Laxer Restrictions? Not Again!

Brian L. Trotrier

Brian L. Trotrier

Executive Vice President and Chief Operating Officer at FREA
A former practicing attorney with more than 30 years experience in real estate and risk management. The Foundation of Real Estate Associates (FREA) has specialized in providing Errors & Omissions Insurance to appraisers and home inspectors since 1993. As a membership organization with over 6,000 members, FREA is one of the largest and most well respected professional associations in the country, providing E&O Insurance for appraisers and inspectors as well as educational opportunities, member benefits, and legal support.
Brian L. Trotrier

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Laxer Restrictions - Residential Real Estate Industry & its lobbying groups pushing for looser restrictions on real estate lending - Imagecredit Flickr - Shawn Rossi

Skinning appraisers alive and blaming them for everything except the disappearance of Jimmy Hoffa and now pushing for looser restrictions!

With the overall economy improving and with unemployment dropping back to more manageable levels, it was only a matter of time before the residential real estate industry (builders, bankers, mortgage lenders, Fannie Mae, Freddie Mac and Wall Street) and its lobbying groups and trade associations popped up and asked for Congress and federal regulators to reduce or end many of the restrictions placed on the industry after it gorged itself on the U.S. economy and left the table with only crumbs and broken dishes for the rest of us. That time is now and no industry is more skillful at using confusing or even meaningless statistics sprinkled with patriotism to chip away at even the staunchest opposition.

Here are just a few examples of how this massive PR and lobbying machine works:

  • Last October, the Mortgage Bankers Association (MBA) printed an article pointing out that the U.S. ranks 34th in the world in homeownership and urging the new housing policy team to work diligently to “correct” the dysfunctional system that allowed the U.S. to fall behind such powerhouses as Bulgaria, Slovenia, and (gasp) Latvia. The real estate industry applauded loudly and was simply ecstatic shortly thereafter when some mortgage lending programs dropped the down payment requirement to 3%.
  • In December, the American Enterprise Institute (AEI) published a white paper on the National Mortgage Risk Index and how it works. One of the more interesting points in the paper was when the definition of first-time homebuyer was explained. Not surprisingly, this phrase no longer means someone who has never owned a home before. According to Freddie Mac, a first-time buyer is someone who is an individual (or one of a group of individuals) who is purchasing a home, plans to use it as a primary residence, and has had no ownership interest in a residential property for the past three years.
  • Then in February of this year, the MBA published an article titled “The Wealth Builder Home Loan” wherein a “new” loan concept created by (surprise) the AEI’s International Center on Housing Risk was dissected and discussed. This allegedly “new” loan concept was what we have always called a 15-year self-amortizing loan. However, the AEI has used statistical evidence to re-purpose the 15-year loan to give the appearance this is a new concept. Specifically, the AEI pointed out: (a) default rates are lower with 15-year fully amortized loans; and (b) 15-year loans pay down more principal in the early years, thus reducing the chance of a loss if a default occurs.
  • In April, the National Association of Home Builders (NAHB) jumped on the bandwagon, but with a somewhat odd twist. The NAHB is urging Congress and regulatory officials to address the “improper appraisal practices, shortage of experienced appraisers, and inadequate oversight of the appraisal system…” Apparently the NAHB has been asleep for the past 7+ years when the rest of the real estate industry was skinning appraisers alive and blaming them for everything except the disappearance of Jimmy Hoffa.
  • Recently, the NAHB fired another salvo aimed at mortgage lenders and appraisers to get Congress to require both groups to accurately account for the savings in operating costs that come from using green features like energy efficient construction materials and methods. This makes sense when looking at the borrower’s ability to repay a loan – if you pay lower utility costs you have more disposable income to use to pay a larger mortgage. However, it’s on the valuation issue that this premise falls apart. It may take another generation or two before there will be enough sale data to prove that a buyer will agree to pay incrementally more for a home with solar panels and drought resistant landscaping than for one without.

According to Freddie Mac, a first-time buyer is someone who is purchasing a home & planning to use it as a primary residence, and has had no ownership interest in a residential property for the past three years.Since we’ve already entered a new Presidential election cycle and anyone running for any federal office will need money and lots of it, it will be interesting to see how far the candidates and political parties go to appease the real estate industry. For the sake of the American people, let’s hope nobody forgets what happened in 2007-2008. It would be a shame if we ever have to repeat that debacle.

For a more in-depth look at the real estate crisis, what caused it, and why it could happen again, please consider reading Hidden in Plain Sight by Peter J. Wallison. Here is a link to a short Q&A with Peter about the book.

https://www.aei.org/publication/hidden-plain-sight-qa-peter-wallison-2008-financial-crisis-might-happen/

Brian L. Trotrier

Brian L. Trotrier

A former practicing attorney with more than 30 years experience in real estate and risk management. The Foundation of Real Estate Associates (FREA) has specialized in providing Errors & Omissions Insurance to appraisers and home inspectors since 1993. As a membership organization with over 6,000 members, FREA is one of the largest and most well respected professional associations in the country, providing E&O Insurance for appraisers and inspectors as well as educational opportunities, member benefits, and legal support.

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8 Responses

  1. Koma says:

    Brian,

    Thanks for the information. Looks like we’re going back on that roller coaster…bottom out ….bubble…bust…bottom out…bubble…bust.. History of this market is always repeating, if just in differing ways.

    Koma

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  2. Sabbie says:

    Our homeownership rate is so low because the same group of stinkers who caused the crash in 2008 turned around and bought those houses back at their very own sidewalk sale, and are now renting them out at a much higher rate to the buyers who were displaced.  High five bro!

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  3. The headline is respectfully unnecessarily alarmist. Removing the MBAs hyperbole, they were still right. Before the crash a buyer could purchase a house with an FHA (insured) loan and a FICO as low as 580. It fulfilled the long standing mission of HUD to make affordable housing available to as many as possible. It also had provisions for explanatory responses to comparatively minor credit blips or negatives. It allowed people that had learned from past mistakes, to reestablish themselves. It ALSO allowed speculators to LIE about owner occupancy and to purchase investment properties for as little as 3% down and in some cases not even that.

    AFTER the crash, it took nearly a 700 FICO to get the same loan; and nearly ALL the more empathetic provisions were eliminated. But it did not stop the speculative investors willing to LIE.

    The MBA was right. Laxer polices WERE and ARE needed. The trick is in only approving those that make sense and that worked well for decades. Negative amortization (in any form) financing is doomed to foreclosure when used by lower income, less sophisticated borrowers. Unrealistic graduated payment mortgages for ease of qualifying can be just as dangerous.

    Conventional loans of 3% down only duplicates the efforts of HUD/FHA & VA but without the obligatory oversights. THESE are a mistake. Unless these new untested critters ALSO require the specific lenders to share in the risks by maintaining adequate reserves to repurchase non performing loans, and prohibiting bundling of individual mortgages in bulk securities in a manner that does not permit servicers to renegotiate individual loans BEFORE they can be defaulted. Such loans should NOT be backed by the United States Government & Taxpayers. I firmly believe in free enterprise. Let the other “free enterprise” investors ALSO take 100% of the risk for these type loans. They are free to profit OR free to fail without involving the rest of us.

    How are 15 (or 17 year) loans a heightened risk? People that can afford such shorter term, traditionally lower rate loans have better cash flow, so of course their default rate is lower! Its a non issue unless the author(s) is upset that the type of financing is being rebranded as ‘new’. Borrowers can achieve the same or similar benefits to a 17+- year loan just by making an extra payment a year (4 week ‘monthly’ cycle payments versus 12 months a year). Loan fully amortizes in about 17 years.

    I am also a (new) Realtor(r); former agent, and former new tract home sales manager. My experience is:

    [1] The real estate market works.

    [2] New home builders are akin to car salesman. While Realtors(r) all over the country have either grown  or been forced to become increasingly ethical, new home hucksters continue to hustle housing ‘packages’ with upgrades costing far more than they contribute to demonstrable market value.

    [3] They also have never bothered to learn (or apply) what makes a comparable sale valid. They expect US to change OUR definitions of market value and techniques so that THEIR costs including profits are the metric used. They are WRONG in this expectation. I personally will not vote for ANY politician that caves to their more unreasonable pressures. Also, what developer does not already HAVE price pre approval or pre sale appraisals at their base asking prices?

    [4] Appraisers DO also bring a lot down on themselves. They do cursory, half assed, low fee  work to begin with and THEN when they are asked to reconsider based on changed deals, they get on our high horses and refuse to approach it with an open mind. Sometimes they/we are prohibited from doing so by the very regulations NAHB and others imposed on us. There is room to seriously consider NAHBs legitimate concerns without undermining appraisal integrity or commencing a new witch-hunt basket full of regulations further micro managing appraisers.

    [5] New construction is also usually complex appraisal. It should not be done by basic licensees or even certified appraisers that do not have adequate personal experience in appraising new construction. Hint-if you do not know what a C of O is, you are not qualified to do the appraisal!  NAHB on the other hand has to pay MUCH more for appraisals involving new construction. If they are upset because they are getting ‘bad’ appraisals, then START PAYING REASONABLE FEES for them, sufficient to attract GOOD appraisers-rather than bottom of the barrel or inexperienced people forced to try to do two or more a day just to survive!

    [6] HVCC destroyed professional working relationships. Appraiser Independence regulations  need to be reconsidered. I never had trouble telling a client “no” to a value or pressure, BUT I also LISTENED to what they were trying to tell me before reaching a conclusion of “yes” or “no” as to whether it favorably affected an appraisal. When a judge appoints an attorney to act as trustee; it is done so with full expectation that they will act honorably and honestly. When they do not, they are punished. Appraisers should be no different. Stop the micro management; hold me accountable to basic standards of competency and integrity but then get the hell out of the way! I am a General Certified Appraiser with 29 years appraisal experience and 6 years real estate sales experience before that dating back to 1971. I don’t need self serving poiticos like Barney Frank or Chris Dodd to tell me how real estate markets work or SHOULD be made to work!

    [7] NAHB is ‘right’ in urging correction to problems. The pitfall and danger lies in what specific solutions are imposed. I submit the ONLY new regulations needed are: (a) field review 10% of all appraisals, (b) Require WRITTEN, legibly signed requests for value reconsideration BEFORE ANY complaint may be sent to a state agency. Too often the reasons for referrals are changed AFTER the appraisers says “no” and then they are punished for some relatively benign technical “offense”. (c) REMOVE the requirement from Dodd Frank for lenders to turn in “bad appraisals”. They SHOP for a value; when they don’t get it, they do an in house “review” finding ’cause’ to order a new appraisal and then to cover up their appraisal shopping, they turn in the original appraiser to hide or ‘justify’ their shopping around, under the guise that ‘they had to’. I am speaking DIRECTLY to RELS and WELLS FARGO here, and could / would happily cite specific instances that we had to address in the Appraisers Guild, if asked. Try me.

    [8] NAHB is 100% RIGHT in their concerns over energy efficiency items. Again, it is a cost and competency issue. I’ve taken Sandy Adomatis’ (Appraisal Institute Green Courses). Don’t expect me to do any appraisals involving significant green features if you wont pay me for the extra time it takes to do them right! That means when I accept a $450 sfr fee for a non complex, FNMA loan limit and THEN find out it has owned solar panels  I go back for a fee increase to $750+ MINIMUM. Don’t expect my level of specialty appraising expertise for $450! The item MIGHT add $20,000 to $30,000 to market value!

    Add 50% to 100% of what I SHOULD ALREADY BE GETTING as a minimum energy audit fee.

    Your alternative? Keep using unqualified people to do them! When I took the courses in August 2014, there were only 42 people in my entire state (California) that had passed the courses and been included in the AI Green Registry. Sandy was right. The rest were simply stating “No market data found to demonstrate a premium for solar energy power was found-therefore no adjustment was made.” Appraisers were, and still are side stepping the issue in a non USPAP compliant manner.

    Appraisers definitely need to either start standing up for themselves; or ACCEPT OTHERS DICTATING how we do our jobs, and stop whining about it! If you want to (finally) stand on your feet like the professional men and women we all are then join me at the American Guild of Appraisers (AGA). http://WWW.AppraisersGuild.Org

    We are already working on several of these issues. I stand behind my comments and am willing to discuss them with any informed opposition. (714) 366 9404, Mike Ford AG002512.

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  4. bubba jay bubba jay says:

    a lot of what happened about ten years ago was not good and unacceptable. a lot of appraisers, a lot of realtors, a lot of loan officers, and a lot of banks were to blame for the chaos. but, we have clearly gone from an environment of the wild-wild west to complete insanity and total absurdity/ridiculousness. if someone doesnt believe that, tell them to get a mortgage on a home right now. if someone doesnt believe that, put a USCRAP book in their hand, and explain to them what thats all about. if someone doesnt believe that, have them watch over an appraisers shoulder for a day or two.  if someone doesnt believe that, tell them to talk to any realtor about whats really going on.

    DONT GET ME WRONG – i do not believe we should go back to the days of the wild-wild west and start giving out loans again to anyone who can fog a window, and i certainly dont believe banks should go back to giving out loans for 110%+ of the current homes appraised value. (remember those radio ads?). but i also dont think its necessary to be in the absurd world we are in right now. someone needs to grow a little common sense and get everything to somewhere in the middle of the wild-wild west and total absurdity/ridiculousness.

    until that happens . . . . .

    the bleeding continues . . . . .

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    • Mike FOrd Mike FOrd says:

      Well said Bubba Jay!

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    • Retired Appraiser Retired Appraiser says:

      God how I miss those USCRAP updates (sarcasm).  The more USPAP refresher courses that I took the more insane it all appeared to be.  I was also a real estate broker for 20 years; over that 20 year period they never came close to overhauling the statutes, restrictions, and guidelines for brokers year in and year out.  With appraisers it was an annual ordeal and I’m sure it continues to be so to this day.    Sisyphus comes to mind; the Greek dude that was damned for all of eternity to push a boulder up the hill, only to have it roll down again. Day after day he would repeat the process.  God help the guys who were damned to rewrite USPAP in perpetuity and God bless those of you who have been damned to relearn the NEW & IMPROVED USPAP year after year after year after year after year…

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  5. You said it Brother!!!

    We tried communicating this belief to the powers that be politely, maybe we ALL need to start referring to the never ending revision to “principles” as USCRAP.

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  6. Jeremy Hall Appraisals - Colorado Jeremy Hall Appraisals - Colorado says:

    FYI:   Important news, and an important article for reading;

    Banks Fined $5.7 Billion Over Foreign Exchange Market Rigging

    “Welcome to Freddie and Fannie’s Mortgage Shell Game”: Still As True As The Day It Was First Published

    When it comes to solar, it’s super important to identify leased vs owned.  As most are leased, that’s simply a debt obligation which transfers with the home, and not necessarily a tangible real property benefit.  Don’t pay your solar bill, and they’ll take all of that equipment off the home, and leave you with an even larger bill to repair the property back to it’s non solar state of condition.  And furthermore, it is not the governments responsibility to promote one type of building over another.  If the benefits of Xeriscaping and solar are worthwhile to consumers, the free market will promote that with time.  When governments intervene into free markets, they usually end up accomplishing the exact opposite of their stated intentions.  Free markets cannot function properly, if the government is involved with the microscopic details of everything from what a person can and cannot buy or build, and what they will and will not receive credit for.  Let lenders make their own decisions, and let them shoulder the entirety of the risk, permanently.

    It is important to remember that many federally chartered institutions have public offerings, stocks, bonds, investors, and are beholden to the constituents first, and are no longer properly following the mandate of their federal charters.  From regulatory take over with ex company workers now populating government positions, to outright fraud and manipulation of rates and currencies exchanges, it is obvious that major federally chartered institutions are no longer following their intended mandates.  It’s the individual against an international corporation, when it comes down to considering what the average American Citizen is up against. Best solution is to pay off your home in the quickest way possible, and never ever sell it or mortgage it again.

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