In connections with this release the Appraisal institute issued two papers.  The first sets forth their case that they are Not the Cause of Low Home Values, while the second paper outlines several issues dealing with Appraisals in a Declining Market.  (go to Appraisal Institute for the press release and the papers).

Following is a brief overview of the case made by the Appraisal institute, which I think many readers will find enlightening and perhaps surprising.

APPRAISERS NOT CAUSE OF LOW HOME VALUES

• Appraisals are not intended to confirm the sales price (Appraisals are completed for mortgage transactions and are used to assist lenders in making lending decisions).
• Appraisers don’t set the real estate market, they reflect what’s happening in the market;
• Appraisers don’t work for the buyer or the seller, they work for the lender (the lender is the appraisers client);
• Appraisers are independent experts who are objective and have no vested interest  in the transaction since their compensation is not dependent upon the value conclusion, the approval of the loan or the eventual sale of the property; and
• Appraisals are often assigned to the least qualified and least competent appraisers since Federal Regulations require a firewall between the lender and the appraisers.  As a result, lenders turn to Appraisal Management Companies whose business models are based on keeping as much of the appraisal fee as possible and to pay as little as possible to the appraiser.

PROVIDING APPRAISALS IN A DECLINING MARKET

• Appraisers must consider all relevant transactions, including short sales and foreclosures that have occurred in the market area and then determine which transactions (“Comps”) should be used in the analysis to arrive at a credible opinion for the subject property;
• The best “Comps” are those that are most similar to the subject property in terms of location, size, condition and other features (for example, a property or a property feature such as a kitchen remodel might cost X.  However, that doesn’t mean that the value will be increased by X or adds X to value.  Particularly in distressed markets, cost may be higher than value;
• The appraiser must analyze and select the best “Comp” and then adjust for material differences between each “Comp” and the subject property; and
• In arriving at the best “Comps” the appraiser should not ignore foreclosures and short sales if consideration of such sales is necessary to arrive at the value opinion.  In selecting the appropriate “Comps” the appraiser must investigate the circumstances of each transaction including sales concessions and property condition.

In our role as a representative of the borrower, we deal with all parties in the transaction including the buyer, seller, real estate agents, the bank, and the appraisal company.  We understand the objectives, motivations and frustrations of all of the parties.  Although we don’t agree with all of the points highlighted by the Appraisal Institute, we do believe that it more or less accurately describes the current environment and the views of the appraisal industry and the lenders, for better or worse.

The other factor that weights heavily on this area is the role of the Federal Government which has instituted regulations and rules that criminalize certain actions in how lenders interact with appraisers, and otherwise heavily influences the process for how appraisals are conducted.  Many people in the real estate and lending industry don’t understand how the Federal Government has influenced the appraisal process and I know most buyers and sellers don’t understand the role the Federal Government plays.

As a conclusion, we would make a couple of suggestions that sellers and their representatives might take to help provide clarity and improve the system long-term.

• Appraisers need accurate information on transactions so Realtors should ensure all property data input into the MLS for both sales and listings is accurate;
• Appraisers often try to contact listing agents and the buyers agents to get information on sales and listings.  I would encourage all realtors to return calls to appraisers and to provide accurate information.  This can only help the overall market;
• Listing Agents, in their role as representatives for the seller, should always meet appraisers at the subject property to provide information on the sales contract, provide information on improvements to the property and provide the data and “Comps” used that support the value.  Many believe this is not allowed but providing this type of information is allowed and is not prohibited (only lenders are restricted in what they communicate to appraisers and how they communicate with appraisers).

INTEREST RATES

The second half of 2011 saw 30 year mortgage rates drop below 4.5% and stay there through the end of the year.  The year ended with 30 year mortgage rates slightly below 4%.  The reasons for low-interest rates are varied however, the following factors are most often cited for the low-interest rate environment:

1. Actions of the Federal Reserve Board to keep interest rates low;
2. Subdued economic growth in the U.S. as reflected by the unemployment rate, muted consumer demand and the continuing lack of investment by business; and
3. The debt crisis in Europe which has contributed to investors seeking out less risky assets such as Treasuries and Mortgage Backed Securities.

These factors are expected to continue into 2012 and most forecasts call for mortgage rates to remain low throughout 2012. (i.e. below 5% for 30 year fixed rates mortgages).  Volatility will still show up from time to time and there will still be opportunities to capture sub-4% rates in the first quarter of 2012.

LOAN PROGRAMS

As has been the case for the last 4 or 5 years, FHA loans will continue to dominate the market for loans where the loan to value exceeds 80%.  Conventional loans guaranteed by Fannie Mae and Freddie Mac will make up the bulk of the difference.  VA loan still remain a great option for Veterans

One bright spot is the jumbo mortgage market where there was an expansion in the availability of these programs in 2011.  Also, the interest rate spread between conventional and jumbo loans narrowed to about 1/4% to 1/2% versus the 3/4% to 1.25% we have seen in earlier years.

There are still limited options for any type of stated income loans or low documentation loans unless a borrower looks to the private mortgage market where the equity requirements, rates and costs are much higher and the terms are much shorter.

DOWN PAYMENT REQUIREMENTS

Following are the general down payment for each loan product

1. FHA-3.5% down payment
2. VA-0% down payment
3. Conventional-3% down payment

CREDIT SCORE  REQUIREMENTS

Credit scores over 760 will almost always allow a borrower to obtain the most favorable financing although scores over 720 will allow a borrower to pretty much qualify for any type of program.

While minimum score requirements vary by program many banks and lenders will require a higher score than the minimum program standards.  As a general rule a credit score of 620 gets you into the game and will qualify for many types of loans, however, a score over 640 for FHA and 660 for Conventional is much more desireable.  As the scores go down the qualification critereia gets tougher and the interest rates rise.

OTHER TRENDS

Borrowers have begun to consider smaller lenders and mortgage brokers as opposed to the large banks.

One reason for this is because of the number of borrowers who have been rejected for loan by larger banks but have been able to complete their transaction through smaller lenders and mortgage brokers.  A second reason is the amount of time the large banks take to process loans.  Many take in excess of 60 days to process a loan while smaller lenders and brokers can get a loan completed in less than 30 days.

Lastly, due to regulatory and market changes over the last few years the individual loan officers and brokers at smaller lenders are often better trained and have completed national and state licensing requirements that have not been required of bank employees.

Next week there are several pieces of economic data that could impact mortgage interest rates.  ISM Manufacturing, Construction Spending, and the Minutes from the December 13 Federal Reserve meeting will be released on Tuesday.  Factory Orders will come out on Wednesday.  ISM Services and ADP Employment are scheduled for Thursday.  Employment Date will be released on Friday.

Next week there are several pieces of economic date to be released that could impact mortgage interest rates.  The Producer Price Index and Industrial Production will be released on Wednesday.  The Consumer Price Index and Housing Starts will be released on Thursday.  Existing Home Sales, Philly Fed and Empire State will come out on Friday.  The markets will be closed on Monday in observance of Martin Luther King Day.

Next week is a light week for economic data that could impact mortgage interest rates.  The Fed’s Beige Book will be released on Wednesday, Retail Sales will be released on Thursday, and Import Prices, the Trade Balance and Consumer Sentiment will come out on Friday.  There will be Treasury Auctions on Tuesday, Wednesday and Thursday.

Looking ahead to economic data that could affect the markets and mortgage rates next week, Housing Starts will be released on Tuesday.  Existing Home Sales will be released on Wednesday and final revisions to third quarter GDP and Consumer Sentiment will be released on Thursday.  On Friday, Durable Orders, Core PCE Inflation, Personal Income and New Home Sales will be released.  There will also be Treasury Auctions on Monday, Tuesday and Wednesday.  Lastly, the markets will close early on Friday for the Christmas Holidays and overall volume is generally light starting this week through the end of the year.

The European debt crisis will continue to have a major influence on U.S. equity and bond markets for some time.

Next week the big event that could impact mortgage interest rates is the Fed Meeting on Tuesday.  On Tuesday, Retail Sales will be released.  On Thursday Industrial Production will come out.  On Friday, the Consumer Price Index, the Philly Fed, Empire State and Import Prices will come out.  There will be Treasury auctions on Monday, Tuesday and Wednesday.

Next week will be a light week in terms expected economic news that could impact mortgage interest rates.  On Monday, ISM Services and Factory Orders will be released.  On Friday, the Trade Balance and Consumer Sentiment will come out.  Additionally the results of the Euro Zone Summit will be released next week.

With the Thanksgiving Holiday next week there will be several pieces of economic data issued early in the week that could impact mortgage interest rates.  On Monday Existing Home Sales will be released.  On Tuesday revisions to Third Quarter GDP will be released.  On Wednesday Durable Orders, Personal Income, Core PCE Inflation and Consumer Sentiment will be released.  Additionally, there will be Treasury Auctions on Monday, Tuesday and Wednesday.  The markets will be closed on Thursday for Thanksgiving but will be open on Friday.

As the situation develops in Europe and perceptions change, investors continue to shift funds between risky assets (stocks) and safer assets such as Mortgage Backed Securities.  As demand for Mortgage Backed Securities changes depending upon the market sentiment, mortgage interest rates will continue to move.

The most significant economic data that will be released next week that could impact mortgage interest rates with be the Monthly Inflation Reports.  The Producer Price Index along with Retail Sales will be released on Tuesday.  The Consumer Price Index and Industrial Production will be released on Wednesday.  Housing Starts and the Philly Fed will be released on Thursday.