The Tennessean
Business
Sunday, June 21, 2009
Low appraisals nip real estate deals
Banks have more restrictions in wake of housing bust
Chris Cooley bought at 19th century farmhouse last year on nearly 11 acres in Williamson County that was going to be his dream home.
He hired Chris Parker, a custom homebuilder in Nashville, to preserve the look of the old house with red metal roof and stone fireplaces while throwing in some modern amenities, such as a three-car garage and walk-in closets.
Now, Cooley wishes he had put off his dream a bit longer.
His appraisal for the construction loan for the remodel project came back saying the house off Old Hillsboro Road in Williamson County will be worth less than what the work will cost. And his financial institution, Reliant Bank, wanted him to pay the difference. Reliant Bank declined to comment.
As real estate values slip and as banks tighten lending requirements, appraisals are killing deals or pushing banks to require home buyers to come up with even more cash at closing. Real estate sales were off about 29 percent in May compared with the prior year, and many who do want to buy a home or refinances are finding plenty of roadblocks.
Everyone is getting blamed for the problem: the appraiser, the bank, the regulators and the real estate market.
“It definitely has been possibly the worst timing ever,” Cooley said, adding that he is worried about being able to sell his existing home in Franklin.
Cooley’s builder, Chris Parker, says he has lost three or four deals this year because appraised values came in less than the total building costs.
Basically, Parker and other homebuilders are asking home buyers in some cases to pay more than the house is worth. This is in contrast to the real estate boom three or four years ago, when it was common for a home to increase in value from the time construction started until it ended.
“It’s frustrating,” Parker said. “I don’t blame the banks and the bank regulators. But they have not thought through the longer-term impact of this. Now we’re all suffering.”
While getting billions in taxpayer funds to boost their capital last year, banks were busy reappraising the values of properties Parker and the other builders own, telling them to come up with extra collateral.
Parker said Regions Bank ordered a reappraisal several months ago that came back saying a lot he owns in LaurelBrooke in Franklin is worth $58,000 less than what he paid for it in 2007, when it cost $458,000. The bank required him to come up with other property he owned as collateral to secure the bank’s investment.
Homebuilders such as Parker are continuing to complain that the government’s bailout on the financial sector has done little to help them.
(Reliant Bank, Chris Cooley’s lender on his new home didn’t take any of the federal government’s capital purchase program money.”
Regions Financial Corp., which sold $35 billion worth of stock to the government as part of the bailout, said in a report published by the U.S. Treasury last week that is working to re-evaluate the commercial real estate loans based on current values.
Banks can’t be careless
Banks must keep accurate, current records of the value of the property that backs up their loans. They re-evaluate those values when development or construction loans come up for renewal, said Jim Schmitz, Nashville area executive at Regions Bank.
“We want to work with our customers and we are working with our customers, but at the same time, we have obligations to our shareholders to stay within the rules that govern prudent banking,” he said.
Jim Tew, senior vice president over mortgages in Tennessee for Fifth Third Bank, said it’s not uncommon to reappraise home builders’ properties. He said bank regulators are encouraging banks to re-evaluate the values and collateral positions of their loan portfolios.
“What we have found is the value isn’t there,” Tew said. “When we try to sell it, we’re stuck with a value problem.”
Tew also pointed out that the Nashville market hasn’t suffered like other markets such as Florida. Plus, homeowners in Nashville can still get a mortgage with as little as 3 percent down.
Murray Huber, an appraiser with Huber & Lamb Appraisal Group in Brentwood, said some of the high-end homes, such as those costing $1 million or more, are sometimes seeing a big gap between the appraisal and the contract purchase price.
But he pointed out that declining real estate values “are not uniform” through-out Middle Tennessee and that some properties actually have improved in the past six months or so.
Borrowers disagree
The median home price in the Nashville area fell 10.6 percent from a year ago, to $169,000 in May, according to the Greater Nashville Association of Realtors.
Lisa Culp Taylor, an affiliate broker with Bob Parks Realty in Brentwood, said appraisals have “become one of the biggest problems we’ve got right now.”
The Federal Housing Administration, which is a major backer of loans, began requiring this year two appraisals for mortgages in certain instances.
Appraisals, she said, often are coming in lower than the price the buyer and seller agreed on.
She said sellers can either lower the purchase price to meet the appraisal, or the buyer has t ocome up with extra cash at closing. Another alternative is to try to prove the appraisal, or the buyer has to come up with extra cash at closing. Another alternative is to try to prove the appraisal wrong, “which has become an absolute nightmare” of a solution, she said.
Gone are the days when real estate or mortgage brokers picked the appraiser. New rules that went into effect in May from Fannie Mac and Freddie Mac forbid it, affecting nearly the entire marketplace for mortgage loans. The rules are designed to end the fraud and conflicts of interest that had helped spur the overheated real estate market a few years ago.
But the new rules also have the effect of encouraging banks to use appraisers randomly selected by third party management firms, which also get a cut out of the appraiser’s fee. The practice worries real estate agents and homebuilders who think appraisers are being chosen who don’t understand the neighborhoods or types of homes they are appraising but are willing to take low prices for their work.
Appraisals don’t match
Greg Davis, a homeowner in Hendersonville, blames an appraiser for the loss of a loan. Bank of America said he needed two appraisals to refinance and consolidate two mortgage loans on his home, a 4,800 square foot A-frame nestled on a hilltop in a semi-rural neighborhood.
One appraisal in February came in a $308,000, which was $90.000 less than the first appraisal, done a few days earlier.
That killed his application for a consolidated mortgage, basically because the appraisal said his home was worth about $17,000 less than what he owed.
“I told (the bank) I got a terrible appraisal,” he said. “The guy obviously made a mistake. I lost a loan because of it.”
His appraiser at Apex Appraisal Services in Nashville declined to talk about it. Bank of America did not comment by deadline.
Danny Wiley, owner of The Wiley Group, an appraiser in Nashville, said he is seeing an increase of complaints from homeowners having their homes refinanced.
“The appraisal is not a projection of what is going to happen in the future,” he said. “It’s what it’s worth right now.”
But some of those most affected understand that. Without slumping market, there wouldn’t be nearly so many complaints about appraisals.
“This is a very emotional issue,” Taylor said. “Selling a home is already such an emotional issue. This is just fraught with difficulties.”