justified. Or use the adjusted values of the comps not the sale prices to enforce the bracketing requirement. Now with RE Brokers putting interior photo’s in their listings and if the pay was commiserate with the effort we might not see so many lowball appraisals. Becuase as of right now the appraiser is handcuffed by this rule and so is the market values. Until this changes the market will remain stable but at these much lower levels for a long time to come.
There are many reason why market values can not rise under the current regulatory environment. One of the major problems with appraisals is that when you appraise a nice home in a declining market, the appraiser can not appraise the house for more than the highest priced sale in that neighborhood, if confined to MLS sales (the ones most trusted by underwriters) then it becomes almost impossible to see values increase. All the houses in the neighborhood are selling for 160-220K and the house that is being refinanced is as nice or nicer than the ones recently sold. distressed owners, preforclosure sales to avoid forclosure and the like. Then the appraiser who has to bracket the selling prices of the comparables to the appraised price of the home can not appraise for greater than the recent sales. Banks won’t let you go back too far in time for the comps. In a local, really strong, diverse housing market it is fairly easy to find sales of similar homes that run the gamut of the price range and you can always find a higher priced home that then can allow the appraiser to bracket and be within the guidelines, however in softer markets and when there are fewer sales it becomes almost impossible. If you are selling the nicest house in the area, not one that is outside of the norm for the neighborhood but one of the nicer ones. it is difficult for the appraiser to find other homes and/or to do the extra due diligence and the extra writing within the report to justify your methodolgy in arriving at the opinion of value. Short of doing all the extra work the appraiser being paid $225 or $250 is going to take the existing few sales shimmie them into the report make all the regular adjustments and submit the report. Value will not reflect the true value of the home. No appraiser is going to add several hours to the report process just to give the seller the $$$ amount they need on the appraisal. Not worth the time at $250.00 when there is no incentive to do the job right. When values become stable, that’s where they will remain, unless the undewriters allow a broader view of the market. As long as the banks will not allow the appraised value to exceeed the highest (unadjusted) sales price then you are stuck. I believe the banks, if justified should allow a maximum of five percent over and above the highest priced sale in the neighborhood, as long as it can be justified. Or use the adjusted values of the comps not the sale prices to enforce the bracketing requirement. Now with RE Brokers putting interior photo’s in their listings and if the pay was commiserate with the effort we might not see so many lowball appraisals. Becuase as of right now the appraiser is handcuffed by this rule and so is the market values. Until this changes the market will remain stable but at these much lower levels for a long time to come.
REPOST: I’m not sure the first time around this message went through.
I have been watching your blog for quite awhile now, and never have I been happier to watch it than today. As a property investor and owner of multiple other businesses, stated loans were the single strongest factor in financing that helped me get to where I am today. My first home loan (for my own home) was full document, and even though I was W-2 then it was a nightmare with the bank continuously losing documents and coming up with new requests at the last minute. Every loan I did after that was stated, and as my rental properties and other business assets increased it became harder and harder to even envision doing a full document loan. By the way, all of my loan payments are auto-deducted from my checking account (from day 1) with taxes and insurance escrowed. Never late, never missed. There have been a number of deals I have passed on in recent years because I knew bank financing would be incredibly difficult, choosing instead to find seller-financed deals which are of course fewer and far between. Refinancing to take advantage of lowered mortgage rates has been similarly difficult. Thank you again Brian and Frank for making this suggestion, and I hope the industry follows your lead. Think big, work small!
One of the major problems with appraisals is that when you appraise a nice home in a declining market, the appraiser can not appraise the house for more than the highest priced sale in that neighborhood, if confined to MLS sales (the ones most trusted by underwriters) then it becomes almost impossible to see values increase. All the houses in the neighborhood are selling for 160-220K and the house that is being refinanced is as nice or nicer than the ones recently sold. distressed owners, preforclosure sales to avoid forclosure and the like. Then the appraiser who has to bracket the selling prices of the comparables to the appraised price of the home can not appraise for greater than the recent sales. Banks won’t let you go back too far in time for the comps. In a local, really strong, diverse housing market it is fairly easy to find sales of similar homes that run the gamut of the price range and you can always find a higher priced home that then can allow the appraiser to bracket and be within the guidelines, however in softer markets and when there are fewer sales it becomes almost impossible. If you are selling the nicest house in the area, not one that is outside of the norm for the neighborhood but one of the nicer ones. it is difficult for the appraiser to find other homes and/or to do the extra due diligence and the extra writing within the report to justify your methodolgy in arriving at the opinion of value. Short of doing all the extra work the appraiser being paid $225 or $250 is going to take the existing few sales shimmie them into the report make all the regular adjustments and submit the report. Value will not reflect the true value of the home. No appraiser is going to add several hours to the report process just to give the seller the $$$ amount they need on the appraisal. Not worth the time at $250.00 when there is no incentive to do the job right. When values become stable, that’s where they will remain, unless the undewriters allow a broader view of the market. As long as the banks will not allow the appraised value to exceeed the highest (unadjusted) sales price then you are stuck. I believe the banks, if justified should allow a maximum of five percent over and above the highest priced sale in the neighborhood, as long as it can be justified. Or use the adjusted values of the comps not the sale prices to enforce the bracketing requirement. Now with RE Brokers putting interior photo’s in their listings and if the pay was commiserate with the effort we might not see so many lowball appraisals. Becuase as of right now the appraiser is handcuffed by this rule and so is the market values. Until this changes the market will remain stable but at these much lower levels for a long time to come.
I have been watching your blog for quite awhile now, and never have I been happier to watch it than today. As a property investor and owner of multiple other businesses, stated loans were the single strongest factor in financing that helped me get to where I am today. My first home loan (for my own home) was full document, and even though I was W-2 then it was a nightmare with the bank continuously losing documents and coming up with new requests at the last minute. Every loan I did after that was stated, and as my rental properties and other business assets increased it became harder and harder to even envision doing a full document loan. By the way, all of my loan payments are auto-deducted from my checking account (from day 1) with taxes and insurance escrowed. Never late, never missed. There have been a number of deals I have passed on in recent years because I knew bank financing would be incredibly difficult, choosing instead to find seller-financed deals which are of course fewer and far between. Refinancing to take advantage of lowered mortgage rates has been similarly difficult. Thank you again Brian and Frank for making this suggestion, and I hope the industry follows your lead. Think big, work small!
Hey all you bloggers talking about seller concessions. Especially appraisers – (Having been one for over 28 years) The affect on value is always measured by paired sales analysis – and it doesnt change for concessions, views or anything else – the data must come from the market and is not someone’s opinion of what the house “should” or “might” have sold for, which would be an Extraordinary Assumption that should be stated in the appraisal (if you are going to such things). The fact is the house DID NOT close for something less than its sales price – so deal with it.
Answer me this – If a house sells FHA for 100K with 5 points (which means it was appraised by a FHA appraiser, underwritten by FHA UW, closed, funded at 100K price and is insured by FHA for 100K – then why would the sales price be something other than 100K when we use it as a comp? (assuming you have no market data to support a concession adjustment, which most appraisers do not). What happened between the time it closed and you used it as a comp to drop the value 5K? Are we really ready to “blindly” say that house is only worth 95K – and that the borrowers and FHA are really at a 105%+/- LTV? If the investors really wanted to stop the so called “abuse” of seller concessions – they would not allow them on the front end, but they are not going to do that. Even this show wanted the return of DPA.
But instead, they just put the appraiser and everyone else in the middle of something most do not fully understand. As an appraiser, I don’t care how many points are paid on a comparable – I’m only concerned with – was the house price increased above its market value to pay points – if so (an you have market data to support it) than make an adjustment, but quit making adjustments to appraisals that are not market supported. Everyone always makes the “Assumption” that the house would have sold for 95K without points – maybe and maybe not.
I am not in favor of stated income loans. All stated income loans did or do is allow self employed borrowers to pad their expense to reduce their income so they don’t pay their fare share in taxes. Self employed borrowers want to tell the IRS these are legitimate business expenses then turn around and tell us they are not which is tax fraud. It is either a business expense which reduces your income or it isn’t. They should be able to have it both ways.
Hey Ralph- the banking lobby writes the legislation- the “jerks” you refer to are just the who-ers who do what they want- you are one of the 99%
The baby always gets thrown out with the bath water; stated income loans worked great before the big banks combined them with no money down and subprime credit. I said it already at the end of 2007, you want to help real estate, somebody start selling stated income loans
Right on Tom! Legislators do not bother studying problems so we end up with legislation that addresses the symptoms and does more harm than good. Hard to believe such sweeping changes can be mandated without any study of their effectiveness!
Stated Loans? Lenders are still trying to clean up their mess from 2005 & 2006. Fannie Mae and Freddie Mac are trying to find any excuse to make lenders repurchase loans. They’re still having a hard time underwriting full doc loans, and now you sugguest they underwrite a stated income loan. They are still preaching that stated income loans were designed to reduce the paperwork for borrowers and that they weren’t designed to allow borrowers to state a higher income than they declared on their tax returns, so even if they allowed for the stated income loans they’d probably ask for a signed 4506 and pull transcripts. Where does that get us?
In todays times when a bank can turn down a buyer for “thinking they are not going to live there” simply because they own more than one property I would think the stated program although making sense has no chance of not being regulated by the gov’t . It is hard enough to get a bank to review and understand tax returns and depreciation schedules. Heck they can just turn it down because they are too stupid to understand the concept of depreciation or wealth. Dream on. This would cost the government tax money. They already disguised this as not ethical when in fact it is solely becuase they wouldn’t be able to get more taxes out of the self employed backbone of the US. You are right why not support the wealth of 99% instead of the one percent. However the 1% is so heavily into the politicians pockets that the majority doesn’t rule anymore.
as a former World Savings LO i couldn’t agree more with Brian. Until 2006 our portfolio was real strong…and the Stated program was supposed to be for S/E only! Worst performing loans in our portfolio were 70% LTV FULL DOC loans. If ya had to go full doc at 70% LTV it meant your credit was usually poor.
BTW, still have my World Savings loan, vintage 2001. Fully indexed at 2.86%…this aint the loan that wrecked the industry at <3% interest rate.
that idea makes no sense. A stock market is a clearinghouse that sees every transaction therefore it can control the flow of business. That’s not true for real estate.
How about we apply the idea that Greenpoint Savings Bank in Queens NY had during the 70′s and 80′s. Forget the stated income concept: it promotes lying, cheating, dishonest LO’s, and further dissolution of the true value of homeownership. Why not just allow banks to make loans based on LTV only. Even if the LTV was as low as 50% we could allow loans to be made with no income stated whatsoever. No-one lies, no-one makes any statement of income at all. Banks can make their own rules regarding the creditworthiness. Remove the chains of the regulations, allowing common sense lending. I’m willing to bet lots of money that if real cash was put down on the sale that came from the assets of the buyer, the mortgage payments would be made more than 99% of the time.
Ralph, the Czar of sensibility; fantastically simple and logical!
Hey Guys, I know you don’t really mean this idea today. It would mean another government regulation. Almost all of which are BAD, and this one falls into that category. We all need to think before we allow these jerks in DC to even think about another regulation of our industry.
Stated Income for Self-Employed would greatly help….even for us in the industry. Currently I have a credit union and 1 major regional bank who will look at 12-24 month business bank statements to see cash flow and if personal creditors and or rents/mortgages are paid via business accounts and whether there is actual cash to afford the home. Downside, the bank provides a HELOC but will go to 150K…in the state of FL. Credit Unions are giving a few 30-yr fixed items with all of this, but still…why not 680 self-employed 80% Stated Income. Typically Self-employeds are far less risk (per statistics) than the W-2′d person yet for decades – in reality always – undewritten far harder.
Read my blog of a few weeks ago on bringing back stated income for self employed ONLY borrowers, in active rain. This loan was only intended for that purpose when it was introduced into the marketplace. The accountant had to verify that the borrower was actually self employed. Could not agree more. I have not had a single self employed borrower qualify this year or last.
Stated income loans? Isn’t that what caused the debacle? I agree with your point about the tax code but there has to be another solution. What if people who wanted to buy a home, earned it. Yes, leverage can be a very good thing for investors who have experience but for the average American, buying a home for cash or with low leverage should be the barrier to entry. A stated loan (done honestly) is only designed for a business owner. If the average business owner could net 50k/year, they would have to save for 5-10 years and then they would have a free and clear house which would free them up to more important things like serve God and others.
You guys ROCK!!! Please run for the Presidency!!
Putting any huge blame on appraisers is totally misguided. A floor on depreciation for home owners? Tell them not to sell their houses because I can’t see any regulatory agency telling a buyer they have to pay a ‘minimum’ for a property. The real estate market is still dominated by what buyers will pay and what sellers will accept. It’s that simple. That interaction is what dictates any market, just like when it was out of control with upward appreciation.
Guys, I am a Realtor and a Certified Appraiser. I cannot appraise a home at $400,000 just because the buyer and seller agreed on that when the entire market has a current highest value of $350,000. $400.000 may be the market value for the buyer and seller in this scenario, but it’s not a good risk for the lender (risk is what an appraiser really measures) because the sales price is 12.5% above the highest market price.
Now the buyer can agree to pay over $350,000 and then their downpayment etc but how often do you see that? An appraisal doesn’t limit what people can pay for a property. It’s just than a reasonable and prudent buyer normally won’t.
Buyers and sellers are in the driver’s seat as to our current values. Don’t like what you’re offered? Don’t sell your home. Don’t like what you’re counter offered? Go buy another home at the low ball price you want.
As for underwriting guidelines holding up the whole buying/selling/appreciation process? Probably needed right now due to the entire mess of the lending industry. I own a home and I cannot possibly expect appreciation in an economy with 9% +/- unemployment and then the financial condition of the country overall.
STATED INCOME LOANS HELLLLLLLLLLLLLLLL YEAAAAA!
I LOVE THE OLD DAYSSSSSSSSSSS. SOMEONE PINCH ME
Where to start? Brian: your idea of a “circuit-breaker” to limit home value declines is a good one in theory, but falls short in practice. The “flash-crash” comparison is an invalid one because the glitch that caused it was an error and not market forces. Yes, we’ve had a large decline in home values, but there are legitimate market reasons for that. To implement a circuit-breaker in home appraisals is simply to put in yet another artificial barrier to delay us finding the bottom in this market – a homebuyer tax credit or blanket loan mod program in a different form. If one subscribes to free-market economic theory, which I know you guys do, then one must accept that the markets will cause pain from time to time. The other “circuit breaker” in some stock markets – suspension of trading of a certain issue prior to news or after a large drop in price – is only done for a short period of time. To implement something like this in home appraisals would require a long intervention and would render the home appraiser (and USPAP) meaningless because it would ignore legitimate market decisions made by rational people Finally, the time to do the appraising equivalent of suspending mark-to-market accounting rules (like they should have done for a short-time pre-TARP for financial firms) is long past. The way to fix the system – or at least assure that it’s able to heal on it’s own when the time comes – is to ensure that the appraiser inspecting the property has market knowledge for the area (eliminate the post-HVCC appraiser independence guidelines) and eliminate the appraisal dichotomy in lending – having an appraiser with years of training and experience preparing a report, but making an underwriter with no formal appraisal training (beyond an appraisal-underwriting class) responsible for the accuracy of the appraisal report. I’ve been talking about this for over a year in my classes.
Your stated income idea is spot-on and the logic is sound. Good post and food for thought.
On another note, how about a post on the huge short-term risk in LIBOR for folks with floating ARM’s? If Greece rolls over next month, it could get real ugly, real quick. Think 2008 on steroids with the French banks exposure to Greek debt. I don’t think the ECB has enough cash to inject into those institutions to save them from a Greek default and the likely Italian default that will follow.
Keep up the good work!
Having full-time jobs and/or regular income would help borrowers and the housing market. Until then, we’re in idle AT BEST.
Fellas, if you want to kill the downward spiral of property values, one item that will help is if the Fannie rules regarding seller assist are amended. As it stands right now, because of the interpretation that most of the appraisals that I have seen is that seller concessions are NOT part of most transactions (A part of most everything I do aside from REOs), that seller concession comes, dollar for dollar, off the appraised value. So in a scenario of a $150K house with 6% seller concessions, going FHA, $5250 is the downpayment, $9000 is the concession, and if that home is used for a comp….. well, the value assigned before any other adjustments is $141K. How would that make the homeowner feel? Upside down in their home after putting 3.5% down, and before ever making a payment.
Just because you have negotiated a way to come out of pocket with less than all the prepaids and closing costs, and the downpayment, does that make your home worth any less?
RBK: Think about how much the seller nets on a sale with a concession. Using your example, the seller would net $141,000. So, that’s the actual sales price (net to seller) after concessions are considered. Appraisers must consider that when using that particular sale as a comparable for another property appraisal. Hope that clears things up. Oh, and you Realtors out there…..don’t jack up the list price of a marketed property in order to include a concession….won’t work. In a stable or declining market (without bidding wars) a property will not be worth more than the last asking price. That’s just common sense!
@Dan Drelich, well that’s a fine example of the same lunacy that is keeping the market from recovering isnt it? What’s the difference what the seller cost is with regard to concessions? I mean really think abou this, A home sold for $150,000 is still sold for $150,000. By your rationalization we should also take out the cost of the seller’s real estate commision. So then does that mean that a home sold for $150,000 where the seller paid a 3% is worth more than the same home sold at the same price with a 6% commision? What about a FSBO sold at the same price, where there is no cost/commision? Guess that must now be the most valuable one out of all there by your theory. Also what makes any property worth anything is what someone is willing to purchase it at? The very basic fundemental reason there is any value to anything is based on the premise of what demand will support with regard to how much is someone willing to pay. Just look at the market we are in, people are unwilling to pay the same price today that they did in 06, for the same product because of percieved risk, and deflated deman. Seller concessions, if common to the market place do not make a property worth any more or any less. End of story.
Yes, that fact does make your home worth less when compared to another home that does not have concessions. The only fair way to compare values is to also compare the perks received by the buyer. If the 150K buyer in your scenario had his own $9,000 to pay closing costs, points & prepaid items, would the buyer have still paid 150K for the home? Nope. And that’s the whole reason the concessions are rolled out.
150 – 9 = 141 – 0 = 141 qed
RBK, Great point. How does this help anyone? An appraised value is only an ‘opinion of value’ anyway. It is not a science. How about builder concessions for everything from upgraded granite counter tops to paying a year and a half of property taxes for the homebuyer – all to keep the selling priced high for the remainder of their homes for sales. Do these get subtracted from the selling price? The building lobby won’t like that.
I don’t agree with the true stated program because then all the LIAR’s would come back out of the closet. I know that most LO’s remaining in the business today are not the one’s that fudged income on a loan app, right!? But I’m sure they’d resurface too. Oh, I’m sorry, did I put one too many zeroes at the end of your income? However, there should be a program for the self-employed based on their cash flows minus true business expenses. Since the IRS allows an S/E borrower to hide their income, most will….wouldn’t/don’t you? How about making them prove their cash flows via business and personal banking statements and compare that to the business expenses and debts listed on credit or something like that? I think this would stand a better chance with the Fed than the true stated income deal.
The FED should have no say. If someone wants to give someone a stated loan they should be able to do so, but along with that there should never be bailouts. Stated or no doc loans are happenning all the time right now with hard money. This should be the land of the free.
I am all for the return of “stated” products. They would help quite a few of my self employed clients. They were never intended to be used for people on fixed income or for anyone employed but the fear I have is that once that door is opened again we will start to have companies expanding the rules again to include people who shouldn’t be put in these programs. We need to find a way to make sure the products remain as intended…