The first question I receive from agents and borrowers alike when learning that our company has received the appraisal report is….........wait for it…....… “What’s it worth?”
You may be surprised to learn that there is more to the appraisal report than just the appraiser’s opinion of value. When my processor receives the report she sends it to the customer and me with a note stating that the report will be sent to the underwriter for review. The underwriter has the job of determining the risk of the loan application which includes analyzing the collateral securing the loan. Value is only one component of overall report. One of the largest private mortgage insurance companies in the U.S., PMI Mortgage Insurance Co. lists these other factors to review during the approval process.
Subject Property:
1. Does the appraiser appropriately and completely describe the subject property’s features, amenities, quality of interior and exterior finishes, fixtures and materials?
2. Does the appraiser accurately report the subject property’s neighborhood value trends (increasing, stable or declining)? If the subject property is in a distressed market, the appraiser should use comparables that are not older than 3 months and provide a current listing.
3. Is there support for the subject property’s effective age?
4. Does the appraiser report and analyze the subject property’s current and prior listings and sales activity?
5. Does the appraiser disclose and analyze negative features and/or characteristics of the subject property?
Comparables:
6. Does the appraiser consistently support the adjustments assigned to the comparables?
7. Are the subject and comparables consistent with the neighborhood boundaries as shown on the location map?
8. Are the comparables similar to the subject property in relation to style, sales price and square footage, and explained if not?
9. Does the appraiser use non-MLS or non-verifiable comparables, and if so, do they explain why?
10. Does the appraiser report, analyze and appropriately adjust for seller concessions?
When an appraiser believes that a property's sales price is supported by the value, you are only half way home. The underwriter has to believe it too.
Sunday, October 17, 2010
Friday, October 1, 2010
Behind the Math of FHA's Newest Changes
By now you've probably heard or read that beginning with new case numbers issued on October 4, 2010, FHA is changing how two key charges are calculated. For the most typical FHA transactions the changes are:
1. The Up Front Mortgage Insurance Premium (FHA's revenue generated by loan) is being reduced 1.0% of the base loan amount (formerly 2.25%).
2. The Annual (collected monthly as part of your payment) Mortgage Insurance is increasing to 0.90% of the base loan amount (formerly 0.55%). The mortgage insurance is the insurance set aside to cover some of the loss in the event of default.
While the net effect to borrowers is a higher monthly payment, I believe the change will result in a positive impact on our business and hopefully our country. This is what I am reading behind the math:
1. By making the change, U.S. Department of HUD Secretary Shaun Donovan is acknowleding that his government agency will operate better with a higher rate of monthly income (the new math) rather than hope to manage it's budget under the old math. The old math required FHA to save some of the up front revenue in reserves. Clearly that strategy wasn't going to last much longer.
2. The resulting higher payment to borrowers will result in a shift towards more Conventional financing. FHA lending has dominated the marketplace for the past 2 years and the change signals a start to return to a more normal lending environment. The key word is "start." Private mortgage insurance companies have already begun enticing borrowers back to Conventional financing with lower PMI rates. It remains to be seen if the big banks will also help by beginning to use some common sense in the lending process. We don't need them to relax underwriting guidelines, we need common sense, rational decision making.
Since I don't hold out a lot of faith that the big banks will adopt common sense thinking, perhaps it is best left in our hands. You can voice your opinion to the banks by taking your business elsewhere. And of course you can voice your opinion on November 2nd during the mid-term elections.
Perhaps FHA's newest changes will lead to more and bigger changes. But that will be up to us.
1. The Up Front Mortgage Insurance Premium (FHA's revenue generated by loan) is being reduced 1.0% of the base loan amount (formerly 2.25%).
2. The Annual (collected monthly as part of your payment) Mortgage Insurance is increasing to 0.90% of the base loan amount (formerly 0.55%). The mortgage insurance is the insurance set aside to cover some of the loss in the event of default.
While the net effect to borrowers is a higher monthly payment, I believe the change will result in a positive impact on our business and hopefully our country. This is what I am reading behind the math:
1. By making the change, U.S. Department of HUD Secretary Shaun Donovan is acknowleding that his government agency will operate better with a higher rate of monthly income (the new math) rather than hope to manage it's budget under the old math. The old math required FHA to save some of the up front revenue in reserves. Clearly that strategy wasn't going to last much longer.
2. The resulting higher payment to borrowers will result in a shift towards more Conventional financing. FHA lending has dominated the marketplace for the past 2 years and the change signals a start to return to a more normal lending environment. The key word is "start." Private mortgage insurance companies have already begun enticing borrowers back to Conventional financing with lower PMI rates. It remains to be seen if the big banks will also help by beginning to use some common sense in the lending process. We don't need them to relax underwriting guidelines, we need common sense, rational decision making.
Since I don't hold out a lot of faith that the big banks will adopt common sense thinking, perhaps it is best left in our hands. You can voice your opinion to the banks by taking your business elsewhere. And of course you can voice your opinion on November 2nd during the mid-term elections.
Perhaps FHA's newest changes will lead to more and bigger changes. But that will be up to us.
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