Full speed ahead on Basel III; Commentary And Input On Appraisal Issues

Unfortunately for borrowers, and rate sheet pricing, the Fed voted "full speed ahead" for Basel III. "Mortgage servicing rights (MSR), for instance, are used far more by U.S. lenders than by their international competitors. Banks get paid fees for servicing a home loan, which means collecting payments and managing foreclosures, and because they can be sold in markets, their value has been allowed to count toward capital requirements. The Basel agreement limited to 10 percent how much MSR's could count toward the common equity component and the Fed decided to strictly follow that standard. In anticipation of the new rules, some banks have been selling off mortgage servicing rights, like earlier this week when BofA agreed to sell $10.4 billion in mortgage servicing rights to a unit of Nationstar Mortgage." (FULL STORY)

The slow world economies have been a help for mortgage rates, and with volumes continuing to be good some companies are expanding. For example, in Southern California iServe Residential Lending is searching for underwriters (DE or Conventional), closers, and lock/appraisal desk personnel. (The positions are in San Diego, although underwriters can work from home both in San Diego and other markets) iServe is licensed in 20 states - and has agency approval so is a direct lender.  With a successful long-term purchase strategy, iServe has a complete product mix of conventional, government, and jumbo products.  For more information, go to www.joiniserve.com or email joiniserve@iservelending.com.

One state over, in Scottsdale, Arizona, independent retail mortgage banker On Q Financial is looking for an experienced Business Analyst/Developer to assist its Information Technology business unit with strategic projects. The incumbent will elicit, analyze, specify, and validate the business needs of project stakeholders, be they business partners or end-users. The Business Analyst/Developer will apply proven communication, analytical, and problem-solving skills to help design and develop processes, reporting mechanisms and interfaces between internal and external applications. Strong applicants will have experience with Encompass SDK, AMB and Microsoft SQL Server. Candidates should send their resume to Devin Dvorak at devin.dvorak@onqfinancial.com.

Appraisals! Often times it goes against the grain of a lender to advance money without knowing the value of the collateral. Even the HARP II program has complications & "work-arounds" involving value and appraisals. I received this note from a mid-sized correspondent about appraisals & AMC's: I was trying to do a loan on a property in the suburban NYC area. And FHA appraisal was done in 2011for another lender at $460k. But our pricing offered better options than the previous lender, and 2011 income docs allowed for more favorable DTI, so it made sense to delay. The original appraiser could not be assigned due to being on the investor's Unacceptable List, so the broker ordered a new appraisal through our AMC. The appraiser is from same county as the property, but takes more than 2 weeks to deliver (need new photos, need to go to town hall for tax classification, I uploaded it but the file was corrupt, etc...). The appraisal is delivered to the broker, lender and borrower at $365k, but two hours later the appraiser sends in a retraction statement, saying value is $350k.

"Our chief underwriter, aware of these unusual events and that the new value results in a denial, permits a new appraisal to be done through another approved AMC chosen by the lender. The new appraisal brings value in at $520k! The underwriters have now ordered a full desk review, asked to consider data pulled from both appraisals along with direct questions from the underwriter of the three 'experts' in the appraisal field, since they are all licensed and educated, who are relied upon throughout the whole lending system, within 90 days in a stable and desirable area of the country, and range from $350k, $365k, to $460k to $520k.  The property is not that difficult to appraise: not unique, no obsolescence, no undesirable market features, and typical for the area. Oh, and did I mention an expiring rate lock? Here is another example where borrowers experience unnecessary pain, probably additional costs...lenders and brokers take a black eye and quality of appraisal work is still compromised."

Fairway Independent Mortgage, in a note sent to clients, wrote, "From February of 2010 to February of this year there has been a decline of 39%, or 1,569, licensed appraisers in Massachusetts. In the past year we lost another 160 appraisers in 12 months! In 2011 the state issued 53 appraisal trainee licenses which was a decrease of 30, apparently 83 trainee appraisers did not renew their credentials. The barriers to entry in the appraisal industry are extreme. New regulation no longer allows for trainees to perform certain functions that they use to be able to perform. This has made it harder for appraisal companies to grow and train new staff since they can no longer perform any tasks that would merit compensation. The hands of appraisal companies are tied!"

Fairway's note goes on: "Steve Sousa, Executive Vice President of the MA Board of Real Estate Appraisers (MBREA), explains, 'Where before many certified appraisers might have one or more trainees out performing supervised work, now you have very few, almost none at all, trainees engaged in the process. There are pretty severe restrictions on licensed appraisers as well, forcing many out of the profession... between 2011 and 2012 the number of certified residential and certified general appraisers fell for the first time. Age is beginning to take its toll as a significant number of appraisers are approaching retirement age.'

"How do you train an apprentice if that apprentice is not allowed to perform most functions needed to facilitate the training?" Fairway asks. "How do we replace an aging workforce if the barriers to entry are too prohibitive? As an industry we need to lobby our representatives and regulators to get some of these restrictions eased before we have another crisis on our hands. In the meantime, it is our professional obligation to educate buyers, sellers and all involved in a real estate transaction about the real time necessary to complete the transaction, and that patience is a virtue, and a necessity! Allow enough time for all to get their jobs done in order to achieve the goal of a happy buyer and seller at the closing table."

One of the questions that tend to pop up everywhere is, "With appraisers seemingly afraid to show an appreciating market, how will property values ever increase?" I received this note from Mike Ousley of Direct Valuations. "Over the past several months, when we have been seeing nascent improvement in the real estate market, I have been hearing the issue of appraisers not recognizing the direction of the market. 'Why aren't appraisers recognizing the markets that are appreciating?  We are getting multiple offers on sales, with accepted offers often times being above the original list price, yet the appraisals are coming in well below even the original list price of the property, making it extremely difficult to finance these deals unless the buyer is willing to come in with more cash or the seller is willing to renegotiate to a lower sales price - it's killing the housing recovery!' It seems that appraisers are not recognizing what market factors are at play in those neighborhoods where demand is exceeding supply.  A negative adjustment to the listing - when all over the news and in the multiple listing services, listings are noted as selling above list price.  No time adjustments for those sales that sold months ago, when all over the news and borne out by multiple listing reports, sales prices are appreciating.  Comparing 'homes' to a property for no other reason other than it sold within the past 6 months and is similar in size, regardless of its amenities, market appeal or condition.  NOT considering what drives a buyer's motives and what motivates a buyer to consider move-in, modernized property versus a 50 year old tar & gravel roof with minimal updating."

Mike goes on: "The question is - What to do about this problem?  First, appraisers must consider all aspects that lead to demand for a property.  Picking the 'best' comparable properties to compare to the subject is the first order of business.  The closer you get to comparing 'like' properties - those that buyers would find as reasonable substitutes - the closer you will get to measuring the demand and the associated market value of the property that is under contract.  It's not sufficient to just report 'sales', the appraiser must report 'competing sales'. Second, and equally as important, the appraiser must assess the market conditions and recognize what direction the market is going in as to price.  As many appraisers were slow to recognize the market when it softened and started to depreciate, so too are appraisers slow to recognize when the market is heating up and appreciating.  This is partly due to the process - to look at 'sales' that have closed, which by their very nature are backward looking and historical.  What's missing in simply reporting those sales is adjusting for the difference of the market conditions between when they entered contract and what is happening and relevant currently.  It's called adjusting for TIME.  Just like a negative adjustment to past sales will account for worsening conditions presently, a positive adjustment to those comparable sales will account for improving conditions.  One way to help support those time adjustments (both negative and positive) is to consider what is competing on the market (listings) as well as listing price to sales price differences and how those prices compare to current sales and how long properties are on the market, indicating demand for those properties."

And lastly Mike notes, "Appraisers must reckon with time and its effect on value.  Certainly, it will take reporting sales, competing listings and analyzing list to sales price as well as days on market factors and adjusting for time and the theory of substitution.  But, what's also missing is that underwriters and investors have to also reckon with these time adjustments.  If appraisers are willing to be so bold as to make positive time adjustments to account for market appreciation, then underwriters and investors will also have to be so bold as to accept them and not discount them, or worse, blatantly say 'we don't accept positive time adjustments'.  Keep in mind, a time adjustment is just as relevant as an adjustment for size differences, pool adjustments or any other adjustment for a difference between the subject property and the comparable sales and listings used in the market analysis. Hillary Clinton said, 'It takes a village.'  With regards to a housing recovery and appreciation, it takes the village of appraisers, lenders, underwriters and investors to recognize and accept market factors at play in each and every neighborhood. (If you have questions, you can write to Mike Ousley, President & CEO of Direct Valuations, at mike.ousley@directvaluationsolutions.com.)

Michael Simmons with Axis Appraisal Management writes, "One of the biggest challenges for lenders and investors is reconciling data in appraisals. Appraisers almost exclusively utilize MLS based data in their reports while underwriters are often saddled with less focused data from AVM's (and other automated data sources) that typically include public record information. Underwriters then have to operate with uncorroborated information in an attempt to identify true market data if they are expected to support - or reject - an appraiser's value conclusion. That's an impossible task for an underwriter and often leads to misleading conclusions and embeds inefficiencies in the process. ('Inefficiencies' being code for 'let's order a desk review'). So where do we go from here?"

Mr. Simmons answers his own question, "Lenders and Investors today are demanding ever more and better data ... and they should. But data alone is not sufficient. It needs to be married with robust analytics - and that takes a local, skilled appraiser.  We at AXIS believe that this next generation of analytics will actually increase the need for more highly trained and qualified appraisers. We believe this explosion of new analytic tools and improved technology will create not only greater demand and heightened opportunities for appraisers, but enhance the quality and security of all loans. The next step will be for our industry to do a better job of educating lenders, brokers, and borrowers to better understand the forces that impact their markets." (Michael Simmons, SVP of Axis, can be reached at michael@axis-amc.com.)

Through it all, the fixed-income and equity markets continue to be nudged by events here and abroad, along with performance of our own mortgage-backed securities. Bernanke said, in testimony to the Joint Economic Committee in Washington, that the U.S. economy is at risk from Europe's debt crisis and the prospect of domestic fiscal tightening, while refraining from discussing steps the central bank might take to protect the expansion. "As always, the Federal Reserve remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate."

Buyers yesterday were hedge funds and money managers, along with the Fed, which adequately absorbed the $2.5+ billion in originator supply. Speaking of the Fed, it released its weekly report on MBS purchases and buying remained at a daily average of $1.2 billion for a total of $6 billion net for the week ending June 6. Over this same period, mortgage banker selling totaled over $15 billion indicating coverage of just 40% of the supply. "Normal" daily supply levels are in the $1.5 to $2.0 billion range which allows were Fed coverage in the area of 60-70%. By the end of the day Thursday, MBS and many rate sheets had improved by about .250 while the 10-yr closed at 1.66% - mortgages had a lot of buying interest from strong demand from Asia, the Fed, money managers, and hedge funds.

Today's calendar is rather anticlimactic: we've had the International Trade numbers for April, which came in at -$50.1 billion compared to -$51.83 billion in March. And while Europe continues to muddle along heading into the weekend, we find the 10-yr down to 1.57% and MBS prices better by about .250-.375.

 

The Shredder:
A young engineer was leaving the office at 5:45PM when he found the CEO standing in front of a shredder with a piece of paper in his hand.
"Listen," said the CEO, "this is a very sensitive and important document and my secretary is not
here. Can you make this thing work?"
"Certainly," said the young engineer. He turned on the machine, inserted the paper, and pressed the start button.
"Excellent, excellent!" said the CEO as his paper disappeared inside the machine, "I just need one copy."
Lesson: Never, never assume that your boss knows what they're doing.