Higher Appraised Values Lead To Sub-prime Mess Appraisers Not To Bame
Higher Appraised Values lead to SubPrime Mess Appraisers not to Bame
I read an article at least once a day the puts the blame for the mortgage mess on lenders who made loans to people with bad credit histories. Although this did happen and there was some fraud involved it is only part of the issue with the subprime problem.
SubPrime loans are defined as loans that are nonconforming to the Fannie Mae or Freddie Mac resale markets. These federally backed publicly traded companies were developed to allow the mortgage markets to maintain the liquidity they need to continue to write mortgage loans in the US.
These conforming loans are packaged and sold on the market as mortgage backed securities and are supported by the US government. Each loan in the package must meet strict guidelines in order for it to be sold. Every loan needs to have documentation as to employment income and the loans cannot be over 417000. Most of these loans also require a credit score of at least 580 and between 1020 equity.
This leads to the logic question of why loan money to people who do not have equity or high credit scores or can prove that they make enough money to pay the loan back? The answer becomes a little more clear when you see where the real estate troubles are the clearest. The states of Florida California and Nevada are currently the hardest hit by the current bust. Ohio and Michigan are also among the list but their issues are more based on job losses in the area than any market based problems.
Florida California and Nevada have problems that are pretty unique unto themselves. First all three states have high median home prices in California it is 514000 In Florida it is 259000 and in Nevada it is 478000. The median price is the exact middle of the range. This means that there were as many homes over that price as there were under that price. So as you can see clearly over half of the homes in California and Nevada are considered nonconforming simply because they are over the Fannie Mae limit.
What it all means
What all of this means is that not all subprime loans are bad. Subprime loans were being made to self employed people with good credit who had a hard time showing enough income to qualify for a conforming loan because of personal guarantees they may have had to make for their business loans. SubPrime loans were made to clearly of every home in California and Nevada simply because they were over the maximum conforming limit. They were also made to people who had credit scores slightly under the minimums needed to qualify for a Fannie Mae product. Things such as having a credit balance too close to your limit on one card can lower your score by as much as 30 points.
These loans are not what most people think of went they hear subprime lending. But with the media missstating the issue banks and the market have effectively shut off the money available for these types of loans. If a borrower that fell into one of these categories were lucky enough to find a subprime product today they would be paying anywhere from 1 to 1.5 more for their loan then they would have a year ago.
This lack of availability to subprime funding is fueling the downward slide in values in these three big markets. If the funds are not available to borrow and the cost of borrowing has increased by more then a percent over the last year it is going to have a negative effect on value. On a 500000 home that could be a 416.00 a month difference. The effect that has on the buying power of that person is about 100000. Meaning that if the borrower has to pay 7 on a loan instead of a market price of 6 then they can effectively afford a home of 400000. This cost and availability of money is one other reason home prices are falling.
About the writer:
About the writer: Robert F. Goldt is a State Certified Real Estate Appraiser 2232 in Florida and also holds a Title Insurance Lisence as well. He has owned his own appraisal and title company for 20 years. If you are looking for appraisers in your area or require any real estate appraised please view visit http://www.appraiserscout.com for a nationwide database of appraisers.
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