Karl Marx is credited with famously saying that "the road to hell is paved with good intentions." As with just about everything else Marx ever said, I disagree with this statement. Usually the road to hell is paved with very bad, often deliberate, intentions which result in very bad actions and ultimately very bad consequences. Such is the case with financial reform and the plethora of rule-making happening right now as a result of the Dodd Frank bill. But at the end of the day, whether the intentions behind the rule-making are good or bad, the destination is the same.
On April 1, not only will the new Fed Rules regarding loan originator compensation go through, but the Fed Rules governing appraiser independence will also become mandatory. Of course, we have been living with variations of these rules since 2009 when the Home Valuation Code of Conduct was implemented, but Dodd-Frank and the Federal Reserve's rule-making have expanded these rules to all residential mortgage loans without regard to the problems that such rules create.
The title of this post is inspired by an article that msnbc.com posted in December of 2010 titled, "Have down payment, but stuck in appraisal hell." The article follows Aaron and Beth Stiner, who have been forced to rent a home rather than purchase one because even though they had sufficient downpayment and could qualify for financing, they could not work out the appraisal issues on their home. The article states that the couple, who lives in Phoenix, had decided to sell their home, had buyers for their home, and had found a new home that they wished to move up to. They applied through a mortgage broker for a loan with GMAC. The appraisal on the home came in at $295,000, and both the buyers and the sellers were in agreement on the value. GMAC was not so sure however, and required a second appraisal. This appraisal came for $25,000 less which did not allow the deal to go through.
The Stiners then switched lenders and started over. The new appraisal on their prospective home came in at $290,000, but again the lender did not feel comfortable about the transaction, so they ordered a second appraisal, which came in much lower.
Meanwhile, the house that the Stiners were selling had three separate appraisals completed on it and each one came in lower than the previous one. Four months later, the Stiners and their buyer gave up after having paid for seven appraisals collectively. At the time of the msnbc.com article, they were renting out their previous home and renting the home they had wanted to buy.
Linda Stern, who wrote the msnbc.com article, interviewed Wells Fargo spokeswoman Vickee Adams, who said that Wells Fargo regularly requests three appraisals. (Wells Fargo was the lender for the prospective buyers of the Stiner's home.) According to Vickee, "Wells Fargo must ensure that the value of the collateral supports the loan amount."
The dynamic at work here is that banks like Wells Fargo do not just react to current market conditions--they try to get ahead of the curve on proposed regulations. Currently there is speculation that appraisal reviews could become requirements for selling loans on the secondary market, which is good motivation for Wells Fargo to start the process now. Couple that with the fact that Wells Fargo primarily sells its mortgage to Freddie Mac--or at least they did when I used their wholesale lending division--and that Freddie Mac's loan approvals contain on the approval a supposed value for the property submitted. If the appraisal performed by the human appraiser is higher than that figure, the underwriter is just naturally going to assume that the appraiser is wrong and that Freddie Mac's value is correct. Most borrowers who can get approved with Freddie Mac could also get approved with Fannie Mae, which has a much more lenient approach to property valuations, but Wells Fargo has traditionally had a rule that once a loan is submitted to Freddie Mac, it cannot be resubmitted to Fannie Mae.
This is one reason that competition in the mortgage markets is so necessary. For all of the Wells Fargos and GMAC's that are excessively conservative, there are other smaller regional companies that could offer other options. But unless there are independent originators offering loan options from a variety of wholesale lenders, borrowers like the Stiners end up giving up and renting because they cannot work through the problems of getting a loan.
Many years ago, before the market crashed and the new legislation was enacted, I did a loan for a doctor who was moving from Long Island, New York to Southern, New Mexico. He had already taken a position with a practice in his new city, and he had begun getting paychecks so we could verify his new income. I was brokering the loan to Wells Fargo, and I had satisfied all of my conditions except one--Wells Fargo required a copy of the employment contract between the doctor and the new practice. The problem with that was that the doctor and the new practice had mutually agreed that he was not going to sign a contract, and without that item Wells Fargo would not do the loan.
Believing this decision to be unjust, I petitioned all the way up to the wholesale lending manager in Dallas, but my request was adamantly refused. I, then, moved the loan to a different lender who immediately approved it. The new lender gave my borrower the same rate and terms as Wells Fargo, but they did not require the employment contract. We closed right on time.
About a year later, the doctor called me to apply for a home equity line of credit on his house. When I pulled the credit report, I saw that after we closed the loan, my lender had sold the closed loan to Wells Fargo, and they were servicing the mortgage! Although they would not close the loan themselves, they were perfectly happy to buy it after someone else had closed it.
Today the options for straightening out problems such as the ones that the Stiners experienced are shrinking daily. The opinions of experienced appraisers are outweighed by a computerized automated valuation model which assigns a value to a home without really knowing anything about the property. Loan originators are being forced into working directly for lenders rather than working for themselves and representing a variety of lenders who could take a different view of problem loans. And the whole country is paying the price. Wallet Pop ran an online article on Friday, March 4, 2011 reporting that Standard & Poors Case-Shiller home price index is reporting a 4.1% decline in home prices during the last quarter of 2010, and that Robert Shiller has told CNN.money that we can expect to see further home price declines of up to 25% as the real estate market experiences a "double dip." The experts in the article blamed the lack of a tax credit similar to the one offered through April of 2010 for the decline in purchase activity. But that is really a cop-out. Tax credits did not exist through any of the real estate booms. The problem is not the lack of government stimulus; rather it is regulatory strangulation of all aspects of the mortgage loan process that is driving experienced professionals out of the industry and qualified homebuyers away from the closing table.
When we realize that we are on the wrong road in life, we are supposed to turn around and come back. But so far that is not happening. Instead, our regulators just keep steering us further and further into housing hell.
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