Shrill screams of excitement are often heard as a roller coaster crests the high point and begins its rapid decent down an unbelievably steep track. Those same screams change to a different pitch when the ride enters a dark hole, and the twists and turns are unexpected and startling. That’s often when the terror sets in. And yet, every time, the coaster pops back into the daylight and slows into the station. The riders survive, and most often are ready for another go at it.

The mortgage market in 2013 was not unlike the best of roller coaster rides. But have we reached the station yet?  Last January, with the 2012 holiday season behind us, 2013 began with 30 year fixed rates hovering around 3.375%. With wide smiles, mortgage professionals had never seen rates this low. And borrowers were enjoying the benefits as well. Our roller coaster had been in freefall, and the excitement was at a high point.

 Then, as we made our way from early May to early June, we got a glimpse of things to come. Interest rates had risen from the 3.50% range to nearly 4.00%. And then, with consistent increases, to the 4.75% range by late August.  Smiles waned a bit, and worry set in. We had certainly reached the dark part of the 2013 ride, and nobody knew when and where the next turn was… or if it would be a fun one. The Federal Reserve, which had been behind these historically low rates through the use of its bond and mortgage purchasing stimulus plan, finally came out with convincing comments in September stating that the stimulus would continue for the foreseeable future. Our ride popped back into the daylight, and rates dropped back down into the low 4’s by late November. Even though we’ve seen some recent slight increases in rates, we’re still seeing 30 year rates in the 4.50% range. As we near the end of 2013, with rates essentially 1% higher than January, this annual roller coaster is nearly over.

Nashville home prices have stabilized, and in most areas show signs of good appreciation. Inventories are presently low, which has created bidding wars in many cases. That has pushed home prices higher.  It’s a matter of supply and demand.

 If this past year has shown us anything, it’s a glimpse into the future. While nobody can say for sure, the most likely scenario for the spring of 2014 will be higher interest rates and higher home values. So is it a good time to buy or sell?  Absolutely – either, or both. The spring will bring more inventory, and with it more competition for sellers. And projected increases in rates will raise the cost of financing for buyers. So don’t wait too long. The exhilarating part of the ride is about to begin again. And who knows when the next turn is coming, taking us back into scary uncertainty. Keep your seatbelt on – 2014 should be very interesting!

Many years ago the menu items available at most restaurants did not have much variety. Let’s consider raw oysters for example. Oysters were not everyone’s cup of tea. But as popularity grew, more and more restaurants began serving raw oysters. And as demand for oysters grew, more oysters needed to be harvested from the sea, and shipped great distances.

Everyone knows we need to be careful about the quality and freshness of something you’re going to eat that hasn’t been cooked. (Something about the months that have an “R” in them.) But we also tend to rely on the restaurant and/or supplier to protect us from bad oysters. And what about the waiter who notices a batch of mollusks that don’t particularly look or smell good? Should he tell his customer not to order them? The other waiters are serving them. The restaurant kept them on the menu. Would he lose his job if he discouraged folks from ordering this popular menu item?

And what about people who bought oysters and other “fresh seafood” from a guy in a truck parked beside the road, or who drove up unsolicited to the house selling “discount oysters”?

Over time, it was discovered that certain people were allergic to oysters. Others, based upon their DNA were susceptible to illness that didn’t show up for several months, or years. Not all oysters caused issues. But many did. And ultimately an oyster illness pandemic broke out. Somebody should do something about this! And so the FDA steps in, with the help of Congress, and regulates the sale of oysters. Absolutely no more oysters are to be sold to the American people.

Whew! Thank goodness the Federal Government stepped in and protected us from this menacing menu item, right?  But what about the oysters that were harvested, shipped, and prepared correctly? And the folks who really liked oysters? I guess the common theory is that it’s better to protect the masses by eliminating these darn things altogether than figure out how to make sure only good ones are served.

Well, I am a mortgage banker. So this must have a point somewhere. Who is responsible for oysters causing a pandemic and no longer being available? What if oysters were “non conforming specialty loan products”. And the waiter was a loan officer. And the restaurant was your local bank, or mortgage company. Then replace the supplier/harvester with the large lenders, Fannie Mae/Freddie Mac, and bond houses who made this “menu item” available. What if the guy pushing oysters unsolicited up and down the street was the unknown mortgage company sending postcards to you and all your neighbors?

Who is responsible? The many people who bought oysters from someone they didn’t know? Shouldn’t they have known better? The waiter who served something on the menu? The restaurant who was making a menu item available that was highly popular? The supplier/harvester who was keeping up with demand? The answer is yes – and no (and very hard to pinpoint). And, no doubt, there are still those professionals who know how to do things right, and have everyone’s best interest and safety at heart.

The next round of tightening standards for mortgage lending is coming after the first of the year. Government rules will cause some borrowers to be denied loans who would today be approved. And it is very possible that many lenders will remove some products from their menu. (More on this later.)

In the mean time, let’s keep an eye on what we’re being protected from. What’s next? Mahi Mahi? (30 yr fixed rate loans?)  Swordfish? (The ability to purchase a home with less than 20% down?) How far does the pendulum need to swing before we all feel safe?

The 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.