New Appraisal Rules and Regulations
May 4, 2009
If you have not already heard, as of Friday May 1st 2009, as one industry expert put it, “the complete lending landscape just changed!” To bring that back in from a more macroscopic statement, the way that appraisal are performed for certain types of real estate has changed. Welcome to the new world “after: the introduction of the Home Valuation Code of Conduct (HVCC). The HVCC pertains to mortgage loans (originated from May 1st onward) that are intended for sale to either Fannie Mae or Freddie Mac.
SO REMIND ME AGAIN ABOUT THE HVCC?
Last week’s article went over the Good, Bad and the Ugly of the Home Valuation Code of Conduct, and before I continue I wanted to remind folks of a few things about the HVCC.
According to the Federal Housing Finance Agency (FHFA), the HVCC builds on existing Fannie Mae and Freddie Mac seller-service guidelines to “increase the reliability of appraisals” for loans sold to the both these agencies.
To make a long story short, the changes being implemented through the HVCC are really intended to protect everyone and are for the greater good (yes - “the greater good”) by setting requirements so that the individuals and organizations requesting the appraisals have no influence on the outcome of the actual appraisal itself. Thus, the HVCC:
* Prohibits lenders and 3rd parties from influencing appraisals;
* Requires lenders to ensure that borrowers get a free copy of appraisal reports at least three business days before closing;
* Allows lenders to have in-house appraisers, so long as they’re completely independent of the sales staff and their compensation does not depend on their estimates or on loan closings;
* Requires lenders to test a randomly selected 10 percent (or other statistically significant percentage) of appraisals and report any problems to Fannie Mae or Freddie Mac, which may force lenders to buy loans back from them;
* Requires lenders to report appraisal misconduct to applicable state agencies;
* Etc. and so forth.
In a nut shell, the HVCC sets guidelines to prevent real estate appraisers from being intimidated, bribed or otherwise influenced in their developing their valuation on a particular property. As you can imagine, there has been a lot of resistance on the HVCC throughout the industry; Real Estate Brokers, Agents, Lenders, Appraisers, investors, and even the end consumer are all going to be affected in one way or another.
WHAT KINDS OF PROPERTIES DOES THIS APPLY TO?
Now, as far as the types of real estate properties that this pertains to, we would need to take a closer look at what both Freddie and Fannie to say.
For Fannie, the HVCC only pertains to conventional, single-family loans and NOT to multifamily loans, or to loans insured or guaranteed by a federal agency. For Freddie, the HVCC also only pertains to single-family mortgages as well (no big surprise there).
NOW THAT I KNOW THE INTENT, WHERE CAN I GET SPECIFICS?
To start out with, a copy of the HVCC can be found on the Fannie Mae web site.
To download a copy, simply go to the following website and once you are there, then click on the link for “Home Valuation Code of Conduct”:
https://www.efanniemae.com/sf/guides/ssg/relatedsellinginfo/appcode/
Along with any new code or regulations comes the issues with interpretation of such. Specifically, exactly what does the code mean and what can (and can not) be done. To help along with that, the various agencies have put out Frequently Asked Questions on the HVCC. At the above link for Fannie Mae, you have access to not only to the 6-page code itself, but also Fannie Mae has put together a nice list of Frequently Asked Questions and a replay of a recorded Webinar on the topic.
Some of the more interesting outputs from the FAQs include:
* The Code does NOT specifically prohibit communication by a real estate agent with an appraiser;
* The Code DOES prohibit an appraiser from collecting payment for the appraisal directly from the borrower;
* The Code ONLY applies to Appraisals and does not apply to other valuation methods (i.e. automated valuation models (AVMs), broker price opinions (BPOs), tax assessments, etc.); and
* The Code prohibits mortgage brokers from ordering appraisal services, but brokers may initiate the appraisal process on a lender’s behalf in accordance with arrangements made by the lender.
Interesting to see how this all plays out, what tweaks are made over the coming months, and how this will impact not only the end user, but also anyone in the business or industry as well.
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Home Valuation Code Of Conduct: Investors Be Ready
May 1, 2009
Today marks a major change in the lending landscape and the way loans are sold to Fannie Mae & Freddie Mac…. Specifically, how they are appraised.
If you have not heard of Home Valuation Code Of Conduct (HVCC),just ask your favorite mortgage broker about it and more than likely their response will be something like:
&$#@%^&%$#^%$#@#$%^
(sorry, but can print what they really will blast you with)
In short, this change is designed to fix the evils of the past.
As always, there are good and bad sides to every change. We will explore the good, bad and ugly of this new approach but first, let’s synopsize what it is about.
WHAT IS HVCC (Short Story)
So what does the code say? Basically, it’s that the people responsible for originating mortgages can have nothing to do with the appraisal process.
In addition, the code also:
* Prohibits lenders and third parties from influencing or attempting to influence appraisals.
* Requires lenders to ensure that borrowers get a free copy of appraisal reports at least three business days before closing.
* Allows lenders to have in-house appraisers, so long as they’re completely independent of sales staff and their compensation does not depend on their estimates or on loan closings.
* Requires lenders to test a randomly selected 10 percent (or other statistically significant percentage) of appraisals and report any problems to Fannie Mae or Freddie Mac, which may force lenders to buy loans back from them.
* Requires lenders to report appraisal misconduct to applicable state agencies.
You can download a copy of the HVCC at: https://www.efanniemae.com/sf/guides/ssg/relatedsellinginfo/appcode/pdf/hvcc.pdf
WHY IS HVCC GOOD?
Let’s face it, the appraisal business has been a bit “rigged” over the last several years.
In short, only appraisers that could “get the deal done” were used on a repeated basis by mortgage brokers, realtors, and or builders. It only makes sense that this is the way the system worked. If you were a realtor, or even if you were a new home buyer, the last thing that you want is for your appraisal to come up short and the deal fall apart.
Since appraisals are somewhat subjective, the appraisers that always got called were those where the subjectivity worked out in favor of the deal.
However, many appraisers felt very pressured to make the deal work….. their future business counted on everybody walking away happy. Of course we are now seeing some of the consequences of that type of approach with our current housing and mortgage crisis.
WHY IS HVCC BAD?
Because now your purchase or sale is a crap shoot.
Why?
Simply because appraisers will be pulled out of a “blind pool”. From my personal experience, only about 20% of appraisers are good at their profession (you know, the ole 80/20 rule).
So you now have an 80% chance of a mediocre appraiser being assigned to your appraisal. Are they really capable of determining the value? I am skeptical.
In addition, most the incentives for the appraisers are now set up to appraise low….. The safe play is to come in BELOW what you may be thinking is actual value.
CONSEQUENCES
HVCC will be implemented May 1, 2009. Many people believe, myself included, that this is going to severely disrupt the home seller market, and investor market, for a period.
Everybody’s major hope is that soon, tweaks will be made into something that is workable for all in the industry.
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- Appraisers brace for industry change (appraisalnewsonline.typepad.com)
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New Fannie Mae Investor Reserve Guidelines
April 22, 2009
I have been asked recently for some clarifications on the recent changes from Fannie Mae on Reserve Requirements when purchasing Investment Properties. As you may know, Fannie Mae has repeatedly changed its guidelines on this topic. Staying on top of this information is key as a real estate investor.
Per Fannie Mae’s February 6th Announcement:
When the borrower will own one to four financed properties (including the subject property) the reserve requirements are:
* two months of reserves on the subject property if it is a second home,
* six months of reserves on the subject property if it is an investment property, and
* two months of reserves on each other financed second home or investment property.
When the borrower will own five to ten financed properties (including the subject property) the reserve requirements are:
* two months of reserves on the subject property if it is a second home,
* six months of reserves on the subject property if it is an investment property, and
* six months of reserves on each other financed second home or investment property.
Note: The reserves calculation for a financed property is based on the monthly housing expense of the financed property. All reserve requirements are based on the new definition of reserves as defined in more detail in Fannie Mae Announcement 09-02.
So just as a numerical example, let’s say you want to finance an investment property costing $100,000 that will result in payments of $1,000 per month. Then your cash requirements will be:
1. 20% Down (typically): $20,000
2. 6 Months Reserve: $ 6,000
3. Closing costs: $ 2,500 (estimated).
In this example, then lender would be looking for $28,500 in your accounts to get approval.
You can click here for your copy of the announcement, or you can get it from:
https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2009/0902.pdf
Hopefully this helps clear things up for those of you confused on the new Fannie Mae Reserve guidelines for investors.
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Fannie Mae Increases Lending Caps
March 28, 2009
To help support the needed financial recovery, Fannie Mae has announced that they are changing their recent investor cap on the total number of mortgages under the same borrower. In the later part of 2008, Fannie Mae reduced the total number of mortgages that an investor can have from 10 down to 4! This resulted in investors scrambling for higher-rate in-house programs and even higher rate private funds for investing.
Now with the issuance of Announcement 09-02 by Fannie Mae, the cap has been temporarily lifted back up to 10 properties. While still sorting to the details, for properties #5 to 10, it looks like 75% LTV with a minimum of 720 credit score and above. The requirements apply to any investment property or second home loan being delivered to Fannie Mae, regardless of whether Fannie Mae is the investor on the borrower’s other mortgages.
You can read more details on this by clicking on the below link: http://www.gozoneonline.com/FannieMae0902.pdf
Remember that most banks, even with this rule, may still limit the total number of mortgages that you have with their institution. However with this said, it greatly opens the doors back up for investors in the GO Zone trying to take advantage of the benefits before the end of this year.
Given this temporary reprieve from Fannie Mae, the timing of the remaining GO Zone benefits, and based on previous Fannie Mae changes over the past 9 months, I suggest that any serious investor who has been wanting to invest in the GO Zone do so now before the cap rules change back and while you can still find high-quality and affordable opportunities.
Fannie Mae Actually Helping With Short Sales?
March 26, 2009
You are kidding me right? A quasi-government institution actually doing something that makes sense and helping homeowners.
Realcomp II Ltd., Michigan’s largest Multiple Listing Service provider to real estate professionals, Thurdsay announced a partnership with Fannie Mae to create a pilot program for homeowners in fear of foreclosure or staring down the barrel of a short sale.
The program will help streamline the short sale process, making it easier for homeowners who are under water in their mortgages to sell, thus reducing foreclosures by allowing these homes to be sold rather than seized by a financial institution.
My personal experience is that the banks and related institutions are their own worst enemy in this foreclosure crisis. As an example, we had a 1.4 Million dollar, cash offer on the table to buy a complex in SW Florida. Even though the price was competitive, the bank never even bothered to provide any sort of reply to our WRITTEN offer.
Hopefully things are starting to change for the better.
Click Here For The Entire Story
Freddie Mac Feb investment portfolio up 34.7 pct
March 26, 2009
NEW YORK, March 25 (Reuters) - Freddie Mac (FRE.N) (FRE.P) said its investment portfolio grew by nearly 35 percent in February, after shrinking the prior two months, though late payments on loans it guarantees also continued to jump.
The government-controlled mortgage funding company said the unpaid principal balance of its mortgage-related holdings rose to $822 billion at the end of February, for an annualized 12.9 percent increase year to date.
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