Monthly Archives: September 2013

To Taper, or Not to Taper… that was the question

As a part of the overall Government stimulus programs started back in 2009, the Federal Reserve announced over a year ago that it would purchase Treasury and Mortgage Securities at a pace of $85 Billion per month in order to foster lower long term borrowing rates, and help the housing recovery.

This program has come under scrutiny lately, with several Fed Governors starting to voice concern about how long they could keep this up. Consequently, over the past month or so, it became widely rumored that at their September meeting the Fed would announce a reduction in the level of purchasing (or to begin “tapering” its purchases of Treasuries and Mortgages). The level of tapering was expected to be $10 to $15 Billion monthly. And this fairly quickly caused mortgage rates to rise. Less government demand for mortgages would result in higher rates.

So, leading into the Fed Meeting and press release September 18th, 30 year mortgage rates stood at approximately 4.625%; and poised for extreme volatility if the Fed announced anything different than the expected reduction in bond purchases.

What did the Fed decide? Surprisingly, they decided to keep doing what they’ve been doing. From the statement, “the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago… However, the Committee decided to wait for more evidence that progress will be sustained before adjusting the pace of its purchases.”

Stocks and mortgage markets rallied immediately after this announcement, assuming we’ve got maybe a few more months before the Fed starts to back out of the market. And 30 year mortgage rates have dipped back down into the 4.50% range; obviously good news for home buyers! But this won’t last long. Since Wednesday afternoon, we’ve already seen the mortgage markets giving back some of these gains.

Is now a good time to borrow for a home purchase or refinance?  You bet it is! Higher rates are coming. It’s now just a matter of when.

Nashville and National Mortgage Limit Reduction Considered

Policymakers are considering a reduction in the maximum loan amount Fannie Mae and Freddie Mac will allow. The intent, it seems, is to reduce the government’s role in the mortgage market. But why now? Why would the Federal Housing Finance Agency risk slowing the current housing recovery?

Industry experts estimate the conventional loan limits will be adjusted downward from $417,000 to $400,000. The maximum loan amount has been $417,000 since January of 2006, when it was adjusted up from $359,650 the previous year.  Loan amounts above the conventional “conforming” limit are by definition Jumbo Loans. Jumbo loans require larger down payments and historically have also meant higher interest rates.

How does this affect the “average Joe”? Let’s assume a buyer has saved, or has approximately 10% available from the equity in a pending sale. ($40,000 to $50,000) Right now, with the existing $417,000 conventional loan limit, he/she could purchase a home with a $463,000 price tag. If the limit is ratcheted down to $400,000, that maximum price range drops to around $444,000. This while Nashville is seeing approximately 10% year over year appreciation in home values. This creates a “double whammy” in housing affordability.

The Mortgage Bankers Association and National Association of Realtors believe it is too soon to change loan limits, and are working with Congress on mortgage finance reforms that will maintain consumer access to affordable mortgage products.

Stay tuned. Or, if you feel strongly enough, write your congress person.

Scott Ractliffe

Appraisal considerations when buying or selling a home

Scott%20RactliffeThe appraiser has just delivered the appraisal to the lender, and you learn that the reported value came in for at least the sales price. The appraisal hurdle has been crossed, right? Not necessarily. Here is what’s going on with the appraisal process and when lenders are underwriting the collateral…

To improve the quality and consistency of appraisal data for loans delivered to Fannie Mae and Freddie Mac (GSE’s), at the direction of the Federal Housing Finance Agency, they developed the Uniform Appraisal Dataset (UAD), which defines all fields required for an appraisal. And all appraisal data is required to be submitted electronically to Fannie or Freddie before they will purchase the loan. The bottom line is, they are collecting data on every property securing every loan they purchase. And the GSE’s purchase approximately 85% of all home loans.

So how is this affecting those of us financing real estate, and those selling it?

All lenders for Conventional and Govt loans, use either Fannie Mae’s or Freddie Mac’s underwriting engine. Using the electronic property data the GSE’s have been collecting, these respective underwriting engines will report back an “opinion” of the value for the particular property address being considered. Freddie Mac calls this the HVE point value (Home Value Explorer). If the HVE varies too greatly from the actual purchase price negotiated between buyer and seller, an underwriter is required to obtain significant overwhelming evidence that the appraiser is “more correct” than the HVE. In these instances, the appraiser is asked to provide additional comps or additional comments and data to support the value reported. This can be very problematic in cases where comparable sales are limited. Underwriters may also obtain their own independent AVM (Automated Valuation Model). In short, we’re seeing the AVM’s and HVE’s being given more weight than the appraiser who actually visited the house, and knows the area. In some rare cases, an underwriter who feels he/she has not received sufficient evidence may consider “the value not supported”. Scary! It appears that “Big Brother” is attempting to take the collateral valuation process out of the hands of experienced trained appraisers, to instead rely upon electronic formulas; much like credit scores now decide credit quality rather than an experienced underwriter looking at the full credit report and making a decision about someone’s creditworthiness.

Meanwhile, a couple of other things are going on behind the scenes. Lenders, after receiving the appraisal, obtain SSR’s (Submission Summary Report). This report analyzes the appraisal, and gives opinions about each comparable sale used, and whether it is considered acceptable. If there is too much of a difference in square footage, etc., the report will give an error warning. These “errors” must be addressed before the appraisal and SSR are uploaded to Fannie or Freddie. Again, more requests for additional information or changes by the appraiser.

Lastly, as I started with above, UAD standardizes all appraisals.  The condition and quality of the subject property and comparable sales are given condition and quality ratings between C1 and C6, or Q1 and Q6 respectively. If you’re buying or selling a “fixer upper”, be aware. Lenders cannot approve loans on properties with a C5, C6, or Q6 rating. Ratings in this range mean that the property has significant deferred maintenance and/or repairs required, or represent safety and soundness issues.

The bottom line to all this is, the appraisal is not officially “acceptable” until it has been reviewed and approved by the lender’s underwriter. The appraiser “hitting the number” is only the first step in what has recently been (and still evolving into) a burdensome process. Fortunately, I’m only seeing issues with a handful of appraisals. But in all of those cases, the first comment is always “but I don’t understand, the house appraised for the sales price”. Hopefully this information will help you understand there is more than just the appraiser’s opinion being considered.