Your appraisal doesn’t matter - it just doesn't.
This bears repeating. No appraisal ordered by parties, attorneys, the court, a mediator…by any person or entity OTHER THAN THE LENDER can be used in a lending determination. That simply means that – if someone needs to get mortgage financing for their buyout - all other appraisals are a waste of money and time. Period. No exceptions.
It’s a matter of law now, not mere mortgage regulations or lender policies. It’s Dodd-Frank, The Wall Street Reform and Consumer Protection Act. If we can loosely call this law…although it’s hard to get the words out of my mouth to call this monstrosity an actual law. Were it not for Obamacare, Dodd-Frank would be the lengthiest congressional bill in history at over 2,300 pages. But, I digress.
This May 1st will mark 7 years since the advent of HVCC (Home Value Code of Conduct, 2009), thence rolled into Dodd-Frank. Yet, I still find attorneys, clients, mediators, courts and others ordering appraisals at a significant cost; and, worse, using these useless appraisals to agree on the value of a property which will soon require financing for a buyout.
I’ve made a living by asking “why” and “what if.” I’ve never accepted common and long-accepted answers in the mortgage industry. Especially when what everyone was saying didn’t pass the sniff test. For example, this is how I discovered that “non-purchasing” spouses are not really required by law to sign the Deed of Trust for the purchase of a homesteaded or primary residence property – like everyone in the industry vowed and declared was the case. This is how I discovered nearly all of the strategies I use to help divorcing folks get mortgage financing for buyouts, etc. This is how I close transactions that others say cannot be closed.
It’s time that the time-honored practice of ordering two appraisals in a divorce and “splitting the difference” be seen for what it is – a totally bogus method of establishing market value.
Imagine that you’re defending your client’s position that her appraisal of $200,000 should be accepted rather than her husband’s preferred appraiser’s opinion of value which stated the value at $220,000. If your client has an appraisal which was obtained as part of her loan application and opposing has an appraisal that was ordered directly from any licensed appraiser, what leverage do you have to convince the parties, attorneys or court that yours is the acceptable statement of value?
From my perspective, it’s simple. Imagine you’re in court and cross-examining the husband’s appraiser. And imagine that you will be questioning me in a few moments (testifying to your client’s appraised value). There is one simple question that cuts through all the fuzziness or confusion. And here it is:
Are you, or is your company, advancing funds to a homeowner and borrower based on this appraisal?
The other side has to say “er, uh, um, hubba, bubba….NO...we don't do that sort of thing.”
Same question to me. My answer? “Absolutely, yes.” I’ll actually stand up, do a happy dance and say “I got the green, your honor, I got the green.” Then, I won’t get to testify in that court again, I’m sure.
This is why it’s a futile exercise to retain the services of an appraiser who is adept at “defending their opinion of value in court.” It doesn’t matter. Neither the court nor the appraiser is going to lend money on that transaction. The court takes money – it doesn’t lend money to people.
You may retort, “the client doesn’t need mortgage financing – they have cash for a buyout.” Ask yourself – or tell the clients to ask themselves – “do I know how to read an appraisal?” Did you know that there are gross and net adjustments to the comparable sales which the appraiser uses to arrive at their opinion of value? (This is because no two houses are exactly alike and a comparison between at least 3 other properties and the subject property must be “adjusted” to account for these differences). Do you know what the maximum adjustment percentages are, above which lenders see red flags? It’s 15% net and 25% gross adjustment maximums. Above this percentage, underwriters begin to suspect that the collateral property may not truly be comparable to the other properties being used as a cost/value measurement.
Well, my first introduction to the HVCC era had me holding an appraisal (ordered by the client and attorney) which reported a value of $545,000 but having to use the lender’s appraisal which reported a value of $470,000. The sticking point is that a buyout had been negotiated on the higher value. But, now, financing had to be based upon the lower value. And what did the client/attorney-ordered appraisal show? Net adjustments of between 54% and 95%...a far cry from the maximum of 15. This appraisal would have been rejected out of hand by an underwriter; but, no one in the legal process knew how to read and evaluate the appraisal so they just looked for the bottom line and assumed they were looking at a reasonable statement of value.
You see, LTV (Loan to Value) ratio is paramount in lending decisions and approvals. There are clear and immovable LTV ratios, not subject to approximations, which limit the amount that can be financed in all mortgage loans. In fact, in Texas equity financing, maximum allowable LTV is a matter of law, not mere industry standards or lender policy. The “V” in LTV is the appraised value which the lender accepts. So, if an appraiser’s opinion is not subject to a lender’s evaluation and is not even prepared for a lender, why in the name of Sam Hill is a court accepting such a statement as valid. The first judge that is required to advance funds for a mortgage based on a bogus appraisal will be the last judge to tolerate this nonsense.
As a point of information, the lender must order its appraisal through a management company and may not communicate directly with the appraisal. The appraiser’s opinion can be challenged but only with relevant data….and “relevant data” cannot be another appraisal. In typical, government, bureaucratic, nonsensical, regulatory idiocy, another appraisal is considered “unduly attempting to influence the appraiser’s opinion of value.”
Who knows if this regulation can be challenged or even if it’s properly interpreted by lenders and their legal departments? But, this is how lenders and banks now operate, in absolute fear of a capricious and arbitrary government agency – the inaptly named CFPB (Consumer Finance Protection Bureau).
Your appraisal doesn’t count. Opposing’s appraisal doesn’t count. The mediator's appraisal doesn't count. The court's appraisal doesn't count. Nobody’s appraisal counts. Only the lender’s appraisal counts for anything.
Please share this with colleagues and friends. We could help a lot of folks. Thanks.
Noel Cookman; [email protected]