Is your realty agent looking out for you, or someone else? Kenneth R. Harney on Dec 21, 2018 WASHINGTON – When you’re involved in a real-estate transaction, do you assume that the realty agents are required to represent the best interests of the home buyer or seller with whom they are working? The Consumer Federation of America recently posed that question to a national survey sample of adults, and 50 percent answered yes. Another 16 percent said “yes, almost always.” So two-thirds of consumers in the survey had roughly the same impression. But a new report from the Consumer Federation – an umbrella group representing nearly 300 local and state consumer organizations – suggests that it’s not necessarily so. The reality, according to the study, is that “real estate agents often are not required by law to represent the interests of buyers or sellers.” As a result, sometimes things can go seriously awry. The study cites ongoing litigation in New York, where clients of a major realty brokerage firm have filed suit alleging that the company “has stripped thousands” of buyers and sellers of the right to employ an agent who is “loyal to them and only them” through its alleged misuse of “dual agency.” In a dual-agency situation, agents of a single brokerage purport to represent both sides of a transaction, the seller and the buyer. The broker and agents in these cases pocket the entire real-estate commission rather than having to split it with a competing firm’s agent. The plaintiffs in the New York case claim that they were pushed into either paying tens of thousands of dollars more for a house or selling a house for much less than it was worth because the agents were working for the same broker – an inherent conflict of interest designed to keep the full commission “in house.” They also allege that the realty company made it a practice to do large numbers of 100 percent in-house-commission transactions to maximize its revenues, despite the potential harm to its clients. Among other things, the company allegedly paid its agents bonuses when they brought in both sides of the commission. The brokerage has denied the allegations. Dual agency is legal in 46 states, according to Finley Maxson, senior counsel for the National Association of Realtors. Typically the brokers or agents involved are required by state law to disclose the arrangement to clients, but the CFA says that rule is not always followed or disclosures are presented in a paperwork blitz and clients fail to focus on them. Stephen Brobeck, author of the new report and immediate past executive director of CFA, says the vast majority of consumers don’t understand the varying types of representation by realty agents. The key question they need to ask before agreeing to work with any agent, he says, is- Will you be representing us exclusively throughout the transaction and have a fiduciary duty to us? A fiduciary duty means that the agent is legally obligated to “procure the greatest advantage” for the client. Among the common forms of representation examined in the CFA study- – Single agent. In this case, the agent works solely for the client and has a fiduciary responsibility to the client. – Subagent. This is where the agent works with the buyer but has a fiduciary duty to the seller. – Transactional agent. In this case, the agent works with both the buyer and seller to facilitate a sale but has no fiduciary responsibility to either party. – Dual agency. The study describes this as an arrangement whereby “the agent somehow is expected to represent the interest of both the seller and the buyer in a home purchase.” “The Holy Grail is to capture the entire commission,” Brobeck told me. “The listing agent might say to the seller, we’ve got a hot buyer for your house” who happens to be a colleague. In the New York case, one plaintiff alleges that she sought to buy a four-bedroom house for its list price of $599,900 but was pressured to pay $635,000 by her agent. She subsequently received a disclosure form with a pre-checked box indicating that she was giving “informed consent” to dual agency – which was not provided to her in advance and thus violated state law. Another plaintiff says he was pressured to pay $125,000 more than he should have because of a dual-agency arrangement between agents. The takeaway- If agents’ disclosures aren’t clear to you, probe further. You need to know who – if anyone – has your best interests paramount.

By KENNETH R. HARNEY

November 30, 2018

WASHINGTON — The Trump administration wants to eliminate professional appraisals on a large number of home-sale transactions — a move that critics say could push the country back toward the see-no-evil days of mortgage lending that preceded the housing crash.

Just before Thanksgiving, the administration’s top financial regulators — the Federal Deposit Insurance Corp., the Federal Reserve and the Treasury Department’s Office of the Comptroller of the Currency — issued a joint proposal that would make traditional appraisals unnecessary for many new mortgages originated for less than $400,000. Instead of a formal appraisal, these homes would receive an “evaluation” by individuals who have no appraisal licenses or certification and would not be subject to current state regulatory oversight requirements that govern appraisers. The evaluators could be an “independent bank employee” or unnamed “third part(ies).” They would, however, have to be “competent” and possess “knowledge of the market, location and type of real property being valued.”

The goal in loosening standards is to lower costs and reduce time in home-mortgage transactions, according to the agencies. There is already an exemption from mandatory appraisals for new mortgages less than $250,000 when a loan is not intended to be sold to government-backed investors such as Fannie Mae or Freddie Mac, insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA).

The new proposal would increase the $250,000 ceiling to $400,000, significantly expanding the reach of the no-appraisal approach. The agencies estimate that if their plan had been in place during 2017, approximately 214,000 home transactions would have been affected. The median existing home price nationwide in October was $255,400, according to the National Association of Realtors, far below the proposed $400,000 threshold.

Appraisers are reacting to the regulators’ plan with outrage — not surprising given the dent it could leave in their incomes. But appraisers say the issue goes far beyond money and instead gets to the “safety and soundness” responsibilities the federal agencies have concerning banks and mortgage lenders. Without a truly independent, professional valuation of a home — its interior, exterior and recent comparable sales — the door could be open to more loans on houses with inflated appraisals designed to “hit the number” needed by the lender to close the deal.

James L. Murrett, president of the Appraisal Institute, the country’s largest group representing appraisers, says adoption of the plan would represent “a return to the loan production-driven environment seen during the leadup to the financial crisis, when appraisal and risk management were thrown aside to make more — not better — loans. Apparently, the nation’s bank regulators have learned nothing from that experience.”

Ryan Lundquist, an appraiser in Sacramento, California, says the financial regulators’ claim that cost is a motivating factor in their proposal is bogus. “In reality,” he says, “the appraisal is one of the least expensive elements in a transaction, especially when compared to what loan officers and the banks make.” Yet at the same time, it is one of the most important for consumers. On a $350,000 home purchase, a $500 appraisal represents 0.0014 of the cost. For a home buyer, a professional opinion of value serves as a check on whether the house is priced too high.

Pat Turner, an appraiser active in the Richmond, Virginia, market, told me if the regulators’ goal is to reduce time and costs, they should cut back on the role of “appraisal management companies,” middlemen who add anywhere from 40 percent to 50 percent or more to what the home buyer pays. Management companies are involved in the majority of new mortgage transactions; they choose the appraisers for assignments, review the valuation and send it to their lender clients. When the home buyer is charged $500, Turner says, the appraiser may only be receiving $250, while the management company pockets the other half. Without the middleman, the appraiser might charge $350 -and that’s all the buyer would pay, a $150 saving.

Equally relevant, he says, is that the presence of management companies in the transaction inevitably adds “days to the whole process.” Turner also notes that evaluations typically do not involve interior inspections, so the value estimate is missing a crucial set of observations. The house might have serious interior or structural damage that lowers its true market value. But if a bank only sees an “evaluation” with no interior inspection, it might well have no clue.

Cooling trend could bode well for home buyers Kenneth R. Harney on Nov 16, 2018 WASHINGTON – Don’t call it a “buyer’s market.” Don’t call it a “correction.” But the fact is that a sobering change is taking shape in the housing market – an unmistakable cooling trend that defies an economy that is showing impressive growth, has the lowest unemployment rate in years and the highest home-equity levels on record. Anyone thinking of selling or buying a home shouldn’t ignore it. Doing so could cost you money, time and maybe a great opportunity. Call it a re-balancing. For years since the end of the financial crisis, prices in most markets have increased steadily – by single digits annually in most places, double digits in cities like Seattle, San Francisco, Denver and others that have vibrant employment growth plus persistent and deep shortages of homes for sale. Sellers were in the saddle. That was then. This is now- – Sales of existing and new homes have been sagging for half a year. According to data from the National Association of Realtors, resales have been dropping since the spring compared with year-earlier levels. At the end of the third quarter, resales were 2.4 percent below their level at the end of the same quarter in 2017. That’s despite growing inventories of homes available for sale in some areas, reversing the boom-time pattern of bidding wars that pushed prices to record levels and drove buyers batty. – Mortgage rates hit their highest level in nearly eight years in early November – 5.15 percent for a conventional 30-year fixed-rate loan – according to the Mortgage Bankers Association. Lending Tree, an online network that pairs mortgage applicants with lenders, reported last week that the average annual percentage rate quoted to shoppers was 5.27 percent. Buyers with good scores between 680 and 719 were quoted 5.42 percent. Though rates in the 5′s may sound reasonable to people who purchased or refinanced a home a decade ago, they are disturbingly high to millennials and other young buyers and magnify the affordability challenges they already face. Higher rates are also daunting to the millions of owners who have mortgages with rates in the mid-3-percent to 4-percent range. Rather than pursuing a move-up or downsizing purchase – requiring a new mortgage at today’s rates – many of them prefer to hunker down on the sidelines, further reducing sales activity. – Sellers are cutting their list prices. According to research by realty brokerage Redfin, 28.7 percent of prices of homes listed for sale in major markets during the month ending October 14 saw reductions. That’s the highest share of homes with price drops recorded since Redfin began tracking this metric in 2010. One of the key reasons for the cuts- Demand by shoppers is down by more than 10 percent compared with a year earlier. Consumer psychology is shifting as well- A national survey by Fannie Mae released last week found that the net share of Americans who believe it’s a good time to buy has fallen to just 21 percent, while the net share who say it’s a good time to sell is 35 percent. There are other signs of cooling underway that could be cited, but you get the point. The cycle has moved from seller-advantage to at least mildly purchaser-advantage in many parts of the U.S. Bear in mind, of course, that the cooling trend nationwide may not mean the same things are happening in your neighborhood. In fact, some cities with moderate housing costs are seeing price increases, homes selling above list, and tightening inventories. According to Redfin, nearly 40 percent of homes in Buffalo, New York, are selling above list at median prices 8.5 percent higher than last year’s. In Richmond, Virginia, 29 percent of homes are selling above list; in Akron, Ohio, 22 percent are selling for more than the original asking price, as are 23.2 percent in Greensboro, North Carolina. So what does this mean to you as a potential seller or buyer? Top of the list- Speak to multiple realty professionals to get a good handle on where your local market is relative to the national cool-down. If you’re a seller, the key to your transaction will be getting your list pricing right. If you’re a buyer, take your time but keep in mind- If you shop diligently, this fall could be a smart time to catch a deal – a marked-down price on the house you really want.

Fannie and Freddie programs offer options to retirees seeking home loans Kenneth R. Harney on Nov 2, 2018 WASHINGTON – It’s a common problem for retirees seeking to refinance or get a new mortgage- After their regular employment earnings stop flowing, their monthly incomes drop. They might have hundreds of thousands of dollars stored away in IRAs or 401(k) plans and other investments, but for mortgage purposes, they don’t have enough monthly income to qualify for the loan they want. They look asset rich, income poor. In some cases, that impression can create serious problems – even rejections of applications by loan officers who don’t know how to work with pre-retiree and retired applicants. Take the case of Jim Slaney. He’s a retired industrial real estate broker, lives in a home valued around $1 million in Glenview, Illinois, near Chicago, and has accumulated substantial retirement funds after a 40-year career. He and his wife have stellar credit scores in the 800s and decided to refinance their existing mortgage, an adjustable-rate loan that was about to shift to a higher interest rate. Slaney assumed that his application would be a slam dunk. Not only did he have significant home equity as well as a flawless history of on-time payments to his bank, he even planned to reduce the principal balance on his mortgage from around $600,000 to $400,000. What he ran into shocked him. The bank’s loan personnel “didn’t know anything” about handling mortgage applications from retirees, he told me last week, and they questioned whether his post-retirement income would support a new mortgage at today’s interest rates. His application contained detailed documentation on his substantial financial assets, but the loan officers at his bank were clueless about what to do with them. Most importantly, they were in the dark about program options offered by investors Freddie Mac and Fannie Mae and some private lenders for retirees and pre-retirees. The options essentially recharacterize retirement assets into qualified income for mortgage purposes, sometimes without requiring actual withdrawals of funds. Had the bank personnel been better trained and had more experience, Slaney could have been approved in a matter of days rather than the eight weeks it ultimately took him to get a run-of-the-mill refi. The programs generally take two forms- One treats ongoing distributions from IRAs, 401(k) accounts and similar funds as income that’s acceptable for home-mortgage applications, provided the withdrawals plus other income are adequate to amortize the loan and are likely to continue for at least the next three years. The second option is designed for people who have retirement funds that haven’t been tapped yet. Loan officers can use retirement-account balances as the basis for what functions essentially as imputed income – money that is or will be available to the borrower to supplement regular monthly income when needed to make repayments on the loan. Steve Stamets, a senior loan officer at The Mortgage Link, LLC, in Rockville, Maryland, has used these options periodically, and considers them “a great alternative” when clients have assets but don’t quite fit the traditional rules that define eligible income. He offered a simplified example of how it works- A client had $2 million in mutual funds but not enough regular income to qualify for the size mortgage he sought. The client didn’t want to withdraw money or be forced to liquidate securities. Using Fannie Mae’s program option, he was able to produce qualifying income for mortgage purposes of $3,889 per month using a formula that discounts the fund balances by 30 percent to protect against market fluctuations that might devalue them. This amount was then added to other income the client had to total the amount he needed to support the mortgage application. John Meussner, a loan officer for Mason-McDuffie Mortgage Corp. in San Ramon, California, says that although Fannie’s and Freddie’s options can be helpful, they come with their own complications as well. One of the biggest- The assets in some seniors’ investment or retirement accounts may not qualify if they’re derived from ineligible non-employment-related earnings. Another issue- Loan terms for seniors may be just 10 or 15 years. Monthly payments on such mortgages are higher than those with standard 30-year terms. Not all clients can afford them. Bottom line- If your assets are tied up in retirement and investment funds, and you’re seeking a mortgage based on your post-retirement income, ask lenders about the Fannie and Freddie options as well as alternatives offered by some private lenders. If the loan officer pleads ignorance, you’ll know it’s amateur hour. Shop elsewhere.

Which is better at valuing your home – you or a computer program? Kenneth R. Harney on Oct 26, 2018 WASHINGTON — Do you have a pretty good idea of what your house is worth? Could you estimate within, say, 5 percent of what it’s likely to sell for? If so, would that make you more accurate about your home value than an estimate from a computer program loaded with recent sales data and algorithms? Maybe. Maybe not. Economists at the Federal Reserve recently completed a study that rated homeowners against computer programs — owners’ estimates of their homes’ worth versus those from automated valuation models (AVMs) — and compared both to the actual selling prices of the same homes. Guess what? It turns out they were, according to the study, “fairly similar.” Despite their reputation for excessive enthusiasm about their homes’ values, owners weren’t trounced by the computers. But neither the humans nor the computer programs were standouts on accuracy. Only about half of the AVM estimates and 40 percent of homeowners’ estimates came within 10 percent of the actual selling price. The study examined thousands of owners’ estimates provided during a Census Bureau consumer survey in 2014 with AVM estimates on their homes from the same time period provided by a commercial vendor. Then it compared both of these numbers with subsequent selling prices. The Fed researchers noted that although computer-generated estimates are based on information owners tend not to collect — such as data on sales transactions — these AVMs “can be incorrect if the characteristics of the home are not well measured” or sales prices of a sufficient number of comparable properties are not available. Owners, on the other hand, know the improvements they’ve made to the house, and they know what the interior looks like — key details that AVMs are missing. What owners tend to lack is stone-cold objectivity. They’re emotionally involved and may have inflated notions of what turns on today’s buyers. Ultimately the arbiters in the valuation game are the professional appraisers who lenders hire to give them independent estimates. Following an inspection, they’ve got much of the market data that feeds an AVM plus an intimate knowledge of the property. Ask appraisers which estimates they’d bank on — owners’ or computers’ — and you tend to get the same, resounding answer: Neither! Ryan Lundquist, an appraiser in Sacramento, California, says owners and sellers can be especially bad with estimates because they’re not tuned into current market trends. He said he recently appraised a house that the owner thought should be worth $500,000 more than Lundquist’s estimate — 30 percent over current market value. Owners like that “are profoundly disconnected with reality,” Lundquist told me. They think they’re still in the robust seller’s marketplace of a few years back rather than the market of today, which in many areas is seeing lower appreciation, rising interest rates, and more frequent price markdowns than in recent years. Lundquist says sellers often fail to understand that buyers today come to the table with a massive advantage — they tend to have far more information on comparable sales and other data, thanks to sites like Zillow, Redfin, Realtor.com and others. They pretty much know the tight price range within which a house should sell and are quick to spot overpricing. Seller disconnects on value can also create big challenges for real estate agents. Anthony Askowitz, broker-owner of RE/MAX Advance Realty in Miami, told me “the reality is that some sellers need to be fired” because they won’t listen to reason about more realistic pricing, and waste agents’ time and marketing dollars. Recently he worked with a seller who insisted that the house should command $1.25 million. Askowitz’s own estimate, based on recent market data, was $1 million. It sold for $950,000. Scott Godzyk, owner-broker of Godzyk Realty Group in Manchester, New Hampshire, says he sees it “all the time” — owners think their value is much higher than it really is. Ironically “they show me Zillow” Zestimates, which in his opinion are frequently off-base. Zestimates themselves use Zillow’s in-house AVM, which claims a 4.5 percent median error rate in New Hampshire. That means half of Zestimates there are inaccurate by more than 4.5 percent. Some counties in the state have median error rates as high as 9.5 percent. The takeaway: Valuing a home is hardly an exact science. Especially in a period when the real-estate cycle is transitioning toward buyers’ advantage in many areas, you need to tap into the data available online, then get the opinions of top realty agents in your neighborhood. That should get you pretty close.