Picking the Horses

Trying to determine the direction of mortgage interest rates is a lot like picking a horse to bet on. Last week, one lender that we work with raised their interest rate 1/2 point within 24 hours after the Fed cut interest rates and money moved into the stock market and out of mortgage bonds. Yet interest rates in the last few months have dropped to new lows. Who would have thought that we would be seeing interest rates dip to their lowest level in almost 4 years. In my reading of the last few days, as many pundits are forecasting increases in mortgage rates in the near future as are predicting rate decreases. Given the volatility of the financial markets worldwide, I believe that anyone in the market for a home or refinancing their current home, need be aware of the volatility and NOT assume further reduction in mortgage interest rates.

The Importance of Appraisals in a Declining Market

Remember the "old days" when home values were steadily increasing and financing for home ownership had few restrictions or hurdles? Well, as you know that environment has significantly changed and is continuing to evolve as both government and financial markets are attempting to deal with the credit situation.

Along with this, the Comparative Market Analysis (CMA) is taking on more importance. In addition to establishing a relative asking price or market value of properties in an area, the CMA actually impacts how the loan approval process might proceed after the offer is accepted.

Until recently, the CMA was almost an afterthought for many real estate professionals; something that could literally be done on the way to a listing appointment. The comparables of existing home sales were easy to do since so many were within the same subdivision and almost all were within a 90 day window.

Today, however, many lenders are using their in-house appraiser or an Automated Valuation Model (AVM) as an initial validation of the independent appraisal before the loan is even underwritten for approval. An AVM is a purchased service that some lenders utilize to provide property valuations using mathematical modeling combined with a database. AVM's calculate a property's estimated value at a specific point in time by analyzing values of comparable properties. The biggest drawback to this method is that a physical inspection of the property does not occur.

If a CMA or any of the other guidelines that lenders now require cannot be positively supported in the appraisal, the appraiser needs to provide a detailed written explanation of the circumstances.

In the past, choosing an appraiser and a mortgage lender were mutually exclusive activities, one performed by the real estate agent, the other by the mortgage broker. In today's environment, a collaborative effort between the real estate and mortgage professionals makes sense when it comes to choosing an appraiser.

As a way to potentially minimize these issues before the file is submitted to a lender for approval, the mortgage broker should determine if the lender has a list of approved appraisers that they recommend or get a list of their specific requirements.

Increase in the Conventional Mortgage Rate Cap

A key element in the Economic Stimulus package proposed yesterday is the increase from $417,000 to $725,000 for conventional mortgages that Freddie Mac and Fannie Mae purchase. This change will have a significant impact in high-cost areas and have the effect of decreasing mortgage interest rates 1/2 to 3/4 point for homes valued between $417,000 and $725,000. It also opens the door for non-conventional loans to be refinanced at a lower rate conventional mortgage.