What is Happening in the Mortgage Market

We are honored to have Chip Wagner, an icon in the appraisal industry and our good friend, as a guest blogger today and tomorrow. Tomorrow, Chip will discuss the impact distressed properties have on housing values. Today, Chip defines the role of the appraiser in today’s real estate transaction.  – The KCM Crew

I have been saying for a couple of years while real estate values were in decline, my bigger concern was going to be when this market stabilizes and tries to improve.  In my February 2011 eNewsletter, I stated: 

“My concern has been that once the real estate market hits bottom, it will be a difficult transition into an improving (appreciating) market after 4-5 years of decline. This seems to be happening right now, with much of the difficulty being the distressed market activity competing with the arm’s length transactions.

While there are no fool-proof solutions to these challenges, it is important for the real estate community to work together with appraisers valuing properties to help them understand the nuances that are occurring from market to market.” 

It seems we have reached that point in the real estate market.

The appraiser is challenged with finding comparables, and once potential comparables are identified, there is a great amount of time attempting to identify the “terms” of the sale – was it an arm’s length transaction in which both parties were equally motivated?  Was it a relocation transaction where a corporate owner was attempting to shorten the time on the market to find a buyer?  Or was it a distressed sale in some way – a short sale, a foreclosure, or a court-ordered sale.  Regardless, the pool of comparables is both limited, and muddied.

Are there appraisers that are inexperienced?  Yes.  Are there appraisers that do not know how to read a market?  Yes.  Are there geographic competency issues? (appraisers going outside of their market to areas they are not familiar with)  Yes.  Are appraisals killing deals?  Yes.  But there are far more appraisers that do know what they are doing and we are trying our best to provide an independent, unbiased opinion of the market. 

Are clients directing appraisers to be more conservative as suggested in the WSJ article?  Nonsense.  Appraisers cannot be an advocate for anybody, or they jeopardize losing their license and livelihood.  I’ve never once in over 21 years have had a client tell me to be conservative or they need the value to be low.  The client cannot tell us what comparables to use that could lead us to an inflated or deflated value.  Was that game being played prior to the real estate recession?  Yes, clients were asking appraisers to push the values upward – (most commonly in cash-out refinance appraisals, not purchases).  But in the past 3-4 years, no client is asking the appraiser to be conservative or low in their numbers.

Are government regulations and lender’s special underwriting requirements interfering with the process?  Absolutely!  The regulation with the HVCC and the Dodd-Frank act have good intentions but unintended consequences that are not protecting the appraisal profession, but rather putting restrictions on what we can do and how we run our business.  State appraisal boards are cracking down on bad appraisals and the word is getting out to the appraiser population that their work better be on the up and up.  Underwriters have the final say in making loans on behalf of the lenders.  I have heard of countless stories of appraisals coming in with value opinions that are reasonable, but underwriters rejecting or changing the final value opinion.  

What is the solution? 

There really is none as long as the market remains complicated.  Real Estate professionals are expected to give their opinion of the market based on what other properties are listed for and eventually sold.  About a year ago, Fannie Mae asked appraisers to include one active listing (or pending sale) in their appraisal reports, and some underwriters are now asking for two.  This is very important clue as to what is happening in the market – a listing, or better yet a property that is under contract can help support an increase in the market, or even stabilization.  It can also support declining values.  

The Real Estate Principal of Substitution, defined states: “that when several similar or commensurate commodities, goods, or services are available, the one with the lowest price will attract the greatest demand and widest distribution.”  If the 3 sales comps suggest a value of $200,000 and 3 listings or pendings suggest $185,000, then the market is in decline.  Conversely, if the 3 listings or pendings suggest a value of $210,000, then the market is increasing.

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ALVIN “CHIP” WAGNER, SRA, SCRP, RAC Member
A. L. Wagner Appraisal Group, Inc. ~ Real Estate Appraisers & Consultants
Specializing in Relocation, Litigation & Lending Appraisals

Naperville ~ Plainfield ~ Chicago ~ Flossmoor
1807 S. Washington Street – Suite 110, Naperville, IL 60565
Telephone 630/416-6556 ~ Fax 630/416-6591

website: www.wagnerappraisal.com

blog:  http://chipwags.blogspot.com/