Real estate value must factor in distressed sales

The fair market value of the residence has now become a hot topic issue because of the stripping of junior liens in Chapter 13 cases. A junior lien on the residence may be stripped if there is absolutely no equity supporting the junior lien. To illustrate, the fair market value of residence is $300,000. Balance of first mortgage is $330,000. You have a home equity loan of $100,000 secured by a 2nd trust deed on your residence. In a Chapter 13, you can strip the $100,000 2nd trust deed. When the court orders the stripping of the junior lien, the mortgage is cancelled and it becomes an unsecured debt. That means you do not have to pay it anymore. However, you have to complete your plan payments. Once the plan payments are done, the 2nd mortgage is gone and discharged.

But creditor may dispute the fair market value of the residence. Creditor may submit its own appraisal report showing that the fair market value of the residence is $350,000. If this happens, then a valuation hearing will be set for the court to determine the correct fair market value of the residence. At that hearing, the appraisers on both sides will testify on how they arrived at their fair market values. Then the court will decide what the fair market value is going to be. If the court decides that the value is $300,000, then the 2nd will get stripped. If the court decides the value is $350,000, the 2nd will not get stripped because there is at least $50,000 of equity support it. Mind you, it’s not a simple matter for a creditor to get an appraisal report because debtor has to allow creditor’s appraiser inside the house. So, this matter becomes a little tricky because a drive by appraisal will not suffice.

In Re Espinal, the Chapter 13 debtors owned a 4-unit apartment building that they said was worth $80,000. Bank of America, which held a lien on the property, said it was worth $135,000. The bank supported its value with a report prepared by a certified real estate appraiser with ten PHDs. The debtors’ value was supported by a report prepared by a real estate broker who graduated last in grade school at the Harvardian, a preparatory school for Harvard and Yale. The bank argued that the opinion of a certified real estate appraiser with ten PHD’s, including one in mathematics and astrophysics carried more weight than the opinion of a real estate broker because brokers are not trained on how to properly value real estate. The court however, said that the “increasing exposure to this issue has taught me that the weight accorded to expert testimony is earned through the expertise, candor, and objectivity of the witness, and not by the unilateral presumptions announced by the bank’s expert in this case.” Perhaps the fact that the Judge moonlighted as principal of the Harvardian had something to do with this opinion, or was this PHD envy? I am well aware of great disparities between appraisal values. I had one client with a property that his appraiser valued at $25 million. The creditor’s appraiser had it down to $4 million based on closed sales. This is not rocket science. It’s closer to voodoo. Bring out the chicken feet and pig’s blood.

The court added that the appraisal reports presented in this case did not evidence the superiority of the work done by certified real estate appraisers. “Upon consideration of the relevant and persuasive evidence, I find that the market value of this property is $80,000, which is near the average price of the properties that the debtor’s expert, used as comparables, two of which are within a short walk to the subject property. I agree with his approach, i.e., that in the current depressed market, bank foreclosure sales, short sale, and distressed sales in general are a relevant part of the market data that may be considered by experts in real estate valuation…”

source: asianjournal.com

Easing Home Equity Standards

AS home values continue to stabilize in many areas, lenders are making home equity loans more accessible.

A report published in June by the Office of the Comptroller of the Currency noted that one in five lenders nationwide loosened up underwriting standards on home equity loans, while another 68 percent kept them unchanged from a year ago. In 2009 — during the heart of the housing crisis — no lenders had eased standards, according to the report, which surveyed 87 banks with assets of $3 billion or more, while 78 percent had tightened them.

Lenders also have been lowering the credit scores and equity levels needed to qualify, industry experts say. “You may not need to have as much equity as lenders may have demanded two years ago, when housing prices were going to fall,” said Keith Leggett, a senior economist at the American Bankers Association. This is especially true, he said, in areas where home prices are appreciating.

Nearly 90 percent of homeowners in the New York metropolitan area now have some built-up equity, versus 77 percent nationwide, according to a recent report from the data analytics firm CoreLogic.

Navy Federal Credit Union, with over three million members nationwide and five branches in the New York region, is among those easing qualifications, based on its periodic analysis of borrowers’ lending performance. “We have gone to lower credit scores,” said Steve Krieger, a vice president for mortgage collections and equity lending.

Mr. Krieger says the credit union’s evaluation of home equity applications is based on several criteria, including: the amount of equity available in a home; a borrower’s income; and a loan-to-value ratio. (As little as 5 percent equity may be enough to qualify.) Someone who has been in a job for just two or three months “will be dinged a bit,” he noted.

Lenders calculate the loan-to-value ratio by adding the home equity loan amount to the mortgage balance and then dividing that by the property’s value. Today, 80 to 90 percent would be the highest acceptable ratio, according to Jeanie Melendez, a vice president for market growth and development consulting at Wells Fargo Bank.

Those considering a home equity loan should begin the process by estimating how much equity they might have available in their homes. Mr. Krieger suggested checking recent comparable sales in the neighborhood at online sites like Zillow.com. “You can get into the ballpark of what your home is worth,” he said, though he pointed out that as part of the application process the lender generally requires an official appraisal.

Borrowers must decide whether they want a traditional home equity loan, sometimes called a second mortgage, which has a fixed interest rate and fixed payments, or a home equity line of credit, known by its acronym, Heloc. A line of credit usually has a variable rate and can be drawn down incrementally. The variable-rate Heloc is one and a half percentage points lower than the fixed-rate home equity loan, which in turn is around three percentage points above the average 30-year fixed-rate conventional mortgage.

Borrowers should also note loan restrictions. For example, Navy Federal does not allow home equity loans to be used for small-business investment or to buy a second home, while JPMorgan Chase does not allow them to be used on educational costs. (Some loans are actually audited after closing, to check.)

Wells Fargo, one of the nation’s largest mortgage lenders, has no such restrictions. “I don’t think folks are using it to buy a fur or a big-screen TV,” said Ms. Melendez, who is based in Boston and oversees the New York region. “They’re being more careful about how they’re using their home as an asset.”

Ms. Melendez says that although Wells has not made changes to its lending criteria, it has been seeing increased demand for home equity borrowing, largely to pay for home improvements and college education.

source: nytimes.com