The Real Estate Financial Crisis

The textbook talks a lot about mortgage securities. I expect you to read this out of Fabozzi. I actually got complaints in past years. Students found this the least enjoyable part of the readings for this course, but you should know about these things.

We have securities called Collateralized Mortgage Obligations. These are mortgage securities that are sold off to investors and they hold mortgages, but as is explained in Fabozzi, they will divide them into separate tranches or separate securities in terms in prepayment risk. That is, there’s a risk that the mortgages will be paid off early in times when it’s adverse to the investors interests. So, they would divide up the risks into different classes of securities. And some of them were rated triple A by the rating agencies because they thought there was almost no risk to those securities, and others were rated differently. And these CMOs were sold to investors all over the world.

Another kind of security which the textbook talks about is a CDO, which is a Collateralized Debt Obligation. These are issued to investors and they typically hold mortgage securities as their assets. Many of them held subprime mortgages in recent years, mortgages that were issued against subprime borrowers. A lot of these securities that were rated very highly by the rating agencies rated triple A, ended up defaulting and losing money for their investors. And the investors were all over the world.

The United States is a leader in mortgage finance and it was issuing companies in the United States, not just Fannie and Freddie, but lots of companies were issuing mortgage securities that had triple A ratings, which meant that Moody’s and Standard and Poor’s and the other rating agencies were telling you basically there’s no risk to them. And so, people in Europe, in Asia were investing in these and they thought they were perfectly safe, and then they went under.

Part of it was bad faith dealings by some of the issuers. Some of the issuers themselves doubted that these mortgages were so safe.

But what do I care? This is what happened. It’s gotten to be a complicated set of steps.  Somebody originates the mortgage. That means I talk to the homeowner. I have the homeowner fill out the papers. Then after they’ve originated the mortgage, they sell it to an investor, like Fannie and Freddie or some private mortgage securitizer and the mortgage securitizer finds a mortgage servicer, it may be the originator, who will then service the mortgage.

What does it mean to service the mortgage? It means to call you on the phone if you’ve missed your payment, for example. Or if you have questions about the mortgage, there should be someone you call. So, the mortgage service does that. That’s a separate entity. And then we have the CMO originator, then we have the CDO originator. It’s gotten to be a very complicated financial system. And then the whole thing collapsed.

So, there’s been a lot of reform to try to see what can we do to prevent this kind of collapse? Some people would say, let’s end the whole thing. Let’s go back to 1778, let’s not have mortgage securitizers. But that’s not the steps that been taken. I think we are making a progress, but I want to just conclude with just a little reference to one important change that was made in both Europe and the United States.

The European Parliament passed a new directive that requires or incentivizes mortgage originators to keep 5 percent of the mortgage balance in their own portfolio. That means, if you originate mortgages, you can sell off 95 percent of the mortgages to investors, but you have to keep 5 percent. So, this 5 percent limit was then incorporated into the Dodd-Frank Act in the United States. So, we again have the same requirement. And this is supposed to reduce the moral hazard problem that created the crisis and retain the mortgage securitization process. So, the idea is this – I know I heard people tell me, mortgage originators sometimes got cynical. They thought, okay, I’m helping this family fill out a mortgage. What do I care? I think this family doesn’t look like they’re not going to pay this back. But what do I care? I’ll fill it out, I’ll sell the mortgage to someone else and I’m out of here.

In fact, it got bad in some cases with some more mortgage brokers. A family would come in wanting to buy a house and the mortgage broker would say, what is you income anyway? And they will tell him the income. And he’d say, you’re trying to buy a $300,000 house on that income? I don’t know if I can do this. But then he’d say, wait a minute. Think about this again, is that really your income? You told me your income is $40,000 a year. Are you sure? Why don’t we say $50,000 thousand a year or say $ 60,000 a year and the couple would look at him in disbelief and say, no, we only have $40,000. He would say, well, think about it. You have other sources, don’t you? Everybody does this, you know. So, okay, we have $60,000. He says fine. And they thought, well, the mortgage broker gave me permission to do this. And he doesn’t care because he’s not going to take the loss.

So, the new law is supposed to discourage that kind of thing. And there are lots of new laws that are trying to tighten up. For example, mortgage brokers in the United States now have to be licensed. It used to be just five years ago, you could be an ex-con, fresh out of jail, and you could take up a business as mortgage broker. You can’t anymore. So, what’s happening all over the world is learned from this experience, but we’re retaining this basic system if mortgage securitization. Mortgage lenders that are professional. The basic industry has been retained. And we’re hoping and thinking that maybe we have a better system.

Video and material above provided by Yale via YouTube. Complete course materials are available at the Open Yale Courses website:http://oyc.yale.edu

This course was recorded in Spring 2011

Government Support For The Mortgage Markets

I want to go on talking about innovation in finance. Another important innovation is securitization of mortgages and government support of mortgage markets.

In the United States in 1938, the federal government, this is also the Roosevelt Administration, set up the Federal National Mortgage Association, which was a government agency that would buy mortgage to support the mortgage market. On Wall Street they couldn’t pronounce Federal National Mortgage Association. You know what they call them in Wall Street? They call it Fannie Mae. That was just an irreverent short name for the Association. It was run by the government. However, in the year 1968, the U.S. government privatized Fannie Mae and it became a private corporation.

So, what did Fannie Mae do? It would buy mortgages from banks. They were trying to encourage the mortgage market. So, a bank would lend money to buy a house and then they’re done. They can’t loan any more money unless they raise more deposits. Well, Fannie Mae would buy the mortgage from them and they’d have money again to lend again. They did this in ’38 because we were still in the Depression and the housing market was still depressed. They weren’t building homes. There were lots of unemployed construction workers. And so, Roosevelt was just thinking how can we stimulate the economy? And this was one of their ideas.

So, Fannie Mae was the mortgage finance giant that was created in 1968. In 1970, the government created another Fannie-Mae-like institution. Its official name was Federal Home Loan Mortgage Corporation. Wall Street had to invent a name for it. So, the called it Freddie Mac. They thought, well, we gave a girl’s name to Fannie Mae. Let’s give a boy’s name. I guess that’s a boy’s name. Both of these organizations are private companies now created by the government and they both use these names officially now. So, that’s their name now, Fannie Mae and Freddie Mac.

Freddie Mac was initially different because what the government asked Freddie Mac to do was buy mortgages and then repackage them as mortgage securities and sell them off with a Freddie Mac guarantee. So, once Freddie Mac started doing this, Fannie Mae said, well, can’t we do that too? So, they both do it. So, what the government had done is create two private corporations. You kind of wonder, why did the government even do that? Remember we have a corporate law. I can start mu own Freddie Mac, my own Fannie Mae. But the government did create them by privatizing Fannie Mae and by creating Freddie Mac, and they are both in the mortgage securitization business. So, they would buy from mortgage originators, the people who lend the money, they’d but the mortgages. In other words, they would take the IOU from someone, they’d repackage them into securities and sell them off to the public with a guarantee from Fannie or Freddie that if there were a default, the mortgage extra balance would be made up by Fannie or Freddie. Well, they did then get other companies called mortgage insurers, to insure at least part of the balance. It’s a complicated financial agreement. But what we had was private companies created by the U.S. government that created securities for investors that were guaranteed against default and based on mortgages.

So, the government then also stated that these are private companies and the U.S. government does not stand behind them. People started to say the government created these two corporations and now they’re securitizing and guaranteeing trillions of dollars of mortgages. Is this going to come back and end up being paid for by the taxpayer? So, the government stated clearly, these are now private corporations. Fannie Mae started out as part of the government, but no longer. Now, it’s a private corporation. And if Fannie Mae goes bankrupt, woe be tied anyone who bought their securities because their guarantee is not backed up by the federal government. So people complained, though. They said, you’re saying that it’s not backed up by the federal government, but do you really mean that? If Fannie or Freddie goes bankrupt, will the U.S. government just let them go under? Well, the official statement was, yes, the government will let them go under.

Guess what happened? In 2008, the real estate market crashed and we had our first housing crisis that was similar to the Great Depression. And in that housing crisis, both Fannie and Freddie went bankrupt. And now, what do we do? We’re in the Bush Administration Republican. They don’t particularly like bailouts. So, you think, of course, George W. Bush would just it’s the law, all right? The federal government’s not going to bail them out. But then, some people said, wait a minute, you know all over the world people are investing these, thinking that Fannie Mae was created by the U.S. government. In particular, a lot of Chinese, those poor innocent Chinese, are trusting the Americans and they put many billions of dollars into Fannie Mae.

Are you going to go and tell the Chinese? Sorry, we won’t back it. Well, someone can say, sure, go tell them that. It’s what we’ve been saying all along. But then the Chinese could come back and say, well, you’ve been saying that, but nobody believed you. Everyone knew that that wasn’t right and the government didn’t take all the right steps to make it really clear. For example, the Wall Street Journal used to list Fannie Mae bonds and Freddie Mac bonds in a section of the newspaper entitled “Government Securities.” And that’s the Wall Street Journal. That’s not the government talking. But, the U.S. government should have come in and told them, no, those are not government. So, we, poor innocent Chinese investors, we’ve read your paper and it said Government Securities. Now George Bush could’ve said, tough luck. You guys should have read fine prints, but he didn’t. Why not? Because it jeopardizes too much. If the U.S. government lets these agencies that it created go bankrupt and it lets those people all over the world down who invested in those securities. They’re going to be mad.

We have a reputation. The United States is able to raise so much money from all over the world because they think that it’s safe here and if we just let these fail, it’s not going to look right. So, the U.S. government took them both under conservatorship and is paying their debts, so those do not default. What we’ve learned from this lesson is that you can say a million times that you’re not going to guarantee something, but you end up guaranteeing it.

I wanted to say something about other countries a little bit. Canada has something like Fannie Mae and Freddie Mac called the Canada Housing and Mortgage Corporation. And so, I’ll just talk about other countries. The Canada Housing and Mortgage Corporation and it was created by the government of Canada and it does work that resembles the FHA and that resembles Fannie Mae, but it’s owned by the Canadian government, it’s not privatized. And so, you might say, well, it’s the same in Canada. But the big difference is, it’s smaller. They didn’t let it get as big as Fannie and Freddie. So, it isn’t heard as much from.

I was a keynote speaker at a conference on February 3 that the Financial Times organized in New York called Focus on Canada. And I had to give a talk about Canada to New York investors. They told me there were hardly any Canadians in the audience. What are we doing here in New York talking about Canada? Well, it’s because the Americans invest heavily in Canada. So, I was up talking to all these American people and I was looking at Canada and the Canada banking system. And I said to the group, Canada and America are just so similar, I can’t see much of a difference. Canada didn’t have Fannie and Freddie, it didn’t have these housing problems, but the worldwide recession hit Canada pretty hard. And so I said, Canada and U.S. are kind of like two peas in a pod. They are so similar. People like to make much of differences, but the Canadian economy just moves up and down in lockstep. And I also said, Canada was saved by the oil crisis being an oil exporter. In 2008, remember when the oil prices shot up? But little to my knowledge, there was a reporter for the Financial Post in Canada in the audience and my talk got reported in Financial Post. And then I went on their website and there was angry blogs from Canadians. I don’t think it’s so insulting to Canada to say that we’re just basically similar.

And I have to say this for Canada, they didn’t get so gung-ho on supporting mortgages as the United States did, so they didn’t have such a big housing bubble that the U.S. did. Part of the reason the U.S. had a housing bubble as big as it did is that these guys really we’re independent. They were taking orders from the government. The government was telling them to increase their lending to low-income, underserved communities. They were promoting the bubble. And so, Fannie and Freddie were told to promote lending to houses during the real estate bubble that preceded the crisis. That didn’t happen, at least not so much in Canada. So, they’ve had less of a bubble. But still the two countries are basically very similar.

Video and material above provided by Yale via YouTube. Complete course materials are available at the Open Yale Courses website:http://oyc.yale.edu

This course was recorded in Spring 2011

Real Estate Finance After The Depression

So, the Roosevelt Administration decided that there was something wrong with the old kind of mortgage. So, in 1934, a year after Franklin Roosevelt became president. He set up the Federal Housing Administration and it specified that – it offered – it was trying to get lenders back in to lend to homeowners because it was a catastrophe in the country.

So, in order to get lenders back in, the FHA started insuring mortgages and that meant that if you’re a mortgage lender and the person you lent the money to doesn’t repay you and the house isn’t worth enough, you can get the house, but sometimes you might lose money because the house has lost value, the government will make it up. So, the government came in with what’s called mortgage insurance and at the same time, the government said all mortgages that are insured by the FHA must be fifteen years or longer. And so, the U.S. government imposed the long-term mortgage on the mortgage industry. And they said this is better because the mortgage – and secondly, it cannot be a balloon payment mortgage.

The government said, this is really imposing too much on ordinary people that they have to come up with a huge sum of money at the end of the mortgage. So, they required that the mortgages be 15-year amortizing. Such mortgages had been offered already by some banks in the United States in the 1920s, but it was innovative finance and too complicated for most people. They never caught on. To amortize means to pay down the balance. So, an amortizing mortgage has no balloon payment at the end. A 15-year amortizing mortgage has a fixed monthly payment, you make it every single month. And at the end, you’re done. You take your spouse out to dinner and you say, we paid off our mortgage, we’re done. So, there’s no family crisis at the end. It’s a fixed monthly payment.

Now, the arithmetic of amortizing mortgages is a little confusing to some people and in 1934, it took some education. But I was to just describe the amortizing mortgage system. So, we’re going to have a mortgage of maturity – the maturity of the mortgage is in M, and that’s in months. So, in 1934, they started out with 15-year mortgages which I thought was pretty aggressive, but by the early 1950s, the FHA emphasizing 30-year mortgages. That’s a long time to pay off on your house. But the idea is, you know, you’re typical family, they get married, they’re buying their first house, they’re 25 years old. So, let’s give them a full 30 years to pay off the mortgage. They’ll be 55, kids will be going off to college, they’re still be working, that’s a comfortable length of time. Why not give them 30 years? And we guarantee the interest rate for 30 years. No surprises. You just know you have this monthly payment.

The question now is, how do we decide on the monthly payment? The idea of an amortizing mortgage is that you have a fixed payment every month, you have an interest rate and you want to make sure that the present value of the monthly payments equals the mortgage balance at the beginning. So, the initial mortgage balance, that’s the amount you borrowed, has to equal present discounted value of all the monthly payments. So, what will I call the monthly payment? Let’s call the monthly payment x, it’s the monthly payment in dollars. So, the mortgage balance is equal to x all over r over 12, where r is the annual interest rate, times 1 minus 1 all over 1 plus r over 12 to the Mth power. That’s just the annuity formula. So, that’s the formula used to compute – so, I’ve shown you that formula before. It’s the present value of a stream of payments equal to x. did I write r over 2? I meant r over 12. So, what you have to do if you are calculating an amortizing mortgage, if the person is borrowing the mortgage balance and I quote a rate r per year, I have to plug that into the present value formula and find out what monthly payment x makes the present value equal to the amount loaned. Now, that is a little bit of arithmetic that mortgage lenders would have had trouble doing. It is not that hard to do, right?

But I have here a page from a mortgage table. I found this in the Yale library. Can you read that? This is from a 50-year-old book. This is before they had computers. And so, it was too hard to do the calculation. Can you read it in the back’? Sort of.

This is for a 10-year mortgage. I just picked ten years. That was uncommon, that’s rather short. Some people would get shorter mortgages. You probably won’t live that long. So, they did give out shorter mortgages as well. So, this is the page from a mortgage book for 10 years and this is for a 5 percent mortgage. So, it shows the monthly payment a thousand dollars. If someone’s borrowing $5,000, you’d multiply this by five. They show it around $1,000. And the monthly payment per $1,000 is $10.61. So, what they’ve done is they’ve found out $10.1 is the x that makes this present value for r equal to $1,000. They’ve done exactly this calculation. Now, they show the payments schedule. The payment every month is $10.61. But what this table shows is the breakdown between amortization and interest. So, it shows the principal for each month. So, at the beginning you borrow $1,000 on this mortgage and you’re paying $10.61 per month. So, each month your balance goes down. In this balance column, they subtract. Well, the question is, how do they figure it out? You’re paying $10.61 per month, but part of that is sixty one cents per month. What part of that is interest? Well, it’s 5 percent divided by 12 of the $1,000 balance at the beginning. Your initial interest is $4.17. So, your principal is the 10.61 minus the interest. So then, that reduces your balance. So, the initial interest is $4.17, the principal interest is $6.44. Then, the balance is $993.56 after one month.

The next month, they figure what fraction of your payment is interest by multiplying 5 percent over 12 times the balance $993.56, and then that comes out to be $4.14 interest. You see the interest is going to be going down, because you’re paying off the loan. But your payment is fixed. So, the payment against principal is going up. So, the first month was $4.17 interest, next month is $4.14. Offsetting that is in the first month, the $6.44 being used to pay off your mortgage. The second month is more $6.47. I couldn’t show the whole page here, but here after six years six months, your interest is down to $1.74 because your balance is down to $407.61. And so, your payment of principal is much higher. The reason this table is important is that people move and they sell their house early. They don’t hold it for the full 10 years. So, you have to figure out when someone sells his house after six years six months, what do they still owe? Well, they now owe $407.61. So, that’s the idea of a long-term mortgage. Your interest payments are changing all the time, your principal payments are changing all the time, but your total payment is fixed. That was an invention, a financial innovation in 1934. This is called a conventional fixed rate mortgage and it’s now offered in many countries of the world.

However, there are only two countries where it’s the major kind of mortgage, United States and Denmark. This is a strange thing. This invention has not caught on around the world. It’s unique to only two countries, although you can get it in other countries. It’s not available in Canada in any number. I guess you could find it, but it’s not common elsewhere. Every time I go to a foreign country, I ask the people there, why don’t you have fixed rate mortgages? I don’t necessarily get good answers. I’ve been trying to understand why it hasn’t caught on. Then, I recently saw that Alastair Darling, who was under the Labour government. Alastair Darling was Chancellor of the Exchange in the United Kingdm until the conservative government took over. He issued a statement saying that U.K. should finally adopt the long-term mortgage. The problem is that any country that doesn’t have a long-term fixed rate mortgage runs the risk of falling into the same problem that the United State did in the Great Depression. Some kind of crisis like that could mean that people would lose their homes in great numbers. So, he’d like to see the U.K. get people borrowing at 10, 20 or even 25 years for their mortgages. But instead, what happened was the Conservative government took over. But you can in the U.K. get long-term mortgages. I think it’s true in most countries of the world.  They’re just not common there. It’s kind of bit of a puzzle. Why is it that only two countries do this generally?

I have a couple of reason to offer why it is. One of them is that the general public is resistant to long-term mortgages because they charge a higher interest. If the lender is going to guarantee it for 30 years, they’re going to have to charge you a higher rate because that guarantee costs something to them and consumers are resistant to paying the higher rate. And that’s part of the problem.

The other part of the problem is that bank regulators might not encourage banks to make these loans because it’s risky for banks. If banks tie their money up for 30 years and then they have depositors who can withdraw their money at anytime, the banks could go under. If there was ever a run, the banks could go under. If there was ever a run on the banks, they can’t liquidate these mortgages fast at all. So, you need a coordinated effort of a government to first make sure the regulators accept these concepts and it puts some risk on the public of the possible bailout of the banking system. And then, you have to get past public resistance. You have to make the public understand that when you get a fixed rate mortgage, it’s a clean contract. We have no worries for 30 years as opposed to problems that have sometimes occurred.

In Canada in1980, the interest rates shot way up and we had a duplicate of the problem that we saw in the U.S. People couldn’t afford to refinance their mortgages and a lot of people lost their homes. And so, it was a big problem. But they somehow got through that and they’re not really thinking about fixed rate mortgages in Canada even now, today.

Video and material above provided by Yale via YouTube. Complete course materials are available at the Open Yale Courses website:http://oyc.yale.edu

This course was recorded in Spring 2011

The Next Generation In Real Estate Appraisals

Zone Data Systems is a collaboration of two hundred thirty nine appraisal offices representing hundreds of appraisers across the United States. Each of the member offices has invested in the Valytics valuation technology developed by Zaio incorporated, a Canadian company for which the ZDS has the exclusive U.S. licensing rights. The technology employed by the ZDS in developing and reporting values on an extremely large number of properties is based on regional responsibility of its appraisers who have the responsibility for becoming the expert in their owned or assigned zones.

ZDS is the largest national appraisal company in terms of our partner and zone appraiser count. We already cover a large percentage of major metropolitan areas and will be expanding in all the major market areas in the near future. Our exclusive Valytics technology provides us the ability to correctly model market conditions into track residential real estate values on an extremely large scale in any different point in time.

The Valuation Research employed has been independently tested for its accuracy and is organized into one concise database. This database can provide retrospective appraisal values, current appraised values, provide the ability to map value trends and form the basis developing reflective exhibits such as GIS base data maps. ZDS can generate individual appraisal reports already pre-researched by professional appraisers. The technology supports a very accurate market modeling supported by local, professional appraisers working in familiar geographic areas.

One of the more recent developments of the Valytics technology is a subscription based product termed portfolio viewer and represents the peak of the cascade of possible products. Portfolio viewer provides the ability to address and monitor a selected inventory providing current value opinion, total value of a given portfolio and value trends. A value summary may also be added. This top of the line portfolio viewer provides the opportunity to download a number of variations of former ports developed from the database.

The valuation technology can be employed to isolated variable such as waterfront properties and compare them to similar properties that do not have water views. Values from coastal areas that have other economic factors can similarly be compared. ZDS can also provide comparisons overtime within specific areas.

Parallel forecasting can be applied for impacted versus not impacted control markets to establish a longer term projections as to value catch up or not.

Using Valytics technology homes can be grouped by common elements, location, size, style, etc. All sales within the market are reviewed and modeled within the database using GeoScoring, subject properties can be properly valued in comparison to existing known competitive sales. The GeoScore is the sum of values that each zone appraiser applies to each critical element with five as an average rating, each component of value can be raided and the totals will determine the relative ranking of each comparable home. The contributory value of each component results in an opinion of value that mirrors the ranking.

A subject property can be GeoScored in its rank will position the property within the overall market group. People have credit scores, now real estate has GeoScores. The homes are scored based on the above illustrated key attributes.

The Next Generation In Real Estate Appraisals

Exterior Inspection: The Real Estate Appraisal

I’d like to go outside value wise as far as property landscaped, does that make a difference if it’s landscaped versus just, you know, when I say landscape, the real landscaping, the lighting, specimen trees like that.

Landscaping here is a good question because you can see people spend fifty, sixty thousand dollars on landscaping and then they may think that’s going to add up much value. Again, what’s typically in common for homes in that area. A lot of bushes, trees, they may not necessarily maple tree, may not just simple maple tree, it adds an over-all appeal to the entire property and many times that would be one of the fact is that make or break a deal. It is very, very hard for appraiser to look at landscaping and try to dissect that and say how much contributory value that actually add to the property.

What if the subject property has no bushes, trees, plants, very basic and then the neighborhood has for most part really managed the lawn, is that a factor?

That’s what we call a frontal utility of the site. It’s typically seen as the negative. Again, it should be brought up to the neighborhood’s standard.

Okay, what about swimming pools?

Swimming pools, that’s a sixty four thousand dollar question. Swimming pools, you have to remember again the climatic conditions. Some parts of the country, we’re in New York here, and many instances we may get three good ones of use of a swimming pool that depend upon how the weather is. You go to some parts of the country, like for Florida for example, you can’t sell a house without a swimming pool. If you go to North Dakota, swimming pool really doesn’t have any contributory value. We also have to take consideration of what the size of the parcel is has about, when you get in to some of the urban areas and say for example if you go to the Bronx, and you have thirty hundred possible length, well if you put a round pool in your backyard, you will used up the entire yard and there’s no land left for other recreational facilities where you get a property, say or Westchester acre and acre and a half, that takes up a small part in the entire property.

So, is there a difference between a ground pool and above ground pool as far as an expert appraisal goes?

Above ground pool is typically seen as personal property, we do not give any value, however, if the above ground pool now has deck on and the deck on is attached to the home by a matter of attachment that now comes real property.

So, they appraise differently?

Yes. Because if it doesn’t have permanent deck on basically personal property, the seller of the property can take that away, and a lender, looks at that as not in collateral to the real estate.

Robin, when we get to the outside of the property, we start looking at the field of the site, for example here, this property is located at the end of the turnaround, which is location great because there is no full traffic on the street. And you could see also we take into account a part of it, it has a slight of slope which is still useable and here at the front we have a flower garden which is seasonal flower garden. This is what we look at site charachteristics. Now, we come to building improvement, as I said, this is by level, make known of the construction material, wood siding, aluminum gutters, national chigger roof. And as we said earlier, this lower level here is below grade. So, this is not counted as part of the gross living area. Its value has a finished basement. So, we have six rooms, two baths upstairs as the gross living area and the remainder is basically see as amenity, finished rooms and the other side of the house. We have the two car building garage.

We’re at the house here what we know here is the central air-conditioning unit and also a deck, this wall is the dining room. Again the deck, has the portion we place, because the entertaining from the dining room, kitchen, you want to go to the deck.

And as you can see here, this property offers some privacy here. There are trees, offering rear property line and another some roadways down there. But if you can see only a cheer basically blocks.

This is wonderful, we really appreciate everything.

Exterior Inspection: The Real Estate Appraisal

Real Estate and The Appraisal Process

Today, we’re going to talk about appraisals and your real estate transaction. If you’re driving and can’t take notes, not to worry, you can find all of our links to topics and guest that we have on our show at RREA.com/radio. If you can watch the videos of our segments and you have questions about the, you can always call in our question line and we will answer those on air for you, that number is 281-882-8088.

We have great show line for you today. We’re very excited to have Mike Brubaker here in the studio with us. He is a local appraiser in Houston area and he has been for over thirty years and he owns Brubaker and Associates. You may have heard of him. If you need an appraisal done, you can find out more about Michael’s company at brubakerandassociates.com. So, welcome to the show, Mike.

Thanks for having me. So, lots of appraisal questions out there I know some consumers get confused about the difference between an actual inspection and an appraisal and they’re very different.

Very different. Most appraisers are not licensed real estate inspectors. Inspectors in the state of Texas have to be licensed. Appraisers are looking more at the value of the property. We don’t necessarily go and turn on ovens and stoves and air conditioners and things of that nature.

But you do go in?

We do go in. There are some appraisal products that can be done on a drop by basis. Some mortgage lenders will do and it’s technically calling exterior only appraisal. And I get questions about that because of me a call and say, well, somebody gave me your he never came in the house, actually a gentleman appraisal product.

So, when would you need an appraisal? I mean, does every transaction require an appraisal?

Not every transaction. Certainly if you’re paying cash for the property, you don’t need an appraisal. But I will tell you, all for cash buyers these days are calling our office to get that confirmation that they get from appraisal that they’re paying decent price for the property.

So, it’s really just to check out the value?

It’s to check out the value. Most lenders, if you’re borrowing money, most lenders are going to require an appraisal.

A  few years ago, some things changed with appraisals and I know a lot of it because the lending issues that were going on and some new regulations came, can you tell us a little bit about those and how things have changed over the last few years?

Well, it’s gotten semi-complicated years ago. Lenders used to have a pool of operators that they picked on their own. Folks would call me because they like our customer service or quality or something on that nature. Back in because of really it’s a dodd frank act if you want to get technical about it. Most lenders or mail required to have to pool of appraiser that is more random selected. The lender can’t choose an appraiser for specific job anymore.

But they can choose their pool of appraisers, is that right?

Yes, and there’s a difference. Some lenders have a very, very large pool of appraisers that they choose from. Some lenders, let me back up, there’s no requirement on the size of the pool as long as there is enough people in the pool to guarantee random selection. He couldn’t have just two people or one person in the pool. So, an awful lot of lenders these days are limiting the size of their pool, they’ve discover that having a large pool with a variety of quality and capability of an appraiser really didn’t work to their advantage.

So, is there a minimum for that pool of appraisers that the lender needs to have?

There’s no legal definition. I think just by aiming and telling you a minimum of three.

If you have different appraisers on that pool and one specializes in condos and one specializes in certain part of town and then you’re giving a random appraisal, you may have someone from Galveston to appraise the house in Woodlands, is that correct?

That’s correct, that sort of the downside of this random pool selection.

Is there any way that a certain type of appraiser can be requested like if you have a large pool of appraisers, can you just excuse from the pool of appraisers who are in the spring area or just that part of the pool of the appraisers that are in the Woodlands, can a lender do that?

That can be done certainly. Now, they want to clarify that this sort of selection process with appraisers is specific to mortgage lending. It has nothing to do with, if somebody needs an appraisal on property for a divorce, for in a State because they want to know what the value of the house because they want to sell it to their brother, they pick up the phone and call us directly.

These are lenders that they’re having to go by these rules and regulations that have come down? That’s correct, these are all lender regulations. How did this new changes affect the industry for appraisers?

You know, it’s a game changer for a lot of appraisers and also a lot of appraisers had a, you know, they had a client based that our company for example, by a thirty year client base folks who we work with for many, many years, who grew like us, we like them. And then, now all of a sudden that client base was worthless.

Yeah, that’s not good. That wouldn’t good. It was really a game changer for an awful appraiser.

Did the fee structure change at all? Because sometimes I hear that appraisers are getting paid less by the lenders and so you have the pools cut down, you don’t necessarily have the best appraisers out there in that pool that the lenders use.

You know, there is a group of folks came in that work, basically what they did is they went to the lenders and said we will create a pool for you. Generally they’re called IMC, it’s an appraisal management company. A lot of those guys and what they did is they went to the appraisers and said we’re going to do everything that you used to do as far as soliciting clients will take, they call that portion out of your hands and all you have to do is appraise your work. But for that, we’re only going to pay you a smaller portion of the fee and get a hundred percent of what used to be which he used to get. So, some of those fees, they varied, there’s an awful lot of as in any business. So IMCs are better than others.

Are you working under any IMCs or do you steer clear of those?

We steer clear, I say that, but we wouldn’t created our own, so that was something that we decided, you know, we could do better than most others. A lot of the IMCs are national IMCs and I’ve discovered that, I’m really not that good on Arkansas or Louisiana, so we stick with our core bas which is to Houston, Austin, Dallas, Texas triangle.

You go pretty far as a company? We did.

Now, what if you are a seller at selling your home and the appraisal at the lender does for the buyer comes in low, you know, if you agreed upon the price of one sixty in the appraisal comes in at one sixty five, what happens?

You know at that point, it’s really tough. It used to be again, the lender could go to the appraiser maybe provide some information, everybody knew the appraiser work because there was a sort of discussion, maybe education the appraiser some that process now is an awful lot tougher because the whole point of dodd frank was to insulate the appraiser from being influenced by other entities that are involved in the transaction. So, there is an appeal process. I have to tell you I have not found it very satisfying and I’ve got a lot of calls from realtors that I haven’t found it satisfying either.

Yeah, I can tell you as a realtor I haven’t find it satisfying at all. It’s been quite an issue for some real estate transaction when the home doesn’t appraise.

Yeah. And I have to tell you, my phone rings an awful lot of phone calls from frustrated realtors, you know, we had the property on the market, it’s sold in five days for back up offers on it and an appraiser came and appraise for less than contract price. My attitude is been, I think by responding in same problem, you know, give him forty eight hours to fix it and sell it to the next buyer.

Now can the lender request another appraisal to go out?

That becomes a little bit tougher because that starts to look like fraud. It starts to look like a lender is cherry picking the appraisal that they want.

So, the buyer would actually have to go to a different lender and then not lender order an appraisal?  That’s pretty much the best when you do it. All right, and sometimes the seller and buyer can negotiate the difference as well, is that correct?

Yeah, and I’m not a fan of that, I have to tell you, I’m very fond of saying that there is no such thing as a divine value, you know, godson appraiser, he’s barely too busy doing other stuff. If we sent ten appraisers to the same property and there were no contract price to current go by, I guarantee you would get ten different appraised values.

Sir, absolutely, it’s just an opinion.

It’s just an opinion. And the opinion is based on the capability, the character that day and I hate to tell you, state certification I remember it was 1990 or 1991 all appraisers are required by the state achieve certification. The highest level of certification offer by the state of Texas is only requires two years of experience.

Well, that’s a low barrier of entry for sure for the industry. It really is, it really is.

All right, we are going to come back right after a commercial break. If you’re streaming us on RREA.com/radio, we appreciate you for tuning in from all over the country and from different parts of the world. We’ll be back right after this to talk more with Mike right after this commercial break.

Real Estate and The Appraisal Process

Home Appraisals and Typical Appraisal Questions

Americans have been over beating on real estate of at least five years. We’re going to take a couple of minutes what the heck an appraisal is and how to make it work on your benefits.

Hey, it’s your buddy, it’s your mortgage guy, Jamey Milheiser here.

The mortgage industry is a whole today is clouded with misinformation, mysteries and confusion. And if there is one mortgage industry that has the most confusion surrounding it, it’s got to be that real estate appraisal.

Homeowners of today are subject to appraisals coming way lower than they think their house is worth or people are trying to buy homes for more what they appraised for. So, today’s installment, we’re going to take a couple of minutes, so you get the 411 and you what an appraisal is and how to make it work.

So, first of all, what is an appraisal? It’s a report structured by licensed and certified real estate appraisal. Commonly this licensing and certification granted by the State that the real estate located in. This report can be used to document people’s asset statements or most commonly the purpose of this video is an instrument to perform a mortgage loan.

So, here’s a six hundred-pound gorilla in the room, how the heck is that person figure out the value of your property. Expert real estate appraisers are pretty hamstrung by the rules/guidelines in which how they derive the value of your property. Commonplace guidelines among the mortgage industry today are to used 3 comparable sales, not listing but home actually close within the last six months within roughly three miles away of you property. If you’re in an urban setting, we can be talking as little as a mile, more rooms, we’d be talking five miles if not twenty miles. The essence of the expert real estate appraisal today is 3 homes and accountable years that is sold recently in your neighborhood. This can obviously get real clunky when we’re talking about how hot the foreclosure market is and sold properties in your area that might go for twenty cents on a dollar.

Now, that one sale won’t necessarily hurt your value. But if there’s a lot of foreclosure going on in your district, guess what, we’re not going to look at green old paper.

Hey, Milly, give me some tips on how to keep my property value up? Keep in mind first and foremost, you are not in control the market. The real estate market is bigger than me, bigger than you, it’s bigger than all of us. So, if you’re up against the comparable sale, don’t sweat it too hard, you can always check your value again maybe at six months and see what’s sold, but you’re basically powerless to what might be going on with homes in your neighborhood. Always keep your property up to date and maintain. A home captain, good condition will always appraise better than one that need some work.

Also, keep in my mind that I don’t like having this conversation with people if you put ten grade windows or ten graded for a new roof that does not need house just to appraise for ten thousand more than what of before the project.

Those things are considered regular maintenance and grant that they will help you sell the property and do help the overall condition standpoint but you will never get dollar for dollar on the remodels that you do, getting your basement fixed up does not count of the same amount of value as the main floor or what’s considered GLA, gross living area above ground. You have a discounted per square footage for your basement advantage. Do not be overly obsessed with what your house being assessed at for the good or for the bad. Also, don’t get too overly outnumbered with zoe, Julia or teh other websites, they give an online value of your property.

The only true way to gain what your property is worth is to do what expert appraisers has to do and use the approach the call sales and compare approach, what homes like yours and your neighborhood selling for recently.

Remember the old adage, it’s only what you can get for it. And the sales comparison approach is the best way we know to tell you that answer. Now, the other thing to consider is age and economic life of the property. We want to live our clients we have a forty year old home and trying to compare to a five year old home in your neighborhood, it doesn’t work like that. You have to look at properties that are comparable in age and what’s called economic life.

And the angel that still hold its true, one of the three most important words in real estate, location, location, location, depending on where you property is at especially like in my market, the fast city, then value reflection weight greatly. Keep in mind, we’re talking about what’s worth in neighborhood.

So, there you go, quick, fast and hurry, some appraisal 101 so you don’t live yourself in frustration or possibly buy your property that’s not going to appreciate the way that it should. I’m Jamey Milheiser, you can help the flowing of interest rate, make sure your loan is locked in disclose.

 

Home Appraisals and Typical Appraisal Questions