Scotsman Guide - July 2009 Residential Edition

Underwriting Vs. 1004MC

If the analysis only included properties “competitive to the subject,” the 1004MC trends could be more meaningful to the underwriter but might not represent the neighborhood trend.

Logically, it would seem the appraisal should include direct analysis of collateral trends. These trends could be compared to the neighborhood for consistency. This would let a lender identify or dispute additional risk associated with the subject property. By focusing on neighborhood trends, however, the 1004MC can overlook risks for the subject property that otherwise could be identified.

Appraisers also are urged to consider properties “competitive to the subject, from the buyer’s perspective” — but the 1004MC doesn’t define “competitive.” This leads to broad discretion when appraisers select data — not to mention, many questions.

If the subject property is 2,400 square feet, would a 1,200-square-foot home in the same area be competitive? If not, should appraisers include it in the analysis?

Are the trends for homes in good condition the same, for example, as a real estate owned property needing $50,000 worth of repairs?

Including all sales and listings in the analysis shows different trends than only using sales and listings that match the subject property, be it turnkey or a real estate owned property needing work. Conversely, the lack of directly comparable data may render the analysis useless.

Limited or dissimilar data also can influence a trend’s accuracy. In many markets, especially rural ones, appraisers are having difficulty finding three good comps, let alone a group of sales. Without tying the data to the economic environment at the time, the trend information also is based on the assumption that the events and factors at the time of analysis will be repeated.

Many factors impact real estate. But the 1004MC doesn’t address supply, demand, interest rates, affordability, migration patterns or employment. It shows underwriters the effect of an issue without the cause.

Good idea, bad execution?

Taken by itself, the 1004MC examines the market in a statistical vacuum absent the who, what, when, where, why and how of a property. Often, the results have no basis in the reality of what is “competitive to the subject.” Instead of being an underwriting tool, it can create havoc.

Appraisers already are adding disclaimers, expanded addenda and clarifications in their 1004MCs for lenders. Fannie, Freddie, the VA and HUD also are clear about the lender’s responsibility regarding the appraisal and its reliability.

As always, lenders must review an appraisal report thoroughly, as should brokers. But at best, the addition of the 1004MC forces them to take a few extra steps to comprehend the appraiser’s analysis and to consider local economics affecting the subject property. Otherwise, both might be passing along implied risk to borrowers that might not otherwise exist.

How to Use Economic Reports

and assesses economic information and trends. Since 1919, it has measured cost-of-living data in the United States.

To produce the monthly consumer-confidence index, the Conference Board surveys 5,000 U. S. households about their attitudes on present and future economic and employment conditions.

Consumer attitudes influence stock and bond markets, and confidence in the economy often means consumers are apt to spend more. Reports are available at conference-board.org.

Jobless claims
U.S. Department of Labor Office of
Workforce Security Weekly Unemploy-
ment Insurance Claims report

This shows the number of first-time filers for unemployment insurance. When fewer people lose their jobs, the job market stands to strengthen. Increased household incomes can mean more consumer spending and potentially more willingness to purchase a home.

Awareness of the jobless-claims report can give you a sense of the job market’s health and can help anticipate surges in employment and pay. These can prepare you for higher inflation and related interest-rate increases.

The report is online: bit.ly/uiclaims.

Government indicators
1. U.S. Treasury Department reports

Fixed mortgage rates are closely linked to movements in long-term Treasury yields because mortgages are often

packaged and sold as mortgage-backed bonds. When the yield on the 10-year Treasury moves, mortgage rates typically follow.

In turn, these yield curves and their spreads can foretell economic growth and pressure on banks. Daily yield-curve rates are available here: bit.ly/dailyyield

2. Federal Reserve’s Federal Open Mar-
ket Committee Report

The Fed’s Federal Open Market Committee (FOMC) meets eight times per year to review the economy and determine what policy and rate changes are necessary. Its goal is to keep prices stable and the economy growing.

The meetings usually address the federal funds rate, the rate banks charge when they make an overnight sale to other banks. At each meeting, the FOMC raises, lowers or maintains the current rate, which directly impacts mortgage rates.

For more information, visit the Fed’s Web site at federalreserve.gov.

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In a market as turbulent as this one, a solid understanding of economic reporting and forecasting can help you recognize potential shifts in investor guidelines, mortgage-interest rates and consumer sentiment.

Each economic report provides information that can help you understand aspects of the housing market and anticipate trends. Viewed together, these reports can help you understand the big picture. This often will allow you to provide informed advice to your customers as they make critical home-financing decisions.