Hi Herus,

1st off, every lender can set their underwriting guidelines as they see fit (to the degree they want to allow loan recovery risk in their doors, or not,) and so far I'm not aware of any blanket guidelines (say, handed down by Fannie or Freddie) along the lines of your concerns.

NONETHELESS... underwriters ARE being far tighter in what they are allowing & requiring in terms of appraisal standards. Even when a loan program's guidelines don't require/prohibit something, an underwriting supervisor *ALWAYS* has the discretion to raise the bar for loan quality purposes.

IMO the banks have fleeced the American taxpayer yet again and are continuing to do so and we can't do a thing about it.

ACTUALLY, if you *really* follow the money (and the problems) the banks aren't the origin of the trouble. They are the tail wagging behind the government's lead (and this applies regardless of the parties in office.)

In the good times, we were under-regulated and the politicians lined their pockets from business bribes (aka "lobbying,") and in bad times we are over-regulated and the politicians STILL line their pockets from business bribes (and they favor bailing out the historically biggest bribers!)

YOU want REAL change? "Term limits."

Cheers,
Dave Donhoff
Leverage Planner

Sorry, but term limits ensure that legislators are never around long enough to get a good handle on the complex problems of our day. It leaves the political parties, top aides, and lobbyists as the unelected "shadow" government. I think that lobby reform would do a better job.

Including foreclosed houses in the "comps" seems inevitable to me, Herus. Here, the selling price of foreclosed homes is a psychological, and likely actual, influence in what the buyer is willing to pay. Our house went up for sale at $160,000 in early 2006. Mid 2007 we got into a 2-year rent-to-own contract with a tenant with a price of $139,000. That contract expired and now we are renting month-to-month to her. She won't buy our house for the $120,000 we can offer it at today because she is looking at $85,000 houses. We don't have the cash to go down to $100,000 today, but I doubt she will buy for that anyways. It looks like we will be landlords for quite a while.

I heard a statistic yesterday that our region (five counties including and around Detroit) is reaching a "bottom." That can be good news. For houses less than $100,000 in my town, there is now only a 5.6 month supply of homes on the market. That is a "normal" market. But in the $100,000 to 199,999 range, there is a 17.1 month supply of homes on the market - still a "buyer's" market. In the city of Detroit, the "Under $75,000" category is now at a "normal" volume of homes for sale, but in the $75,000 to $100,000 category there is a 98 month supply of homes on the market! Can you imagine? Plus, the lowest category was "$75,000 and below." A lot of those homes are going for $6000 or less. The category no longer makes any sense.

It is obvious that here, in the metro Detroit area, foreclosures are definitely affecting house prices.

Well, the appraisal changes can make things very tight. The bank lowered our HELOC limit last year, and we finally decided to apply for a reconsideration. After paying for the appraisal ($385), we were given a value on our home of $290K.

Now, our home had been appraised in 2003 during a refinance, for $515K. But the appraiser (a nice guy, it seemed), had to use what sales had occurred in the last 3 mos. - and they ranged from a low of $220K to a high of $499K. Tossing out the highest and lowest, left 3 homes that averaged together, came out to $290K.

Our home is possibly the most overimproved 2bd in the neighborhood - these days they just tear them down and plop duplexes on the lot. The fact that ours is in turnkey condition, unfortunately cannot be counted in the new appraisal. The appraiser had to count two foreclosures against the one regular sale. BTW, first-time buyer friends who looked extensively in our neighborhood for foreclosures and short sales, said everything they saw needed a lot of work.

The subjective judgment of that 2003 appraiser - that we had done extensive remodeling, upgraded every system, and redesigned the floorplan to be more modern and desirable - is no longer allowed.

Fortunately we don't plan to sell anytime soon, but if we did I sincerely doubt it would be listed at such a low price as the new appraisal shows. I don't think it's worth $515K at the moment, but it's definitely worth more than $290K. How much more - who knows? No point in being greedy in today's market, I think.

We did have a happy ending - as we have already paid off our first, the bank seems willing to reinstate our old higher HELOC limit (we only wanted it just in case). I don't blame the appraiser or the bank, that's just the way the system works right now. The pendulum swings, and overreacts on either end.

Dave, how does the appraisal thing work if nothing comparable has sold within 3 months? I know when we got a mortgage for our current home we ran into an issue with comps not being within a 5 mile radius and sold within a certain time limit. Well we are just outside a small town of 5000 so not like a big city and a 5 mile radius covers a lot of farm land.

"BTW, first-time buyer friends who looked extensively in our neighborhood for foreclosures and short sales, said everything they saw needed a lot of work."

I am curious about this. What if a house that went into foreclosure is stripped by the previous owner. For example, they remove things that can be sold like sinks, carpet, A/C
unit, storm doors, cabinets, etc. Would an appraiser use such a house in comps for a neighborhood and thereby not compare apples to apples? In other words, a house that is only partially finished because of removals instead of just dated or worn-out content.

Also, I am curious about foreclosures that sell for less than 1/2 of what the previous owner paid and financed? We have one in our neighborhood where (based on the online records) this has happened. The funny thing is that the house was abandoned for about a year and then people came in and fixed up the inside and now it is a rental. I walk my dog by here every day and I never saw a for sale sign on the property. Why would a bank take such a big hit on a property and not even sell it properly? I could see losing 10%-30% due to the economy and lack of buyers, but not over 50%. It seems suspicious or strange to me.

BTW, our area has not been part of the bubble and prices generally rise about 2% per year for homes and prices are very low to begin with (compared to most of the USA).

Hi lyfia,

Dave, how does the appraisal thing work if nothing comparable has sold within 3 months?

There are "value discount-factor protocols" used by appraisers and underwriters when there are insufficient comparables within the proscribed limts. The "discount factors" may shift relative to a lender's appetite/need for mroe volume versus its distaste/avoidance of risk.

IOW, it can become more of a "judgment call" when there are less comparables to make a decision obvious.

Cheers,
Dave Donhoff
Leverage Planner

"Would an appraiser use such a house in comps for a neighborhood and thereby not compare apples to apples?"

Honestly, I think they would take the path of least resistance. In today's environment, that would be to dance to the tune of the piper, ie the bank. While this has generally always been more or less true, it is rock-solid reality today.

So, if the piper says use such and such comps and don't adjust for such and such FACT (ie not opinion), then that's what they will do.

The home I mentioned in my original post. I know this one well, having attempted to buy it via short sale more than two years ago (you can search for my threads on it if you are inclined). At that time, the best estimates I got for its repair (remember, the people were still living there although they had effectively run out of money) was $150K. Shortly after our attempt bombed (we reached our limit of $500k, keeping the additional $150k in mind), we bought a nearby house in the same 'hood for $600k and which needed perhaps $70K but was larger and better built to begin with. Shortly after that, this family walked and left the house to further dilapidation. More than TWO YEARS later, it goes up for sale as a foreclosure. Recent estimates of repair were more like $250K (two years of complete neglect, and as we know a vacant house wears faster than a lived-in one). So it goes up for $330K and closes at $300.

Now I am marketing my home for $680K, and a few homes in the hood (with lesser features, again see my other threads) are on the market for between $500 and $675K. Am I worried the foreclosure's going to hurt us despite it being in NO WAY actually comparable with our home (we now have over $680K in it) besides being in the same 'hood? Of course... that's why I started this thread.

So - in the vein of Life Isn't Fair, we paid all our bills, bought within our means, maintained our home, did all the right things. The neighbors bought way more than they could afford, neglected the upkeep, and finally split, causing the bank to lose perhaps $300K (I know the mortgage balance was around $570 at the time, then there's all the income lost while the house sits). So to make up, in a cosmic sense, for the bank's loss caused by irreponsible owners, WE pay. Yes I know this is a story that is being repeated all over the US, and perhaps the world, today.