REQUIRED READING: There is a controversy taking place among some appraisers about the second version of the Home Affordable Refinance Program (HARP 2.0), but I'm not really sure what's generating the heat behind it.
The second phase of HARP 2.0 states that there will be no limit on loan-to-value ratios (LTVs) because the 125% LTV cap has been taken off. The LTV is now unlimited, and it applies only to Fannie Mae and Freddie Mac loans. Lenders don't have to participate in the program, either.
That means that underwater loans can have 150% or even 200% LTVs. HARP 2.0 requires a ‘reliable’ automated valuation model (AVM), rather than a full appraisal, to take care of collateral valuation – and rightly so, because a full or even drive-by appraisal on an underwater home is costly and time-consuming.
Some appraisal groups want the definition of a ‘reliable’ AVM because they do not want to be held liable by Fannie Mae or Freddie Mac – or lenders, for that matter – for incorrect valuations. I think we're losing sight of the issue. I say it doesn't matter whether an AVM is reliable or unreliable. We're talking about homes that are at least 25% underwater – if not more.
Let's say that a borrower has a $100,000 loan and has missed no more than one payment on it. The home, however, is only worth $75,000. Under HARP 2.0, it could be worth $50,000 – a 150% LTV.
Either way, it doesn't matter. The point is in allowing the borrower to refinance that home in order to continue making payments on it.
Now, let's say a borrower wants to refinance a $100,000 loan on a home that is worth $25,000, according to an unreliable AVM. That would make it a 175% LTV, and under HARP 2.0, that would be adequate. It would also mean the home is 75% underwater.
Even so, the question is not whether or not the AVM is reliable. Again, let's not lose sight of the issue. The better question is, why is this borrower staying in his or her home in the first place?
The likely answer is that the borrower is a responsible homeowner who likes where he or she lives and wants to stay there for family and personal (not financial) reasons. That borrower has made monthly mortgage payments, but times are tough – perhaps the borrower is only working part-time or lost their job – and he or she would like to keep up with the monthly mortgage payments.
I would ask all appraisers seeking a definition of a ‘reliable’ AVM to do the math. Let's consider that same $100,000 loan, taken out for 30 years with a 5% interest rate. Disregarding taxes and insurance, that homeowner would be paying approximately $537 per month. Lower the interest rate to 4% for the same amount and term, and the borrower would pay about $477 per month. That gives the borrower a $60 per month savings that equates to $720 per year.
If appraisers insisted that Fannie Mae and Freddie Mac needed a full appraisal on the property – let's call it a $400 value – that would take away more than half of the first year's savings that the borrower would get by doing the refinance in the first place. Even one short $250 drive-by appraisal subtracts more than one-quarter of the savings this borrower would have in the first year.
The bottom line is that the appraisal – whether full, drive-by or AVM – is unnecessary under the HARP 2.0 rule. Appraisers, by virtue of an unlimited LTV, are not liable for any aspect of the valuation as specified by the program's parameters. It looks to me like this controversy is just a bunch of hot air.
Here's another question: Would Fannie Mae or Freddie Mac have anything to lose by an inaccurate appraisal performed by an unreliable AVM? The answer is an emphatic ‘no.’ The investors, by lowering monthly payments, have everything to gain.
I will again refer to our borrower who has a $100,000 loan and is paying $537 per month. He has been up-to-date on the loan, but lost his job and needs to lower his payment amount to $477 per month. Let's say his home has a 125 LTV. If the lower monthly payment keeps the borrower out of foreclosure, why would Fannie Mae or Freddie Mac care whether the home was worth $75,000, $50,000 or, for that matter, $25,000? They wouldn't care, because if that home goes into foreclosure, it begins costing Fannie Mae and Freddie Mac more money as an REO property.
Add to that the fact that the value of the home would likely drop anyway by virtue of the home's being in foreclosure. Now let me ask you this: Why would the appraisal value matter at all?
In this case, I am speaking of HARP 2.0 and an unlimited LTV for refinancing a home. However, my feeling is that the same should go for borrowers looking to lower their interest rates by refinancing through the same lender. Those borrowers should not have to submit an appraisal – or even a credit report for that matter. They should simply be given the rate (providing they still hold the note).
Lenders may get hot under the collar at this suggestion. After all, they'd contend, they can't subject themselves to the risk. Once again, that rebuttal sounds like a lot of hot air.
Think about it: The lender already holds the risk on the original note, so there would be virtually no difference. If anything, the lender's risk would actually decrease, because the payments would become more affordable for the borrower.
With a regular refinance in this market, obviously, the same logic certainly does not apply. But we're not talking about regular refinances here. We're talking about HARP 2.0. They are apples and oranges.
Appraisers need not be concerned that this will weaken and erode appraisal standards for traditional transactions. We already tried to use appraisal alternatives with home equity lines of credit, and it didn't work. Trust me, no one's going to be forgetting about the damage those decisions caused for a while.
In this market, for a traditional refinance, a property's true value still needs to be filtered through a certified, licensed appraiser who reviews the home to determine if a borrower is eligible for a refinance. In today's market, even a drive-by appraisal will not necessarily perform the function adequately.
Let's say our borrower is not applying under HARP 2.0, but would like to refinance their home at a lower rate. The borrower has a $100,000 loan but needs some equity on the home before lowering his monthly payment. Then, of course, the true value of the home needs to be taken into account.
Anyone who is concerned about Fannie Mae and Freddie Mac's appraisal policies for HARP 2.0 needs to remember that this is not a regular scenario. It is an opportunity for investors to preserve the value of the loan as best they can and to keep borrowers – typically underemployed and struggling to make home payments – in their homes.
Now is not the time to be charging for full appraisals, or even drive-by appraisals. Rather, it is the time to help borrowers make their mortgage payments on time. More specifically, now is the time to help responsible borrowers who have made their monthly payments consistently – with perhaps the exception of one late mortgage payment.
Talk about kicking someone when they're down! While there are borrowers out there who could easily make their monthly payments but are strategically defaulting on homes, these appraisers need to actually ask Fannie Mae and Freddie Mac what a ‘reliable’ appraisal should be.
Seriously? The agencies' response to ‘reliable’ and ‘unreliable’ appraisals should be, ‘Who cares?’ In fact, the best response would be that no appraisal is necessary at all.
I would tell any appraisers worried about their liabilities that these can be homes that are so underwater that we don't even need to see an appraisal amount. In fact, unless you just want to earn some cash in this refinance, we really don't need their services at all in the newly refined HARP 2.0.Â
As far as Fannie Mae and Freddie Mac are concerned, they might want to consider helping these sincere borrowers who make their monthly mortgage payments on underwater homes by curtailing their refinance costs completely and simply charging a small fee to refinance to a lower percentage rate.
Excuse me for my cynicism, but if the Obama administration's goal were to solve the housing crisis and help borrowers stay in their homes, it would excuse the appraisal community completely from adding any undue charges to the HARP 2.0 refinance. At least that would show some respect to borrowers who work hard and try to make their monthly mortgage payments on time. At the same time, they might want to add a penalty for those borrowers that decide to ‘strategically default’ on their homes, costing lenders, investors and servicers time and money.
If anything, we should be thanking the borrowers who are eligible under the HARP 2.0 program, rather than pushing them from the frying pan into the flame.
Stefan Lamanna is chief appraiser at Global DMS, headquartered in Lansdale, Pa. He can be reached at (877) 866-2747.
