Tuesday, September 28, 2010

A modest step toward untangling housing markets

One of the impediments to housing transactions is appraisals. If appraisals (which are backward looking) don't support the offer price of a house, the financing for the house can disappear.

For low down payment deals, this is frustrating, but appropriate. But for deals involving a minimum of 20 percent down, it is hard to see how appraisers have a better sense of value than the potential buyer who is actually putting a lot of money at risk. It may make sense to allow buyers who put 20 percent down, and whose source of funds is well documented, to get a loan even if the appraisal comes in a little low.

6 comments:

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Doug said...

There is the issue of fraud. Unscrupulous sellers may offer a property at too high a price to an uninformed buyer, or to a straw buyer. The appraiser is standing in the way of the fraud. If no valuation independent of the transaction is obtained, then the consequences will be REO in the near future.

Another issue, sellers offering cars and other high-value items as incentives to buy the property. If the loan forecloses, the buyer walks away with the car and leaves the lender with a property worth much less than the purchase price. An appraiser will give the value of the property net of the giveaway.

A similar issue is rebates or other seller givebacks such as downpayment assistance (what if they give the 20% downpayment, setting the price inflated 50%-100% above market value). FHA has had a big problem with 3rd party downpayment gifts from so-called "charities" funded by the seller. Without an appraiser to monitor that the property is the total value or nearly total value of the transaction, the seller givebacks will soar and again more houses go underwater. Many complaints about appraisers undervaluing the property are from developers or their sales forces.

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