Appraisers' Free Forum

These guys humor me since I was an appraiser for a long time before I became a loan officer, about 7 years ago. Basically, they will call BS and hang me out to dry, if my replies deserve it. I might even be disciplined somehow, if I don't give questioners an intellectually honest answer. Of course, there are gray areas. I do the best I can to answer gray area questions as well.

Tell me this: Where else are you going to be able to ask questions of a lender where he won't dare to tell you anything but the real answer?

I prefer to joust on appraisal related issues with these guys, but I welcome questions on the lending process, especially appraisal related questions. But, I'm open to any lending subject.

What's the difference in income - appraisal vs. lending?

Things must be pretty slow now...no?

I'm rather unsophisticated at these sorts of things, so here goes.....I'm hoping maybe you can help me figure this out!

I'm noticing in MY market, that the entry level housing, for the local workforce is the only market that is showing any sort of activity. I suspect this has to do with affordability.

Is there some easy way to determine how much house (price wise) someone could afford, based on their income?

TB

TB - the oldest ratios out there are 28% of gross income for housing and 36% of gross income for housing and all debts - when someone has great credit scores there's always room for higher ratios - sometimes maybe too much room!

Mentor wrote:
Tell me this: Where else are you going to be able to ask questions of a lender where he won't dare to tell you anything but the real answer?

I prefer to joust on appraisal related issues with these guys, but I welcome questions on the lending process, especially appraisal related questions. But, I'm open to any lending subject.

1) Do you think this fallout of sub prime lending will send people into "A" paper lenders? I know some very credit worthy people that went with MB's for the better rate.

2) I'm still doing appraisal work with my supv & working part time at BOA as a customer service rep. for the health insurance. What if any conflict of interest for me to solicit for loan customers while employed part time at the bank?

Lynn wrote:

Mentor wrote:
Tell me this: Where else are you going to be able to ask questions of a lender where he won't dare to tell you anything but the real answer?

I prefer to joust on appraisal related issues with these guys, but I welcome questions on the lending process, especially appraisal related questions. But, I'm open to any lending subject.

1) Do you think this fallout of sub prime lending will send people into "A" paper lenders? I know some very credit worthy people that went with MB's for the better rate.

[font=Comic Sans MS]I'm not Mentor, but I'll take a stab at it - YES![/font]

2) I'm still doing appraisal work with my supv & working part time at BOA as a customer service rep. for the health insurance. What if any conflict of interest for me to solicit for loan customers while employed part time at the bank?

[font=Comic Sans MS]If at the "BOA" - YES; if you're at "work" - NO[/font]

Phat Underwriter wrote:TB - the oldest ratios out there are 28% of gross income for housing and 36% of gross income for housing and all debts - when someone has great credit scores there's always room for higher ratios - sometimes maybe too much room!

Those ratios have been bent, broken, and torn to shreds.......I've seen people going 36/44 these days for some lenders - I know those ratios will get tightened up as time goes on and the profile of borrowers changes...

Lynn wrote:1) Do you think this fallout of sub prime lending will send people into "A" paper lenders? I know some very credit worthy people that went with MB's for the better rate.

It already is Lynn - Think about what has happened to the Jumbo (loan amounts over $417,000) loan programs. For all intensive purposes, the funding for jumbo is non-existant these days. Now, MOST people who can afford those types of loans are making a very good living, and should have decent credit, but a lot of lenders aren't willing to take on that kind of credit risk. Does it make sense?? Not really, but thats just the model thats out there today.

The problem is, in my opinion, that no one knows how to really look at a borrower, and make a good lending decision - Credit scoring is very hit and miss, and doesn't always give a true indication of a borrowers willingness or ability to repay a loan, and as such, it's difficult to price mortgage backed securities and CDOs. Today, everything is being thrown out with the bathwater, and it will be figured out eventually.....

I got it! I finally got it!

http://appraisalnewsonline.typepad.com/ ... .html#more

I have been struggling with this for over a month now and this showed up in my mail box this morning!

TB

MHMerriman wrote:

Lynn wrote:The problem is, in my opinion, that no one knows how to really look at a borrower, and make a good lending decision - Credit scoring is very hit and miss, and doesn't always give a true indication of a borrowers willingness or ability to repay a loan, and as such, it's difficult to price mortgage backed securities and CDOs. Today, everything is being thrown out with the bathwater, and it will be figured out eventually.....

This has been my contention for a very long time now.

I learned to underwrite subprime credit in the mid 1980's and worked in the lending and banking industries till the mid to late 1990's, mostly dealing with the subprime borrower. Back in those days you had to collect what you made...personally...so you were careful about what you put out on the street. Too strict and you weren't doing business, too loose and your delinquency spiraled out of control and you spend all your time in the field knocking doors for payments. Either extreme and your job is gone.

This was before FICO so the "character" component of the credit mystery was very much tied to the borrower's "story"; where are they now, how did they get there, where will they be after I give them this loan, can I get all my money back plus interest? We had internal scorecards that acted more as an audit check than a default predictor. We loaned money at some 400-1000 basis points above the prevailing comforming fixed rate loan. These were adjustables. People had incentive not to remain a subprime borrower.

The emergence of the secondary market and the accpetance of FICO scoring changed everything. The removal of the originator and underwriter from the servicing end, and the source of funding, caused abuses that skewed loss predictions. The hunger of Wall Street for higher and higher yields caused the creation of ever more exotic derivatives, and of course looser and looser underwriting. Money was so cheap, competition so great, and the risk so managed (they thought) the spread over conforming thinned. So much money was made, by some, that the obvious warning signs were ignored by the wise, unseen by the ignorant. Now....pop! Easy credit is over, so long, bye bye.

Of course subprime will be back but I figure it will look much like it did in the 1980's. So probably, will the pricing.

skibs wrote:The problem is, in my opinion, that no one knows how to really look at a borrower, and make a good lending decision - Credit scoring is very hit and miss, and doesn't always give a true indication of a borrowers willingness or ability to repay a loan, and as such, it's difficult to price mortgage backed securities and CDOs.

Scott-

I'll just never forget in early 2006 when I went to a conference and the head of analytics for Fair Issac gave his presentation. The lenders were enthralled with the predictive power [italics for my emphasis] of consumer credit analytics. It seemed so scientific, how could it fail?

Aaron Krowne of Implode-O-Meter fame has a good commentary on his blog (wall street examiner) that's titled, "Markets are not Math!". The same can be said for credit-worthiness predictions.
http://wallstreetexaminer.com/blogs/krowne/

It is fair to say (no pun with Fair Issacs intended) that the lending programs offered evolved significantly further than the credit analytics could carry them. When making a loan to someone with less than stellar credit history, what is the predictive power of the past? What indication is there that a specific consumer will "change directions" and that present and future behavior will be different from past behavior. I've seen guys at the craps tables blow-through $1,000 in 5-minutes betting against the streak. The only protection against the past behavior is asset-backed guarantee; unfortunately, that control process broke down too.

Statistics work well in the aggregate but fail at the individual level. That's where underwriting (as you once did) needs to come into play: similar to when a credible appraisal is needed vs. an AVM valuation.
When there is little risk (a solid history of credit responsibility, a low LTV, and verified Income), use credit scores and AVMs all you want.
The problem that occurred is that the lenders were sold on the idea that if a "formula" (unproven, IMO) could predict likelihood of repayment en mass, then it could also be applied to specific individual lending decisions.

Credit analytics, AVMs, statistical analysis, etc., work well in general and may work well at the low-end risk portion of the lending universe. Anything else requires an individual review of the loan submission. Automated analytics can be of great assistance, but are not the substitute to case-by-case UW and valuation review (where warranted).

Lynn wrote:

Mentor wrote:
Tell me this: Where else are you going to be able to ask questions of a lender where he won't dare to tell you anything but the real answer?

I prefer to joust on appraisal related issues with these guys, but I welcome questions on the lending process, especially appraisal related questions. But, I'm open to any lending subject.

1) Do you think this fallout of sub prime lending will send people into "A" paper lenders? I know some very credit worthy people that went with MB's for the better rate.

2) I'm still doing appraisal work with my supv & working part time at BOA as a customer service rep. for the health insurance. What if any conflict of interest for me to solicit for loan customers while employed part time at the bank?

Sorry, when I first signed up here & started the thread I thought I would get automatic email notification of posts. (is it possible?).

Anyway, I forgot I started this thing

I switched from a large, respectable MB 8-13-07 when I accepted an offer from a large bank, with a triple A credit rating by Moody's & Best, I might add:) Sick of swimming up stream in the face of headline generated worry. And, yes, the MB advantage of shopping multiple lenders has diminished. The big horses behaved relatively well & the market looks favorably on their paper, which is 90% A.

I'd look at your employment agreement at B of A for clues. I'm not a corporate guy. Obviously, you should turn down appraisal assignments that you think put you in a conflict of interest position.

Mako, business is OK for us survivors:) I'm up to my elbows in pre-quals, so I see a fall rebound locally......or, is it just me?

"What's the difference in income - appraisal vs. lending? "

Most appraisers would fare no better than chum in shark infested waters. Of course, there are some that would do well. I have to force myself to do the amount and type of marketing that I fully realize is necessary.

Income potential is higher than most of you can imagine, however, most that enter the business fail. It's very similar to real estate in that way. For me, it was about double, but I'm stubborn about some things. It could safely be 4x. In the future.......same thing:)

Nice explanation of what happened, Skibs K.

We can still do DTI of 50% or more on some products, for high scoring buyers. FHA breaks around 50% DTI for borrowers with good credit and a purchase scenario, and that is with minimum down.

45% DTI may become the new ceiling for the rest. Who knows?

BTW, MHM: Jumbo is back. Low 7's. It still makes sense to go conforming with a large 2nd up to a point, but once again, there is a spread to consider. I haven't kept track as to why Jumbo returned. I suppose the buyers of mortgage backed securities switched to stocks, took a bath and reconsidered

Denis: Using FICO, developed in as little as 6 months (normally 1-2 24 month trades required for riskier stuff) as the basic predictor of future behavior is like using weather forecasts and soil engineers to locate a beach front development while forgetting to consult the historians about the likelihood of hurricanes, cyclones, tsunamis and/or earthquakes.

Mentor wrote:"What's the difference in income - appraisal vs. lending? "

Most appraisers would fare no better than chum in shark infested waters. Of course, there are some that would do well. I have to force myself to do the amount and type of marketing that I fully realize is necessary.

Income potential is higher than most of you can imagine, however, most that enter the business fail. It's very similar to real estate in that way. For me, it was about double, but I'm stubborn about some things. It could safely be 4x. In the future.......same thing:)

Thanks Mentor!

I had a client during the '90's & early part of this decade (time flies!) that was a pretty heavy hitter. The guy made as much in a month as I made all year appraising.

"...most that enter the business fail. It's very similar to real estate in that way..."

80% of real estate agents never manage to update their license @ the end of their two year requirement period.

Of the remaining 20%...only roughly 19% are estimated to make enough to feed a family.

Still...the lure of big money is hard for some to resist.