ALL PHOENIX REAL ESTATE

Do you crave power but loathe the idea of accountability? Do you enjoy finding reasons for something not to work rather than taking the time to see why they should? Enjoy wielding arcane and illogical guidelines regardless of how they were intended?

Become an underwriter!

As an underwriter, you have the opportunity to quash the dreams of home buyers and sellers nationwide. And we’re not talking about those dodgy folks using no-doc, zero down loans from yesteryear. No, in 2010 you have the opportunity to screw with people with 800-plus credit scores and large down payments not to mention those FHA buyers for whom there’s always a reason not to lend.

It doesn’t matter whether the guidance provided by the government since a guideline was passed says you’re wrong. You’re the underwriter, which means you’re right! You’re just like Moses coming down from Sinai, except you get to delete, amend and rewrite the tablets on which the Ten Commandments are written however you like. God himself can’t question what you’re doing (though if you have a first born son or aversion to locusts, you may want to show a little restraint, just in case.)

These aren’t the halcyon days when underwriters simply rubber stamped loans no matter how ridiculous the documentation and terms because, hey, everyone was doing it. This is much more fun! Armed with a stack of paper and Google, a good underwriter these days can find almost any reason not to approve a loan.

And why would they approve a loan? It’s not as if lenders are supposed to lend. You see how well that worked for them in the past (though there was less restraint shown than at a Vegas bachelorette party.)

Come on and release the inner curmudgeon within. Once you’ve got the reins, no one can slow you down - not the government, not the loan officers and real estate agents, and certainly not the dupes buyers and sellers counting on you to do your job according to its description, assess risk and make an appropriate decision (one that sometimes, despite it all, should end in an approved loan.)

Want to apply? Call 1-800-FUBUYERS today!

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Suddenly, it all makes sense … the emphasis on protecting the relationship, being supportive of the program no matter what, the ever-present big picture.

Once upon a time, back during my time at Century 21 I was a member of USAA’s Movers Advantage program. It was something I couldn’t mention unless someone told me they were a USAA client and proceeded to engage in the super-secret 14-stage handshake known only to USAA members and Movers Advantage agents.

Why? Because those were USAA’s rules. God forbid an agent in some way manage to profit from paid membership in Movers Advantage. Wait, did I just mention we paid?

Similarly, I couldn’t tell one of these folks using USAA for their mortgage when USAA had screwed the pooch on a transaction lest I damage the relationship - whether it was my company’s relationship with USAA or the clients’ with USAA wasn’t quite clear, but that’s another story for another day.

So when I would run across a situation like the one I’m dealing with today, when USAA has managed to bungle a closing by making the unique decision to require a termite inspection on a spec home, and by not mentioning this fact until 1 p.m. on the closing date I couldn’t tell the client “USAA screwed the pooch.”

Luckily, I’m under no such distasteful dictate at the moment.

Spec homes and new homes come with soil reports that verify that the soil has been treated for critters. This usually is sufficient, unless of course you’re USAA, the same company that has spent three days trying to figure out the math of the 10% tolerance on page 3 of the new HUD-1 statement.

(Hint: when the Good Faith Estimate shows an appraisal is $305 and the actual bill is for $450 - a roughly 50% increase - you’re not going to make the 10 percent tolerance.)

Here’s the dilemma, at least in my mind … USAA’s base clientele is the military and, at least in theory, USAA bends over backwards to serve that clientele knowing the sacrifices made by their members on behalf of the rest of us.

But when the company can’t seem to get out of its own way to handle a simple VA loan, doesn’t it make it really, really difficult to recommend them in the future?

Maybe it doesn’t matter. After all, there always are Movers Advantage agents mindful of the big picture who’ll do what they’re told to get a green light on their scoresheet at the corporate office, logical or not.

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Appraisal … the word to many is akin to the gospel handed down from the heavens, an unassailable determination of a property’s true worth.

Sadly, the reality is a bit different.

An appraisal is one person’s opinion of value. No more, no less. It’s an informed opinion, to be certain, based on experience, training and guidelines developed to help an appraiser determine what a property’s value might be. But it’s still an opinion and as such it carries a certain bias.

bias (n, adj, adv, v) a particular tendency or inclination, esp. one that prevents unprejudiced consideration of a question; prejudice.

Appraisal values often vary depending on the purpose of an appraisal. For instance, an appraisal contracted by a lender for a refinance almost always will come out higher than an appraisal contracted by a lender for a new purchase. The reason is simple - the bank doesn’t care what the home’s real value is, it just wants a tool to help evaluate the level of risk associated with the loan. On a refinance there’s already equity in the home, the risk is inherently lower and appraisers tend to be a little more liberal in their estimates.

So what to make of an appraisal for appraisal’s sake, say for a home owner who wants to determine the intrinsic value of a property for whatever purpose?

Read on …

How much is this home on the left worth? It’s an unfair question to ask of you, really, as you have neither the home’s particulars nor the recent comps in your hands.

However, two appraisers working to set the value of a neighboring home did. One was working for the seller. The other was working for a lender who was going to underwrite a new home loan.

Both started at the same place - a 5 bedroom, 3 bathroom home with a pool, 2,569 square feet with a three-car garage built 10 years ago. From there, though, the two appraisers went vastly different directions.

(Keep in mind, the adjustments about to be mentioned were made to equalize this property with the subject property down the block.)

The lender’s appraiser started with the sale price of $169,000 and made the following adjustments:

• Subject property upgrades: +$7,500 compared to the home pictured above
• Square footage: -$9,450 (the home above is a bit larger)
• 3 full baths versus 2.5 in the subject: - $3,000

Total adjustments - $4,950.

The appraiser for the seller, viewing the same property just two weeks earlier, had a bit of a different opinion:

• Subject property upgrades: +$10,000 vs. the $7,500 addition on the new appraisal
• Square footage: -$11,000 vs. the $9,450 deduction above
• Bathrooms: $2,000 for a third full bath versus a half, vs. $3,000 above

So … two different appraisers and, putting aside the different values for the upgrades, two different sets of values attached for a full bath versus a half bath and for the exact same difference in square footage.

But we’re not quite done …

•  The lender’s appraiser decided the 3-car garage on the home above didn’t merit an adjustment compared to the subject home’s 2-car garage; it’s listed as an “offset” presumably due to other changes to the property. The seller’s appraiser included a -$2,000 adjustment to value.
• The lender’s appraiser made no adjustment for the condition of swimming pools, rating them equal; the seller’s appraiser assigned a +$5,000 bump to the subject property for the pool.
• The lender’s appraiser, having addressed upgrades earlier in the appraisal, let the original adjustment stand; the seller’s appraiser assigned a $5,000 increase in value to the subject property on a separate line item on top of the $10,000 already given for better condition above, essentially counting the same upgrades twice.
• The lender’s appraiser made no adjustment for landscaping; the seller’s appraiser assigned a $3,000 increase in value to the subject property for landscaping.

The bottom line? The lender’s appraiser ended with a net adjustment of negative $4,950, bringing the comparable value of the home pictured above to $164,050 (again, these are adjustments designed to provide an apples to apples comparison.)

Meanwhile, the seller’s appraiser ended with a new adjustment upward of $7,000, giving the home pictured above a comparable value of $176,000.

Two appraisers viewing the same property two weeks apart assigned values $11,950 apart from each other - $15,000 of that difference came in the four line items at the bottom of the seller’s appraiser’s assessment.

Who is right? Unlike the now-solved mystery of how many licks it takes to get to the Tootsie Roll center of a Tootsie Pop, the world may never know.

But wait, there’s more!

In the same two appraisals was another property … but, truthfully, I don’t have the strength to take you through the adjustments to this one in the same detail (and, quite frankly, I’m not sure anyone’s still reading after the Tootsie Pop link.)

And so I’ll simply summarize - this second home sold for $170,000. The lender’s appraiser assigned a comparable value of $158,020. The seller’s appraiser assigned a comparable value of $167,000, a difference of $8,980.

Two properties, two stated comparable values differing by a total of $20,930.

Both appraisers will tell you they are correct; in fact, they attest to this fact in the several pages of boilerplate that comes attached to every appraisal. But they can’t both be right. Or can they?

After all, the appraisal really is nothing more than an opinion of value. The weight of that opinion isn’t determined by the appraiser but by those who are using that opinion for their own purposes, whether it’s to defend a high list price or to explain a decision not to write a loan for an agreed upon sale price.

Gospel proof of a home’s intrinsic value, though? Absolutely not.

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We’ve talked about this a little bit before as 2009 came to an end, but all signs are pointing to increasing interest rates as 2010 continues.

Government participation in purchasing loans is expecting to wane and as that happens rates are expected to climb - we’re not going to see the beautiful 18’s of the late 70s and probably not even the 8’s of the late ’90s, but the days of the 4’s and very low 5’s are likely going to fade into the rear view mirror.

Which means those buyers still sitting on the fence are faced with another reason to make a decision this spring - jump and purchase or slip off the backside and keep on renting. (Reason number one remains the $8,000 or $6,500 homebuyer tax credit due to expire - hopefully once and for all - April 30.)

Speaking of fun with real estate lending, FHA is tightening its own rules and regs as the entity’s capital ratios continue to head the wrong direction due to the high popularity of its low 3.5 percent down payment.

Once upon a time, FHA wasn’t credit score dependent. Those salad days are long past; if you have a credit score under 580, you’re going to need 10 percent down instead of the much gentler 3.5 percent.

Seller contributions are being capped at 3 percent versus the old 6 percent, which would be remarkable if it had been possible to get more than 3 percent toward closing costs in a market environment where appraisals come in at the number and not a dollar higher (and once in a while lower, though I haven’t seen this as much as other agents.)

Upfront mortgage insurance on FHA loans also is going to rise from 1.75 percent to 2.25 percent, assuming FHA gets approval from the government on the change.

Lastly, just in case one of my Canadian readers made it this far, the loony has run away from par again … I may be in the minority but I’m not seeing par happening any time soon as there are more reasons for it not to happen than reasons for it to occur.

All in all, some potential gloomy news on a dark and damp Thursday morning …

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When you’re about to close escrow on a property, buyers and sellers receive a copy of the settlement statement - the HUD-1. On this, all the various charges are laid out and each side knows what they’re receiving and what they’re paying.

It hasn’t been uncommon for buyers to sometimes be surprised at the numbers that appear on the settlement statement - especially when the figures they received from their lender on their Good Faith Estimate don’t match what the final charges may be.

That’s changing, thanks to the federal government, though there are some unintended consequences coming with the change.

Here’s what the newly designed third page of the HUD-1 will look like:

There are three sections, nearly all dealing with lender charges - one of charges that cannot change from the GFE to the HUD-1, another where the figures can change up to 10 percent between the two and a third where the figures can change freely.

Charges that cannot be different than on the GFE include origination fees and points. Charges that can change up to 10 percent include appraisals, credit reports, flood certifications and title insurance. Charges that can change as needed include the home and termite inspections and home warranties.

The first and last sections are self-explanatory; on the middle third, though, if the lender fees on the HUD exceed the fees stated on the GFE, the buyer has to agree to and sign off on the changes.

Now here’s the unintended consequence: when there’s a change of more than 10 percent, the buyer has three days to  review and approve the new charges. Theoretically, a buyer can sign off on the changes immediately. However, knowing that the government has mandated this three-day period, how many lenders do you think are going to move the file forward in any less than three days regardless of when the buyer says okay?

This easily can go the same was as the Truth in Lending disclosure changes, where a review period morphed into a mandatory hold a la a space shuttle launch. And with that change came delayed closings, extended escrow periods, etc.

Good times.

Overall, though, the changes should be effective in holding lenders’ feet to the fire to make sure what they quote at the beginning of the transaction translates into what they’re going to charge at the end.

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