WeeklyBasis 07/10/09: Rate Rebound & Problematic Appraisal Rules

Rates on conforming loans up to $417k and super-conforming loans up to $729k have been on a wild ride in the last 7 weeks, spiking up .875% then regaining .625% of that in the past three weeks, for a net increase of .25%. Inflation and bond market oversupply concerns lead the run up, then worse than expected housing prices (latest Case Shiller Home Price Index -18.1%) and jobs numbers (-467,000 jobs lost in June) led rates dropping again. Investors flock to bonds when economic news looks weak, and when mortgage bond prices rise on rallies, yields (or rates) drop. Rate volatility is still huge day to day as bond markets trade furiously to reconcile the economic sentiment, so if a borrower sees a rate they like when they’re ready to transact, they should lock that rate and not get greedy. Rates on Jumbos from $729k to $3.5m are competitive for borrowers with strong down payments, income and credit profiles, but borrower scrutiny—even for the most stable borrowers—is still growing. And property valuations issues are front and center, more on this below.

Appraisal Rules Causing Problems
As of May 1, a new regulation prohibits loan officers from talking to home appraisers. Previously, this was one of the first steps in a loan agent’s client advisory process. The new regulation is called the Home Valuation Code of Conduct (HVCC) and was mandated by Fannie Mae and Freddie Mac, which both are regulated by the Federal Housing Finance Agency (FHFA). Now a bank has a stable of appraisers or contracts with an appraisal management company, then a loan officer submits an appraisal order which gets randomly assigned to an appraiser.

Borrowers, Realtors and loan officers are seeing increasing cases of complacent appraisers—or far flung appraisers being assigned to an area where they have no local knowledge—missing relevant data and causing delays or cancellations of purchase and refinance transactions.

As of now, the majority of HVCC-compliant banks don’t have a dispute policy, meaning if an appraisal misses relevant data and shows inadequate value, there’s nothing a Realtor or borrower or loan officer can do, and the purchase loan or refinance loan transaction is declined.

A few firms, including RPM Mortgage, have FHFA-approved appraisal processes that include a dispute policy, under which borrowers and Realtors can submit evidence if they disagree with an appraisal’s findings. Evidence is reviewed and if credible, the appraisal will be held accountable for revisions and/or comments. To minimize risk and cost, borrowers should target banks that have dispute processes in place.

Second to disputes on the list of HVCC issues is the ability for a bank to assign appraisers local to the area. The HVCC rules are too new for any bank to claim victory in this area, some (including RPM) are sorting this out. With countless location and property characteristics that affect value analysis, it seems inevitable that more banks will have to sharpen their HVCC processes and allow for smarter communication with appraisers. A developing story if there ever was one.

CONFORMING RATES ($200,000 – $417,000) – 1 POINT
30 Year: 5.0% (5.18% APR)
FHA 30 Year: 5.0% (5.18% APR)

SUPER-CONFORMING RATES ($417,001 to $729,750 cap by county) – 1 POINT
30 Year: 5.5% (5.68% APR)
FHA 30 Year: 5.25% (5.43% APR)

JUMBO RATES ($625,500 – $3,500,000) – 1 POINT
30 Year: 6.375 % (6.55% APR)
10/1 ARM: 6.25% (6.39% APR)
5/1 ARM: 5.25 % (5.43% APR)