The National Association of Home Builders (NAHB) is pleased with one underwriting guideline adjustment made last week by government sponsored enterprise, Freddie Mac.
Freddie Mac's Bulletin 2009-18 announced several changes to the GSE's underwriting guidelines. The changes deal mainly with the documentation required for income and asset verification, make "condominium hotel" loans ineligible for purchase, and eliminated Form 70A, Energy Addendum as a required attachment to appraisals.
More notably, Freddie Mac made several "Best Practices" recommendations for selecting appraisers and reviewing their products. One of these contained the statement that Freddie does not require appraisers to use Real Estate Owned, foreclosures or short sales in selecting comparable sales but rather that appraisers must "certify that comparable sales chosen are those most similar to the subject property." These should include distressed sales if they are representative, something many industry professionals have been requesting since the Home Valuation Code of Conduct was enacted on May 1, 2009.
In a press release on Monday, NAHB Chairman Joe Robson said that this was "a step in the right direction," but that this modification needed to go further. He called for additional changes that would allow appraisers the option of expanding both the geographic area and the time frame for comps in cases where local and recent contracts are heavily skewed toward distressed sales.
He cited a recent survey by NAHB that found that 26 percent of builders have seen signed contracts fall apart because of appraisals that do not reflect the contract sales price. Of these, 54 percent said that the questionable appraisals were actually coming in at less than the cost of building the home.
In addition, 60 percent of those responding to the survey knew of problems in their market areas caused by inadequate appraisal values. The biggest problem reported resulted from the use of foreclosures and distressed sales as comparables.
The NAHB's position is that such sales should not be used without appropriate adjustments to reflect the cost of improving them to a point where they are a valid comp and a reasonable alternative for the home buyer.
"Home builders are increasingly concerned that inappropriate appraisal practices are needlessly driving down home values," Robson said. "This, in turn, is slowing new home sales, causing more workers to lose their jobs and putting a drag on the economic recovery.
The NAHB further stated that current appraisal practices are causing other problems for builders by depressing the availability of acquisition, development, and construction funds. The low values being assigned to land and subdivisions have caused banks and investors to cut lending to builders, require additional collateral, or even call performing loans.
"If the spigot for housing production loans is cut off, there can be no housing recovery, and this has major implications for the economy as a whole," said Robson.