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appraisers and home mortgage


ERICOPOLY
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It looks like I might finally be able to close on my house (getting a mortgage).  Two different appraisers were here Thursday working to have the house appraised for the lender.

 

The house isn't listed in the MLS, so both appraisers asked to see the purchase agreement.

 

Are they just trying to find out the contracted price so that they can "hit the number"?  Why would an appraiser otherwise be interested in the purchase agreement?

 

I suspect that if the house doesn't appraise for the selling price, then the lender might not want to hire them ever again.  30% down payment already protects the lender quite a bit, they just want to get the deal done at this point to get their fees and they want that appraisal to protect their butts if the loan is sold to investors.  Does that sound about right?

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This is a great question Eric. I am in the field of mortgage lending and this issue can come up quite often.

 

So the make or break on this issue is your down payment. Naturally with your 30% D.P. you and the lender have little to worry about. However if the situation was such that you were choosing the 3.5% FHA option and you really only had 4-5% in your bank account this can become quite an issue. Like literally kill the deal.

 

This is due to the peg of LTV being the lesser of either the purchase price or the appraised value.

 

So for example sake lets say your buying a home at sale for 100k, and putting 3.5% down

The appraisal comes in at 110K, spectacular you just bought yourself a home with 10% in return right off the bat. Unfortunately your loan and your equity in the lenders eyes, including interest rate pricing, will be for 96.5k

 

Shitty situation, lets say the home appraisal comes in at 90k.

Well unfortunately your still going to buy the home for 100k and the lender is going to only make the loan for 86.85k.

Which means you now have to bring 13.15k to the closing table to close the deal. (aka 13.15% down payment)

 

This is why the appraiser is issued the purchase contract, so he knows not to f%*#k with it too much. However in my honest opinion this is still an issue of coercion on the lenders part to make appraiser assign values. And your dead on about if the appraiser creates too many issues with value, well he's not going to get anymore job assignments from NOT the lender, but the AMC. Lenders no longer can talk to appraisers they have to go through a middleman that apparently will stop manipulative practices. HA, such a joke.

 

Anyways. In your situation, with such a large down payment you have very little to worry about. UNLESS, it comes in for 5% below the sales price, at which time you will most likely receive unfortunate news from the LO who now tells you your rate is probably 30-40 bps more expensive. Shit could get really dicey if the appraised value is 15% lower. Which means you would then have MI attached to your loan unless you brought more to the closing table.

 

All in all your probably all-right. This is a situation that most affects low down payment loans with borrowers who have very limited funds.

 

 

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This is why the appraiser is issued the purchase contract, so he knows not to f%*#k with it too much. However in my honest opinion this is still an issue of coercion on the lenders part to make appraiser assign values. And your dead on about if the appraiser creates too many issues with value, well he's not going to get anymore job assignments from NOT the lender, but the AMC. Lenders no longer can talk to appraisers they have to go through a middleman that apparently will stop manipulative practices. HA, such a joke.

 

Whoa.

 

Um... the lender is not supposed to mess around with the appraisal value.  Otherwise it leads to bad loans being made, which leads to all sorts of problems as shown by the US housing bubble.  Trying to influence the appraisal is a dodgy underwriting practice.

 

If the appraiser has to hit a certain value, then it's a waste of money to hire them.

 

(Whatever.  A loan with a 30% downpayment is a very responsible loan for the borrower and the lender.)

 

---

The American housing market is a strange place.

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(Whatever.  A loan with a 30% downpayment is a very responsible loan for the borrower and the lender.)

 

It would be more responsible for the borrower to have 0% down.  In my opinion, I have responsibility to my own interests, and putting my capital at risk isn't responsible at all.  But I have no choice in the matter.  I'm not being offered a low risk, 0% down mortgage.

 

The days of low risk mortgages have sailed.  Unfortunately, the borrower's risk has skyrocketed.

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There were even loans that exceeded 100% of the home's value.

 

That's got to be "predatory borrowing".  I don't know what else to call it.

 

I understand how you might think that right off the bat.

However the 0% and the negative equity (102%) loans are not really "theoretically" predatory.

-However I must note that yes predatory lending, or as we say in the industry reverse-redlining, is prevalent and most commonly happens with the low down payment loans.

 

Anyways the 0% and 102% loans are 90% of the time either VA or USDA loans.

VA loans with no down payment are options for our honorable military forces. (Its a spectacular loan literally you can buy a house with no down payments and no Mortgage Insurance, I would serve just for that reason! Along with shooting a .50 cal!/ flying a heli!)

The USDA loans are created to propagate rural development. The rules are very particular "zoning wise" in which areas are considered USDA approved. Literally you have to live in the farmland like areas...but still not farm for commercial production.

 

In the end yes, US housing and lending practices are very...well...artificially inflated.

 

Keep this thread running, I am enjoying explaining these nuances. 

 

 

 

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Keep this thread running, I am enjoying explaining these nuances.

:D

 

Part of me wants to see subprime 2.0 so I can go short some stocks.  Too bad the lending market is now mostly Fannie, Freddie, USDA, FHA, and VA.  I believe that's 90%+ of all mortgages?  All subsidized by the American taxpayer.

 

And then there's the other subsidies- tax deductions, HAMP, HARP, the defunct tax credit, bank bailouts, lenient banking regulations (though tightening), etc. etc.

 

Some of the incentives in the US are a little perverse.  You might want to continually refinance your home (and pull equity out) so that you maximize your tax deductions.  Ironically, this was a great strategy in 2007 because the US government would bail you out in a few years.  The more irresponsible you were, the likelier you were to receive bailouts.

 

The US is one of the few countries in the world where 30-year fixed rate mortgages are a thing.

And it is also a country where no prepayment penalties is a thing.

These mortgages are very, very difficult for the lender to hedge.  e.g. Bank depositors are not making 30-year bank deposits.  And then trying to hedge away the prepayment risk is also difficult.

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FWIW

 

I am based in Ontario, Canada and had a friend recently go through a refi with one of the big banks. The rep asked what the home was worth and subtly let him know that he can come up with a mortgage based on that value via "hitting" the automated appraisal system provided by CMHC (emili). From what I understand, mortgage brokers have become very good at manipulating the inputs to come up with the needed appraisal value. No physical appraisal needed... This was for a modest condo with 20% down.

 

It seems underwriting standards in Canada and US are quite different...

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you found someone to lend to you dispite being such a bad unemployed risk????? Nice Work... I tried for a heloc but couldn;t do it.. owning the house outright and having a serious net worth plus a well paid job counts for nothing if you don;t tick all the boxes in their system...

 

Oh for lending based on common sense....

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FWIW

 

I am based in Ontario, Canada and had a friend recently go through a refi with one of the big banks. The rep asked what the home was worth and subtly let him know that he can come up with a mortgage based on that value via "hitting" the automated appraisal system provided by CMHC (emili). From what I understand, mortgage brokers have become very good at manipulating the inputs to come up with the needed appraisal value. No physical appraisal needed... This was for a modest condo with 20% down.

 

It seems underwriting standards in Canada and US are quite different...

 

Did they inflate the square footage of your condo by including common areas, the walls, etc.?  That's one way to game the CMHC system.  The emili system is a computer-based system so it should come up with the same value every time.

 

The fraudsters who commit egregious mortgage fraud game the computer-based appraisal system by flipping homes to themselves in a local neighborhood.  This inflates the emili appraisals because emili is based on local comparable sales.  When they commit mortgage fraud, they get a few hundred thousand dollars extra because the CMHC did not appraise the home well.

 

In general, Canada has better underwriting than the US.

- Banks aren't allowed to do really dumb things.

- No 30-year fixed rate.

- Recourse mortgages.  Only some parts of the US are recourse.

- Prepayment penalties.

- None of this 0% downpayment nonsense.  You can still get a 0% downpayment mortgage in Canada by getting a loan plus a 5% downpayment mortgage.  But nobody offers mortgages that are officially 0% downpayment.

- More income verification for self-employed individuals.

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Part of me wants to see subprime 2.0 so I can go short some stocks.  Too bad the lending market is now mostly Fannie, Freddie, USDA, FHA, and VA.  I believe that's 90%+ of all mortgages?  All subsidized by the American taxpayer.

 

I nearly rolled off my chair laughing at this comment! I don't know if we will see something quite like the mortgage bubble which stimulated the housing price bubble we saw in 06-08.

 

I don't know if we can quite say its 90% but its definitely over 80% based on #of loans. Hard Money, Jumbo, and asset depletion loans are out there and do command market space.

 

Which brings me to suggest that people on this forum that are having trouble qualifying for mortgages due to income should definitely look in ASSET DEPLETION based qualifying loans. Basically we qualify the loan by using your stock/cash/401k account and infer that you can withdraw an amount from this and it equals your monthly income.

 

 

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Which brings me to suggest that people on this forum that are having trouble qualifying for mortgages due to income should definitely look in ASSET DEPLETION based qualifying loans. Basically we qualify the loan by using your stock/cash/401k account and infer that you can withdraw an amount from this and it equals your monthly income.

 

that only assists with income issues. I don;t have that problem - I have a short sale in my past which indicates that i can't get a HELOC. own the house outright and have a decent income and net worth but theres no lender willing to look past the short sale.

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FWIW-I've had appraisers come in well below the K price, and well below what I think a reasonable estimate of market value might have been at the time it was appraised. I don't think either cared at all what the lender thought. Appraisals seem very subjective to me. Perhaps the housing crises proved this last point? 

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It looks like I might finally be able to close on my house (getting a mortgage).  Two different appraisers were here Thursday working to have the house appraised for the lender.

 

The house isn't listed in the MLS, so both appraisers asked to see the purchase agreement.

 

Are they just trying to find out the contracted price so that they can "hit the number"?  Why would an appraiser otherwise be interested in the purchase agreement?

 

I suspect that if the house doesn't appraise for the selling price, then the lender might not want to hire them ever again.  30% down payment already protects the lender quite a bit, they just want to get the deal done at this point to get their fees and they want that appraisal to protect their butts if the loan is sold to investors.  Does that sound about right?

 

 

 

 

Eric,

I am also in the Mortgage Lending industry and would like to weigh in on your concerns.

·        * The Purchase Agreement needs to be reviewed by the appraiser to basically make any adjustments to your transaction compared to the others. Example, if the seller is offering to pay the buyer’s closing costs, that may be worth roughly $2,500 or whatever is common for the area. So, when comparing your transaction against others in the area, this $2,500 credit you are receiving must be factored in to the comparable transactions. Same for repair concessions, etc. Stated differently, if a comparable sale is considered where a home sold for $250K but the seller paid $5K in costs to the seller, the total consideration paid is $245K. Any concessions need to be factored in to the equation.

·        * I’d be naïve to think that there is not an element of “hitting the number” at play, but the fact that they want to see it does NOT necessarily mean that is the ultimate goal. FWIW, I would bet that we see 5-10% of appraisals that do not hit the number. (Ironically, this tends to really make the borrower mad when, in reality, it should make them happy. A low appraisal gives the buyer ammunition to go back to the seller and say “Sorry dude, but this expert says that you house is only worth $x, and I can only get financed for 80% of $X, so we need to bring down the purchase price to $x”, most of the time, buyers do not think this way)

·        * I cannot comment on all lenders, but we do not employ appraisers or hire appraisers, we hire Appraisal Management Companies (AMCs) to manage this process. We do not know who is appraising the home until we receive the appraisal. Yes, we have asked for appraisers to no longer be considered for our orders in our history (at a rate of less than once out of every 500 or so appraisals) but we do that not based on “hitting the number”, but based on professionalism. If an appraisal is done poorly (inconsistent adjustments, blatant errors, etc.) then we will ask that the appraiser not be used in the future. We do not penalize appraisers for not “hitting value” but, again, I am sure that element exists. I’d also bet that this practice is not pervasive, not nearly as pervasive as was the case 10 years ago.

* I am surprised that you were able to talk to the appraiser as that is an inherent conflict of interest. You could use undue influence, potentially, if you talk to the appraiser. Same with your agent…they should not be talking to the appraiser. It is acceptable to provide recommendations on comparable properties, but the appraiser has two options in that event…use those comparable properties or explain why he/she did not.

The mortgage industry has devolved into a formulatic process rather than using common sense. That is starting to change a bit, thank goodness, but common sense is still lacking much of the time. I could tell stories…

-Crip

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* I am surprised that you were able to talk to the appraiser as that is an inherent conflict of interest. You could use undue influence, potentially, if you talk to the appraiser.

-Crip

 

I sat down with the appraiser in the dining room and he asked me a lot of questions.  We talked for about an hour.

 

He asked me how I arrived at the purchase price.  I explained how I calculated the value in my offering price. I also asked him if he'd noticed a few of the recent transactions that I cherry picked (the ones that seemed both high transaction price as well as inferior comps).

 

My angle is that I want the appraisal to match the price in our lease/option agreement -- if it comes in low, I'll have to dig up more funds of my own at closing as the loan is based on 70% of appraised value.

 

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Single family residential real estate appraisers usually just drive by and play their novelty theme horn (dukes of hazard is most popular); maybe if you get a real professional they do a few doughnuts in the driveway.  ;D

 

That hasn't been my experience.  The last few times I purchased a house and the last time I refinanced my mortgage, the appraisers were there for well over an hour taking measurements in every room, tons of notes/drawings and looking at pretty much everything including basement and outbuildings.  I'm pretty sure what I've experienced is standard at least in New England.  How can you appraise a house from the driveway?

 

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Single family residential real estate appraisers usually just drive by and play their novelty theme horn (dukes of hazard is most popular); maybe if you get a real professional they do a few doughnuts in the driveway.  ;D

 

That hasn't been my experience.  The last few times I purchased a house and the last time I refinanced my mortgage, the appraisers were there for well over an hour taking measurements in every room, tons of notes/drawings and looking at pretty much everything including basement and outbuildings.  I'm pretty sure what I've experienced is standard at least in New England.  How can you appraise a house from the driveway?

 

I think (hope) drive by appraisals are over with. I think they were common during the housing bubble.

 

For my last refi (maybe 2 years ago now), the guy came in and looked around every room. Nothing too crazy. No measuring. He wrote some notes. And he was out of here within 30 minutes. I live in the SF Bay Area.

 

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Single family residential real estate appraisers usually just drive by and play their novelty theme horn (dukes of hazard is most popular); maybe if you get a real professional they do a few doughnuts in the driveway.  ;D

 

That hasn't been my experience.  The last few times I purchased a house and the last time I refinanced my mortgage, the appraisers were there for well over an hour taking measurements in every room, tons of notes/drawings and looking at pretty much everything including basement and outbuildings.  I'm pretty sure what I've experienced is standard at least in New England.  How can you appraise a house from the driveway?

 

I think (hope) drive by appraisals are over with. I think they were common during the housing bubble.

 

For my last refi (maybe 2 years ago now), the guy came in and looked around every room. Nothing too crazy. No measuring. He wrote some notes. And he was out of here within 30 minutes. I live in the SF Bay Area.

 

 

"Drive by appraisals"?  One check box on the form:  [] House exists.

 

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Single family residential real estate appraisers usually just drive by and play their novelty theme horn (dukes of hazard is most popular); maybe if you get a real professional they do a few doughnuts in the driveway.  ;D

 

That hasn't been my experience.  The last few times I purchased a house and the last time I refinanced my mortgage, the appraisers were there for well over an hour taking measurements in every room, tons of notes/drawings and looking at pretty much everything including basement and outbuildings.  I'm pretty sure what I've experienced is standard at least in New England.  How can you appraise a house from the driveway?

 

I think (hope) drive by appraisals are over with. I think they were common during the housing bubble.

 

For my last refi (maybe 2 years ago now), the guy came in and looked around every room. Nothing too crazy. No measuring. He wrote some notes. And he was out of here within 30 minutes. I live in the SF Bay Area.

 

 

"Drive by appraisals"?  One check box on the form:  [] House exists.

 

hahah pretty much.  ;D

 

 

 

 

 

 

http://blogs.wsj.com/developments/2012/08/15/no-more-drive-by-appraisals-%E2%80%93-on-some-loans/

 

During the housing market’s go-go years, the practice of “drive-by” appraisals, in which property appraisers didn’t physically inspect the interior of a home, was commonplace.

 

It’s since become far less so, as mortgage lenders remain extremely cautious about the loans they are making. They want to make sure that they have an independent estimate of the market value of a home, so it stands to reason that an appraiser should actually take a look at the home’s interior. Most of the complaints about the appraisal industry these days are of a different nature – that appraisers are too conservative about how they value homes.

 

Rules proposed by federal regulators on Wednesday would ban the practice of “drive-by” appraisals and require a physical inspection of the home. But the rules, required by the Dodd-Frank financial overhaul of 2010, would only apply to a small slice of the mortgage market – loans defined by regulators as “higher risk.”

 

Regulators define high risk ones in which the rate is at least 1.5 percentage points above a market average.

 

However, lenders don’t make many loans above this threshold: In 2010, the most recent year for which data are available, such high-risk loans made up only 3.2% of the overall lending market, according to the Federal Reserve.

 

The regulators, including the Fed and Consumer Financial Protection Bureau, also said they aim to combat fraudulent property flipping schemes in which a developer buys a property, makes minimal repairs and tries to sell it at an inflated price. In an effort to combat this property flipping, the regulators propose to require lenders making higher-rate mortgages to obtain an additional appraisal at no cost to the borrower.

 

An appraisal exists to protect a lender; it is different from a home inspection done on the borrower’s behalf to see if there are any needed repairs before closing.

 

Separately, the consumer bureau proposed that lenders should be required to provide consumers a free copy of their appraisal no later than three days before the property sale closes.

 

That proposal, another Dodd-Frank requirement, has become standard practice around the appraisal industry in recent years, said Bill Garber, director of government and external relations for the Appraisal Institute, an industry trade group. Until around 2008, lenders didn’t provide a copy of an appraisal to borrowers unless they received a written request, but new standards for the industry changed that practice.

 

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