Mortgage crisis changes are transforming home sales
After consulting with three real estate agents, Popian and her husband tried to sell their house on Chatham Street in Janesville for $99,000.
A prospective buyer liked it, offered $97,600, and a sales contract was signed.
Financing was in place; the house passed inspection, and the two sides scheduled a closing date.
“Everyone was happy,” Popian said.
Then a bomb blew the deal to smithereens.
The home’s value, according to a bank-ordered appraisal, was about $77,000, more than 20 percent less than the price agreed upon by the buyer and seller.
That changed the buyer’s financing package significantly.
“Either she would have had to come up with the difference or we would have had to come down in price,” Popian said.
Neither happened. The buyer walked, and Popian and her husband are now trying to rent the house.
Popian’s story illustrates industry changes that stem from the subprime mortgage crisis of the mid-2000s.
It’s not unique to Janesville.
In fact, the National Association of Realtors reported that 16 percent of its members said they had sales contracts canceled in June. That was up from 4 percent in May.
Lawrence Yun, the association’s chief economist, attributed the cancellations to tight credit and low appraisals.
“Appraisers are definitely taking a more conservative approach, deciding to error on the side of conservatism,” said Randy Borman, team leader for the Janesville, Milton and Evansville offices of Century 21 Affiliated.
“We’ve seen some deals blow up, but we’ve had many more that require some renegotiation where either the buyer comes down on their price or the buyer and seller agree to split the difference.”
In this climate, it’s rare for an appraisal to be at or above the agreed-upon sales price, Borman said.
That frustrates sellers, buyers and real estate agents who believe they’ve put together solid deals.
The most significant player in the deal, however, is typically the mortgage lender who must make a loan that makes sense when compared to the home’s value.
“It used to be that the most difficult thing was getting the buyer and seller together,” Borman said. “Now, its equally or more difficult to go from the acceptance of offer to the closing, and appraisals are certainly a part of that.”
The Home Valuation Code of Conduct went into effect in 2009, one of several pieces of legislation created to avert another crisis in the mortgage industry. Part of it stems from the mid 2000s, when real estate agents and lenders across the country pressured appraisers to make the numbers work.
The result was a glut of overvalued homes that secured exorbitant loans that didn’t survive the Great Recession.
Borman, who also has experience as a lender, said there’s plenty of blame to go around.
“Back in the day, people were doing anything and everything to get someone into a house whether they could afford it or not,” he said.
That was typically happening in markets outside of the Midwest, he added.
“We’ve always had a very stable market, and we didn’t have any collusion here,” he said.
Paul Burkart of Modern Appraisal Service in Janesville has been a local appraiser for 26 years. He agrees with Borman’s perspective.
“We have very good lenders here,” he said. “There’s never been any undue pressure to arrive at a certain value to get a deal done.”
The national crisis was significant enough that new rules extend to everyone.
The HVCC sets standards for solicitation, selection, compensation, conflicts of interest and appraiser independence. It covers any mortgage sold to Fannie Mae, Freddie Mac or Ginnie Mae, which covers more than 90 percent of the mortgages made in this country.
Essentially, real estate agents and lenders are prohibited from selecting appraisers, a task that now goes through third-party “appraisal management companies.” In addition, real estate agents and lenders can’t have substantive conversations with appraisers.
“For the most part, it used to be that someone at the bank would call me and say, ‘Paul, I need an appraisal on this property,’” Burkart said. “Now it all goes through the AMC, and we can’t have any contact with the lender, certainly as it pertains to valuations.”
The third-party appraisal companies want to maximize profits, so they often hire low-cost appraisers who might not be familiar with a particular market.
Burkart is aware of appraisers from Milwaukee, Rockford and even Mauston doing work in Janesville.
He doesn’t suggest that those appraisers are doing anything wrong, but he believes local market knowledge is important.
“Ninety-nine percent of what I do is in Rock County,” he said. “I’m a strong believer that you should not do an appraisal outside of your geographical area that you know and understand.
“Some of that is happening, and I think it’s sad that some of the appraisal quality has suffered.”
An appraisal that comes in below a sales price doesn’t always reflect insufficient market knowledge, he said.
Typically, appraisals are based on comparable neighborhood sales that are true arms-length transactions that don’t involve pressure or duress. Typically, they don’t include foreclosures or other troubled sales.
But, Burkart said, troubled sales make up the majority of transactions.
“You get in some neighborhoods, and 50 percent or more of the sales are foreclosures,” he said. “We have to use houses that have sold, but there just aren’t a lot of comparables.”
Burkart is aware that deals have fallen through because of low appraisals, but he said that’s simply a reflection of market conditions.
“Just because one buyer is willing to buy for a certain price does not make a market; it’s not necessarily a true valuation,” he said, noting that appraisers are aware of a negotiated price before they do an appraisal.
“The offer to purchase is in itself a good comparable, but we have to support it with others,” he said.
Sometimes, he said, people fall in love with a home and are willing to pay slightly more than the asking price and significantly more than the market value.
“But if there’s a mortgage involved, the appraiser has to find supporting data,” Burkart said.
Popian suggests that home sellers get appraisals before they put their properties on the market. In her case, an early appraisal would have saved time and consternation for both sides.
Burkart said that’s a decent suggestion, and it offers sellers another tool.
But Borman said appraisers know their clients: Sellers are looking for maximum value; buyers are looking for minimum, and the lenders want a number that justifies the mortgage.
“Appraisals are like opinions. Everyone has one,” Borman said, adding that it’s virtually impossible for appraisers to discount troubled sales because they account for such a large percentage of the local market.
Burkart doesn’t disagree.
It’s not an exact science, he said.
“An appraisal is an estimated opinion of market value, and the key word is opinion,” he said. “An appraisal is only as good as the comparables, and right now the lack of true arms-length sales makes it harder for us to do our jobs.
“When a sale or refinance falls apart, people look at us as the bad guys.”