The housing debacle that started in late 2006 (and is continuing) had a substantial effect on lending. According to ml-implode, 355 lenders have disappeared since late 2006. At the beginning of August, Taylor Bean Whitaker, one of the largest lenders, abruptly folded their operations. Several larger players are on ml-implode's watch list. The reach of the troubled housing market continues to grow.
Because of the slumping real estate market, many areas have been designated "declining markets". That means the LTV's allowed will be lower, and comps used for valuation will be adjusted (lower) to make up for the declining price environment. That means the home owner may be shut out of refinancing and taking advantage of historic low rates, or not qualify to consolidate debt. This may lead to even more foreclosures, creating more downward pressure on home prices.
One of the newer regulations passed was the infamous HVCC, or Home Valuation Code of Conduct. It evolved because of a knee-jerk reaction to the housing market. The suspicion was that many appraisers were in bed with lenders and realtors, giving inflated valuations to properties so deals could get done. Unfortunately, there were some dark spots in this process, and now the entire real estate industry is paying the price for this. HVCC requires that appraisals now be ordered through an appraisal management company (AMC), instead of the lender dealing directly with the qualified appraiser that he or she already has a solid relationship with. In fact, the lender is not allowed in any way to contact or communicate with the appraiser. This may sound fine, but it has major negatives to it. First, the appraiser, chosen from a lottery, can travel as far as 100 miles away from the subject property. He or she may not be familiar with the area they were sent to report on. Second, appraisers are now being compensated less, because the AMC has to get their share of administration fees. The appraisers now have to travel further and get paid less. That is unfair to the appraiser, and everyone involved in the real estate transaction. I have already seen appraisals come back as much as 25% less that expected, even in areas that are not hard-hit. This has a substantial economic impact. Think of who is involved in a real estate transaction – appraiser, realtor, lender, title company, inspector, attorney. This has a ripple effect, no doubt.
Finally, foreclosures are not going away. With unemployment at 9.4% nationally, and in many areas over 10%, foreclosures will continue to rise. More than half the foreclosures are due to loss of employment. These foreclosures are beginning to find their way into appraisals, pushing prices even lower.
This is news everyone should be aware of – owner, buyers, sellers, realtors and lenders. Having this information in hand, and discussing it early and candidly with clients will avoid a lot of shock and awe when it comes to signing documents. Everyone will be better served if we, as professionals, have the current information and share it in a prompt manner with our clients.