It is becoming significantly more difficult for those attempting to sell or refinance a home to get an appraised value that meets lender requirements to qualify for a loan. This development is impacting borrowers’ abilities to purchase or refinance homes, and is slowing the stabilization of the housing market. The roots of this growing problem are a lack of comparable home sales data due to a reduction in the number of non-distressed home sales, and significant increases in the sales of foreclosed homes and short sales.
When an appraisal comes in lower than expected, a home sale or refinance can be jeopardized. A low appraisal could push the loan-to-value (LTV) ratio of the property outside acceptable lender limits, causing financing to be declined. An unacceptable LTV could also cause a lender to decline refinancing, and borrowers who cannot refinance may miss out on thousands of dollars in savings.
The low number of non-distressed home sales and significant inventory of distressed properties are making proper valuations difficult, and are simultaneously depressing home values. In the past, foreclosed property sales were relatively low and therefore given little weight as comparables for a home sale or a mortgage refinancing.
However in many markets with high foreclosure rates, distressed property sales comprise a majority of comparable transactions, and these distressed homes are often sold at a fraction of the “fair market” value of the property. In an environment where there are so many distressed homes, foreclosure sales define the market and may result in a lower sales price, declined mortgages, and difficulty refinancing.
According to a recent study from the National Association of Realtors (NAR), 35 percent of home sales in February and March 2010 were real estate-owned (REO) or short sales. Estimates on the number of REO houses on the market at the beginning of March range from 480,000 (Barclays Capital), to 750,000 (RealtyTrac). Additionally, Barclays Capital estimates that 4.6 million households are delinquent on their mortgage payments, and as a result foreclosures are likely to have a major impact on appraisals for some time to come.
The recent increase in home sales, largely due to the first-time homebuyer tax credits, could provide a short-term solution to the lack of comparable data. Home sales will be at increased levels through mid-summer, but are still far below peak activity of a few years prior. This temporary spike in home sales will provide short-term relief from the lack of comparable data, but without sustained sales, the problem will reoccur.
Going forward, this will be an extremely important situation to monitor for the mortgage industry, especially in light of the potentially large shadow inventory of foreclosed homes that could still hit the market over the next two years. Due to inconsistent reporting methods, the industry is not precisely sure how much shadow inventory is out there. A second wave of foreclosed homes would only compound the current problem.
Short of widespread changes to the appraisal process, which are unlikely, the only real solution to this problem is an increase in normal home sales. However the continuing weak labor market and the potentially huge shadow inventory of distressed homes make large increases in normal purchases unlikely in the near term. This problem will likely continue to cause low appraisal values and put downward pressure on home prices for the foreseeable future.
John Walsh is the president of Total Mortgage Services, an expanding mortgage banker. Walsh founded Total Mortgage Services in 1997 with a customer-centric approach and a mission of responsible lending. Today, the company offers a range of mortgage solutions, from FHA to jumbo loans, with some of, in not the lowest mortgage rates in the industry. Total Mortgage Services recently launch TMS Funding, a wholesale lending business, to complement its very successful retail lending platform and offer mortgage brokers and borrowers better service, choice, knowledge and efficiency in the mortgage lending process. John Walsh can be reach at [email protected]
or for more information on Total Mortgage Service please visit www.totalmortgage.com.