Featured news — posted January 20, 2005

Get ready for some extra work on FHA assignments.

Months ago we reported on the trend of seller concessions and seller-assisted downpayments artificially inflating property values by being recorded as part of the "sale price" of homes. We told you that the State of Colorado warned its appraisers to take seller concessions into account to stanch this overvaluation phenomenon, as did the Appraisal Institute. Now, the Federal Housing Administration (FHA) will require such an analysis.

The Department of Housing and Urban Development (HUD) announced January 4 that their appraisers will have to:

What you should do first: You should let your FHA clients know that they are required to provide you with a complete copy of the ratified sales contract, including all addenda, for the subject property that is to be appraised, all financing data and sales concessions for the subject property granted by anyone associated with the transaction, including gifts and/or down payment assistance, which may or may not be included in the contract of sale. If your client requests a reconsideration of value, you must be provided with any amendments to the contract that occurred after the effective date of the appraisal.

HUD announced its new policy in its Mortgagee Letter 2005-02. click here and choose "2005 Letters" for a list of all mortgagee letters so far this year, and choose "05-2" from the list. (No direct link possible.)

With Aurora coming out soon, we would like to reiterate a point we've made previously (here and here, to name two) that we recommend that you upgrade computers every couple of years to a top notch system. We've often taken the approach to upgrade now, before a new version ships. You want to get your new computer up and running, be familiar with it, get WinTOTAL going on it with all your files, databases, and so on, and have it ready for a new version. That way, when you get the new version CD, you just plop it in and it all works. Otherwise, you're asking yourself to learn a new computer, get the old WinTOTAL installed with all your data files, and then get the new version going. Not ideal in any work environment, particularly what we and you hope is a busy one.

Look at it this way: It's your business system, not a college term paper word processor. Hardware, even loaded with all the fundamental software you need (Windows, MS Office suite, Outlook, etc.), has never been less expensive — in fact, if you haven't priced systems in two or three years, even, you'll probably be surprised how affordable robust PCs have become. And if you use Vault with Exact, the transition to a new system is even easier.

We're often asked what the "minimum" system for an appraiser should be. (It's probably not a good idea to think in terms of "minimum." After all, you don't want your business to run minimally, you want it to run well.) Even though Aurora will run on "less," here's what you'll want on your PC or workstation at the very least:

• Windows XP (Home or Professional)
• 1.5 GHz+ Pentium III class processor
• 256 Mb+ RAM
• Video Card with 64Mb RAM
• 1024 X 768 (XGA) screen resolution

If you still haven't upgraded to Windows XP (we wrote about that in July here), you're missing the boat. Microsoft itself is "gently" urging its customers to upgrade and is discontinuing support for almost every OS in its arsenal but XP. It's only a matter of time before Windows 98 is put out to pasture completely. Even more important: Microsoft will no longer release security updates or patches for Windows 98, meaning your system could be at the mercy of hackers or identity thieves.

Recent stats from our support department show that Windows 98 users are roughly four times more likely to have an issue that requires in-depth troubleshooting by a senior technician. And those issues are three times more likely to simply be "unsolvable." Believe us, we still test our software for Windows 98 compatibility. But, here's the problem: Windows 98 is less capable of handling a variety of programs installed on your computer, not to mention running several programs at the same time. When you get too many things going on this seven year old operating system (that's 429.25 "tech-years" which are much different than "dog-years") it just stops doing what's asked — often without the courtesy of an error message. XP is much better at handling multiple applications and simply more reliable for your business — that's why we recommend it.

When Aurora is released we want everyone not only to be able to use it but to use it to its fullest capacity. Upgrade now, if you haven't.

Home equity crisis coming, report says; blames lender pressure in part

American households cashed out $333 billion worth of equity from homes between 2001 and 2003, the beginning of the refinancing boom — levels three times higher than any period since Freddie Mac started tracking the data in 1993, a new report highlighted.

A House of Cards: Refinancing The American Dream is a new report released last week by Demos, a nonpartisan public policy organization based in New York. The problem is not that so many Americans took advantage of historically low rates and relaxed credit qualifications, the group said: Rather, a majority of households that refinanced between 2001 and 2003 used cash equity from their homes to cover living expenses and pay down credit card debt, further eroding their home's cash value, which many families rely on for economic security.

A striking finding from the report: Between 1973 and 2004, homeowner's equity actually fell — from 68.3 percent to 55 percent. In other words, Americans own less of their homes today than they did in the 1970s and early 1980s.

The report highlights the dangers of Adjustable Rate Mortgages (like we did, here). As the Federal Reserve continues to raise interest rates, a mortgaged family with an adjustable rate mortgage will experience a significant increase in their monthly mortgage payments, the group said. The combination of higher mortgage payments coupled with rising costs of basic living expenses represents a growing financial threat.

Of most immediate interest to appraisers, the report fingered "appraisal fraud" as one of the main culprits of the crisis it predicts. Happily, it hits on the culprit: pressure from clients. "One of the most alarming findings in the report is the role that mortgage fraud, in particular appraisal fraud, plays in the refinancing process," the group said in its press release. "There are growing numbers of third party brokers pressuring appraisers to inflate home values in order to 'close the deal' and reap larger fees or bonuses. The consequence can be dire for homeowners who refinance and draw out more cash equity than their home is actually worth."

Its report, viewable here (12-page PDF), states "Who wins? Third party mortgage brokers, primarily, reap significant rewards in this process with increased commissions or closing fees. The banks providing the loans also benefit, although they may be left in the dark on illegalities. These mortgages are purchased from banks at the inflated appraisal price and bundled into risk pools by governmental, quasi-governmental, or private firms. Government agencies that participate in the securitization of mortgages include Ginnie Mae, Fannie Mae, and Freddie Mac. Because the loans are held for such a short period by mortgage issuers, due diligence is an often ignored concept."

The report also points out (as we did here and in the pages of the latest Mortgage Technology magazine) that the amount of debt American homeowners have taken on is staggering. "As home equity has fallen, household debt service burdens have risen to record levels. Between 2001 and 2003, the 'financial obligations ratio' — the amount of disposable income needed to pay down debt — averaged 18.44 percent. Since 1980, the first year data was collected, the single year record occurred in 2002 with a financial obligations ratio of 18.56 percent."

The report does not conclude based on this (but we do) that more debt-burdened homeowners (and consumers in general who will be homeowners in the next few years) means lower credit-quality borrowers, means more attention needed to be paid to the likelihood of default, and therefore the value of the collateral for the mortgage loan. Appraisers are poised to be the solution to this next crisis, if it comes, not scapegoated as the problem.