Crisis Has Changed Home Appraisal

From: The Tampa Tribune 09/25/2008


By ANGIE HICKS

Special to the Tribune

Published: September 25, 2008

Brian Dean wanted to add a pool to his 1967 home in Safety Harbor, so he checked with his lender about obtaining a home equity loan.

Before the bank would consider his request, it required Dean to get a new appraisal. He had an appraisal done two years ago, but the shelf life of a home appraisal has become shorter in the wake of the U.S. housing crisis. Home values, which many thought would continue steadily increasing as they have for generations, are now in flux. Lenders consider an appraisal outdated if it wasn't done within the last six months.

If you're thinking of selling, refinancing, renovating, or even if you just want to be sure your property tax bill is on target, you'll need an up-to-date appraisal.

According to a recent nationwide poll of Angie's List members, more than 25 percent had an appraisal done on their home within the last year; and almost half of those were ordered by their mortgage lender.

Finding an appraiser - or a lender or a real estate agent - who is reliable and trustworthy is essential in today's market. Inflated appraisals were common during the housing boom early in the decade, and helped contribute to the crisis we're now enduring.

Dean's home appraised for about $20,000 more than he expected, but the extra likely came because the appraiser factored in the value of the home subject to the installation of the pool and not "as is."

"Once we get the pool in, I have no doubt that the house will be worth what the appraisal was," Dean said.

Michael Gann, a state-certified residential appraiser with Clearwater's Isaacs & Isaacs Appraisals Inc., said the appraisal industry has been hit hard by the housing slump and lenders are asking for more detailed assessments from appraisers.

"We're changing the course of our business to provide what lenders are looking for," Gann said. "It almost kind of works out to where we have half the business we were doing, but we're working twice as hard."

Often, homeowners confuse an appraisal with a home inspection. A home inspector determines the condition of the home and its major components. Appraisers generate data from comparable homes sold recently in the area. On site, they measure the house, take pictures of the exterior and do a walkthrough to establish its condition. Additional amenities, such as a remodeled kitchen or bathroom, room additions and replacement windows are also factored in.

Gann said appraisers are often urged by their client to inflate the value of their home, but said his company has a strict ethics policy that it enforces.

"There's always some pressure," Gann said. "We just don't allow it. Basically, that is why a lot of people are complaining about the mortgage meltdown ... lending practices were so wide open, people were borrowing 120 to 125 percent of the value of the house. Then to top it off, mortgage brokers were getting appraisals that were overvalued.

"Now, lenders are going back on loans in default and not only has the property declined in value because of the overall market, but it was never worth what it was appraised for."

If you are in the market to sell your home, Gann advises you have it appraised first.

"The sales market is so volatile, before they put their house on the market, a lot of people are having it appraised to determine its true market value."

HIRING AN APPRAISER

•Use only licensed, professional appraisers who are highly rated by previous customers and are familiar with property values in your area.

•List major home improvements and upgrades you've made, including the date of installation and the costs.

•Repair or replace even the minor things, such as leaky faucets and missing door handles.

•To help increase the value of your home, keep paint and floor coverings to neutral colors, and keep the yard maintained. If you live near a wooded area, clear out the brush.

•Make sure that all areas of the home are accessible to your appraiser, especially the attic and crawl space. Trim any bushes and move any items that would make it difficult to measure the structure.

•Don't follow the appraiser around, and don't let your pets follow him or her either. Distractions will inhibit the appraiser from providing you with an accurate report.

•Federal law entitles you to a copy of the appraisal report. Review it, because you may disagree with some findings. If you and your appraiser can't come to an agreement, you may want a second opinion.

Angie Hicks

Angie Hicks is the founder of Angie's List, www.angieslist.com

During the previous housing market boom, FHA mortgages became rare. With high levels of appreciation in housing prices, combined with loose lending practices by major lenders – the FHA product was not competitive. Now with a large percentage of borrowers unable to qualify for conventional mortgages, FHA mortgages make sense again.

The Federal Housing Administration, commonly known as FHA, was created in 1934 as part of the New Deal to create opportunities of home ownership. Since its inception, FHA has insured over 34 million properties, and operates entirely from self generated income with no typical costs to tax payers.

Borrowers get FHA mortgages from private banks and lenders, just like any other mortgage. Borrowers pay a small fee as part of their mortgage payments for FHA insurance. In return, FHA insures mortgages for the lenders in case of default on the loan. The FHA program is intended for borrowers with weak credit or little or no cash who would otherwise not qualify for a conventional mortgage.

In recent years, lending practices relaxed for conventionally backed mortgages, and the types of customers who would have been FHA candidates were able to qualify for a wide variety of mortgage products without high credit scores or a large down payment. With the exception of a few niche markets, such as manufactured homes, the higher costs and more stringent requirements involved with FHA mortgages made them undesirable. FHA’s share of mortgages fell to only 7% of the market by 2007.

Now that the housing market is going through a period of declining values and increased foreclosures, lenders have radically tightened criteria to qualify for conventional mortgages. For many home owners needing to refinance and many new buyers, the only option is an FHA insured loan.

To further increase the new found popularity of FHA, new government changes geared to helping the housing market recover have been aimed primarily at the FHA. In September, the President Bush announced a new plan called FHASecure to assist in refinancing mortgages of home owners in risk of foreclosure. The program which features risk based premiums, with higher risk borrowers paying higher insurance premiums, began on January 1, 2008. The plan was expanded in April to cover a wider range of former subprime borrowers. FHASecure is expected to handle approximately 500,000 homes by the end of 2008.

Additionally, part of the Bush administration’s economic stimulus package which was passed by congress required FHA to increase allowable loan limits and streamline the loan underwriting process. In response, FHA published new loan limits on March 5, 2008. The loan maximums were increased to 125% of the medium sales price for each metropolitan area. For example, the maximum loan limit for the Tampa Bay area increased to $292,500 resulting in a much higher number of homes being able to qualify for FHA mortgages.

There are limitations. Even with the recent increase, the maximum mortgage for FHA in our area is $292,500 which still excludes a large number of home owners. Also, in addition to the required mortgage insurance premiums, homes must meet more stringent criteria for condition with FHA compared to competing mortgage types. Check with a mortgage or lending professional if you want to find out if this type of loan works for your situation.

Although there are many reasons and explanations for exactly why the current housing market turmoil resulted, much of the focus is on the countries large lenders. There is also enough blame to go around, including buyers purchasing homes they could not afford, and existing home owners refinancing to remove all built up equity out of their homes. The nation’s mortgage lenders facilitated both.

By the term "lender", we do not mean the local mortgage broker or bank loan officer. Lender refers to the large national companies which fund the vast majority of home mortgages.

Subprime loans given to borrowers with weak credit, purchasing expensive homes with no down payment – this was the common theme during the recent boom in housing prices. The ready availability of loans created an ever higher demand and drove prices of real estate in many areas, including the Tampa Bay market, to unsupportable levels. Economists and housing experts were not surprised when the "bubble" finally burst.

The ever increasing availability of loans created competition among the lending institutions which forced loan criteria to be relaxed, and allowed their customers to overextend on mortgage payments they could not afford. Our televisions and mail boxes were full of offers for refinancing our homes to take cash out for anything from remodeling to buying the boat or RV of our dreams.

When home prices peaked, and then began to fall, a large number of homeowners found themselves with little or no equity in their homes. With home prices continuing to fall, many now find that their home values are below the balance due on their mortgages. Because many home owners purchased at the height of the market, and put little or no money as a down payment, they have no motivation to remain in their home. With the perception of nothing to lose, many are simply walking away from homes and allowing them to be foreclosed on. Unlike our parents in generations past, who saved for years in order to pay 20% as a down payment, these owners do not feel the same reluctance to walk away from an investment they struggled to obtain.

The recent glut of foreclosures has hurt the average home prices further. As banks sell of foreclosed on properties at lower prices, they artificially have driven values of surrounding properties down – resulting in even more home owners owing more than their home is worth. And the typical seller is unable to compete with banks selling homes, pricing their foreclosed properties below what a typical home owner can afford to list their home for.

Once the national lenders began to recognize the crisis that they contributed to, how did they react? Recently, the large wholesale lenders began to publish lists of "Declining Markets" and new lending guidelines. Now, most of the national lenders have followed suit with similar policies.

Lenders have now tightened lending guidelines across the board. Where once almost any credit score qualified for a loan of some sort, now only the highest credit scores qualify for the most desirable types of mortgages. Typical borrowers for a conventional mortgage loan must now have excellent credit scores, and show a large amount of equity or down payment to qualify. Lenders have also established lists of Declining Markets, including the Tampa Bay Area. For loans in these declining markets, the loan requirements and the scrutiny placed on loans from these areas is even higher.

As a result of these new lending guidelines, customers find it much harder to find loans. The same borrowers who were encouraged to refinance to remove cash, now can’t qualify to refinance to get out of a bad loan and avoid foreclosure. Home owners who are trying to sell their homes are likewise finding it harder, as the low numbers of current buyers find it harder to find financing.

In short, the pendulum of lending practices has swung from one extreme to the other. From loans for almost all to loans for almost none.

There are bright spots. New guidelines for FHA loans have created a safe haven for many borrowers. Current market conditions are primed for a recovery, and many experts agree that the bottom of the market has been reached. Home owners and those in real estate or building related industries are just waiting to see when the return to a stable market will be seen.

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