Real Estate News and Commentary

November 20, 2009January 26, 2020

Real Estate Wakeup Call

If the real estate industry is waiting for a wakeup call, it may be coming in May 2010. Three events that are expected to either end or peak next May include: the Fed’s discontinued purchases of mortgage backed securities, end of home buyer credit, and expected foreclosure increases.

In a November 19th press release, the Mortgage Bankers Association (mbaa.org) reported that delinquencies on residential mortgages have increased to 9.64% for the third quarter of 2009, which is a 40 (basis) point increase from the second quarter of 2009 and a 265 (basis) point increase from the same time last year; the overall foreclosure rate is up 35 (basis) points from the third quarter of 2008. The report claims that FHA and “prime” mortgages make up the bulk of the delinquencies. MBAA Chief Economist Jay Brinkman stated in the press release that “because mortgages are paid with paychecks” increased unemployment will “drive up delinquencies and foreclosures” [increases].

As delinquencies and foreclosures are expected to peak next year, both the home buyer credit and Federal Reserve purchases of mortgage backed securities are expected to end in April 2010. What? Yes, not only is the home buyer credit is to end, Steve Cook of the Real Estate Economy Watch reported that the National Association of Realtors agreed to not ask for another extension of the home buyer credit (www.realestateeconomywatch.com/2009/11/the-last-days-of-the-homebuyer-tax-credit).

The Fed has been buying mortgaged backed securities to ease the market and keep mortgage interest rates low. The program, that began earlier this year, is expected to end as the Fed slowly eases up on the mortgaged backed securities (also reported by Steve Cook).

We are anticipating seeing if the programs to forestall a real estate disaster have done what they were supposed to do. So, we may wake up to a gentle alarm clock next spring or a trumpet blasting in our ear.

November 19, 2009October 5, 2019

Is there a duty to disclose recent low-ball appraisals?

(Home Buyers Beware)
Nothing can hurt a real estate transaction more than a home that doesn’t appraise to the contract price. In this depreciating market, I have heard many colleagues bemoan the “low-ball” appraisal. For a listing agent, a low-ball appraisal doesn’t just mean the possibility of losing a home buyer because the lender would not finance the purchase at the contract price; it’s also a dilemma of disclosing the valuation to future potential home buyers.

Although low appraisals also happen in appreciating markets, this market is unique. Along with depreciated values, the new Home Valuation Code of Conduct (HVCC) has also impacted on residential real estate appraisals and transactions. The HVCC was created out of an agreement between Fannie Mae, Freddie Mac and the Federal Housing Finance Agency to increase the integrity of residential appraisals by prohibiting lenders (or third parties) from “influencing or attempting to influence the development, result, or review of an appraisal report” (www.freddiemac.com/singlefamily/pdf/hvcc_746.pdf). The HVCC went into effect on May 1st 2009, such that Fannie Mae and Freddie Mac would no longer purchase residential mortgages with appraisals that did not adhere to the Code.

Before the HVCC was enacted, it was not uncommon for real estate agents and/or loan officers to try to influence valuations by offering alternate comparables or other pertinent information. This type of communication may have been necessary in cases that involved unique properties or where the appraiser was missing important information. However, it is also this type of communication that attempted to influence the appraisers to increase valuations!

To address the issue of appraisal influence, the HVCC requires strict rules on appraiser selection and communication; lenders and real estate agents are not allowed to hire appraisers nor are they allowed to communicate with appraiser in such a way that may influence the appraisal process (www.fhfa.gov/webfiles/277/HVCC122308.pdf).

Some critics of the HVCC complain that lenders are using third party appraisal services which hire appraisers who are unfamiliar with the neighborhood or worse- hiring appraisers from out of state. A colleague, relaying a recent experience, told me that a low-ball appraisal that was provided for a client may have been due to one appraiser coming to a home in Bethesda for the “inspection,” while another appraiser from Texas completed the appraisal for a national lender.

Low-ball appraisals do not kill all transactions. In fact, many buyers and sellers come to agreement on a new price and settle without any other obstacle. However, there are transactions where the buyer and seller cannot agree on new price and the home is back on the market. This is where the listing agent has to decide what information to disclose about the previous appraisal. Although Article 1 of the Code of Ethics and Standards of Practice of the National Association of Realtors (NAR.org) pledges Realtors “to protect and promote the interests of their clients,” it also obligates Realtors to treating all parties honestly. Additionally, Article 2 of the code of Ethics prohibits Realtors from misrepresenting or concealing pertinent facts relating to a property or transaction.

In the current market environment, low-ball appraisals may be an increasing trend. Revealing or not revealing these low valuations to future potential home buyers may also become a source of future disputes.

This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of November 16, 2009. Copyright © 2009 Dan Krell

November 12, 2009July 25, 2019

It’s all about the perception of value (or how to possibly solve the perception of devaluation)

A recent Move.com survey reported that only 5.4% of consumers surveyed indicated they intend to purchase a home in the next 12 months. Additionally, the survey suggested that not enough is being done to stabilize the real estate market (nar.realtor).

The survey underlines a key issue that has bubbled throughout the foreclosure crisis that has kept many home buyers on the sidelines- the home buyer sentiment “that home values will continue to fall as the number of distressed properties continues to increase” has diminished the value attributed to home ownership.

Fannie Mae’s new “Deed for Lease” program is a step in the right direction as a way to forestall distressed properties from entering the market (which may be one cause of lowering home values). Certainly, any further and immediate action is welcome to reduce future distressed property inventory. Maybe it’s time to re-examine the property disposition process that attempts to sell distressed properties piecemeal, only to languish on the market (sometimes for months).

Rather than attempting to sell foreclosures piecemeal through the slow and methodical process that currently exists, why not consider the bulk foreclosure sale process for quick dispositions to allow those with resources transform distressed properties into neighborhood showcases? Rhonda Rundle wrote about the pros and cons of bulk REOs in her Wall Street Journal piece “Online Marketplaces Vie to Offer Bulk Sales of Foreclosed Homes” posted November 26, 2008 (http://online.wsj.com/article/SB122765299132257847.html). Rather than being a “market of last resort,” as Ms. Rundle reported, lenders and servicers should consider the potential of bulk REOs as a primary market for rapid property disposition- and possibly assist in home value stabilization.

November 10, 2009October 5, 2019

A two pronged stopgap for real estate

Last week was indeed historic for events in Washington, DC. However, two important developments that directly affect real estate should be highlighted. You may have already heard that the home buyer tax credit was extended and expanded. However, you may not have heard that Fannie Mae announced another program to assist home owners facing foreclosure.

On Friday November 6th, the President signed HR 3548 into law which extends the home buyer tax credit through next year; home buyers must have a ratified contract for a principle residence (up to a purchase price of $800,000) by April 30th 2010 and close by June 30th 2010. A tax credit up to $8,000 will continue for first time home buyers who purchase their home before the sunset date; other home buyers who purchase their home before the deadline may be eligible to receive a tax credit up to $6,500. Home buyer income limits have also been increased to $125,000 for individuals and $225,000 for those filing joint returns (prorated amounts may be available for those who earn more than the stated limits). For additional qualifying information, please refer to the guidelines posted by the IRS (www.irs.gov/newsroom/article/0,,id=206293,00.html).

Additional good news came last week from the mortgage giant Fannie Mae, which issued a press release announcing the “Deed for lease” program. The “Deed for Lease” program is designed to assist struggling home owners to stay in their homes by allowing them to pay “market” rent. The program requires home owners facing foreclosure to give the home to their lender via a “deed in lieu of foreclosure” (also known as a friendly foreclosure).

The rental period for the “Deed for lease” program may be up to twelve months. The program may also be available for investment properties that are currently occupied by tenants. A rental application fee of $75 per unit is required. If the home is occupied by tenants who want to stay in the home, those tenants must cooperate with the property manager through the process. Any disruption of the process may result in disqualification from the program. Once initiated, the home owner may not be eligible for the ”Cash for Keys” program (a relocation assistance program for those who are forced to leave their homes). Eligibility requirements and further assistance can be obtained from your Fannie Mae servicer (www.efanniemae.com/sf/servicing/d4l/).

This two prong approach may stem further eroding residential real estate values, which may be due to foreclosures, by increasing demand while reducing inventory. Providing incentives to all home buyers will add additional home buying activity, while allowing home owners facing foreclosure stay in their homes may decrease the negative events associated with foreclosure, such as: lowering the number of displaced home owners who are forced to move, reducing the number of vacant homes; and decreasing the inventory of distressed properties that have the potential to lower neighborhood values.

Alone, programs such as these have drawn criticism pointing out statistics indicating that the money is wasted. However, increasing demand through incentives, while decreasing distressed property inventory may be the combination needed to hold off further eroding home values while strengthening the overall economy. Time will tell if the one-two punch is successful and if there is a need for further expansion of one or both of sides of the equation.

November 9, 2009October 5, 2019

Don’t be pushed into a short sale

A tale of three Home Owners

The real estate market downturn is becoming reality for many home owners as they realize their home’s value is less than their mortgage balance. Not all home owners, who currently have negative equity, are behind on their mortgages or need to sell at all. If you feel the need to sell or leave your home, weigh all your options by getting all the facts.

Consider these three short sale scenarios from three real home owners; after consulting qualified professionals, including attorneys, Realtors, and housing counselors, they chose and had different outcomes. The fist home owner decided that she needed to relocate to another state. Although she was not late on her mortgage payment, she quickly realized she was in a pickle because she owed more than the amount she could net after a sale. Her Realtor recommended that she consult an attorney to discuss other available options other than a short sale. After her consultation, she decided that the best move was not a short sale but to file a Chapter 7 bankruptcy and get a fresh start in her new home state.

The second home owner was divorcing and (like the first home owner) was unaware that the market had changed such that they were in a negative equity position. After consulting their attorneys, they moved forward to sell their home through a short sale. Since there were two mortgages on the home, both lenders needed to approve the short sale. The first lender agreed to the short sale, however the second lender did not. To make this long story short, this seller filed a Chapter 7 bankruptcy.

The third home owner was also divorcing and was three months behind on his mortgage. To make it easy for himself, he tried to have his lender accept a “deed in lieu of foreclosure” (sometimes called a friendly foreclosure). He consulted his attorney after his lender refused the “deed in lieu,“ and decided to move forward with a short sale. His lender was motivated and the short sale was quick and successful.

Many real estate agents are soliciting home owners to sell their home as a short sale. Unfortunately, not all of these agents are presenting all the facts and alternatives. Some homeowners may find that they may not need to sell at all; among their choices are attempting a mortgage modification or a bankruptcy filing.

Don’t allow a real estate agent push you towards a short sale without considering all of your options; consult an attorney and a housing counselor. Everyone’s needs and situations are different, it is important to consider all aspects and impacts of your decision. Even if you have a security clearance, consult your attorney to understand what and how derogatory credit items may affect your clearance and employment.

Be wary of solicitations to help you in your time of need, including those by “foreclosure consultants.” Foreclosure consultants (which may include real estate agents soliciting you if you are in foreclosure) must follow local and state consumer protection laws. Don’t be fooled by an “expert certification” given to professionals after attending a seminar or online course. If after considering you options, you decide that a short sale is appropriate for your situation – seek a qualified and experienced Realtor.