Home Builders Face New Hurdles

Builders are on track to construct the fewest single family homes in history this year. Total housing starts in July were down 1.7 percent, month to month, which may not sound like a lot, but when you break the number down, you see the problem. Single family starts were down 4.9 percent, while Multi-family starts rose 6.3 percent. Rental demand continues to rise, as consumer confidence in homeownership was decimated yet again by the recent debt turmoil in the economy. I am reporting these numbers today from a construction site. Mid-Atlantic Builders of Rockville, MD is putting up the last phase of a large single family development out in Bowie, MD, which is about 15 minutes outside the DC Beltway. According to executive VP Stephen Paul, "We started what we call the spring market in February. We started out very strong, we had a good February, March, even into April. What started to cause consumer confidence to wane was the escalation of gas prices, the debt issue with the government, and what's going on in Europe." In other words: Confidence. "We see people not sure what to do at this moment and a little unsure," adds Paul, though he is confident that things will pick up this Fall, but housing analysts aren't so sure. "The market is continuing to adjust to a reduction in the national home ownership rate at the same time the supply of existing single family homes remain excessive," writes Peter Boockvar at Miller Tabak. Builder Stephen Paul told me of a new trend I'd heard of only anecdotally: We're seeing more multi-generational families moving into our homes, so we're selling in-law suites, with the regular part of the house, and the parents are moving in and actually helping pay, funding the mortgage, so that's helping with the affordability." That's precisely why we are seeing a drop in household formation. Add that to the surge in renting and it's pretty clear why the nation's home builders are in for a long
haul back to recovery.

NAR - existing home sales down

Existing-home sales eased in June as contract cancellations spiked unexpectedly, although prices were up slightly, according to the National Association of Realtors (NAR). Sales gains in the Midwest and South were offset by declines in the Northeast and West. Single-family home sales were stable while the condo sector weakened. Total existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, declined 0.8% to a seasonally adjusted annual rate of 4.77 million in June from 4.81 million in May, and remain 8.8% below the 5.23 million unit level in June 2010, which was the scheduled closing deadline for the home buyer tax credit. The national median existing-home price for all housing types was $184,300 in June, up 0.8% from June 2010. Distressed homes – foreclosures and short sales generally sold at deep discounts – accounted for 30% of sales in June, compared with 31% in May and 32% in June 2010. According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage was 4.51% in June, down from 4.64% in May; the rate was 4.74% in June 2010.

Total housing inventory at the end of June rose 3.3% to 3.77 million existing homes available for sale, which represents a 9.5-month supply at the current sales pace, up from a 9.1-month supply in May. All-cash transactions accounted for 29% of sales in June; they were 30% in May and 24% in June 2010; investors account for the bulk of cash purchases. First-time buyers purchased 31% of homes in June, down from 36% in May; they were 43% in June 2010 when the tax credit was in place. Investors accounted for 19% of purchase activity in June, unchanged from May; they were 13% in June 2010. The balance of sales was to repeat buyers, which were a 50% market share in June, up from 45% in May, which appears to be a normal seasonal gain.

Single-family home sales were unchanged at a seasonally adjusted annual rate of 4.24 million in June, but are 7.4% below a 4.58 million pace in June 2010. The median existing single-family home price was $184,600 in June, up 0.6% from a year ago. Existing condominium and co-op sales fell 7.0% to a seasonally adjusted annual rate of 530,000 in June from 570,000 in May, and are 18.0% below the 646,000-unit level a year ago. The median existing condo price5 was $182,300 in June, up 1.8% from June 2010.

Regionally, existing-home sales in the Northeast fell 5.2% to anannual pace of 730,000 in June and are 17.0% below June 2010. Themedian price in the Northeast was $261,000, up 3.1% from a yearago. Existing-home sales in the Midwest rose 1.0% in June to a pace of 1.04 million but are 14.0% below a year ago. The medianprice in the Midwest was $147,700, down 5.3% from June 2010. Inthe South, existing-home sales increased 0.5% to an annual level of 1.86 million in June but are 5.6% below June 2010. The medianprice in the South was $159,100, down 0.1% from a year ago.Existing-home sales in the West declined 1.7% to an annual paceof 1.14 million in June and are 2.6% below a year ago. The median price in the West was $240,400, up 9.5% from June 2010.

Home prices trending up

Home prices and inventory levels are trending upward in many US cities tracked by Altos Research, according to the firm's latest Housing Market Update. The median national home price for all 26 markets covered by Altos hit $450,358 in June, up from $444,273 in May. Meanwhile, in the past three months, listing prices rose 2.31% and inventory levels grew 3.52%. The only city to report a drop in home prices in June was Las Vegas and even that was amere 0.86% decline when compared to the month before. When analyzing home price data for the past three months, both New York and Las Vegas experienced falling prices, reporting drops of 2.2% and 1.61%, respectively, Altos said.

Inventory rose in 12 of the major markets tracked by Altos last month, while falling in the remaining 14 composite cities. The biggest inventory jump occurred in Boston, with the city's inventory level rising to 5.8%. Phoenix, on the other hand, experienced the largest inventory level drop, falling 7.93%. Even though the 90-day home price trends rose somewhat, Altos said a weekly sample taken from the month of June still shows a "slight flattening" in home prices. Comparatively, the latest S&P/Case Shiller report said the average price of a single-family home rose for the first time in eight months during the month of April. Altos suspects the S&P/Case-Shiller will be reporting a few positive trends through September. At the same time when looking forward, Altos foresees a slowing or plateau of home prices in the fourth quarter.

MBA - mortgage applications decrease

Mortgage applications decreased 5.1% from one week earlier, according to data from the Mortgage Bankers Association's (MBA) Weekly Mortgage Applications Survey for the week ending July 8, 2011. This week's results include an adjustment to account for the Fourth of July holiday. The Market Composite Index, a measure of mortgage loan application volume, decreased 5.1% on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased 24.0% compared with the previous week. The seasonally adjusted Purchase Index decreased 2.6% from one week earlier. The unadjusted Purchase Index decreased 21.9% compared with the previous week and was 0.2% lower than the same week one year ago. The Refinance Index decreased 6.2% from the previous week, and was 42.1% lower than a year ago. The Refinance Index has decreased the past four consecutive weeks, reaching its lowest level since April 29, 2011. The Refinance Index is not seasonally adjusted but is adjusted for the holiday.

The four week moving average for the seasonally adjusted Market Index is down 4.7%. The four week moving average is down 1.0% for the seasonally adjusted Purchase Index, while this average is down 6.3% for the Refinance Index. The refinance share of mortgage activity decreased to 65.6% of total applications from 66.4% the previous week. The adjustable-rate mortgage (ARM) share of activity decreased to 5.5% from 6.1% of total applications from the previous week.

Luxury housing leading the recovery

The housing market is showing "signs of improvement" with help
from luxury home sales, Toll Brothers Chief Executive Douglas
Yearley said yesterday. "There are some signs luxury is leading
us out of this a little bit," he said. "We're clearly off the
bottom." But while Toll is a builder of those luxury homes, the
CEO expects sales the rest of the year to be relatively flat.
That's despite 60% of Toll sales coming from the northeast
corridor of Boston to Washington, D.C., which was not hit with
the same housing problems as Las Vegas and Florida, among others.
"I think in pockets we’ll see some success," Yearley said.
"The good news is pricing has definitely stabilized. We’re not
seeing price reductions. In some isolated cases, we have some
pricing power, we’re able to raise prices." He added that
after five or six years of waiting, buyers want "to move on with
their lives and I think they’re done trying to time the perfect
point to get in the market. They’re taking advantage of great
interest rates. Affordability’s at an all-time high…It’s
helping us but we have a long ways to go."

Fed’s Fisher Opposes Extension of QE2

U.S. Federal Reserve Bank of Dallas President Richard Fisher said he opposes any extension of the Fed’s asset purchase program after June, saying inflationary pressures are building “world-wide.” “No further accommodation is needed after June. We can no longer press on the monetary pedal,” Fisher said in a speech at Goethe University in Frankfurt. Fisher has been skeptical of the program, dubbed QE2, saying two weeks ago, that it should prove “demonstrably counterproductive,” and it would be better to discontinue it. Last week, the Fed voted to maintain its key lending target near zero and maintain its planned $600 billion in Treasury purchases through June. As the Fed’s rate-setting board voted to continue the program, he warned of speculative excesses that may be contributing to the rise in oil prices. “We are seeing the signs of all the intoxication” that arises from cheap and available capital, Fisher said.

Obama tries to force mortgage deal

WSJ - Obama tries to force mortgage deal

The Obama administration is trying to push through a settlement over mortgage-servicing breakdowns that could force America's largest banks to pay for reductions in loan principal worth billions of dollars. Terms of the administration's proposal include a commitment from mortgage servicers to reduce the loan balances of troubled borrowers who owe more than their homes are worth, people familiar with the matter said. The cost of those writedowns won't be borne by investors who purchased mortgage-backed securities, these people said. If a unified settlement can be reached, some state attorneys general and federal agencies are pushing for banks to pay more than $20 billion in civil fines or to fund a comparable amount of loan modifications for distressed borrowers, these people said. But forging a comprehensive settlement may be difficult. A deal would have to win approval from federal regulators and state attorneys general, as well as some of the nation's largest mortgage ser
vicers, including Bank of America Corp., Wells Fargo & Co, and J.P. Morgan Chase & Co. Those banks declined to comment.

So far, most loan modifications have focused on shrinking monthly payments by lowering interest rates and extending loan terms. Banks, as well as mortgage giants Fannie Mae and Freddie Mac, have been shy to embrace principal reductions, in part due to concerns that many borrowers who can afford their loans will stop paying in the hope of being rewarded with a smaller loan. Several federal agencies have been scrutinizing the nation's largest banks over breakdowns in foreclosure procedures that erupted last fall. Last week, the Office of the Comptroller of the Currency said only a small number of borrowers had been improperly foreclosed upon. But the regulator raised concerns over inadequate staffing and weak controls over certain foreclosure processes.

A settlement must satisfy an unwieldy mix of authorities, including state attorneys general and regulators such as the newly formed Bureau of Consumer Financial Protection, who support heftier fines. They must also appease banking regulators, such as the OCC, that are concerned penalties could be too stiff. "Nothing has been finalized among the states, and it's our understanding that the federal agencies we are in discussions with have not finalized their positions," said a spokesman for Iowa Attorney General Tom Miller, who is spearheading a 50-state investigation of mortgage-servicing practices.

FHFA presents new compensation model

The Federal Housing Finance Agency (FHFA) has issued a 28-page document that presents several alternatives it plans to consider for how Fannie Mae and Freddie Mac compensate mortgage servicers. The report is part of joint initiative announced by FHFA and HUD in January to revise the compensation model for mortgage servicing. The new payment models are also being considered for companies that service Federal Housing Administration (FHA) loans on behalf of Ginnie Mae. Currently, the typical compensation structure pays the loan servicer from a strip of the interest on each mortgage, an “IO” strip, regardless of loan status, FHFA explained.

The agency says the IO strip is a difficult asset to manage and results in a servicer receiving more than enough income to cover the expenses of servicing performing loans, but not enough when a portfolio includes a significant number of nonperforming loans. FHFA says this arrangement decreases the flexibility needed to ensure optimal servicing of nonperforming loans during times of high defaults like the industry is currently experiencing. The document outlines various alternatives to the current pay model, including a fee-for-service compensation structure for nonperforming loans and reducing or eliminating the minimum mortgage servicing fee for performing loans. FHFA provides extensive analysis of the alternative scenarios that encompasses illustrations of cash flows and accounting, capital calculations and requirements, and mortgage rate setting. FHFA says the ideas, models, and alternatives included in the presentation should be used as starting points “to generate
thinking and to explain concerns with the current compensation system.”

The agency said it is coordinating the efforts of the initiative to gather feedback from the industry, consumer groups, investors, and other regulators and government agencies. FHFA has established a dedicated Web link to post information related to the servicing compensation initiative, including background materials and issues that should be considered as development moves forward. When the administration released its plan for winding down Fannie Mae and Freddie Mac earlier this month, officials stressed that one of the near-term reforms on the agenda is reforming servicing compensation. FHFA said in January that implementation of a new servicing compensation structure is not expected to occur before the summer of 2012.

Mortgage servicing crackdown expected

U.S. banking regulators are close to finalizing new national guidelines that will impact mortgage servicing shops after an interagency investigation revealed "significant weaknesses in mortgage servicing related to foreclosure oversight and operations," said John Walsh, the Acting Comptroller of the Currency, in prepared statements to be delivered before a Senate Banking panel today. "In general, the examinations found critical deficiencies and shortcomings in foreclosure governance processes, foreclosure document preparation processes, and oversight and monitoring of third-party law firms and vendors," Walsh said.

"These deficiencies have resulted in violations of state and local foreclosure laws, regulations, or rules and have had an adverse affect on the functioning of the mortgage markets and the U.S. economy as a whole." Walsh said even though the process of outlining new guidelines for servicers is at its early stage, regulators intend to address some of the pressing issues they discovered while investigating the servicing process — namely a lack of national standards for the foreclosure process and borrower confusion over whom to contact in foreclosure cases due to uncertain protocols.

Walsh's report on the investigation of loan servicing firms comes on the heels of a major announcement from the Mortgage Electronic Registration System, or MERS. MERS, which is an electronic registry of mortgage records, informed members late Wednesday that they are now prohibited from foreclosing on residential loans using the MERS name. MERS has long been the target of foreclosure defense attorneys and consumer advocates for creating a foreclosure process that fails to create transparent oversight and protocols.

Walsh said as part of their comprehensive examination of servicing shops, regulators examined Lender Processing Services Inc. (LPS), MERSCORP, the parent company of MERS, and MERS itself. After reviewing the servicing shops and examining bank self assessments, as well as 2,800 foreclosure cases, Walsh said investigators concluded that there were "significant weaknesses in mortgage servicing related to foreclosure oversight and operations." He said regulators have yet to finalize their proposed guidelines, but that will be the next step in the process.

Foreclosures falling - not

The number of homes receiving foreclosure filings, default notices, auctions, and repossessions, fell 17% in January compared to a year earlier, RealtyTrac reported today. But that's still 261,333 properties and a 1% increase compared to December. Even with the slowdown, more than 78,000 borrowers lost their homes in January, easing off the record 102,000 that was reached last September. Besides, it's less a sign of a robust housing recovery and more a sign that lenders have become bogged down in reviewing procedures, resubmitting paperwork and formulating legal arguments related to accusations of improper foreclosure processing.

"We expect a spike in the first quarter," said Rick Sharga, a RealtyTrac spokesman. "If we don't get that, it could mean that the foreclosures are being pushed back even more and that the time needed for recovery will be prolonged." There was a bit of a shakeup among the individual states at the top of RealtyTrac's hardest-hit states. Florida, which had been outpacing all others for years, fell to ninth place in January, with a rate of one in ever 409 homes receiving a filing. Year-over-year, filings are off by 54% in the Sunshine State. Now, the seven states with the highest rate of foreclosure filings in January were all in non-judicial states, where foreclosure auctions can be scheduled and homes repossessed without any court hearing. Nevada led the states for the 49th consecutive month; Arizona was second and California third. Idaho and Utah filled out the top five worst-hit states. Among metro areas of more than 200,000 residents, Las Vegas had, as usual, the highest
foreclosure rate.

Home affordability at pre-boom prices

WSJ - home affordability at pre-boom prices

Data provided by Moody's Analytics track the ratio of median home prices to annual household incomes in 74 markets. By that measure, housing affordability at the end of September had returned to or surpassed the average reached between 1989-2003 in 47 of those markets. Most economists believe the housing boom took off in 2003. Nationally, the ratio of home prices to annual household income reached a peak of 2.3 in late 2005. But by last September, it had fallen to 1.6, matching the lowest level in the 35 years the data have been collected and well below the historical average of 1.9 between 1989 and 2003. "Based on incomes, this is as affordable as it gets," said Mark Zandi, chief economist at Moody's Analytics. "If you can get a loan, these are pretty good times to buy."

Measuring home prices relative to income is not the only way economists calculate housing affordability. They also examine the relationship between house prices and rents. Measured by the price-to-rent ratio—the price of a typical home divided by the annual cost of renting that home—prices are fairly valued, or undervalued, in around 20 markets. Nationally, the price-to-rent ratio stood at 14.85 at the end of September, above the 1989-2003 average of 12. The data suggest pockets of the country have further to fall. Home prices still remain overvalued by both measures in several markets, including Seattle, Charlotte, New York and Portland, Ore. Based on rents, "it's still not a slam dunk to buy" in those markets, said Mr. Zandi. He said markets appeared most overvalued in the Pacific Northwest, which was among the last regions to enter the housing downturn.

Historical measures also showed prices were still high along the Northeast corridor from Baltimore to Boston. Of the 74 housing markets, Baltimore appeared to be the most overvalued. By contrast, prices in Cleveland, the most undervalued market, have returned to 1991 levels based on the price-to-rent ratio. Historical measures comparing rents and incomes with home prices provide a useful gauge of affordability, but can be imperfect at measuring how close different markets are to recovering from a bubble.

GOP calls for end to HAMP

House Republicans introduced a bill this week that would repeal the Home Affordable Modification Program (HAMP). The bill was introduced by Reps. Jim Jordan (R-Ohio), Darrell Issa (R-Calif.) and Patrick McHenry (R-N.C.), who cited yet another report from government watchdogs about the program’s underwhelming performance. The Treasury Department introduced HAMP in March 2009 allocating nearly $50 billion in incentive payments to servicers, borrowers and investors for modifying mortgages on the verge of foreclosure. Through December, servicers have modified more than 579,000 loans, well short of the 3 million to 4 million the Obama administration targeted. In December, the Congressional Oversight Panel estimated the program ultimately will reach between 700,000 and 800,000 borrowers.

If the bill passes, the Treasury will be unable to provide assistance under HAMP, which was authorized under the Emergency Economic Stabilization Act of 2008. The bill also would terminate all contracts between the servicers and the Treasury. “HAMP is a colossal failure,” Jordan, co-sponsor of the bill and chair of the oversight subcommittee on Regulatory Affairs, Stimulus Oversight and Government Spending said. “In many cases, it has hurt the very people it promised to help. It’s one more example of why government interference in the private sector doesn’t work and that’s why it should be repealed.”

Year-end housing sales end in the black; month-to-month median price increases 6 percent

(January 13, 2011 – Orlando, FL) Members of the Orlando Regional REALTOR® Association closed just 1.74 percent fewer homes in December of this year (2,368) than last (2,410), keeping year-to-date Orlando area sales in the black at 19.57 percent above 2009.

“In the first half of the year, the extended $8,000 first-time homebuyer tax credit and expanded $6,500 tax credit for repeat buyers helped encourage sales,” reviews ORRA Chairman of the Board Mike McGraw, McGraw Real Estate Services, PL. “Orlando’s homebuyers in 2010 also benefited from historic affordability levels, record low mortgage rates, and an inventory chock full of moderately priced homes.”

The 8,363 sales under contract and awaiting closing at the end of December are 2.45 percent above December 2009, which recorded 8,163 pending sales. There were 8,998 pending sales in November 2010.

Newly filed contracts —like pending sales an indicator of future sales activity — reached 3,196 in December 2010, a 7.1 percent increase over the 2,984 newly filed contracts in December 2009.

The median sales price of all homes sold in the Orlando area increased to $106,000 in December from the $105,000 median price that had held steady since September. According to ORRA the current median price is 6.11 percent above than the $99,900 median price recorded in August 2010 (the year’s lowest) and is 11.67 percent below the median price of $120,000 recorded in December 2009.

The median price for “normal” existing homes – i.e., those that are neither a short sale nor a foreclosure – sold in December is $160,000. The median price for bank-owned sales is $75,000 and the median price for short sales is $100,000. The lower median prices of bank-owned and short sales, which accounted for 68.71 percent of all sales in December, exerts a downward influence on the overall median price ($106,000).

The Orlando affordability index decreased to 246.73 percent in December. (An affordability index of 99 percent means that buyers earning the state-reported median income are 1 percent short of the income necessary to purchase a median-priced home. Conversely, an affordability index that is over 100 means that median-income earners make more than is necessary to qualify for a median-priced home.) Buyers who earn the reported median income of $53,447 can qualify to purchase one of 11,729 homes in Orange and Seminole counties currently listed in the local multiple listing service for $261,532 or less.

First-time homebuyer affordability in December decreased to 175.45 percent. First-time buyers who earn the reported median income of $36,344 can qualify to purchase one of 8,450 homes in Orange and Seminole counties currently listed in the local multiple listing service for $158,083 or less.

Homes of all types spent an average of 96 days on the market before coming under contract in December 2010, and the average home sold for 94.40 percent of its listing price. In December 2009 those numbers were 89 and 93.95 percent, respectively. The area’s average interest rate increased in December to 4.92 percent.



Inventory

There are currently 14,993 homes available for purchase through the MLS. Inventory decreased by 199 homes (1.31 percent) from November 2010, which means that 199 more homes exited the market than entered the market. The December 2010 inventory level is 3.58 percent lower than it was in December 2009 (15,549). The current pace of sales translates into 6.33 months of supply; December 2009 recorded 6.45 months of supply.

There are 11,919 single-family homes currently listed in the MLS, a number that is 4.13 percent more than the 11,466 single-family homes listed in December of last year. Condos currently make up 1,814 offerings in the MLS, while duplexes/town homes/villas make up the remaining 1,260.



Condos and Town Homes/Duplexes/Villas

Sales of condos in the Orlando area increased by 7.74 percent in December 2010 when compared to December of 2009 and increased by 24.55 percent compared to November of 2010.

As we’ve seen all year long, the most (254) condos in a single price category that changed hands in December 2010 were yet again in the $1 - $50,000 price range. This year-long trend accounted for 54.32 percent of all condo sales in 2010.

Orlando homebuyers purchased 224 duplexes, town homes, and villas in December 2010, which is a 6.16 percent increase from December 2009 when 211 of these alternative housing types were purchased.



MSA Numbers

Sales of existing homes within the entire Orlando MSA (Lake, Orange, Osceola, and Seminole counties) in December were down by 2.05 percent when compared to December of last year. Throughout the MSA, 2,910 homes were sold in December 2010 compared with 2,971 in December 2009.

Each county’s December-to-December sales comparisons are as follows:

Lake: 5.51 percent below 2009 (360 homes sold in 2010 compared to 381 in 2009);
Orange: 5.21 percent below 2009 (1,527 homes sold in 2010 compared to 1,611 in 2009);
Osceola: 3.40 below 2009 (511 homes sold in 2010 compared to 511 in 2009); and
Seminole: 13.78 percent above 2009 (512 sold in 2010 compared to 450 in 2009).


2010 Year-end Recap

Sales in 2010 were up by 19.57 percent over 2009. A total of 28,602 homes were sold in 2010 compared to 23,921 the previous year.
From a year-long perspective, the 2010 cumulative median price fell 16.23 percent to $108,900 compared 2009’s $130,000.
Throughout 2010, the majority (10.25 percent) of single-family homes that changed hands each month were sold for less than $50,000. About 8 percent of all single-family home sales in 2009 were in the $50,000 or less price range.
Condo sales increased 49.34 percent in 2010, with 6,532 condos sold in all of 2010 compared to 4,374 sold in 2009 and 1,454 sold in 2008. An enormous majority (3,548 or 54.32 percent) of sold condos fell into the $50,000 or below category. For the entire year, duplex, townhome, and villa sales were up 28.52 percent.
By year’s end in 2010, 35,021 homes were sold in the Orlando MSA while 30,377 homes had been sold by year’s end in 2009 (a 15.29 percent increase).


Each county’s 2010 year-end sales comparisons are as follows:

Lake: 2.19 percent above 2009 (4,199 homes sold in 2010 compared to 4,109 in 2009);
Orange: 16.29 percent above 2009 (18,823 homes sold in 2010 compared to 16,186 in 2009);
Osceola: 11.13 percent above 2009 (6,311 homes sold in 2010 compared to 5,679 in 2009); and
Seminole: 29.18 percent above 2009 (5,688 sold in 2010 compared to 4,403 in 2009).


For detailed statistical reports, please visit www.orlrealtor.com and click on “Housing Statistics” on the top menu bar. This representation is based in whole or in part on data supplied by the Orlando Regional REALTOR® Association or its Multiple Listing Service (MLS).

Revised appraisal guidelines haunt investors

Revised appraisal guidelines haunt investors
Posted on January 28, 2011

Just in case you haven’t run into it yet, our wise government – particularly the agencies that oversee mortgages – instituted more new guidelines in December that are just now starting to affect real estate investors. Effective Dec. 2010, in order to continue policing the mortgage industry, the Federal Reserve System engaged new policies for Automated Valuation Models on appraisals. (See http://www.federalreserve.gov/newsevents/press/bcreg/20101202a.htm) The newest guidelines require “interagency cooperation” in inputting data into the huge property database. These agencies include the Office of the Comptroller of the Currency (OCC), FDIC, Office of Thrift Supervision, Federal Reserve System, and the National Credit Union Administration. Further, the guideline goes one step further requiring actual visits to the property for a property condition report. Certainly, this inspection is needed in many circumstances. However, it does slow the process down by several more days and, on REO and foreclosure properties oft times, this can be the kiss of death.

How does this affect you? If you are a real estate investor that uses mortgage financing on potential rentals or flips, you may run into a new set of appraisal problems. Most affected are non-owner occupied loans, second mortgages, and lines of credit. If you’re one of those rare birds that still has a line of credit in place, it means when the bank is reviewing their collateral for the line, your ability to borrow may be reduced – sometimes drastically.

For potential new homebuyers, this doesn’t change things much. If it is an owner occupied property for a traditional or FHA first mortgage, lending institutions policies on appraisals are fairly close to the same as they were prior to December 2010. Some, however, have gone to the “two appraisal” rule. This means, to be safe, they are requiring two independent appraisals on each property. Whether they select one appraisal to go with, choose the lower of the two, or average the two varies with each institution.

Bottom line: In the near future, if you have been dependent on mortgages to purchase investment properties, you may want to adjust your business model. Several investors I know have already been shocked by hugely reduced values lenders are willing to do on investment properties. This is no fun when you’re expecting to have a closing. So, to be safe, do one of two things: (1) Use property you already own to collateralize lines of credit. Realize there must be plenty of equity available to do this smoothly; or (2) Even if you do fewer transactions, simply pay cash. Whether this is your own funds or those of an angel investor doesn’t matter. Paying cash is and has always been the path of least resistance. All others to the back of the line.