Mortgages without appraisals?

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Fannie and Freddie are relaxing their rules!

Government-chartered entities Fannie Mae and Freddie Mac are relaxing their decades-old appraisal rules to allow some refinances and, more significantly, some sales to close without new appraisals. Both entities indicate they will only permit loans to close without appraisals in situations where they have substantial data on the properties in question as well as the local real estate markets.

How will the new plans work? Lenders will submit loan files to either Fannie or Freddie for underwriter analysis. The entities’ proprietary systems (automated valuation models) will be employed to determine whether sufficient valuation data is available to support the requested loan amounts.  These systems are said to be depositories of millions of prior appraisal reports and “proprietary analytics” that allow for computer-driven valuations of properties. If the system determines that no appraisal is required, the borrower will be given the choice of proceeding without an appraisal or coming out of pocket for an appraisal.

Should local residential contracts be tweaked? Should lawyers advise their purchaser clients to obtain appraisals?  We will have to cross those particular bridges.

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This seems reminiscent of the situation in the early 1990s where title insurance companies limited their requirements for current surveys. Residential lenders were given the survey coverage they required without the cost of updated surveys. Lawyers were left holding the bag, so to speak, to advise their purchaser clients of the benefits of surveys and to encourage them to incur the cost despite the fact that there was suddenly no lender or title company requirement.

Lawyers are not typically involved in residential transactions prior to loan approval, however, so it is entirely possible they will not be involved with the question of whether to obtain appraisals unless astute and cautious buyers specifically seek advice up front.

Fannie and Freddie have been quietly phasing in this new process for months and indicate appraisals will continue to be required for most loans. Fannie estimated that only ten percent of loans were eligible to close without appraisals at the inception of its program for refinances. That percentage is likely to be smaller for sales.

Both entities require at least twenty percent equity to qualify. Fannie’s program includes single-family homes, second homes and condominiums.  Freddie’s program is limited to single-family, single-unit primary residences. Homes in disaster areas, manufactured homes, and homes valued at more than $1 million will not qualify. The borrower’s credit scores and credit worthiness will also be considered.

Real estate agents are likely to love this new technology-based innovation. It will save money as well as time. Appraisers (like surveyors in the 1990s) will not be happy as this program is phased in.

What do you think? Are appraisals a good thing?  Will foregoing appraisals be akin to the “no doc” and “low doc” mortgages that helped lead us to the financial crisis of 2008? Are actual inspections by trained human beings of the interiors of residences necessary to establish value? Let’s see how this plays out!

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CFPB rules have been revised

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Are we now free to share Closing Disclosures with real estate agents?

cfpb-logoThe CFPB recently issued amendments to its rules governing residential loan closings, but it did not settle the debate about whether Closing Disclosures can be shared with real estate agents. Traditionally, real estate agents were provided settlement statements both before closings, to give them the opportunity to explain the numbers to their buyer and seller clients, and after closings, to enable them to close MLS listings.

Since we have been operating under the CFPB rules and generating Closing Disclosures, we have struggled with the insistence on the part of real estate agents to receive those documents and the reluctance on the part of lenders to share them.  Most of us have resolved this conflict by providing real estate agents with separate settlement statements, such as ALTA’s Settlement Statements, which are similar to our prior HUD-1 Settlement Statements. It took us awhile to figure out that Closing Disclosures are not traditional closing statements and do not facilitate disbursement. Once we realized separate settlement statements are actually needed to fully inform borrowers, sellers and real estate agents, this issue became less important.

The CFPB has indicated it has received many questions about sharing Closing Disclosures with third parties. The amendment says:

“(T)the Bureau notes that such sharing of the Closing Disclosure may be permissible currently to the extent that it is consistent with (the Gramm-Leach-Bliley Act) and Regulation P and is not barred by applicable State law. However, the Bureau does not believe that expansion of the scope of such permissible sharing would, in this rulemaking, be germane to the purposes of Regulation Z.”

Lenders will likely continue to refuse to allow sharing of Closing Disclosures in light of this clear-as-mud directive. Most lenders currently state that the consumer may provide the Closing Disclosure to real estate agents if he or she chooses to do so. That rule is not likely to change.

One of President Trump’s first official actions affects housing

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The Federal Housing Administration (FHA) announced on January 9 that it planned to reduce mortgage insurance premiums effective January 27. Mortgage insurance protects lenders from borrower defaults and is common where the down payment is less than 20%.

The Democratic view of this issue is that sufficient reserves and four years of economic growth allowed the FHA to pass along some modest savings to consumers. Additionally, the move was viewed as an attempt to help first-time and lower income home buyers to access the market at a time when mortgage rates were rising.

The Republican view is that such reductions put taxpayers at risk by decreasing the funds the FHA has to deal with mortgage defaults. In other words, taxpayers might be at a greater risk for footing the bill for another bailout if FHA’s reserves were reduced.

President Trump’s advisors criticized the Obama administration for adopting new policies as it prepared to leave office. During Dr. Ben Carson’s confirmation hearing for Secretary of the Department of Housing and Urban Development (HUD), FHA’s parent agency, he expressed disappointment that the cut was announced so late in President Obama’s term.

On January 20, shortly after he was sworn in, as one of his first substantive actions, President Trump undid this new policy before it took effect by signing an executive order.

HUD then issued a letter stating that more analysis is needed before changes are made, and the rates will remain the same for the time being.

It appears industry groups may have differing opinions on whether President Trump’s executive order will affect home buying. Will this action reduce opportunities for first-time buyers? Or will it eventually allow FHA’s reserves to be increased to a point where it can offer more services to borrowers? Industry groups will continue to weigh in, and this blog will continue to keep South Carolina dirt lawyers posted on developments.