Zillow under fire for ‘Zestimate’ system

Kenneth R. Harney May 12, 2017

It was bound to happen: A homeowner has filed suit against online realty giant Zillow, claiming the company’s controversial “Zestimate” tool repeatedly undervalued her home, creating a “tremendous road block” to its sale.

The suit, which may be the first of its kind, was filed in Cook County Circuit Court by a http://www.chicagotribune.com/topic/chicago-suburbs/glenview-CHIS0025-topic .html> Glenview real estate lawyer, Barbara Andersen. The suit alleges that despite Zillow’s denial that Zestimates constitute “appraisals,” the fact that they offer market value estimates and “are promoted as a tool for potential buyers to use in assessing (the) market value of a given property,” meets the definition of an appraisal under state law. Not only should Zillow be licensed to perform appraisals before offering such estimates, the suit argues, but it should obtain “the consent of the homeowner” before posting them online for everyone to see.

Andersen said she is considering bringing the issue to the Illinois attorney general because it affects all owners in the state. She also has been approached about turning the matter into a class action, which could touch millions of owners across the country.

In the suit, Andersen said that she has been trying to sell her townhouse, which overlooks a golf course and is in a prime location, for $626,000 – roughly what she paid for it in 2009. Homes directly across the street, but with greater square footage, sell for $100,000 more, according to her court filing. But Zillow’s automated valuation system apparently has used sales of newly constructed houses from a different and less costly part of town as comparables in valuing her townhouse, she said. The most recent Zestimate is for $562,000. Andersen is seeking an injunction against Zillow and wants the company to either remove her Zestimate or amend it. For the time being she is not seeking monetary damages, she said.

Emily Heffter, a spokeswoman for Zillow, dismissed Andersen’s litigation as “without merit.” A publicly traded real estate marketing company based in Seattle, Zillow has been offering Zestimates since 2006. Currently it provides them for upward of 110 million houses – whether for sale or not. Type in almost any home’s street address and you’ll likely get a property description and a Zestimate. The value estimates are based on public records and other data using “a proprietary formula,” according to Zillow. A Zestimate “is not an appraisal,” the company says on its website, but instead is “Zillow’s estimated market value” using its proprietary formula.

The Zestimate feature is the cornerstone of Zillow’s business model since it pulls in millions of home shoppers, allowing the company to sell advertising space to realty agents. Zillow makes big money with the help of its Zestimates: In the first quarter of this year, it reported $245.8 million in revenues – a 32 percent jump over the year before – including $175 million in payments from “premier” agents, who pay for advertising.

But there’s a flip side to Zestimates. Homeowners, realty agents and appraisers have been critical for years about the valuation tool, citing estimates that too often are far off the mark – sometimes 20 or 30 percent too low or too high – and misleading to consumers. Zillow itself acknowledges errors. Nationwide, according to Heffter, it has a median error rate of 5 percent. Zestimates are within 5 percent of the sale price 53.9 percent of the time, within 10 percent 75.6 percent of the time and within 20 percent 89.7 percent of the time, Zillow claims.

Another way of looking at the Zestimate error rate: Roughly one-quarter of the time, the value estimate is off by 10 percent or more of the selling price, and wrong by 20 percent or more 10 percent of the time. Though the 5 percent median error rate sounds modest, when computed against median sales prices, the errors can translate into tens of thousands of dollars – hundreds of thousands in high-cost areas. Also, in some counties, error rates zoom beyond the 5 percent median – 33.9 percent, for example, in Ogle County, Ill., and 10 to 20 percent in a handful of counties in Ohio, Maryland, Florida, Oklahoma and Illinois.

Some appraisers are cheering Andersen’s suit and welcomed the idea of state-by-state legal challenges.

“They’ve been playing appraiser without being licensed for years and doing a bad job,” said Pat Turner, a Richmond, Va., appraiser. “It’s about time they got called on it.”

Fannie Mae eases burden of student loans

KENNETH R. HARNEY on May 5, 2017

WASHINGTON – Here’s some good news for home buyers and owners burdened with costly student loan debts- Mortgage investor Fannie Mae has just made sweeping rule changes that should make it easier for you to purchase a first home or do a “cash-out” refinancing to pay off your student debt.

Fannie’s new policies could be game changers for large numbers of consumers. Roughly 43 million Americans are carrying student debt – $1.4 trillion nationwide – according to industry estimates. These not only are a drag on borrowers’ ability to save money, but are a key reason why so many young, would-be home buyers remain renters – or are camped out in their parents’ homes.

There are three big changes that Fannie has made that could affect you-

- If you’re one of the 5 million-plus borrowers who participate in federal reduced-payment plans on your student loan, your actual monthly payments, as reported to the credit bureaus, will count toward your debt-to-income (DTI) ratio calculations. If your payments were originally supposed to be $500 a month but you’ve had them reduced to $100 through an “income-based repayment” plan, only the $100 will be added to your monthly debts for DTI purposes. Previously lenders were required to factor in 1 percent of your student loan balance as your monthly payment on the student loan, even though you were actually paying a fraction of that. As a result, many borrowers’ debt ratios were pushed beyond most lenders’ underwriting limits.

- For an estimated 8.5 million American home owners who are still carrying student debts, Fannie has lowered the costs of a “cash out” refinancing, provided the extra cash you pull out from your equity is used to retire your student debt. Among the potential beneficiaries- parents participating in “parent plus” programs that help pay off their kids’ student debts, and parents who have co-signed for their children’s student loans. Fannie is eliminating the usual extra fee it charges for cash-outs, as long as the funds that borrowers withdraw pay off student loan debts.

- If you have non-mortgage debts that are being paid for by someone else – say your parents pay your monthly credit card balances – these no longer will be included in your DTI computation, provided the payments have been made steadily for 12 months. This should improve the debt ratios of young buyers who are still getting a little help on their cash flows from Mom and Dad.

Jerry Kaplan, senior vice president for Cherry Creek Mortgage, a lender based in the Denver area, sees Fannie’s student loan changes as “a huge deal.” It’s “not uncommon,” he told me, to see loan applications showing $50,000 to $100,000 or more in unpaid student loan balances, and Fannie’s previous rules often made it difficult for them to get approved.

John Meussner, a loan officer at Mason McDuffie Mortgage in Orange County, California, described the negative impacts of Fannie’s previous method of treating student loans with income-based repayment amounts. His firm recently received an application from a borrower – a parent with $100,000 in student loan debts she took out for her children’s educations – who could not be approved for a refi under the old rules. Though she was actually paying just $100 a month, Fannie’s mandatory 1 percent calculation rule required Meussner to list her debt at $1,000 a month. Now, since the $100 in payments are on her credit reports, only $100 will go into her DTI calculation and she will likely qualify for the loan she sought.

“This is a step toward common sense,” said Meussner in an interview.

Not every lender is quite as enthusiastic about the changes, however. Steve Stamets, senior loan officer with Mortgage Link Inc. in Rockville, Maryland, says he has “mixed feelings.” On the one hand, he has applicants with heavy student debts who couldn’t be approved under the old rules and now will qualify under the new ones. But he worries about the sheer size of some of these student debts. If borrowers have trouble paying down these loans or making full payments, they could end up in default on their home mortgages.

For its part, Fannie Mae says it expects mortgages originated using the new guidelines to have low default rates. Borrowers must still meet Fannie’s regular credit score and other underwriting criteria, which some industry critics say are too stringent, not too lax.

Bottom line- Check out the pros and cons with lenders. You just might be a fit.

Make sure home inspectors play by the rules

KENNETH R. HARNEY on Apr 28, 2017

WASHINGTON – Most home buyers and sellers don’t think much about what might derail their purchase or sale. But here’s a sobering fact- One of every 20 sales contracts blows up along the road to closing. And roughly one of every four runs into an issue that delays the scheduled settlement.

These statistics come from new survey research conducted by economists at the National Association of Realtors, covering the period of December 2016 through February of this year.

Guess what’s the No. 1 real estate deal killer? Home inspections. Nearly one third of all terminated real estate contracts crashed and burned because of the inspection results. Inspections also ranked as the No. 3 cause of delayed settlements, accounting for 13 percent.

Many or most of those deal-killing or delaying inspections probably turned up legitimate defects that the buyers needed to know about. But some went a little too far. Take this example provided by Diana Dahlberg, broker and owner of 1 Month Realty in Kenosha, Wisconsin. She was representing home buyers who hired a local inspector. When the inspector examined the furnace, recounted Dahlberg in a post on ActiveRain, a real estate networking and educational website, “he went crazy saying there was a cracked heat exchanger,” then turned to the seller, who was nursing her baby, and said, “If you don’t want to kill your baby, you better get a new furnace right away.”

Both the seller and the buyers “freaked out” at hearing this. Later that day the buyers canceled the contract. On subsequent inspection, Dahlberg told me, “there was no crack in the heat exchanger.” There was nothing wrong. The sellers were so upset that they took their house off the market.

In an interview, Dahlberg told me that some inspections “have become a nightmare” for sellers and their agents. Nonetheless, she strongly supports the concept and value of home inspections by competent inspectors – “we do need that third party opinion” to be certain about the condition of a property. But they need to stay within strict professional norms and guidelines.

Walter Fish, owner of Bay Area Home Inspection LLC in the Marquette, Michigan, area and a certified and licensed inspector, agrees. He says that furnace issues are a “common example” of where inspectors exceed their appropriate scope. “Some inspectors have been known to call out [for replacement] older furnaces” that are operating normally. Why’s that a problem? Because under widely recognized professional rules of conduct, inspectors are not supposed to “determine the life expectancy of any component or system.”

Fish is a member of the International Association of Certified Home Inspectors (InterNACHI), one of the largest trade groups for the profession. The association’s “residential standards of practice” spell out the basic do’s and don’ts for inspectors. Among the tasks they are not supposed to perform, according to the standards, are assessing-

- The life expectancy of the property or any components.

- The market value of the property or its marketability.

- The “suitability” of the property for any use or the “advisability” of its purchase.

- Aesthetic issues.

Scott Godzyk of Godzyk Real Estate Services in Manchester, New Hampshire, described on ActiveRain one deal-damaging inspection he experienced that crossed all sorts of professional tripwires. A buyer hired an inspector he found online. The inspector’s final report noted among other problems-

- The roof is at the end of its 25 year life.

- The furnace hasn’t been serviced in years.

- The oven smokes when it’s turned on.

- Paint colors in several rooms “do not match.”

- Kids’ toys are a trip hazard.

All of which were curious findings since-

- The house was only 9 years old, so the roof was nowhere near its 25 year functional life.

- The furnace had been serviced during each of the preceding seven years, as the dated tags attached to it confirmed.

- The oven only smoked because the inspector turned it on without looking inside, where the sellers had a couple of plastic containers.

- Paint color match is not a matter for a home inspector.

- Kids’ toys do not convey with the house. Duh.

The takeaway here for you- As a seller, be aware of the standards of practice for inspectors. A good source is InterNACHI (https-//www.nachi.org/sop.htm.) As a buyer, search for certified or state licensed inspectors with solid references who will fairly and accurately report what you need to know about the house – not what you don’t.

Credit bureau settlement shines light on scores

KENNETH R. HARNEY on Mar 31, 2017

WASHINGTON – When is your “credit score” irrelevant in buying a house or refinancing a mortgage? A new federal legal settlement with a major credit bureau has the answer- The only score that matters is the one your lender uses to evaluate you, not some random score you got on a website.

All the others you might buy or see – there are dozens of them hawked on the Internet – may be interesting, but they won’t affect the interest rates you’re quoted, the fees you’re charged or whether your application gets approved or rejected.

The new legal settlement from the Consumer Financial Protection Bureau alleges that Experian, one of the big three credit reporting bureaus, “deceptively marketed credit scores to consumers by misrepresenting” them as “the same” as what their lender would use in determining whether and on what terms to offer them a loan.

In fact, said the CFPB, the scores Experian advertised extensively were its own proprietary “educational” scores that virtually no lenders use to make credit decisions.

Experian’s promotions appeared on third-party websites, banner and display ads, direct mailings and sites such as FreeCreditScore.com, FreeCreditReport.com and CreditReport.com, as well as AnnualCreditReport.com.

As part of the settlement, Experian was fined $3 million. The case follows CFPB settlements in January over similar allegations with the other national credit bureaus – Equifax and TransUnion – in which they were required to make $17.6 million in restitution to consumers and pay $5.5 million in fines. TransUnion and Equifax were accused not only of falsely representing the usefulness of their in-house educational scores but also luring consumers into “costly recurring payments for credit-related products with false promises.” All three bureaus denied any wrongdoing.

Which brings us back to mortgages. If you’re like many home buyers and owners, you’ve seen online pitches and ordered your scores, often free. They may have come with tie-ins to credit card offers or credit monitoring and identity theft protection services.

One site may have said your score is 788, ranking you as “excellent” on their scale. Another may have said you look even better – your credit score is 801 and you’re among the credit elite.

Armed with these seemingly sterling scores, you start checking out mortgage company offers. With an 801, you figure, hey, I’m bullet-proof. I’m a prime candidate for the best mortgage deals out there.

Then you apply to a lender for a preapproval and get the sobering news- Your middle FICO score – lenders often pull scores from all three bureaus – is a 716, and that’s what we’ve got to use to price your loan. The score is okay, but it’s 85 points below where you thought you were, and below the cutoff point for the best mortgage interest rates and terms.

FICO scores, which are predominant in the mortgage market and mandated by giant investors Fannie Mae and Freddie Mac, run from 300 to 850. Higher scores mean lower risk to the lender. Lower scores can cost you a lot. According to a March 23 national survey for FICO by Informa Research Services, a mortgage applicant with a 765 FICO would get an average quote of 3.8 percent on a $300,000 loan with a monthly principal and interest payment of $1,405. The same applicant with a 650 FICO would be quoted an average rate of 4.9 percent with a monthly payment of $1,589 – $184 more a month.

But here’s a little complication- The FICO score your lender pulls for your mortgage application may not be the same as the FICO score your credit card company might be sending you every month online. Or, perplexingly, it might even be different from the FICO score you get on MyFICO.com.

That’s because FICO has introduced multiple models over the years, each with what the company describes as consumer-friendly improvements. The latest is FICO 9. The most widely used is FICO 8.

But most mortgage lenders use the older models specified by Fannie Mae and Freddie Mac. The differences in scores from older to newer may be modest for many applicants, but could be significant for some. Fannie and Freddie are considering updating their scoring models but have not done so yet.

Bottom line- Ask your loan officer which model was used to generate your FICO scores. And never depend on generic scores available online as part of your mortgage planning process.

Are you paying unseen add-on fees for your appraisal?

KENNETH R. HARNEY on Mar 24, 2017

WASHINGTON – Are you getting fleeced on appraisal charges when you buy a house or refinance? Could you be paying as much as double what the appraiser is receiving for actually doing the work, with the excess going to an undisclosed third party?

Many appraisers say yes. And they’re eager to let consumers know that when the appraisal charge is $500 or $800 or $1,000, they’re frequently being paid just a fraction of that. The rest is going to an “appraisal management” company under contract by the lender to oversee the appraisal process. Management companies hire the appraiser, negotiate fees, review the appraisal and send it to the lender. Management companies often select appraisers willing to work for relatively low fees. In exchange, they make assignments available to appraisers that they might not otherwise receive.

Controversy arises when management companies add 35 percent to 50 percent surcharges – or more – onto the final bill to the consumer. Federal rules do not require disclosure of the surcharges, nor do regulations in the majority of states. Appraisers say management companies often seek to hide the amount of their add-ons by prohibiting them from attaching their invoices to the appraisal report the consumer receives.

Worst of all, they say, is when the consumer blames the appraiser for the high fee being charged, unaware that much of it is going into a third party’s pockets.

Ryan Lundquist, an appraiser active in the Sacramento, California, market, told me about a recent experience- The house he was asked to appraise had complicated features and was difficult to value, requiring a higher than typical fee – $800. Subsequently he learned that the management company tacked on an extra $345 – a 43 percent surcharge – hitting the consumer with a $1,145 bill. After the homeowner complained, he learned that the management company said the $1,145 was solely Lundquist’s quote, not theirs, which was a lie.

“I was shocked,” Lundquist said in an interview, “it wasn’t honest, it wasn’t ethical,” plus the borrower was being “gouged.” Forty-three percent extra “just seems too much for a middleman service.”

Lundquist described his experience in a blog post, which drew dozens of responses by appraisers around the country, mainly critical about management companies’ add-ons to consumers’ bills.

“I got chewed out by the owner of the house,” wrote one. “Yes, I charged $700. But he (the owner) paid $1,700″ – a $1,000 add-on. “Now that is an excessive fee.” Another complained that a management company had “hit (the home owner’s) credit card three times” for the appraisal fee before the work was performed and then tacked on a 45 percent surcharge. The owner “yelled at me” for the rip-off, he said. The appraiser ultimately declined the assignment rather than work for the management company.

Richard Hagar, an appraiser in the Seattle area, told me in an email that “I’m still receiving fee ‘offers’ (from management companies) below $400, while the borrower is being charged $800.”

Carl Schneider, a Tulsa, Oklahoma, appraiser, said excessive markups are commonplace, but consumers usually “know nothing about it” because the appraiser is prohibited from revealing the actual fee.

“I resent forcibly being complicit in this fraud,” Schneider said in an interview. “Why can’t they be transparent?

David Doering, a Jefferson City, Missouri, appraiser and president of the National Association of Independent Fee Appraisers, told me “we often don’t know what’s being charged to the consumer. We only hear about it when people are angry.”

I asked the executive director of the appraisal management companies’ national trade group, the Real Estate Valuation Advocacy Association, for comment about fee add-ons and efforts to conceal charges, but he declined to discuss pricing, noting that “I am not a party to any AMC (appraisal management company) contracts.”

Jeff Eisenshtadt, president and CEO of Title Source, whose TSI Appraisal division is a major management company, told me “there’s a tremendous amount of value” his industry brings to the table, but “we believe the consumer really should be focused on the bottom line charge for the appraisal,” not the split between the appraiser and the management company. Consumers don’t care about the individual costs of “the pickles and onions and lettuce” that go into a hamburger, he said, nor should they when it comes to appraisals.

Maybe he’s right. But if you care about where your money is going when you pay for an appraisal, ask the lender or the appraiser. Who’s getting what? And why?