Las Vegas real estate, mortgage, appraisal blog

In a written statement in a hearing before the Committee on Financial Services Subcommittee on Housing and Community Opportunity in the United States House of Representatives, Margaret Burns Director, Office of Single Family Program Development for HUD had this to say about homeowner downpayment assistance programs:

As you may know from previous public statements and testimony offered by the FHA Commissioner, our agency has been concerned with seller-funded downpayment assistance for some time now. While well intended, the programs have had a significant negative impact on FHA's business for the last several years. Loans made to borrowers who rely on these types of seller-funded gifts perform very poorly. The foreclosure rates on these loans are more than twice those of all other home purchase loans insured by FHA. Moreover, FHA experiences higher loss rates from the sale of the properties associated with these particular foreclosures, a reflection of the overvaluation that occurs with these programs. The higher foreclosure rates represent a financial burden for FHA and taxpayers, but of greater concern, they hurt the families who lose their homes and the neighborhoods in which those homes are located.

The core problem with these programs is not that the borrowers they serve are riskier or less credit-worthy; it's that the programs disrupt the natural negotiations between buyers and sellers in a way that results in inflated sales prices and thus higher mortgage amounts. Seller-funded downpayment assistance programs flourish in weak real estate markets. In weak markets, low buyer demand means that sellers are less likely to get full asking price for their homes and are therefore willing to participate in programs that will help them sell for a higher price. As such, the property overvaluation associated with seller-funded gift programs occurs in markets that are least able to adjust to and accommodate pricing variations.

For example, in fiscal year 2006, more than 50 percent of FHA's purchase mortgage business in both Ohio and Indiana was for borrowers who relied on nonprofit seller-funded gifts. In these states, home values have been stagnant or declining. In soft housing markets, borrowers with no or negative equity who face any kind of financial hardship have fewer options to recover and can slip into foreclosure fairly quickly, despite the best efforts of FHA's loss mitigation programs. High foreclosure rates in these communities contribute to additional deterioration in home values and a vicious cycle of property depreciation.

Burns went on to discuss studies that supported her stand and mentioned the programs the FHA has initiated to help buyers purchase homes.

FHA sought legislative authority to eliminate its own 3 percent cash investment requirement: to offer cash-poor, but creditworthy, borrowers a safer, more affordable alternative to the seller-funded gift programs. It was our view that a modernized FHA would reduce borrowers' reliance on seller-funded gift programs, an outcome that would be good for borrowers and taxpayers. Because congressional efforts have yet to result in FHA being permitted to offer better and more flexible financing options, we determined it was time for our agency to stop recognizing this particular type of assistance.

As you have heard Commissioner Montgomery state many times, FHA financing is the most consumer friendly on the market today, helping families access prime rate mortgages. FHA financing has none of the harmful features that are common in the subprime market, features that have been the subject of much congressional discussion and debate. FHA does not permit prepayment penalties or negative amortization; FHA requires lenders to escrow for taxes and insurance; FHA underwriting ensures the borrowers' capacity to repay meets a suitably high threshold; and FHA requires evidence of a borrower's income and employment. In essence, FHA makes it possible for first-time homebuyers to obtain home financing that is safe and fair and affordable.

That is our objective at FHA - to help borrowers who otherwise wouldn't qualify for prime rate financing. We want these families to receive the tremendous protections offered by FHA, both through FHA's underwriting and in the form of our successful loss mitigation program. And we continue to work with this Committee to enact needed reforms that would help our traditional borrowers, such as risk-based pricing and "Zero Down" financing.

But now, we find ourselves in a position where we can no longer sit back and wait for that alternative. If we did nothing, some would appropriately question FHA's capacity to manage risk and FHA's own data shows that the poor performance of the loans to borrowers using seller-funded gifts must be addressed as soon as possible.

It seems that her statement has fallen on deaf ears, however, as a recent post in a New Jersey news source says that a compromise to keep downpayment assistance is being pursued diligently.

Chairman of the House Financial Services Committee, Barney Frank, has discussed publicly the fact that he has negotiated an agreement with HUD Secretary Steve Preston that will provide for the continuation of privately funded down-payment assistance.

The agreement allows HUD to impose risk-based pricing on downpayment assistance transactions which provides Secretary Preston the fiscal protection he seeks for the FHA insurance fund.

According to an Inman News article published Tuesday, Chairman Frank is quoted as saying "The FHA loved the ban on down-payment assistance (but) hated the ban on risk-based pricing," Frank said at Saturday's hearing. "That seemed to me to offer an opportunity. So (HR 6694) will replace both bans with middle ground -- and it will pass the House, I can guarantee you. What you want to do now obviously is talk to your senators. We think it will go through there -- it has the approval now of the Secretary of HUD."

I did a little digging after hearing about WaMu being taken over by the FDIC and then bought by J.P. Morgan. Washington Mutual (or WaMu), in 2001, announced that they would be using AVMs instead of appraisals and for many that was the turn towards failure. An article on Access My Library from Origination News dated August 1, 2001 went a little further into it.

Washington Mutual Home Loans & Insurance Services Group has announced an initiative to integrate automated delivery of real estate appraisal data into its Optis mortgage origination platform.

Called OptisValue, the new system is scheduled to be deployed in third quarter 2001 to streamline the appraisal process and cut costs through to provide electronic delivery of appraisal reports. OptisValue incorporates FNC Inc.'s Collateral Management System (CMS) to support OptisValue. The system is slated to offer 24/7 access to information and real-time status of ordered appraisal services.

Washington Mutual-approved appraisers will be required to use Appraisal Institute (AI) Ready software and to use FNC Inc.'s Appraisalport.com website to electronically receive assignments and submit completed appraisals.

"Our new real estate appraisal system will help support WaMu's substantial loan production and will contribute to the efficiencies delivered by Optis," said Stacey Arens, executive vice president of operations for the Home Loans & Insurance Services Group at Washington Mutual. "The OptisValue system supports our goal to enable closings in three to five days. With the use of AI Ready software, the system will create significant cost savings for Washington Mutual and ultimately for our customers."

AI Ready software is currently offered by Day One, a division of Appraisal.com Inc., Buffalo, N.Y. "I see this as a very smart action on Washington Mutual's part," said Appraisal.com president and CEO Mark Yellen. "Today 90% of lenders are still receiving appraisals on paper, and WaMu's pro- active stance is an important step toward industry-wide acceptance of electronic delivery. Access to a common pool of data is a solution that is going to benefit everyone."

In a related announcement, AIRD Inc. (www.airdport.com) announced that Appraisal Partner Inc. (API) has incorporated the Open Appraisal Document Interface (OADI) for its forms software products. The interface allows forms companies to implement the Appraisal Institute's Residential Data Storage and Transmission Standard.

AIRD, a joint venture between FNC and the Appraisal Institute, is offered as the first XML-based Internet-accessible, nonproprietary national database of residential physical property data based on factual information submitted by appraisers.

Software conforming to the standard bears the logo "Appraisal Institute Ready" and allows banks and their vendors to transmit and receive data to and from other participating software, as well as AIRD, without re-keying.

"Through the standard and through the Appraisal Institute Ready initiative, API's clients will be able to deliver appraisals and retrieve information easily online and thus will be able to work more efficiently," said Ann Spitzley, president of AIRD Inc.

On May 4, 2005 Andrew LaPlante told the Federal Reserve that appraisals were unnecessary for every loan and that the likelihood of failure for those loans was minimal.

The New York Times recently discussed the pros and cons of the bailout bill that has been splashed all over the front pages of newspapers and home pages of news sites. Although many enduring mortgage woes are hoping that this bailout will help them to keep their homes and keep banks from falling under the wheel of the "mortgage crisis" it is also raising fears that the government is biting off more than it can chew.

Some question the prudence of adding to the nation’s overall debt at a time when the Treasury relies on the largess of foreigners to cover the bills. Even so, there is wide agreement that a broad intervention like the one Treasury is proposing is necessary.

“It goes a long way; it ameliorates it very substantially,” said Alan S. Blinder, an economist at Princeton and a former vice chairman of the board of governors at the Federal Reserve, who has said for months that the government must step in forcefully to buy mortgage-linked investments.

“We’re deep into Alice in Wonderland’s rabbit hole,” Mr. Blinder said.

But significant skepticism confronts the plan. Under a proposal circulating Saturday, the Treasury could spend as much as $700 billion to buy mortgage-linked investments, then sell what it can as it works out the messy details of the loans. But no one really knows what this cosmically complex web of finance will be worth, making the final price tag for the taxpayer unknowable. One may just as well try to predict the weather three years from Tuesday.

It seems as though many have forgotten exactly what has caused this crisis. With rumors about banks and mortgage companies and doomsayers claiming the end it is sometimes hard to recall just when this started and how.

“The risk of ending up like Japan, with 10 years of stagnation, is now much lessened,” said Nouriel Roubini, an economist at the Stern School of Business at New York University. “The recession train has left the station, but it’s going to be 18 months instead of five years.”

If the plan works, it will attack the central cause of American economic distress: the continued plunge in housing prices. If banks resumed lending more liberally, mortgages would become more readily available. That would give more people the wherewithal to buy homes, lifting housing prices or at least preventing them from falling further. This would prevent more mortgage-linked investments from going bad, further easing the strain on banks. As a result, the current downward spiral would end and start heading up.

“It’s easy to forget amid all the fancy stuff — credit derivatives, swaps — that the root cause of all this is declining house prices,” Mr. Blinder said. “If you can reverse that, then people start coming out of their foxholes and start putting their money in places they have been too afraid to put it.