Just as one man’s terrorist is another’s freedom fighter, so to is a return to prudent lending practices now leading to “unintended consequences”, namely fewer loans being extended.
The post-bubble spin-mongering continues. New lending standards now mandated by Freddie and Fannie as a result of a settlement between New York State and the mortgage giants to settle charges that pressure from lenders had produced inflated appraisals requires that lenders get a second appraisal on 10% of the loans they sell to the mortgage giants.
Mirable dictu, this process is leading to lower valuations, which confirms that the pressure to goose prices was widespread. That isn’t surprising, given the extensive reports in the media of appraiser collusion and Cuomo’s findings. But the real estate industry is instead trying to characterize this as the new sobriety in valuations as the result of bureaucratic conservatism, as opposed to the market being depresses and appraisals correctly reflecting that.
DoctoRx also points out that banks only need one appraisal to keep a mortgage on their books or sell it to a local investor.
Nevertheless, the story reveals an increasingly common pattern in Bloomberg in the last couple of months, of the news service making the most bullish interpretation (in this case, the real estate market is better than the appraisals say) and making it prominent, both in the headline and the initial paragraphs of the story. The header is “Low Appraisals Threaten U.S. Property Rebound by Cutting Prices,” which clearly says that the appraisers are disagreeing with prices agreed between two parties. Folks, that is what happens in a normal lending environment. I’ve seen and heard of it on transactions in more normal time. The idea that an appraiser should rubber stamp what a buyer is willing to pay is NOT a prudent lending practice, yet that is what the article implies. The story starts with that theme:
There may be another culprit scuttling a U.S. housing recovery: low home appraisals.
Flawed appraisals are derailing real estate sales and depressing values across the U.S., the National Association of Realtors said yesterday as it reported that existing home prices declined 17 percent in May from a year earlier.
“It’s pointing to thousands of delayed or canceled transactions,” Lawrence Yun, chief economist of the Chicago- based Realtors group, said in an interview. “We’ve had a massive inundation from members saying this is a big problem.”
Yves here. The fact that this story appears to have come from industry-cheerleading NAR’s lips to Bloomberg screens is a red flag.
It isn’t until the eighth paragraph, which is below the fold in my browser window, that you get this:
When home values come in below the sales price, that’s not the appraiser’s fault, it’s a reflection of the market, the Appraisal Institute, a Chicago-based professional group that represents more than 25,000 appraisers, said in a statement yesterday.
“We take offense with the notion that an appraisal is only good if it happens to come in at the sales price,” the group said. “That mentality helped cause the mortgage meltdown to begin with.”
Yves again. But the story immediately undercuts that and returns to the “low appraisals” mantra:
More deals are falling apart in a housing market that needs transactions to recover from a three-year slump that has dragged the U.S. into a recession. Low appraisals join a list of suspected obstacles standing in the way of a rebound that includes rising interest rates, a glut of foreclosed properties, and the highest unemployment rate since 1983.
Yves here. Look at the second sentence. “Low appraisals join a list of suspected obstacles standing in the way of a rebound.” That suggests that the rebound would be happening NOW were it not for all these pesky problems. But if you look at the rather daunting list of fundamental problems (note that rising rates were not reflected in the transactions included in housing report issued yesterday), the more accurate phrasing would be something like “lower appraised values reflect factors that suggest a housing recovery is some way off, including….” The “low appraisals” as opposed to “low appraised values” is also a masterful bit of Orwellianism, since it again says the appraisers are coming up with results that are “low”, meaning systematically biased, while “low appraised values” would be more descriptive.
The story provides all of two anecdotes to support its case, as well as quotes from some sources that appear likely to be industry-friendly. It does add that:
The U.S. Office of Thrift Supervision last May called the deal “flawed” and said it should be reconsidered. The Federal Reserve said it should be scrapped in a June 2008 letter to the Office of Federal Housing Enterprise Oversight, now called the Federal Housing Finance Agency, that oversees Fannie Mae and Freddie Mac.
However, the clear plan of the Powers That Be is to goose housing prices, so I do not take the official protestations at face value.
It should not be all that difficult to prove evidence that appraisals are coming in out of line with incomes and rentals. As readers know, housing got way out of line with the buyer ability to pay and needed to correct. The notion that it should “rebound” from here across the board, given how badly priced it became in many markets is questionable. There may be markets where housing had indeed overshot on the downside and appraisals are proving an obstacle, but support for that viewpoint in this story is far from persuasive.