Are you in the place of "what happened" when it comes to your home, its value and equity? Have you recently applied for a simple re-finance or buyers loan and been refused, even though you have no troubles financially? If so, you're not alone. While value is always relative, understanding the current market valuation process and how the lenders and the government work in today's real estate market can help you decipher what's going on.
Banks
Follow the money and it will always lead you to the culprit. In this case the banking industry. They literally overextended themselves through high risk loan practices and then packaged the loans as products and sold them to other institutions - essentially spreading the infection. While overall loan rates remained low over the preceding 3 years with the dramatic rise of fuel costs in early 2008, credit became tighter and these higher non-market based loan rates jumped as their entry level adjustable period ended. The confluence of increased loan costs, higher personal expenses and tight credit toppled the house of cards in 4Q08.
The banks couldn't refinance everybody because they had no real money or solvency when compared with the debt of the loans. No money = no credit. No credit meant everything that used revolving credit to finance itself such as credit cards, small business, large retail businesses and home owners/buyers found themselves high and dry. The core of the economic engine literally fell off its wheels and the cascading effects created the worst economic environment in nearly 80 years.
The government decided that the best way to deal with this was to flood the banks that created the problem with money. Illogically they assumed that institutions that had not acted in their shareholders best interest would now suddenly change, even former Chairman Greenspan was amazed at the bank's duplicity. The Bank's did exactly as you would expect anyone in a tough financial place that got bailed out - they covered themselves. First with "performance" bonuses and salary increases to celebrate their good luck; then asset reshuffling/sales and finally hoarding the remaining cash.
That is why credit remains so tight and most financial institutions remain in a precarious position. They are not actively putting the money back in circulation to drive the economic engine. Less credit = fewer loans - it does not mean the banks don't have the money.
Foreclosures
A number of high risk loans that have adjusted have gone into foreclosure. The other shoe, are the ones that will adjust over the next 24 months. As foreclosures escalate, home sales will increase - this does not indicate market conditions are improving, just that some buyers are picking up properties that banks and individuals are dumping on the market. Home values will not begin to recover until this inventory is absorbed and credit becomes more available.
HVCC and the Law of Good Intentions
To help us all the government saw the problem as the appraised value of the properties not loan practices as the next big piece of the problem. They adopted New York Attorney General's Andrew Cuomo's "Housing Valuation Code of Conduct" (HVCC). This altered appraisal practices with the intent of improving the current housing market. Specifically, the HVCC prohibits mortgage brokers and real estate agents, from choosing the appraiser in a real estate transaction. The code is meant to ensure fair and neutral appraisals, but it actually reduces the quality of appraisals and drives up costs to homebuyers by creating additional middlemen known as Appraisal Management Companies (AMCs) and more red tape. The HVCC also allows the Fannie Mae, Freddie Mac and FHA to stop purchasing mortgages from lenders that do not adopt the code with respect to single-family mortgages. No pressure.
Essentially, the top of the food chain (banks) got billions for bailouts and bonuses and at the bottom end, small business, fee based independent appraisers got higher costs, reduced fees bewildering regulations and reduced business. It is estimated that tens of thousands of consumers have already been denied their opportunity to enjoy historically low rates. This is a classic example of the Law of Good Intentions - something done in the right spirit that sadly backfires.
Appraisers
Real estate appraisers are traditionally licensed by the state they operate in and appraise within a given geography so they develop over time an excellent "feel" for market value. They are usually independent business people who do appraisals on a fee basis - no appraisals = no money. Appraisal fees for regular homes can run from a $200 - $400 depending on the area and amount of work. Sounds OK until you figure in business costs - insurance, MLS, etc. then you need 12 - 20 appraisals a month to make any money.
With the advent of Cuomo's legislation, the "impartial" AMC's are taking up to 50% of the total appraisal fee. Unlicensed or inexperienced individuals are performing property inspections and their appraisals are then being "signed-off" by 3rd parties that have never physically seen/inspected the property. This also means that instead of 12 - 20 appraisals to make any money - now you need 24 - 40. Doing exactly the same thing you were doing 60 days ago and since it takes around 2 days in a perfect world (live appointment, comparison, research, paperwork, etc.) to do an appraisal - it is more likely you will now start to lose money in your business.
By law, no one involved in the transaction can communicate any issues directly to the appraiser. So real estate transactions that could have closed are now failing, because values are being determined in the dark and the one person that might be able to support a local circumstance, the appraiser can't help. The result - continued property devaluation.
With mortgage loans being denied due to inaccurate appraisals, borrowers are being forced to apply with other lenders who in turn have to charge the consumer ANOTHER APPRAISAL FEE to proceed with the transaction. Benefit - AMC - Loser - consumer and the appraiser.
Until the confluence of the credit freeze, over aggressive government regulation and consumer confidence can get unraveled - valuations and loans will continue to have issues. First step - remove new government regulation so more loans flow through the system raising consumer confidence. No reason good things can't come from the bottom up instead of bad things from the top down.
