Well, Saturday's Richmond Times-Dispatch has three different articles - in it's tiny, tiny four page Business section - that address some of the difficulties the housing recovery faces.
First, there is an article addressing yesterday's disappointing news about consumer spending, which drives 70% of the total economic activity for the U.S. economy. Incomes were flat in September, while wages and salaries dropped 0.2%. All this resulted in a consumer pull-back in spending by 0.5%. This creates BIG concerns about consumer spending in the upcoming holiday season. The stock market reacted with big sell-offs, with the Dow Jones dropping just under 250 points.
Second, Genworth announced that it would be relaxing it's standards and would now start issuing primary mortgage insurance, or PMI, to individuals putting down 5% for the purchase of a home. Genworth had been offering PMI only in instances where the buyer put down 10% or more of the purchase price of a home. PMI is the tool banks use to ensure that they have adequate coverage to recover their full loan amount in case the home owner defaults on his or her mortgage. PMI is required in transactions where the buyer puts down less than 20% of the purchase price of the home. When one puts down 20% of the purchase price or more to purchase a home, this is considered a "conventional" mortgage and no PMI is required. In those instances, the 20% down payment, or buyer's equity, in the home is considered sufficient "cushion" to allow the bank to recover it's full loan amount and cover any costs, should the buyer go into default on his or her mortgage.
This news about Genworth is really good for the housing market. One of the results of the housing crisis was the bankruptcy or restructuring of many, many mortgage insurance providers. This meant PMI was available from fewer insurers, it became more expensive, and the terms upon which it was available became more restrictive. Genworth appears to have done an amazing job of managing itself out of the financial crisis and putting itself back on strong financial footing. Good for them.
Third, Kenneth Harney of the Washington Post reports that the Home Valuation Code of Conduct ("HVCC") could be abandoned or replaced with a more thoughtful regulatory response. The HVCC was a product of supposed appraisal abuse, where lenders would push appraisers to "hit the number" of a property's purchase price, so the loan could be issued. The allegation was this contributed to inflated home prices, as appraisers over-valued properties under pressure from lenders. The HVCC is intended to ensure "appraiser independence," by setting up firewalls between the loan officer and the appraiser.
However, the law of unintended consequences rears its ugly head. The HVCC has killed many deals, with below-market appraisals, at a time when the housing market recovery is still fragile. Here's how:
- Because of the appraiser independence requirements, many large banks have turned to appraisal management companies ("AMCs") which act as the intermediary between the lender and the appraiser;
- Often these AMCs are wholly or partially owned by the lender;
- The AMCs often charge a fee, say $400, to the purchaser for the appraisal, but pay the appraiser only a portion of that, say $200. The AMC pockets the difference;
- To get appraisers willing to take a significantly reduced fee, the AMCs often have to use the least experienced or least respected appraisers;
- This results in appraisals from appraisers who are from far outside the geographic area and are unfamiliar with the local market; and
- AMCs and their appraisers often use distressed sales or bank owned properties as comparables, which unfairly lower the valuation of properties that are "regular" sales.
All in all, a pretty mixed bag for the housing market specifically, and the overall broader market generally. Here's hoping we start to see some more stability.
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