Friday, December 5, 2008

Refi No Good--A Lesson in "LTValuation"

Photo by jurek d.

Following up on my refi post, I share a lesson I learned today (when my own refi deal tanked) that suggests one reason why efforts to stabilize the housing market are foundering.

I still recall the point in my first home purchase deal when I looked at the contract and asked my realtor what it meant that a condition of the deal was my ability to obtain financing at [blank], and she had filled in the blank with "80% LTV." She couldn't explain it to me--she just always put that in the blank (!). I now know all too well what that means, and it killed my refi attempt. LTV stands for "loan to value," and it represents the ratio of the loan amount to the value of the property; e.g., an $80,000 loan secured by a mortgage on a $100,000 home is "80% LTV," while a $90,000 loan on that same home is 90% LTV, the wrong direction if you're the mortgage banker considering making the loan. The bank (mortgagee) wants an "equity cushion" (value in excess of the mortgage-secured loan) to protect the bank in the event that the loan defaults and the bank decides to enforce the mortgage ("foreclosure"). Indeed, borrowers who need to borrow more than 80% of the home's value (that is, can't afford a 20% down-payment) often have to pay "private mortgage insurance" (or "PMI") to protect the bank in case a foreclosure sale's proceeds don't cover the defaulted "more than 80% LTV" outstanding loan.

As in many other aspects of commercial law and practice, valuation thus becomes the key to the deal. Entire courses (probably series of courses) in business departments are dedicated to the variety of methods of valuing things, including real (immovable) property. The appraiser who tried to value my home for the refi (to establish at least 80% LTV) decided that the identical townhome behind mine that sold a few months ago for a depressed price represented an inflated comparable value for my home--since it sat on the market for a few months, he decided that the purchase price should be further depressed by more than 10% to represent its true "value." Good grief! I can imagine discounting a recent sale price if there were evidence that the local market had softened in the intervening period (my appraisal didn't suggest anything like this). But otherwise, if someone just paid $X for an identical home a few months ago, I would think $X would be a pretty good comparable for the value of my home, regardless of how long that other home sat on the market. Indeed, it's perfectly obvious that the other place sat on the market so long because the original asking price (which was nearly $30,000 over $X!) was too high, and when the right price was asked, it sold. That's how the market works. Now two townhomes in my association have sold for exactly $X, but the appraiser thinks my place is worth $X minus 10% because it took so long to sell one of the other places? Please!

JPMorganChase (and other banks whose appraisers operate in this foolish way) are losing good business and failing to embrace the economic stimulus that federal authorties are bending over backwards to offer. Banks and especially mortgage servicers seem to be stubbornly struggling against the stream of federal efforts to solve the housing/financial/economic crisis.

I'm now convinced that throwing more money at banks is not the solution--they have proven that they lack the resolve, willpower, or whatever to deal responsibly with this crisis. I hereby nominate Sheila Bair (FDIC Chairperson) as the new tsar of a nationalized housing lending industry. O.K., I'm kidding . . . but only a little.

1 comment:

Jennifer Martin said...

Jason, we are getting ready to play the mortgage refi game as well with our Boston home and have already decided that the real wildcard for refis is the appraisal. Banks are being excessively conservative on property values right now. In a sense, overcompensating, which is driving good refis out of the market.