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Fannie Mae Home Valuation Protection Code

Fannie Mae is working with regulators to set standards for home appraisals. The Fannie Mae Home Valuation Protection Code. From the press release:

First, to help ensure appraisal independence and valuation protection, Fannie Mae will adopt a Home Valuation Protection Code. The Code establishes requirements governing appraisal selection, solicitation, compensation, conflicts of interest and corporate independence, among other requirements. Fannie Mae will adopt the Code immediately, and make appropriate changes to its Sellers Guide to reflect the Code. Beginning January 1, 2009, Fannie Mae will require that lenders represent and warrant that appraisals prepared in connection with mortgage loans originated on or after that date that are delivered to Fannie Mae conform to the Code.

Second, Fannie Mae will provide $12 million over five years to help establish an Independent Valuation Protection Institute. The Institute will monitor and study the area of home valuations. The Institute will establish a hotline for consumers to contact if they believe the appraisal process has been tainted or if they believe they have been harmed by appraisal fraud. Appraisers also will be able to contact the Institute if they believe their independence has been threatened in any way.

 

16 Comments on “Fannie Mae Home Valuation Protection Code

  1. While overstating market values can lead to problems, lower valuations suggest a lower amount would be lent, which might further degrade prices.

    On the other hand, this would never have been an issue if the housing price appreciation continued on forever–it would take a gross exaggeration to overstate a property too much.

    If this trend continues, then one day we will be back to pricing based on economic fundamentals rather than how big of a shovel a lender has.

    I do note, however, that a perfect valuation today will not save anyone from a future drop in market values. If a lender really wants to reduce risk, then a much lower percentage of market value should be loaned. If necessary, simply lower the percentage loaned down to incorporate fairly aggressive appraisers. There is only so much that an appraiser can reasonably overstate a property.

    In the end, the problem is that too many people let the bank tell them how much they can borrow.

    I’m looking forward to the RMLS February 2008 numbers.

  2. If a lender really wants to reduce risk, then a much lower percentage of market value should be loaned.

    Yep, that old 20% down requirement would have prevented a lot of problems for lenders and borrowers both. There’s less of a worry of a buyer walking away from a loan if they’ve got 20% in the game. And if a buyer can put 20% down it shows that they know how to budget and save. Prices wouldn’t be anywhere near as high as they are now which would have helped buyers.

    Seems like we’re heading in the direction of 20% downpayments again…

  3. And if a buyer can put 20% down it shows that they know how to budget and save.

    One would have to have about $64k to put 20% down on an median priced home. One would need an additional $6k-$10k on top of that if lenders decide they want to see three (3) months of savings for emergencies. This type of buffer was part of the “traditional arrangement” as well.

    So that is only…let’s see…$70k – $75k to save up. It would take the average person years to save that amount, even at a 1000 dollars a month.

    You could invest the saved money in hopes of creating more, but how is that going to work out for you given what the markets are doing? I say “not very well”

    And of course the money your supposed to be saving for retirement is left completely out of this equation.

  4. I forgot to add my point sorry…

    My point was that if lenders revert back to traditional arrangements, prices have to come down or there won’t be a lot of loan activity period

  5. It would take the average person years to save that amount, even at a 1000 dollars a month.

    Yep PDX_Renter, you’re right. That’s why it should have been the de facto requirement all along – you can bet that if it were you wouldn’t need to save up $75K now. Probably would be more like $45K – 45 months, about 4 years is a reasonable amount of time to save up for a downpayment on a house.

    The whole “0 down” for houses thing caused a lot of demand to be brought forward too early and all at once thus leading to the bubble (it wasn’t the only cause, of course, but it was a large part of it). A 10 or 20% down requirement helps smooth out demand.

    And of course the money your supposed to be saving for retirement is left completely out of this equation.

    True, you’d better keep saving up for that retirement as well while saving up for the house.

    My point was that if lenders revert back to traditional arrangements, prices have to come down or there won’t be a lot of loan activity period

    Exactly, and we’re starting to see that drop in loan activity already and we’re not up to the 20% requirement yet (As I understand it right now it’s at 5% if you’ve got really excellent credit, 10% if you’re in the middle somewhere and if you’ve got not so good credit then you’d better have the 20% in hand).

  6. Maybe Charles needs to talk a little about first time home buyer programs that do not require 20% down. There’s also programs that give add’t incentives to buy in an area that is more ‘distressed’ or in need of ‘development’.

    There also needs to be a readjustment of attitudes amongst younger individuals regarding what they can ‘afford’ in a real estate market. Historically, people bought a starter home (less than 1,000 square feet with 2 bedrooms and 1 bath). After 5 to 7 years they traded up. This process was repeated throughout a person’s life every few years. Maybe the first house was not in the ‘best’ neighborhood but it was a way to get their foot in the real estate door.

    Somewhere, somehow, over the past ten years or so, people have wanted to not do these steps and just jump into 2,000 square feet with granite kitchen counters, etc.. How you put the jeannie back in the bottle, I don’t know.

  7. kevbo-

    Where is the research to support this claim:

    “Historically, people bought a starter home (less than 1,000 square feet with 2 bedrooms and 1 bath). After 5 to 7 years they traded up. This process was repeated throughout a person’s life every few years.”

  8. Why have to cite research or references for a personal observation?

  9. JP, I’m sorry that I don’t have a reference to cite for my claim. With over 15 years of lending and real estate experience, I know it to be true. Ofcourse there are exceptions where people did buy bigger houses as their first home. But before I/O and NegAm loans, there was some logic to the housing market.

  10. When one states “Historically” instead of “From personal observation” that insinuates statistics can back up a claim. IMHO

  11. kevbo-

    Thanks for the clarification. Instead of “historically,” it’s “based on my personal experience including over 15 years of lending and real estate experience.”

    Many times one’s personal experience is much different from the average or majority. This is one reason why sampling technique is so important. Convenience sampling is the most dangerous to use as a basis for conclusions about the entire population.

  12. bearlee-

    Yes, “historically” implies that there is documentation. What else is history based on?

  13. With over 15 years of lending and real estate experience, I know it to be true.

    kevbo: might your experience be a bit skewed? You are in RE and lending after all – that’s going to give you a somewhat different view of things.

    I don’t know many (any?) people who keep “moving up” every few years. Some of us are even still in our first home after almost 20 years – moral failure on our part? And now that I think about it, most of the people I know who bought houses over the last 10 or 15 years are still in the same ones unless they had to completely move out of the area for whatever reason (job change, etc). Maybe we’re just a stable lot?

  14. Thank you to all for not letting me get away without citing some statistical analysis. I don’t doubt that there may be some bias in my beliefs since I’ve been in the RE business.

    Don’t know if Charles has access to any data, showing the increase (my belief) in the size of houses in Portland over the past two decades or so. Would be interesting to see.

  15. kevbo-

    No documentation or statistical data is needed for personal observation or experience, but you stated “historically” which implies documentation.

  16. I must say I enjoyed your spirited conversation. Just to clarify, there are still zero down and low down programs available for buyers. The underwriting guidlines have become more strict, but they are still available. Freddie Mac still has a 100% one loan product and FHA has 3% down with all the down payment being a gift and the seller can pay all closing costs. There are also Down Payment Assistance programs such as Ameridream that allow the seller to pay the 3% and all closing costs creating a type of zero down program.

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