All is Fair Game

By: Diana Olick
CNBC Real Estate Reporter

I hate to say I told you so, but on May 1st and again on June 1st, I told you about the potential negative ramifications of the Home Valuation Code of Conduct. Today the Realtors confirmed what I had been hearing all across the mortgage industry.

“In the past month, we have suddenly been bombarded with many stories of, at the last moment, transactions falling apart because appraisals are coming in unrealistically low,” said National Association of Realtors Chief Economist Lawrence Yun. “As a result it opens up a new round of negotiations between a buyer and a seller or in many cases the buyer just steps away.”

The HVCC went into effect at the beginning of May, an outgrowth of a lawsuit by New York State Attorney General Andrew Cuomo against Washington Mutual. Fannie Mae [FNM 0.64 0.02 (+3.23%) ] and Freddie Mac [FRE 0.71 0.06 (+9.23%) ] agreed not to buy any loans that didn’t comply with the code.

The HVCC forces a firewall between lenders/brokers and home appraisers. Gone are longstanding relationships between a local mortgage broker or lender and a local appraiser.

Now, lenders and brokers are forced to use appraisal management companies (ironically – or maybe not so ironically—many of which are owned by the big banks). These companies hire independent appraisers across the country and call on them to do the local appraisals.

Realtors say some of these appraisers are not only not local, they don’t even have access to the local MLS. They are doing appraisals using computer models, often incorporating distressed sales as comps, and often not even knowing that the home had extensive renovations or an addition. As a result, the appraisals are coming in far lower than the agreed-upon purchase price.

It is affecting new purchases as well as refinances.

“The new HVCC is certainly increasing processing times, raising costs for consumers, and in often cases bringing in valuations that don't appear to be correct as a result of lesser experienced appraisers from outside the area appraising properties at potentially lower valuations,” says Craig Strent of Bethesda, Maryland’s Apex Home Loans. “When that happens that throws the refinance or the purchase mortgage out of whack of course and creates fairly large problems for the financing, so we're seeing some really negative effects as a result of this HVCC.”

The point of the HVCC was to take fraud out of the appraisal process, and let’s face it, there was plenty of that. But they may be throwing out the baby with the bathwater here. Interestingly, after I discussed this on CNBC this morning (see video), we got a call from a Congressional office asking for the transcript of my report.

By: Diana Olick
CNBC Real Estate Reporter

With mortgage interest rates creeping higher again (and yes, I realize by historical standards, they’re still low, but as a housing stimulus they would need to be below 4 percent), a new idea is floating around industry associations and Capitol Hill. It’s another home buyer tax credit. The current $8000 credit for first time home buyers only expires November 30th. The new proposal is for a $15,000 tax credit for all home buyers.

A new bill from Sen. Johnny Isakson (R-GA), who used to be in the real estate business, would not only offer a bigger credit to a wider swath of potential home buyers, it would also removed the income caps ($75,000) that kept a lot of buyers out of the current credit.

It’s debatable just how much the first time home buyer tax credit juiced the spring housing market. It certainly didn’t hurt, but some say it wasn’t nearly enough, given its limitations. Even allowing borrowers to monetize the credit up front, which HUD recently announced, left a lot of earlier potential buyers out.

“Stimulating the housing market is one of the best ways Congress can help accelerate the recovery of our national economy,” said David Kittle, Chairman of the Mortgage Bankers Association in a press release. Obviously everyone, from the builders to the Realtors support the proposal.

“Due to expire at the end of November, the current $8,000 first-time home buyer tax credit has proved to be an effective policy targeted toward a specific demographic group that is showing tangible results,” chimes NAHB Chairman Joe Robson. “Enhancing this credit would help to stoke the economic engine at a key point in our recovery.”

The question is: At what cost? A letter to Sen. Isakson from the Joint Committee on Taxation provides a revenue estimate for Isakson’s bill, S.1230, the “Home Buyer Tax Credit Act of 2009.”

Assuming an enactment date of July 1, 2009, we estimate that your proposal would have the following effect on Federal fiscal year budget receipts:

I’m not arguing either way for the credit, I just think we should have our eyes wide open as this debate begins.

A new report shows foreclosure starts among the 30.4 million first-lien residential mortgages owned or guaranteed by Fannie Mae and Freddie Mac -- most of them prime loans -- jumped 63 percent during the first three months of the year, to 243,800.

The sharp increase in the number of homes entering the foreclosure process compared to the previous quarter outpaced the 20 percent increase in foreclosure prevention actions by Fannie and Freddie's 3,000 loan servicers. Those actions, including loan modifications, forbearance and repayment plans, and short sales, totaled 87,000.

Fannie Mae and Freddie Mac own or guarantee 56 percent of outstanding mortgages, and about 84 percent of them are considered prime loans. The 151,600 foreclosure starts on prime borrowers in the first quarter of 2009 represented a 260 percent increase from a year ago, while foreclosure starts on nonprime borrowers nearly doubled, to 92,200.

Completed foreclosure sales and third-party sales were also up 17 percent from the fourth quarter of 2008, to 41,800, despite a temporary suspension of foreclosure sales on owner-occupied properties in effect during parts of the quarter.

In announcing the release of the latest quarterly report on Fannie and Freddie's foreclosure prevention efforts, the Federal Housing Finance Agency emphasized a 57 percent increase in loan modifications from the fourth quarter of 2008 to the first quarter of 2009, to 37,300.

FHFA also noted that the Obama administration's Making Home Affordable loan modification and refinance programs were still in development in March, the final month covered in the report.

The percentage of loans 60 days or more past due, however, continued to climb, reaching 3.6 percent by the end of the first quarter, up from 3 percent the previous quarter and 1.5 percent a year ago. That compares with a 9.2 percent industry average, and 10.2 percent for loans backed by the Federal Housing Administration (FHA). The report said 9.7 percent of Fannie and Freddie's nonprime loans were delinquent by 60 days or more. And the delinquency rate of prime loans has more than doubled in the last year, reaching 2.5 percent.

By the end of March, 1.1 million loans owned or guaranteed by Fannie and Freddie were late by 60 days or more, a 19 percent increase from the end of 2008.

The performance of mortgages modified by the 3,000 loan servicers employed by Fannie Mae and Freddie Mac was also an area of concern. The percentage of loans current six months after modification fell from 43 percent to 37 percent.

FHFA expects that more recent loan modifications will perform better, since 83 percent of loans modifications completed in the first quarter of 2009 resulted in lower payments for borrowers, compared with 16 percent in the first quarter of 2008.

Fannie and Freddie's loan servicers also managed to boost the number of short sales by 31 percent from quarter to quarter and by 353 percent from a year ago. The number of short sales -- 8,054 -- represented less than one-tenth of foreclosure-prevention actions.

Last month, the Obama administration announced an expansion of the Making Home Affordable program to provide incentives for borrowers and loan servicers to engage in short sales and deeds-in-lieu of foreclosure.