Next housing crisis and appraisals

next housing crisisAre government agencies setting up the next housing crisis?  A November 20th proposal from the FDIC, the Fed, and the Office of the Comptroller of the Currency, has some consumer advocates suggesting just that.  The joint proposal from these agencies would have the threshold for a (1-4 unit) residential mortgage appraisal increased from $250,000 to $400,000.  This means that an appraisal would not be necessary for homes valued less than $400,000.  However, this rule would not apply to mortgages insured or guaranteed by federal agencies, such as FHA or VA mortgages.

Contrary to causing the next housing crisis, the rationale given for the appraisal rule change is to reduce mortgage processing delays.  The change is also supposed to reduce costs to both financial institutions and consumers.  The proposal states:

The agencies believe that the proposed increase to the appraisal threshold for residential real estate transactions would reduce burden in a manner that is consistent with federal public policy interests in real estate-related transactions and the safety and soundness of regulated institutions.”

However, the Appraisal Institute ( is in strong disagreement.  AI president James L. Murrett, MAI, SRA stated in a press release that the rule change could potentially harm consumers by undermining “crucial risk mitigation services.”  Murrett commented,

The Appraisal Institute anticipates that [the increase] will result in a return to the loan production-driven environment seen during the leadup to the financial crisis, where appraisal and risk management were thrust aside to make more – not better – loans. Apparently, the FDIC has learned nothing from that experience.

The Appraisal Institute is not alone in rejecting the rule change for residential mortgages, as opposition is being voiced from various consumer organizations.  But the proposal should not have been a surprise.  Changing the appraisal thresholds, which has not been adjusted since 1994, has been in the works for several years.  And rumor of an imminent rule change was reported in January by Patrick Rucker for Reuters (U.S. regulators ready to ease check on property values: sources;; January 28, 2018).  Mortgage Bankers Association supported a threshold increase because of appraiser shortages, especially in rural areas.  However, consumer advocates are concerned of triggering a new housing crisis because improperly inflated home values contributed to the last crisis.

Interestingly, although this appraisal rule was considered earlier this year, a threshold change was only made for commercial mortgages.  The final rule dated April 9th raised the threshold for commercial appraisals from $250,000 to $500,000.

Some industry associations, such as the National Association of Realtors, have yet to comment on the recent proposal to increase the residential appraisal threshold.  However, the NAR did issue a statement April 5th supporting the commercial appraisal threshold increase.

Curiously, NAR’s recent support for increasing the commercial appraisal threshold is counter to their 2016 statement in favor of maintaining a $250,000 threshold.  The 2016 letter sent to the Federal Financial Institutions Examination Council stated:

“NAR believes increasing the appraisal threshold levels would undermine the health of the real estate lending industry as a whole. As NAR states in its Responsible Valuation Policy, a trustworthy valuation of real property ensures the real property value is sufficient to collateralize the mortgage, protect the mortgagor, allow secondary markets to have confidence in the mortgage products and mortgage backed securities, and build public trust in the real estate profession.

It remains to be seen if NAR’s position on “building trust in the real estate profession” will completely change to also support an increased residential appraisal threshold.  Or if not requiring appraisals for homes under $400,000 will cause the next housing crisis.

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By Dan Krell. Copyright © 2018.

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Five years ago – was real estate to blame for financial crisis

Real Estate

Five years ago this week Lehman Brothers filed for bankruptcy and almost immediately initiated the financial crisis. What followed in the wake of the Lehman Brothers collapse was a domino effect of financial sector failures which resulted in: a number of bailouts and government takeovers of failing entities; finger pointing and blame for the foreclosure and financial crises; and a number of laws to address the issues that are thought to have contributed to the crisis.

In retrospect, the financial crisis may have been circuitously the result of the foreclosure crisis, which was entering its second year. At the end of 2006, the real estate market was already seeing a major shift from the record breaking seller’s market, to a market that saw inventory climb to record highs. At that time I wrote about how nationwide foreclosures had increased 27%, and how economists were expecting existing home sales to continue at the same levels into 200, which was to initiate a housing recovery.

By the spring of 2007, the experts’ opinion of a short lived foreclosure crisis was not to be realized; and the blame game for the foreclosure crisis was in full swing. Trying to make sense of the foreclosure crisis, almost daily media reports of inflated appraisals and misrepresentation of mortgage terms were popular. At that time there was no way to pinpoint one source for the crisis. While the foreclosure crisis was in full swing, we did not have the perspective to understand all the participants and components that contributed to the resulting Great Recession.

Testimony to the Financial Crisis Inquiry Commission in 2010 included descriptions of the CDO (collateralized debt obligation) market. Financial brokers packaged mortgages into CDOs and sold them worldwide; the returns for these CDOs were so good that the demand was seemingly insatiable. As the demand for CDOs increased, the number of mortgages that were needed also increased. To meet the increasing demand of mortgage production, the temptation to bend the rules and lend to almost anyone seemed to be at the heart of this piece to the crisis; and many of those mortgages were subsequently foreclosed. The fraud seemed to reach in other areas too, including financial rating agencies that graded subprime CDOs as “AAA” to make them more appealing.

To improve accountability and transparency in the financial system, to protect consumers from abusive financial services practices, and to end “too big to fail,” the landmark Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted. The broad and wide sweeping Dodd-Frank legislation created the Consumer Financial Protection Bureau and the idea of the Qualified Residential Mortgage. Although the legislation has been widely acclaimed; there are many who remain critical of the legislation, saying that the markets could be set up for the next crisis.

Only in retrospect we can begin to understand the complexity of the dynamics which brought about the almost collapse of the financial sector through the mortgage markets. And while there have been a number of hearings, books, working papers, and dissertations about the causes and effects of the foreclosure and financial crises, we still seek to condense complex issues into a digestible statement. If a movie is produced about the financial crisis, the slugline might be: “Financial crisis that was a result of fraud that took advantage of a hot real estate market and easy money.”

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By Dan Krell
Copyright © 2013

Disclaimer.  This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice.  Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction.  Using this article without permission is a violation of copyright laws.

Mortgage workout or workover?

by Dan Krell

Earlier in December, a new mortgage relief program was announced as the Bush-Paulson Mortgage Plan. The plan, although not yet approved nor agreed to by all parties involved, is intended to help those home owners who have sub-prime mortgages with interest rates that will adjust significantly higher. Proposed details, as revealed in a December 5th, 2007 Financial Times article, include a five year interest rate freeze for sub-prime adjustable rate mortgages that were dated between 2005-2007 and whose rates are to increase between 2008-2010. Lender participation will be voluntary. Additional borrower qualifications include having less than three percent equity in their home, not being more than sixty days behind on their mortgage payment, as well as demonstrating an inability to afford any mortgage increase (

Many Wall Street investors have criticized any workout plan as excessive government intervention in a market that is already correcting itself. Some in the industry have described such intervention as delaying the inevitable for those in foreclosure, explaining that many home owners who can not afford a rate increase now would possibly not be able to afford a delayed (five year) rate increase. Other critics include self described “responsible“ home owners who feel they work hard to maintain their credit and pay their mortgage timely; they claim that any government intervention to help those in foreclosure sends the wrong message.

Others, including Presidential candidates, have criticized the President for not doing enough to help those home owners already in foreclosure. For example, Senator Hillary Clinton (as posted on her website criticized President Bush’s plan and proposed an alternative plan that includes immediate foreclosure moratoriums and across the board rate freezes. Although well intentioned, many proposed alternatives also have market and socio-economic consequences.

Unfortunately, many home owners who are facing foreclosure don’t know that a workout plan (know as a “loan modification”) may already be possible with their present lender. Of course the home owner must request it. Additionally, the proposed workout must make sense and the home owner must demonstrate a need as well as the ability to afford the modified payments. In many cases, lenders would rather work with financially troubled borrowers than foreclose; the foreclosure process is costly – for both the lender as well as the borrower.

The key to initiating a workout plan is for the home owner to communicate with their lender. Among the many reasons why home owners facing foreclosure do not communicate with their lender include lack of information of their options, misinformed of their options, and psychological stress (including apathy and feelings of hopelessness). The latter being the most prevalent because of the psycho-social complexity, which include the events that brought the home owner to their present financial problem as well as the time and effort involved in attempting to resolve any mortgage issues.

In an effort to assist home owners who are presently facing or at risk for foreclosure, Treasury Secretary Paulson and Housing Secretary Jackson created the Hope Now Alliance as a step in President Bush’s initiative to help American families keep their home. The Hope Now Alliance was created to facilitate communication between borrowers, lenders and housing counselors. For more information on loan work outs you can visit or

This article 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 December 24, 2007. Copyright © 2007 Dan Krell.