In a nutshell, the mortgage crisis is largely a result of people watching their mortgage payments rise as interest rates rose. Many of these homeowners had unconventional loans, such as interest-only loans or adjustable rate mortgages (ARM). Far too many of them had borrowed more than they could really afford, and when things got tight, they found themselves unable to make their house payment. Because of the sheer numbers of distressed homeowners, banks and other financial institutions took a major hit (witness the sale of Bear
Sale Prices Far Less than Value
Many homeowners are caught with homes that are worth far less than they paid on them. They can’t refinance, and they can’t sell for what they owe on the home. Appraisals play a part in this problem, because an honest appraisal of the home will show that it is not worth what is owed. According to Jason Brooks, who originates loans in Denver and is loan officer for www.Denverhomelender.com, Homeowners are stuck. “The equity in their homes isn’t sufficient for a new loan and this problem is compounded by the new stricter underwriting”.
Homeowners who have taken out home equity lines and spent that cash are particularly liable to find themselves “upside-down” on their loans, as they have no equity on the home and owe the full amount of the previous appraisal. In a buyer’s market, it is difficult to sell a home you have no equity in, because buyers are looking for bargains. If you have to sell the home for as much as you paid for it, just to meet your mortgage, you face stiff competition from those willing to sell their homes for less, even to take a short sale, in order to get out from under the home and move on.
And even homeowners who previously felt they were in great shape in terms of having equity and their home and owning a home with good resale value now find themselves struggling to sell their homes for enough money to allow them to carry out their plans. As home values decline, buyers become less willing to pay what they consider to be inflated prices for homes. There are many choices for buyers, and eventually they will discover the right home, offered by a homeowner who desperately needs to sell. With this competition, getting a good price on your home can prove difficult.
There is a saying in real estate that you make money when you buy, not when you sell. In other words, buying bargains is better than owning a home that appears, on paper, to be going up in value. This is becoming painfully obvious to people whose homes are now not worth the inflated values they saw, again on paper, just a short time ago. Some homes may be worth slightly more than the original selling price, some far less. But one thing is clear: people who bought homes that were barely affordable at the time are finding themselves facing real difficulties now as home values fall and the economy declines.
Will Appraisals Be Inflated?
One danger, in a situation like this, is that appraisers will begin inflating homes’ appraised values, making selling easier for the current owner. While this is certainly possible in isolated cases, it is unlikely that appraisers, as an industry group, will begin over-valuing homes.
The first thing arguing against such mass over-valuing is that appraisers are independent professionals. They are not a single group of individuals working for a single employer, and thus are far less likely to collude in anything, including deliberately inflating appraisals. Because they are independent, each appraiser is likely to base appraisals on concrete standards, rather than what other appraisers are doing or would do. And because appraisers are professionals, they are unlikely to abandon their professional ethics and over-value homes in the interest of helping homeowners or, on a larger scale, easing the mortgage crisis.
Another reason such mass over-appraisals is unlikely is that such activity would not go unremarked, or unpunished. Over-valuing a home during appraisal is fraud, and even if a large number of appraisers did choose to risk their careers in the hope of helping homeowners, a mass rebellion of this type would be discovered, probably quite quickly.
The guilty appraisers would lose their licenses and possibly face criminal charges, and their actions would not have had, in the end, much effect on the economy. Homes would continue to decline in value, buyers would continue to search for bargains, and distressed homeowners would continue to be distressed.
While the thought that something of this nature might happen can be a little alarming, and raise doubts about appraisal values among buyers looking for great deals on a new home, the reality is that it is very unlikely to happen.
Although a few overzealous appraisers may sometimes value a house at more than another appraiser would determine, mass over-valuing is not likely to become a problem. However, declining appraisals, and declining home values, are a very real concern.
Or, Will Appraisals Fall?
Real estate is not always predictable, and it is possible that appraisers will begin valuing homes at far lower values than the most recent appraisal (at the current owner’s time of purchase). How would this affect the real estate market?
Again, it is important to realize that appraisers are professionals, and that they have concrete standards for appraising homes. Appraisal is as much, if not more, science than art, and two appraisers are likely to value any given home in a similar price range.
However, one element in appraising homes is the comparable values of homes on the market and sold recently in the same neighborhood. As home sales decline, values do tend to decline, and appraisals in turn may be lower than sellers hope.
This could be bad news for sellers who owe more than the home is worth and are hoping to sell their homes to avoid foreclosure. Unfortunately, this is a difficult time to sell a home, and lower selling prices are contributing to a downward spiral.
How Can Homeowners Use Appraisals to their Advantage?
In this difficult time, homeowners are looking for any way to improve their situations, and knowing how appraisals work and what to expect can help considerably in getting through the mortgage meltdown. Understand that appraisers have guidelines to follow, and that this is not a black art or a capricious “making up” of a value. Know what is valuable in homes in your area, and how you can make your home as attractive to an appraiser, and a buyer, as possible.
When you prepare to sell your home, it helps to know what comparable homes in the area have sold for, and what sellers in your immediate area are asking for homes. You may discover quite early in the process that your home is in a neighborhood where prices have declined considerably; while disappointing, this is useful knowledge. It will allow you to make reasonable expectations and preparations.
Learn what improvements or changes in your home’s situation could improve the appraisal, and selling price, and by how much. If replacing the carpets would increase your home’s selling price more than the cost of putting in carpets, it might be worth considering. However, in these selling conditions, larger renovations like granite countertops or a koi pond in the backyard are probably not worth considering. You may be surprised to find that some seemingly small improvements, such as a lawn makeover, may improve your home’s “curb appeal,” while other things that you may think are more important, like painting, may not make much difference at all. Discuss improvements with a real estate agent or, better yet, an appraiser, before making any decisions.
If, based on comparable prices and downturns in appraised values, you realize you will not sell your home for what you owe on it, now is the time to start looking for help. Contact you lender to discuss the idea of a short sale or other workout to allow you to sell the home and avoid foreclosure.
Remember that appraisals are based on specific criteria, and are not just made up out of thin air. There may be steps you can take to improve the appraised value of your home and allow you to sell it at a price that meets your mortgage obligation. If you can do this, do it. If you feel there is no hope of getting your home appraised at a high enough price to sell it, now is the time to investigate other options.
Jason Brooks Originates Mortgages and Home Loans in Denver, Colorado. He can be reached at (303) 573-1200.
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