Ask the Expert - The Effect of Short Sales on Home Appraisals

Question: I’ve recently noticed some places for sale listed as a “short sale”. My understanding is that they are trying to get an offer to present to the lender in hopes they will accept the offer instead of the seller defaulting on the loan and forcing the lender to foreclose. My question is this. If a lender accepts a very low offer because it is more than they would get in a foreclosure sale, does that sale price negatively impact the property value of the surrounding homes? Or is there something that distinguishes a short sale price from a regular sale price when looking at comps? Thanks

Answer: The simple answer to your question is yes - the sale price does negatively impact the value of surrounding homes, and no - there is nothing to distinguish a short sale from any other sale. Now for the details....

You are correct in your understanding of the mechanics of a short sale. Typically, the homeowner lists the property with a Realtor. On the multiple listing service, the agent is required to show that this is a short sale and that the sale is contingent on being accepted by the lender.

However, it is not always the case that a short sale will yield a higher price than a foreclosure. The lender will weigh the costs involved in a foreclosure: months that the borrower lives in the home without paying the mortgage; attorneys fees; repairs and upkeep; etc. In comparison, short sales can be less of a drain on the lender. The borrower remains in the property until it sells, which usually means the home stays in good condition. Because the borrower initiates the short sale, they are much more likely to cooperate with the lender, and this can greatly reduce any legal fees. Therefore, in many instances, the lender will agree to a short sale price that is significantly lower than what the home would sell for had it gone into foreclosure. So this addresses the first part of your question - short sales absolutely will negatively impact the value of surrounding homes, often more so than foreclosures.

Now to your second question. When a home sells, it is recorded into the public records. There is nothing in these records that differentiates a "regular" sale from a short sale or a foreclosure. If an appraiser is looking for comparables, they may be able to find this information on the multiple listing service, or by talking to the local Realtor.

If the appraiser learns that the sale of record is a short sale, they will try not to include it as a comparable. Why? The definition of "fair market value" is the price a willing buyer will pay and a willing seller will accept. This definition assumes that there are no mitigating forces pushing either party. Such forces include divorce, death, and job layoff. Certainly, the inability to pay the mortgage fits this category. So, from an appraiser's point of view, a short sale price does not reflect fair market value. However, if you live in an area where the majority of sales are from foreclosures or short sales, the appraiser may not have an option. In that case, these sales will be used.

A Case Of The Fox Guarding the Hen House?

A new company has emerged to address some of the financial turmoil created by the credit crisis. Private National Mortgage Acceptance Company, LLC, known as a PennyMac, has just opened its doors.

PennyMac plans to buy at-risk loans from banks and savings and loans - at a deep discount. They will then attempt to work with the borrower to restructure the loan so that the borrower can make the payments and stay in the home. Once the loan is stable, PennyMac will then sell the loan to other investors at a profit. As stated on PennyMac's website, they will acquire "loans from financial institutions seeking to reduce their mortgage exposures. PennyMac will create value for both borrowers and investors through our distinctive approach to loan servicing. "

These financial woes were caused, in part, by the greed of irresponsible corporations. Some, like Countrywide, one of the biggest players in the loan debacle, are being investigated by the FBI for securities fraud. So it's good to know that there are money wizards trying to solve this mess. But who are these financial "white knights"?

Let's start with PennyMac's founder, Chairman, and CEO, Standford L. Kurland. Here's a quotation from Mr. Kurland's biography as stated on the website:

He is well recognized for his leadership in developing the strategic direction, risk management activities, financial management, and organizational development of Countrywide Financial Corporation. During his tenure at Countrywide Financial, until his departure in 2006, where he served as Chief Financial Officer and then Chief Operating Officer and President, the company grew in market capitalization from just over one million dollars to a leading financial services firm with over 25 billion dollars in market value. Under his leadership, Countrywide built a world class organizational and governance structure.

Yes - you read that correctly. The man who was the head of one of the largest companies responsible for this financial mess is now going to head the company that will profit from trying to fix the mess. "He won't be the first or the last person trying to make money on both sides of a trade," said Frederick Cannon, an analyst at Keefe, Bruyette & Woods Inc., who covers Countrywide.

You sure are correct, Mr. Cannon. Kurland isn't the only former Countrywide manager planning to use PennyMac to drain even more personal profit out of this loan crisis. Here are a few other former Countrywide employees and their new PennyMac titles:

David Spector, Chief Investment Officer;
Farzad Abolfathi, Chief Technology Officer;
Adal Bisharat, Director, Strategic Planning;
James S. Furash, Chief Development Officer;
Aratha M. Johnson, Chief Administrative Officer;
Michael L. Muir, Chief Capital Markets Officer
Lior Ofir, Director, Technology;
Mark P. Suter, Chief Portfolio Strategy Officer; and
David M. Walker, Chief Credit Officer.

If I murdered someone and wrote a book about it and that became a best seller, I would not be allowed to keep the money. The law says I can not profit from my crime. So why are these people allowed to perpetrate these financial crimes and, not only get away with it, but be allowed to profit from the fix?

Want to Sell Your Home? Get Creative

It's difficult to sell a home in today's depressed real estate market and sellers are desperate to find a way to have their home stand out among all the housing inventory. It is not unusual for sellers to offer incentives to the buyer, and some of these are quite creative. Among the more usual are pre-paying a year's homeowners dues or paying for upgrades. Some sellers include furniture or a car with the purchase. Still others try to entice buyers by including a vacation with the purchase.

And then there is J. J. Rogers. For three years, Ms. Rogers tried to sell her four bedroom home in Red Feather Lakes, Colorado. Finally, in frustration, she has decided to give it away! Ms. Rogers is running an essay contest. To try and win her home, each entrant must submit an essay explaining why they should win, along with a $100 entry fee. So far, Ms. Rogers has had 500 entries. She is hoping to receive at least 2000 entries before the May 25 deadline. This would cover her mortgage, closing costs, and give her a some left over.

Or you could do what Bob and Ricki Husick did. After a year of trying to sell their Pittsburgh, Pennsylvania home, they offered to give the buyer their money back upon the death of the Husicks. That's right - buy the house for $399,000 today, and get the money back when the Husicks die. And, as an added incentive, the Husicks also offered to throw in the couple’s retirement home in Arizona if the buyers would agree to care for the Husicks in their old age. And yes, they did get offers.

Of course, all of these options come with legal, tax and accounting issues. So if you decide to try something like this, make sure to consult with the appropriate legal and financial professionals. But in this difficult real estate market, you can't blame sellers for trying new incentives to get their homes sold. When the going gets tough, the tough get .... creative!

Fair Debt Collection

As economic times become more difficult, a greater number of people are defaulting on their bills. And a greater number of debts are being turned over to debt collection agencies. And with this has also come a rise in complaints about debt collection agencies. The Federal Trade Commission said that, for the past three years, they received more complaints against debt collectors than against any other industry. And for the past five years, complaints are up about 43 percent according to the Better Business Bureau.

Debt collection agencies are necessary for businesses who are legitimately trying to recoup their losses. According to a study cited by a collection industry trade group, in 2005 the collection industry saved the average American household $351. That is how much money households would have spent if businesses were forced to raise prices to cover bad debt.

But sometimes these agencies resort to unethical tactics to try and recover the debt. "Most people are not aware of their rights. And unfortunately debt collectors take advantage of that fact," says Joe Ridout of Consumer Action. So it's important that you know what these companies are and are not allowed to do. Here are some basic consumer rights:

A debt collector may not call you before 8 a.m. or after 9 p.m., unless you agree;

You may not be contacted at work if the collector knows your employer disapproves;

If you don't want to hear from a debt collector, write a letter telling them to stop. By law, they have to. But the debt won't go away and you can still be sued;

If you have an attorney, the debt collector is allowed to contact them. If you don't have a lawyer, your friends and family can be asked about how to get in touch with you;

A debt collector may not misrepresent the amount of your debt;

A debt collector may not use profane or threatening language;

Debt collectors may not say that they will put a lien on your property or file a lawsuit unless the agency really means to do that and it's legal; and

Collectors may not legally claim federal benefits such as Social Security, or your retirement accounts, like your IRA or 401(k).

Debt collectors can get very aggressive, so it's important that you know your rights. For more information, you can look at the Fair Debt Collection section of the Federal Trade Commission website. This site goes into detail about what debt collectors are and are not allowed to do. In addition, it provides information on how to file a complaint against a debt collection agency.

Temporary Increase in Conforming Loan Limits

As part of the economic stimulus package, HUD has increased conforming loan limits. Why should you care? Any loan that is greater than these limits is called a "jumbo" loan. And "jumbo" loans have higher rates and points than "conforming" loans. So if you presently have, or want to get, a "jumbo" loan, you may want to check and see if the conforming loan limits in your area have increased. You can do this by going to HUD's new Web page. Type in your county, state, and the type of loan you want (FHA, HECM, or Fannie/Freddie). The site will then calculate the new limit for your area.

The rates and terms on these new loans won't be quite as low as the old conforming loans, but they will be much better than the old "jumbo" loans. So it may be worth your while to refinance to a lower rate. Or, if you want to buy a home and need a large loan, this may be just the break that allows you to afford a new house.

But don't wait too long to act. These new limits are only temporary. They expire at the end of 2008 unless Congress agrees to extend them.

HomeSaver May Save Your Home

Not everyone who is having problems making their mortgage payments has loan with lousy terms. Sometimes circumstances occur - illness, temporary job loss, etc. - that cause a borrower to get behind in their monthly home loan payments. If only they could find the money to get current, they could continue to make their regular monthly payments as before and keep their home.

Now there is HomeSaver, developed by Fannie Mae, one of the largest purchasers of home mortgages. Starting April 15, Fannie Mae will authorizes the companies who service their loans (servicers are the folks to whom you write your monthly check) to offer an unsecured personal loan to homeowners who need that one-time help to get current on their loan. The funds can be used to pay past due balances of principal, interest, taxes, insurance, and up to six months (in some cases twelve months) of home owner association fees.

The borrower signs a promissory note for the funds, payable over 15 years at a fixed interest rate of 5 percent. Homeowners can borrow the lesser of $15,000 or 15 percent of the original unpaid loan balance. No payments are required for the first six months nor does interest accrue during that period so the advance is amortized over 14.5 years. There is $600 workout fee. The money is applied directly to pay back the amount in arrears, so the borrower never actually gets the money. These are much better rates and terms than one could get in the “normal” personal loan marketplace.

Mike Quinn, Senior Vice President for Single-Family Credit Risk Management, said "HomeSaver Advance will help Fannie Mae streamline its loss mitigation efforts and offer loan servicers a new way to cope with a delinquent loan. Our research shows that most borrowers become delinquent because of a temporary life event or hardship. This loan can offer these borrowers another alternative, and help prevent a temporary setback from becoming a foreclosure."

So if you need some help getting your home loan payments back on track, contact your lender to see if they offer HomeSaver. It just might save your home!

Appraising the Appraisal - New Guidelines for Home Appraisals

There is plenty of blame to go around when it comes to the housing crisis - lenders, Realtors, mortgage brokers, and borrowers. Even the appraiser has been derided for overstating values. But appraisers have been placed in a very difficult position.

Many banks and savings and loans have their own "in-house" appraisal departments. The appraiser, a bank employee, is told that the loan department wants to make a loan on a particular home. In order to do so, the appraisal needs to come in at or above a certain home value. The appraiser knows that if he does not come in at that amount, the loan will not go through and he'll have the loan department breathing down his neck. Enough of these complaints and he might lose his job. So he manipulates the numbers to make sure his appraisal comes in at the required value.

This problem exists even for independant appraisers (those who do not work directly for a lending institution). Most appraisal companies are on a lenders "approved appraiser" list. This means that, with each new loan, the lender will turn to this list to hire an appraiser. For many appraisal companies, this is how they get the majority of their business. And if they are thrown off the list, the appraisal company may go under.

Either way, the in-house appraiser or the approved appraiser has every reason to manipulate the appraisal to meet the lender's required loan amount. But this is about to end.

Starting in 2009, Fannie Mae and Freddie Mac, two of the biggest players in the secondary mortgage market, have announced that they will no longer buy loans from lenders who do not use independent appraisers. Lenders who want to sell loans to Fannie Mae or Freddie Mac will not be allowed to use in-house appraisers, or appraisals done by a subsidiary or an affiliated company. Also, mortgage brokers and real estate agents may no longer choose the appraiser. And finally, Fannie Mae and Freddie Mac will create the Independent Valuation Protection Institute, a group that will accept complaints from consumers who feel their appraisals are unfair, and appraisers who feel that they are being pressured to provide inacurate appraisals.

Will this make it harder to get a loan? Yes, but at least you will know that your homes appraised is a realistic estimate of it's true worth.