Homeowners across the country are having appraisal problems. Low appraisals cause problems in two ways: either the appraisal comes in so low that the buyers can’t qualify for a mortgage, or it comes in too low, reflecting a lower value of the home and the loss of equity that the homeowners might now have as a result of the recent decline in housing values. With the decline in home values and the loss of equity the homeowner once had in the home, the homeowner will have a harder time refinancing.
I recently received a letter from a homeowner whose house appraised at $187,000 two years ago. Three weeks ago, the same property appraised for just $127,000. The homeowner wanted to refinance a first and second mortgage into a single primary loan. The owner is seven years into his first mortgage (a 15-year fixed rate mortgage at 5.375 percent), and 4 years into the second mortgage (a 15-year fixed rate loan at 7.84 percent).
The homeowner still has enough equity to qualify, but the new loan-to-value ratio is 81 percent, and the lender has offered a 30-year loan at 4.78 percent and wants to charge the borrower private mortgage insurance (PMI).
But his appraisal problems are about to get worse. As he explained, “My neighbor, who bought his home in 2006 for $170,000 has decided to stop paying his mortgage because his house is now a liability instead of an investment. His house is now appraised for $104,000! If the bank forecloses on him, that will make my property value go down even more.”
My reader wants to move, but he can’t get any equity out of his property because the appraisal is so low and local property values keep dropping. He earns a good living and has a credit score of 780. He wanted to know what he could do to improve his refinancing odds and beat the appraisal albatross.
The problem is you usually can’t beat a bad appraisal. You can ask the lender to reappraise your property, but if you live in a neighborhood of foreclosures and strategic defaults, it is going to drive down the value of your home – and all of the homes in the neighborhood.
The loan deal my correspondent was offered is a bad one all around: The lender is suggesting replacing two 15-year loans with a new 30-year loan. The interest rate, while a bit lower than what the homeowner is currently paying is significantly higher than the 4.2 percent many homeowners with high credit scores and ample equity are getting.
The only reason to take this deal is because you simply can’t afford the two loan payments you have. But over the term of a new 30-year loan, you’ll pay tens of thousands of dollars in additional interest over keeping the two loans that you have. Paying private mortgage insurance might even mitigate any savings you’d have, so this new loan could be all pain and no gain.
Unfortunately, there’s not much I can say in a situation where a neighbor is considering strategic default. For all the grumbling about how we’re “bailing out homeowners,” I’d think that every homeowner who doesn’t want to see his or her equity disappear should welcome every opportunity to keep homeowners in their properties, paying their mortgages.
The appraisal problem will continue for some time to come. The relatively new Home Valuation Code of Conduct (HVCC) rules, which govern what appraisers can and cannot do when appraising property, has already been rewritten. Hopefully, the new rules will make appraisals friendlier toward homeowners located in communities with a large number of foreclosures or strategic defaults.
If this is happening in your neighborhood, you can help out in your community by being neighborly and helping homeowners feel that the neighborhood and community still brings value to each family that lives there. Maybe you can help your neighbor try for a loan modification, or perhaps the homeowner will be able to arrange a short sale. Either option is better for the rest of the neighborhood than another strategic default, or another foreclosure.
As values decline, more borrowers that can walk from their mortgages may. We can only hope that lenders see this situation as a spiral down and work with as many borrowers as possible to keep them in their homes and keep neighborhoods vibrant with at least with stable pricing.
That will certainly help the so-called appraisal problem.
Unfortunately, it seems that home lenders these days aren’t very willing to work with borrowers on their home loan modifications. Some lenders are making short sales difficult for their borrowers. And, lenders as a group appear willing to continue with a wait and see attitude while the housing market continues to slide or bounce along the bottom.