Jill, Home Buyer in Easton, CT

HUD requiring banks to reduce appraised values in "distressed areas" when making mortgage loans.

Asked by Jill, Easton, CT Sat Nov 1, 2008

I am told that HUD is requiring downward adjustments of appraised values in certain distressed areas. The wayit works is you apply for your loan, get your commitment letter and then after they do the appraisal, they reduce the appraised value if the property is in a distressed area. My question is: isn't this going to drive property values down in these areas? Doesn't it become a self-fulfilling prophecy? I just lost a loan because of this and we were already putting almost 30 percent down.

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Have not heard of any HUD or Bank requirement to reduce appraised values in a "Distressed area" or anything similar. Having appraised over 4,000 properties I look for comparable sales (foreclosures included) in the immediate neighborhood, properties currently for sale as well as expired listings, and that should give a pretty good idea of the areas value. USPAP (Uniform Standards of Professional Appraisal Practice) has strict guidelines we must follow. We have to be very careful in describing any neighborhood. I once used a statement in a report describing the subject neighborhood as follows: "The immediate neighborhood displays far below average pride of ownership with many vacant, run-down, boarded up dwellings and several vacant, trash strewn lots" This is what I saw, what anyone with eyes would see, but we are not allowed to describe as such. USPAP and the State of Connecticut Appraisal Commission is who I answer to. The lenders pay the appraiser and if the appraiser wants to continue to receive assignments, the appraiser is in many cases pressured to revise or look at the appraisal again or risk their losing business. I have never inflated or deflated a value due to pressure... The previous comments are very informative and as another poster commented "Ask them for a copy of the HUD requirement for a downward adjustment in certain distressed areas". Just my rambling thoughts.. Jim
0 votes Thank Flag Link Thu Dec 4, 2008
Although HUD doesnt mandate an adjustment for a declining market, most lenders determine certain areas to have more significant decrease in value and saleability. Therefor, the lender may suggest to the appraiser that an "adjustment" be made. I have heard and seen appraisers making up to a 10% adjustment, on similiar properties.
0 votes Thank Flag Link Tue Dec 2, 2008
Hi Jill

HUD has not imposed a declining markets policy, unlike FNMA and FHLMC. However, the individual bank may have put thier own policy in place. Many lenders are lowering the appraised values in order to minimize risk.

HUD did impose additional collateral assessment practices for "high balance" loans (over $417,000) in declining housing markets. This new policy was established in April of 2008, HUD Mortgagee letter ML2008-09

Please feel free to contact me if I can be of assistance to you. I am an FHA Direct Endorsed underwriter, and have been with United Mortgage Corp since 1992. We are HUD and USDA lenders.

Have a good day.

Jacqueline Pulcano, SVP
United Mortgage Corp
0 votes Thank Flag Link Tue Nov 25, 2008
Jill, I've heard something similar to what Susan stated earlier pertaining to properties in the Cleveland vicinity, and I've heard something similar to what Scott stated earlier pertaining to properties in the DC metro.

A way to ensure that someone at that bank isn't trying to snow you is to do the following: ask him/her to put that statement in writing, ask him/her to sign and certify that statement, tell him/her that you're going to verify that statement with one of their competitors, and s/he will have committed purgery if s/he didn't tell you the truth. If s/he is unwilling to give you a signed and certified, written statement, then ask to see a copy of that policy in writing. If s/he is unwilling/unable to produce that policy in writing, then you'll know s/he is lying, and then move on.
0 votes Thank Flag Link Tue Nov 25, 2008

Yes, some banks are simply reducing appraised values by 5%, due to their logic that the market is declining, so they want to protect themselves. This is something I saw a lot in late 2007/early 2008, but have not seen it lately. This began when Fannie Mae started listing what it considered to be distressed areas. However, even though this practice has ended, I would not be surprised to learn some banks are still performing this reduction. Banks have lost a lot of money lately, and many have gone under, so this is a form of risk management for them.
0 votes Thank Flag Link Tue Nov 25, 2008
I am getting very different information from everyone. The Bank is telling me it's a HUD requirement and has nothing to do with the appraiser.
0 votes Thank Flag Link Sun Nov 2, 2008
It is not entirely true, the biggest problems are appraisers are using their own interpretation and banks are doing the same. It is supposed to be that if foreclsoures are a driving force in the area, then the appriaser must use the most similar properties even if they are foreclosures. in the past the banks did not want them to use foreclsoures and they were intructed not to, now they are instructed to do so. Some appraisers are gun shy and fear losing their license or getting sued so they are going to extremes with the low values. You do have the right to ask your loan officer to get new comps if you disagree and you can provide comps you feel are more suitable and ask for it to be revised.
Web Reference: http://www.ScottSellsNH.com
0 votes Thank Flag Link Sun Nov 2, 2008
Hi Jill,

My understanding for lowering an appraisal is for homeowners apply for a loan mortification; a way to safe the homeowner from going into foreclosure. There is a lot of confusing information going around, double and triple check.

Good luck,
Bill Johnson
Realty America
(702) 553-6543
0 votes Thank Flag Link Sun Nov 2, 2008
Yes, it used to be in Fl. (all laws are different state to state) an appraiser was allowed to over look a foreclosure and move on to real sales, but we are so inendated with foreclosures, bail and buyers and shortsales they HAVE to now include them in appraisals there fore driving the market. It will be hard but for investment purposes for your future, find a devlp. with a low amount of diestressed properties for many reasons but mainly most banks don't pay assoc. dues and keep up properties so HOA's must raise everyone elses maint. and then they have to cut back on what that money is going towards. Find an older area where people purchased maybe in the early 2000 or earlier. Also, appraisers must now also look at listings for sale because that is the future sale which may always decrease the market more.
0 votes Thank Flag Link Sat Nov 1, 2008
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