In November of 2008, Fannie Mae and Freddie Mac published their requirement for appraisers to use the new “Market Conditions Addendum” for all appraisals done after April 1, 2009. Through Mortgagee Letter 2009-09, the Federal Housing Authority (FHA) has responded in kind by establishing their appraisal requirements for properties located in declining markets, including the use of the Market Conditions Addendum. The purpose of this addendum is “to provide the lender and borrower a clear and accurate understanding of the market trends and conditions prevalent in the subject neighborhood.” (Fannie Mae form 1004MC)
What I’d like to provide you is a better understanding of what is required of appraisers in today’s market, and the importance of delivering an accurate assessment of the subject property and the neighborhood trends.
Historically, loan officers have not taken seriously the great importance of the appraisal and the value it has to their clients. Unfortunately, in my experience, I find that most loan officers really don’t understand appraisals and what’s involved in determining the value of a property. In turn, they generally have not treated the appraisal as a truly important piece of information for the borrower. I’ve observed that loan officers regularly put tremendous pressure on appraisers to “bring in the value.” This is not only highly unethical, but it displays a total disregard for the client’s needs.
When a client requests a cash-out refinance, a good practice is to ask them the following question: “How long do you expect to stay in the home?” The answer will help determine just how much cash they should really take out. You should assume the role of a financial advisor, and you should give them a broader understanding of the potential ramifications of any resulting transaction. The truth is, most clients aren’t thinking long-term, so you have to help them. In all cash-out situations, you have to compare the short-term gain to any long-term losses and establish a priority. It may well be that the short-term benefit (debt consolidation) is more important than the long-term loss (less profit when property is sold).
For example: Let’s say you have a client that wants to do an 85 percent cash-out refinance to consolidate some debt. When you ask them, “How long do you expect to stay in the house?,” they answer, “Three years.” Given this information, you have to project what the house may sell for at that point and what they will net from that sale. If the house is currently appraised at $250,000 (based on a solid appraisal with no stretch on value), the loan amount at an 85 percent loan-to-value (LTV) will be $212,500. Using conservative figures, here’s what you project:
Future sales price $235,000
Mortgage payoff $210,250
Commission at six percent $14,100
Seller concession at five percent $11,750
Transfer tax at one percent $2,350
Escrow costs $1,500
Cash needed to close $4,950
In this scenario, you estimate that your client may need to bring approximately $5,000 to close on the sale of their home. Your client doesn’t like that idea, so you decide to do an 80 percent LTV for a loan amount of $200,000. At this loan amount, your client will receive approximately $6,200 at closing. Your client likes this much better and opts for the 80 percent LTV.
The scenario I’ve just described to you is that of a mortgage professional giving sound advice to their client. Imagine how good that client will feel about giving referrals to this loan officer.
Now let’s look at the financial outcome for the same $250,000 (real value) where the same client goes to a “loan pusher” who is only concerned with their commission, who doesn’t think long-term either for the client or themselves, and makes it his or her business to exert pressure on appraisers to “bring in the value.” We will assume the “loan pusher” had the appraiser “bring in the value” at $275,000, and they did an 85 percent cash-out refinance for a loan amount of $233,750. Of course, the client is happy to consolidate their debt, but they are blissfully unaware of what the future outcome will likely be when they try to sell their home in three years. Here’s how the numbers may look for this client:
Future sales price $235,000
Mortgage payoff $230,250
Commission at six percent $14,100
Seller concession at five percent $11,750
Transfer tax at one percent $2,350
Escrow costs $1,500
Cash needed to close $24,950
In this outcome, the client has to bring in nearly $25,000 to closing! How happy do you think they’d be, and how ready to send all their family, friends and co-workers to their “loan pusher?”
Sadly, it’s thanks in large part to these “loan pusher” scenarios that has contributed to the current crisis in our industry and all the appraisal reform. And, based on the great feedback I get, I’m encouraged to know that the readers of my column are true mortgage professionals, trusted advisors for their clients who are more concerned with integrity and their client’s best interests than with a quick profit at the client’s expense.
And now, here are the 10 things your appraiser must do or provide for all FHA appraisals of properties located in declining markets done after April 1, 2009, from Mortgagee Letter 2009-09:
1. At least two comparable sales within 90 days of the appraisal date.
2. A minimum of two active listings or pending sales in addition to the three closed comparables.
3. Bracketed listings using both dwelling size and sales price when possible.
4. Adjust active listings to reflect the List to Sales Price Ratio.
5. Adjust pending sales to reflect contract sales price when possible.
6. Include original list price and any revised list prices.
7. Reconciliation of adjusted values of active or pending sales with adjusted values of closed comparable sales.
8. Absorption Rate Analysis.
9. Verify sales data through the parties to the transaction.
10. Known or reported sales concessions on active and pending sales.
This update includes an often stated warning that … “Direct Endorsement Lenders are reminded that if the appraiser they selected provides a poor or fraudulent appraisal that leads FHA to insure a mortgage at an inflated amount, the lender is held responsible equally with the appraiser for the integrity, accuracy and thoroughness of an appraisal submitted to FHA.”
If the above appraisal guidelines look foreign to you, that's okay, because this update is intended for appraisers and underwriters. What you can (and should) do is to provide you with this information so you can take the following actions and help make yourself an FHA resource in your market.
1. Forward this update to your appraisers.
2. Forward this update to all of your real estate agent partners.
As you already may be aware, I provide legislative updates for LoanToolbox. After sending this update and suggestion to the membership, one of their Platinum Plus members followed my suggestion, and sent the FHA Appraisal update to their real estate agent and client databases. Shortly thereafter, I received this correspondence:
“I sent that out to my database yesterday and when I checked my e-mails, I had two real estate agents asking me to call their customers for a loan, and a refinance request from another old customer of mine. One agent in particular thanked me for the information, but everyone else just seemed to be responding to the contact. I am really pleased with how Platinum Plus lets me manage my database with automation.”
Become an FHA resource in your market place and gain an advantage over your competition.
Go FHA!
Jeff Mifsud founded Southfield, Mich.-based Mortgage Seminars LLC in 2004, has been an FHA originator for 12 years, is a contributor to LoanToolbox.com and is a former FHA underwriter. Jeff may be reached at (877) 342-9100.
