Can Inflated Appraisals Create More Foreclosures? Until the start of November few people would have regarded Albany, NY as the center of the foreclosure meltdown, yet in a single week the state's attorney general radically changed the national mortgage debate. It all began November 1st when New York attorney general Andrew Cuomo alleged that eAppraiseIT, a subsidiary of First American Corporation, caved to pressure from one of the nation's largest mortgage lenders, Washington Mutual, and inflated home appraisals. “The independence of the appraiser is essential to maintaining the integrity of the mortgage industry,” said Cuomo, previously HUD Secretary under President Clinton. “First American and eAppraiseIT violated that independence when Washington Mutual strong-armed them into a system designed to rip off homeowners and investors alike. “The blatant actions of First American and eAppraiseIT have contributed to the growing foreclosure crisis and turmoil in the housing market,” Cuomo continued. “By allowing Washington Mutual to hand-pick appraisers who inflated values, First American helped set the current mortgage crisis in motion.” While Cuomo’s allegations will need to be proven in court, his key point is irrefutable: If there have been systematic efforts to inflate appraisals then real estate valuations for some of the world’s largest portfolios will need to be reduced while valuations for other property and mortgage holders will surely be suspect. The result — in terms of homeowner prices, neighborhood values, corporate assets, shareholder equity, investor balance sheets, Wall Street indexes and derivative valuations — would be massive losses, certainly in the range of hundreds of billions of dollars and possibly far more. If a broad pattern of appraisal inflation can be shown, it would also impact individual homeowners. Prices would be more difficult to justify and refinancing would impossible for many owners seeking to raise cash or jettison toxic loans. Foreclosure levels would increase because fewer borrowers would be able to sell or refinance for enough money to pay off current loans. Valuations It wasn’t too long ago that Citigroup had a market value of $283 billion. That’s a number you could measure by multiplying the $57 share price by 4.97 billion shares. Recently Citigroup shares dropped below $33, meaning that in the past year owners lost nearly $120 billion in market value. What’s interesting about company values is that they’re easy to compute. Just look at the price per share at any given time, multiply times the number of shares outstanding and that's it. You can easily value any listed company. Matters are a lot more complex with real estate. Unlike stock, individual homes are not bought and sold minute-by-minute so there's no instant pricing guidance. The fact that a home down the street sold for $535,000 does not tell us the exact value of any other home on the block. While one share of Citigroup is worth exactly as much as any other share in the same class, that's not with real estate, even for two condos with the same size and design located in the same building. Unlike carpeting or floor tile, you can’t value homes on the basis of square footage because there's no standardized way to measure houses — the square footage guidelines of the American National Standards Institute (ANSI) are voluntary. To make matters more mysterious recorded sale prices may not reflect the actual money paid to property owners. So-called “seller contributions” — sometimes $10,000 or more in credits to a buyer — are not itemized in public records or MLS reports. Even stranger, property records sometimes show that homes have been sold for good consideration, an expression which means nothing more than love and affection, qualities which are impossible to measure. The process of valuing real estate is complex because all properties are both local and unique. Since lenders make loans on the basis of a sale price or an appraised value, whichever is less, knowing the fair market value of a home is enormously important to buyers and sellers as well as lenders and investors. Appraisers There are several ways to determine the value of a home. Real estate brokers can provide a CMA (comparative market analysis) or a BPO (broker’s price opinion). Lenders, however, will not accept either because brokers inherently have a conflict of interest — their income typically increases as sale values rise. The alternative is an appraisal, an independent opinion of value by a licensed appraiser or, in a growing number of cases, a fair market sale price determined with an automated valuation. The attraction of automated evaluations is cost and time: With automated appraisals a home can be valued just about instantly and at far less expense than the cost of a professional appraiser. The use of automated appraisals is limited, however, because such technology does not work in areas with few sales or where the housing inventory is diverse, such as a community with older Victorian homes. No less important, while automated technologies can often give a good sense of general values they do not reflect specific pricing. With an automated appraisal there's a numeric property valuation — but real estate is more than numbers. Townhouse prices in a given community may average $315,000 each, but if they all go on sale tomorrow some units will sell faster than others. Why? The unit with the flooded basement and mold will not sell as fast as the unit with the designer furnishings. Such distinctions are invisible to automated appraisal programs but not to buyers. Marketplace Distortions For buyers and lenders the obvious preference is to get a full-blown appraisal, but cost is a concern and the result is that many borrowers are perfectly happy to get an automated valuation. The catch is that appraisal money saved may not be money well spent because appraisals tend to be conservative and thus prevent borrowers from over-paying and lenders from lending too much. But imagine what would happen if the lending process was distorted. Instead of fair-market appraisals, suppose lenders encouraged the most inflated valuations they could find. In fact, imagine if lenders pushed appraisers to increase values. Appraisers often feel such pressure. According to an online petition from appraisers nationwide, such pressure “comes in many forms” and includes: “The withholding of business if we refuse to inflate values, “The withholding of business if we refuse to guarantee a predetermined value, “The withholding of business if we refuse to ignore deficiencies in the property, “Refusing to pay for an appraisal that does not give them what they want, “Black listing honest appraisers in order to use “rubber stamp” appraisers, etc.” Appraiser coercion appears to be more common than in the past. A recent study by the October Research Corporation found that “90 percent of appraisers were pressured by mortgage brokers, lenders, realty agents, consumers and others to raise property valuations to enable deals to go through, doubling similar findings from three years ago.” Appraiser complaints should not be ignored. If appraisals are inflated, if bloated valuations are a widespread problem, then more than home prices are being distorted. The Wider Impact Since lenders don’t want to lend more than they should, why would they pressure appraisers to produce higher valuations? The answer is money. A large percentage of all mortgages are packaged together and sold, meaning that most “lenders” are really loan retailers. Bigger loans mean larger commissions for loan officers, extra fees for servicing loans, larger revenues when loans are sold, better quarterly results, higher share values and bigger executive bonuses based on performance. The problem is that exaggerated appraisals also have a downside. Purchasers get hurt because they pay more than fair market value for houses, thus they have bigger-than-necessary mortgages. Larger monthly costs increase the potential for foreclosure and bankruptcy. When overvalued homes need to be sold, buyers are often upside-down — they owe more than the house is worth. Investors who buy thousands of loans at a time are also impacted. While it’s easy to calculate the worth of a public company, figuring the value of mortgages is not so simple. One has to know the fair market price of the property which secures each mortgage, and if those values were routinely overstated then investors paid too much for their mortgages and asset values must be reduced. Not only are mortgage investors impacted, so are those who own derivatives based on mortgage values. If mortgage values have been artificially inflated, then derivatives must be re-priced to lower levels. Right now we can see that mortgage loans and related financial products are being written down on Wall Street. The result is massive losses for stockbrokers, banks and investors of every size. “Write-downs to this point have largely been based on rising default rates,” says James J. Saccacio, chairman and chief executive officer of RealtyTrac, the leading online marketplace for foreclosure properties. “If it also turns out that appraisals were systematically hyped because of lender pressure, then further write-downs will be required, write-downs vastly-larger than anything seen to date. Not only would the losses be huge, they would invariably spread to homeowners, lenders, pension funds, insurance companies and investors who played by the rules. The damage to the economy would be immense. We acknowledge Peter G. Miller who is the author of The Common-Sense Mortgage and is syndicated in more than 100 newspapers. --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Avoiding Foreclosure If you don't pay your monthly mortgage payments over a period of time, the mortgage company can foreclose. This means you will lose title to your property and may be evicted from your home. A foreclosure becomes part of your credit report and may adversely affect your ability to obtain credit in the future. To avoid possible foreclosure, it is helpful to have money saved to cover several months of your housing costs in case of an unexpected emergency, like job loss, divorce or separation, serious illness, or the death of a loved one. • What if You Cannot Pay Your Mortgage? • What if You Can No Longer Afford to Keep Your Home? • Beware of Scam Artists What if You Cannot Pay Your Mortgage? 1. Call your mortgage company now! As soon as you realize that you are unable to make your payments, talk about your circumstances with the mortgage company to which you send your monthly mortgage payment. Your options to retain your home are most effective when you are only one or two payments behind. Too many people in financial trouble wait until the last minute to call their mortgage company. Some hope their problems will quickly resolve themselves. Others worry the mortgage company will rush to collection or foreclosure. The truth is: the longer you wait, the greater your chance of losing your home. If you are unable to make your mortgage payment, don't delay–call your mortgage company immediately. In a significant number of all foreclosures, the borrowers did not return their mortgage company's calls or written invitations to discuss payment options. Depending upon your situation, your mortgage company may be able to provide you with temporary financial relief. Here are a number of alternatives to discuss with your mortgage company. • Forbearance is an agreement to temporarily let you pay less than the full amount of your mortgage payment, or pay nothing at all, during the forbearance period. Mortgage companies may consider forbearance when you can show that funds from a bonus, tax refund, or other source will let you bring the mortgage current at a specific time in the future. • A reinstatement occurs when you pay your mortgage company the total amount you are behind, in a lump sum, by a specific date. This is often combined with forbearance. • A repayment plan is an agreement that gives you a fixed amount of time to repay the amount you are behind by combining a portion of what is past due with your regular monthly payment. At the end of the repayment period you have gradually paid back the amount of your mortgage that was delinquent. • A loan modification is a written agreement between you and your mortgage company that permanently changes one or more of the original terms of your note to make the payments more affordable. Common loan modifications include o Adding missed payments to the existing loan balance o Making an adjustable-rate mortgage into a fixed-rate mortgage o Extending the number of years you have to repay 2. Contact A Non-Profit Housing Or Credit Counseling Agency Non-profit housing and credit counselors can help you analyze your financial situation. They also can help you organize a budget to pay your mortgage and other monthly expenses–without your mortgage company's direct involvement. Finally, these agencies can help you find and take advantage of local services or programs that provide financial, legal, medical or other support. You can find a credit counseling agency in your local phone book or by contacting the U.S. Department of Housing and Urban Development (HUD) at (800) 569-4287 on weekdays between 9:00 a.m. and 5:00 p.m. Eastern time. You can find a list of HUD-approved agencies on their web site. What If You Can No Longer Afford to Keep Your Home? If you cannot or do not want to keep your home, your mortgage company can work with you to avoid foreclosure. This can help reduce the negative effect on your credit reputation. There are several different ways this might occur depending upon your financial circumstances: • An assumption permits a qualified buyer to take over your mortgage debt and pay the mortgage payments, even if the mortgage is non-assumable. As a result, you may be able to sell your property and avoid foreclosure. • If you can sell your house but the sale proceeds are less than the total amount you owe on your mortgage, your mortgage company may agree to a short payoff and write off the portion of your mortgage that exceeds the net proceeds from the sale. • Your mortgage company may agree to a deed-in-lieu of foreclosure if you agree to voluntarily transfer title of your property to your mortgage company in exchange for cancellation of your mortgage debt. In most cases, you must attempt to sell your home for its fair market value for at least 90 days before a mortgage company will consider this option. This option may be unavailable if there are other liens on your home, such as judgments from other creditors, second mortgages, or tax liens. Beware of Scam Artists Predatory lenders often target people in financial distress. They try to panic you into high cost mortgages, making financial problems worse and increasing your risk of losing your home. Predatory lenders usually offer loans with • High interest rates • Broker fees • Unnecessary costs like pre-paid life insurance • Unaffordable repayment terms Here are some tips to protect you from predatory lenders: • Be suspicious of anyone who offers you "bargain loans," whether they mail, fax or e-mail an offer to you, call you on the phone, or come to your door. • Beware of promises of "No Credit? Bad Credit? No Problem!" and offers that are only "good for a very short time". • Avoid lenders who encourage you to borrow more than you need or more than the value of your home. • Beware of terms that change at the last minute or offer next-day approval based on prepayments or up-front fees. • Do not sign anything you do not understand. It is your right and duty to ask questions. • Beware of phony credit counseling agencies charging high fees for financial counseling services you can get for little or no charge through non-profit agencies. You can find a list of HUD-approved agencies by visiting their web site. REMEMBER: Anything that sounds too good to be true usually is! If you suspect a predatory mortgage company is targeting you, call your local office of consumer affairs, the Federal Bureau of Investigation, an approved credit counseling agency or your local Don't Borrow Trouble campaign. How Freddie Mac Helps Ask your mortgage company if Freddie Mac owns your mortgage. We require our mortgage companies to look for options that help borrowers who are delinquent on their mortgages keep their homes and avoid foreclosure. Working together with our mortgage companies, from 2000 through 2004 we have helped over 176,000 financially troubled borrowers keep their homes. Resources • Get a list of housing counseling agencies from the Department of Housing and Urban Development. • Get debt advice from the National Foundation on Credit Counseling. • Learn more about managing your finances by taking Freddie Mac's online credit education course, CreditSmart®. Is the housing market dead, flat, or about to make a surprised increase? Who knows, and quite frankly, who really who cares. After reading what's on this portal, you will figure out that no matter what's going on with the economy, finances, or what's going on within the real estate industry, people will always need a place to live. It doesn't take a, sophisticated techie yuppie to figure out that owning a home or owning several homes, has far more benefits than renting. Just see for yourself! La venta de una propiedad vieja y la compra de una nueva Para acogerse al alivio contributivo que concede la ley, la adquisición de la nueva residencia no tiene necesariamente que efectuarse mediante una compraventa. Si usted vende su residencia principal y compra una nueva, puede tener que pagarle contribuciones al Gobierno si en la venta recibe una ganancia Esa situacion se daria si el precio que usted paga por la residencia nueva es menor que el precio pagado por la residencia vieja En este caso, la diferencia entre un precio y el otro seria la ganancia que usted tendria que reconocer y sobre ella pagar la cantidad correspondiente como ganancia de capital a largo plazo al Departamento de Hacienda. Por el contrario, si el precio de la residencia nueva es igual o mayor al pagado por la vieja, entonces usted no tiene que reconocer ganancia alguna en la venta de esta, siempre y cuando que la compra de la nueva residencia se lleve a cabo dentro de los dos afios siguientes a la fecha en que se efectuo la venta de la vieja residencia Si deja pasar esos dos afios, pierde el beneficio. Puede ocurrir, sin embargo, que usted haya hecho mejoras. a su residencia principal. En ese caso, al precio pagado por ella puede anadirle todo el dinero que hubiera invertido en las mejoras para de ese modo aumentar la base contributiva sobre la cual va a decidirse" si ha tenido una ganancia o no. Asi, por ejemplo, si el precio pagado por su residencia fue de $100,000, pero usted le hizo mejoras valoradas en $20,000, la base contributiva para de-terminar si recibe una ganancia de capital al adquirir una nueva residencia, serian $120,000 y, por consiguiente, si el precio pactado por esta es esa misma cantidad o una mayor, no tendria que reconocer ganancia alguna Utilizando el mismo ejemplo anterior, si usted no le hizo mejoras a su residencia, la base contributiva serian $100,000, o sea el precio pagado por la vieja residencia, en cuyo caso tendria una ganancia de $20,000. Esa ganancia puede usted tributarla como una ganancia de capital, en cuyo caso tendria que pagarle al Departamento de Hacienda el 10% de esos $20,000.0 puede usted, si le resulta mas conveniente, incluirla en su planilla de cbntribucion sobre ingresos como parte de su ingresos bruto y tributar dicha ganancia al tipo contributivo regular establecido por el • Codigo de Rentas Internas. Debo agregar que para que usted cualifique para recibir el beneficio contributivo que concede la ley, la segunda residencia, o sea la nueva adquisicion, tiene que estar localizada en Puerto Rico. Si la ganancia la utiliza para com-prar una nueva residencia en Florida, por ejemplo, entonces no es usted ele-gible para recibir ese alivio contributivo y tendria que reconocer como una ganancia los $20,000 recibidos segiin en ejemplo arriba mencionado. Es importante saber que si se cum-plen los requisites antes mencionados, usted no tiene que utilizar todo el efectivo recibido en la venta de su residencia para pagar el costo de la residencia nueva Puede utilizar parte del mismo, retener la diferencia y usarla para lo que desee y pagar el balance del precio con un prestamo hipotecario. El metodo de pago del costo de la nueva residencia, pues, no es lo importante. Para acogerse al alivio contributivo que concede la ley, la adquisicion de la nueva residencia no tiene necesariamente que efectuarse mediante una compraventa. Puede usted adquirirla mediante permuta (cambio de una propiedad por otra) y recibe el mismo beneficio, sujeto, claro esta, a que se cumplan los requisites antes mencionados. Toda vez que lo importante en estos casos es por un lado el precio pagado por su residencia y el pagado por la nueva, es esencial que conserve copia de las escrituras de esas transacciones, asi como la prueba documental de las mejoras hechas a la primera y lo pagado por ello, a fin de que pueda de ese modo establecer los hechos determinantes que requiere la ley y recibir el alivio contributivo que esta concede. No obstante lo dicho anteriormente, la ley le concede un privilegio especial a las personas de 60 afios de edad o mas que hayan poseido y usado una propiedad como residencia principal por mas de tres anos durante el periodo de cinco anos terminados en la fecha de venta de la misma, consistente en una exclusion de $150,000 de la ganancia. Esta exclusion aplica para afios con-tributivos comenzados a partir del 1 de enero de 2005 y puede ser ejercida una sola vez en la vida del contribuyente. Reconocemos la recopilación de la antes incluida información al Lcdo. Rodolfo Glück.

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