When a borrower applies for a VA (Veterans Administration) or FHA (Federal Housing Administration) loan there is the possibility of having the borrowers loan costs covered by the loan.

For example:  If a house has a current market value of $200,000 and it sells for $200,000, and, the loan if for $200,000 (a 100% loan to value ratio), everything is quite clear.  However, if the borrower has $10,000 in loan costs that they would like to include in the loan, what often happens is the appraiser is asked to provide an appraisal with a value conclusion of $210,000.  But, didn’t I say the house had a current market value of $200,000?????   Yes, I did.

Very, very often, the appraiser who is asked to provide an appraisal with a value conclusion of $210,000 will do just that.  And, that is fraud.  Appraisers know that the lender will use that appraiser’s services much more often if the appraiser does what the lender wants.  Greed is a powerful force amongst humans.

What I would like to know is why doesn’t the lending industry come up with products that allow a $210,000 loan ($200,000 in collateral backed loan funds, plus the $10,000 in closing costs) and not ask the appraiser to commit the fraud.  It seems to me that such a lending product could be created.  It seems to me that calling everything by its correct name would be useful.  That is, calling the appraisal without fraud (the one at $200,000) an appraisal and the one at $210,000 a fraud.  And, doing the $210,000 loan as a value plus loan costs deal.

Is it the mortgage insurance side that would not allow this????

For thirty plus years I have been competing with the appraisers that will produce the $210,000 appraisal without hesitation.  I have never seen the need for me to do that.  I have acquired a client base that does not require such practices.  But, a large part of the residential mortgage lending industry, for decades, has been operating within that fraudulent practice.

It is difficult for the appraiser to refuse such requests for fraud when they know that there are other appraisers available to the lender who will commit the fraud willingly just to keep the business coming their way.  But, if the loan was able to be made based on an appraisal of $200,000, there would be no incentive for the fraud.

I say, cut out the incentive for fraud.

Perhaps the new regulations will help.  The current condition of the residential mortgage lending industry suggests that perhaps this is an important topic.

Are there loan products that provide the value plus loan cost funding I am referring to?  Let me know if you know.

Ralph Olsen, IFA appraiser

Pacific West Appraisal Services, Inc.

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I just completed an appraisal of a 4,000 square foot house in central Clark County. The house is four years old. It is on an acre of land. It is a good to very good quality house. The county has it assessed at $800,000.

I did research of the central county area for newer houses of 3,000 to 5,000 square feet of living area. From the search parameters I entered I found 11 houses similar to the subject that had sold in the last six months. That is 1.83 houses per month. With the same search criteria I found 82 listings. These data suggest a 44.73 month supply on the market. That is almost a four year supply.

Several days ago I did an appraisal of a house in central Clark County. The house was new on the market in August of 2007 and available for $700,000. It just sold for $475,000 net. That is 68% of the original asking price. This was a spec house on a lot with a very good view.

As you have seen in previous posts, the housing stock in the $500,000 to $1,000,000 range has been hit very hard by this recent market “correction.”

Ralph Olsen, IFA appraiser

Pacific West Appraisal Services, Inc.

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Recently it has been asked by a lender, why an appraisal for the FHA would cost more than an appraisal for conventional financing.

In the past (1970’s, 1980’s and early 1990’s) an FHA appraisal was markedly different than a conventional appraisal. There was a glossary of terms and definitions that the FHA supplied the appraiser. Each of the items were to be considered by the appraiser in conducting an FHA appraisal. The list included the width of the road access to the property; the width and breadth of the scuttle hole into the attic; the size and orientation of the pressure release tube on the hot water heater; depth (or R-factor) of the attic insulation; was there a sump pump…….. The list was extensive. We appraisers were very trained in the need to conduct an inspection of all these things. In fact, the FHA had every appraiser on their list annually attend a seminar covering the details.

Then in 1994 or 1995, the banking lobby successfully got the FHA to drop all that. Also, the banking lobby got the FHA to allow the lender to choose the appraiser, whereas the FHA had always done the appraiser selection in the past. That was when the problems really began. Prior to that date I, as and MAI and SRA, was doing about 12 FHA appraisals per month. Also, I was assigned, by the FHA, to a particular area of town to watch for some types of fraud that had been occurring. Since the banks took over the selection of the appraiser I have done very few FHA appraisals. It seems the lenders did not like the appraisers following the FHA rules. That interfered with the lenders closing loans. Well, if you have been in the business long enough, you’ll remember the problems the FHA had with defaults during the middle 1990’s. This was a direct result of letting the proverbial fox into the proverbial hen-house.

Today there are still extra things the FHA asks the appraiser to look at when conducting an appraisal. Also, there is the greater risk of doing appraisal work on behalf of an insurer, like the FHA. Some lenders recognize the difference. Some lenders say there is no difference. The ones who say there is no difference are not paying attention. That could cause problems.

With the rise in FHA participation in the marketplace, there is a need for the appraiser and lender to pay attention to what is being done. I am hopping the industry has grown weary of the cost and hassles of the fraud that has occurred in the past.

There is plenty of business to do without the fraud.

Ralph Olsen, IFA appraiser

Pacific West Appraisal Services, Inc.

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I did an appraisal several days ago.  There were plenty of recent, conventionally financed sales in the area that were very similar to the subject.  There were also REO sales (bank foreclosures) and some creatively financed and traded houses.  The appraisal was pretty easy, but the market is a bit dicey.

I went to a neighborhood that is about five years old several days ago.  There are about 150 houses in the sub division.  As I looked for sales data I found that there haven’t been a sale in that development in the last six months that was not a foreclosure, and there were a number of foreclosure sales.  There were no cash, conventionally financed or even creatively financed sales to be found.

It is difficult these days to read the data.  It is very mixed.  Some neighborhoods are doing pretty well.  Others are not doing well at all.  It will be interesting to look at the NTS statistics at the end of this month.

Ralph Olsen, IFA appraiser

Pacific West Appraisal Services, Inc.

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It is common to need an appraisal done of a proposed house. It is also common to need monthly construction progress reports to follow up the appraisal.

This is a common practice in the appraisal profession. The appraisal can be done from the blue prints together with the specifications that describe the finish work. The appraisal is done as if the house were complete today. Often, at the end of construction, the lender will ask for an update to the appraisal to track the market value.

A key element to this process is a useful construction progress report. A form with the different construction elements of the house broken out as line items together with a percent of the total is needed. Custom forms are made to cover these progress reports. With a column for each of the months of construction, an appraiser can track the progress accurately, reporting the percent of completion to the lender each month. This allows the lender to advance money to the builder as progress is made.

Ralph Olsen, Appraiser IFA

Pacific West Appraisal Services, Inc.

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Yesterday I received two phone calls from two different relocation companies.  They were asking questions about the local market.  It seems that it has become very difficult operating a relocation company in the current economic climate.

One of the companies wanted to know why I had not included a large forecasting adjustment on a high end house.  The other appraisers involved with that relocation had used large forecasting adjustments.

The statistics for this property’s market suggested that the houses were selling within 90 days at about a 95% sales to listing price ratio.  My read of the data suggested that forecasting was not necessary when the relocation company wanted the analysis to reflect a 90 - 120 day window.  However, it seems the other appraisers felt that large forecasting adjustments were called for because of the current economic climate.

I did another appraisal a month ago for a relocation company.  I used the local statistics to conclude the anticipated sales price to be $390,000.  It sold in about 25 days for $405,000.  And, I did the appraisal for the new buyer.  In the case of this property, my intuition suggested it might sell a bit higher and sooner than the statistics suggested.  This was due to the quality and location of the neighborhood and the subject property.  I played it straight by the statistics and was a little low.

A year ago I appraised a house for relocation.  It had been on the market for $525,000 for several months.  I did the relocation appraisal and concluded $400,000.  I got some static back on that one.  I was accused of being way too low.  It sold about six months later for $375,000.  Tough market.

The other relocation company that called yesterday just had some questions to ask.  They had not used my services, but had a house in Brush Prairie on five acres that three appraisers had examined.  There was a wide disparity to the results the appraisers provided.   The relocation representative expressed frustration with the market.  The appraisers, she said, were mostly well qualified and experienced with relocation work, but as everyone else, were having a tough time reading the markets.

There are houses in this county that were new and available in 2006 that have still not sold.  There are houses selling within 30 days in some areas.  Being an appraiser these days is like being in high school science class.  You look through the microscope at the paramecium and try to focus on its nucleus.  But, the little bugger keeps moving.  You have to track it all around and focus for its up and down movement too.  It is great when you get a good focus on that nucleus, but it ain’t easy to do sometimes: especially in a market like we have today.

Ralph Olsen, Appraiser, IFA

Pacific West Appraisal Services, Inc. 

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