The Big Bank Problem

For the past 6 months I've been strongly encouraging my clients to select a local bank for their mortgage financing. From the litany of horror stories I'm hearing from other Realtors here about the big bank mortgage process ("process" is a generous term, "mess" would probably be more accurate), I've become even more emphatic about working with local lenders.

So what is the problem with the big lenders for home purchases here in Sullivan County, and why do I think the smaller, local lenders are better?

There are two main problems with the big lenders. First, in the aftermath of the loosey-goosey anything goes years, they've imposed such tight and inflexible underwriting guidelines that make it difficult, if not impossible, to get a loan approval in a low density rural area like Sullivan County. A large national lender, for example, may require that the valuation be supported by 3 comparable sales (within 20% square footage and similar age and style) that have closed within the past 90 days within a single school district or township. Those underwriting standards may work fine in a dense suburb like Levittown, but they don't work here. This is an example of the tightest criteria I've heard of, and aren't necessarily common to all national lenders or applicable in all situations. But even with somewhat more liberal criteria, a great value house can face a tough mortgage approval unless all the stars are lined up just right.

The second problem relates to the appraisal process itself, particularly in the wake of the "Home Valuation Code of Conduct" (HVCC) requirements from Fannie Mae and Freddie Mac that went into effect on May 1st. HVCC is well intentioned, and designed to eliminate any influence on the valuation (appraisal) process by those involved in the loan origination and sales process. One main purpose of HVCC is to shield appraisers from pressure to "bring in the value", and eliminate the fear that future appraisal assignments rest on that.

In order to meet the requirements of HVCC, most big lenders have farmed out the appraisal process to third party appraisal management companies (AMCs). The AMCs are generally large regional and national companies (with their own profit motive) that then take the appraisal orders from the lenders and assign them on a rotating basis to one of the independent appraisers who have agreed to do appraisals at the price offered by the AMC. The problem here is that the AMC doesn't necessarily look to give the appraisal assignment to the appraiser who is most qualified to do that particular appraisal, but rather one who will do it at the lowest cost. The appraiser may or may not 1) be based in Sullivan County, 2) have much experience with doing appraisals here and 3) be a member of the Sullivan MLS, which is the primary source of the most recent sales data. I've had appraisers sent from Dutchess and Westchester counties who didn't even know we had an MLS!

Some local appraisers, who have a very comprehensive understanding of this area, are also turning down AMC assignments because they can't make a living at it. An AMC may get paid, say, $325 by a lender for an appraisal, and then farm that out to an independent who they pay $200. Now, $200 may be plenty to do a good appraisal in a higher density suburban area, when the travel time between appraisal appointments is maybe 10 minutes and the latest sales data is publicly available online to the appraiser. But here in Sullivan, an appraisal can be much more time consuming and involved, and not just because of increased travel time. Because our county still doesn't offer online property transfer data, and the data available from third party vendors like First American is typically two to three months behind, it can take considerable effort to gather data on non-MLS sales. Also,  appraisals here often require lengthy narrative explanations to support the valuation, particularly when no comps are available that fit the lender's parameters.

And if an appraiser does go out on a limb to support broadening the parameters, what can they expect? Grief from a desk reviewer in some office six states away who couldn't find Sullivan County on a map if their life depended on it.

The end result of this is that the big lenders have set up huge, faceless bureaucracies that would make Orwell or Kafka proud. It seems that their primary purpose isn't to get people into houses, but to avoid any charge of influence or shady dealings at any cost.

By the way, if you do succeed in getting a mortgage approval from a big lender, don't think you're home free. Don't be surprised if next month, a week before you're scheduled to close, the lender does a desk review of the appraisal before issuing the final closing documents, and pulls the loan commitment. Or they ask for a second appraisal because a concession for a repair item is referenced in the contract.

So how is it different with local banks? Local banks (and in this group I include Ulster Savings, First National Bank of Jeffersonville, Walden Savings Bank and Catskill Hudson Bank) just have a better understanding of the local market when it comes to underwriting. For example, they understand that requiring all comp sales to be in the same school district or township, particularly our smaller townships and school districts, isn't that realistic. Their underwriters are also local and understand, for example, the relative value difference between lakes.

The other big difference is that they generally don't farm out appraisals to appraisal management companies, but order the appraisals directly from local appraisers. In the spirit of HVCC, they have set up procedures to shield the valuation process from the loan origination process. But using an AMC — the 'solution' that the big banks have exacted — is not required. Any bank, big or small, can order appraisals directly from a list of appraisers it maintains so long as the loan origination side is not involved in the appraiser selection and there are procedures and policies for appraiser assignment. For example, a local bank could set objective criteria requiring appraisers to be based in Sullivan County or a contiguous county and be a member of the local MLS.

Also, when a bank orders an appraisal directly, it can pay the appraiser the full appraisal fee, compared to an AMC that only pays a portion of the appraisal fee to the independent contractor. As a result, the more experienced appraisers may gravitate to working with local banks, where they can make more money. Also, a local bank may be better positioned to understand the rationale behind some the adjustments the appraiser may be making, and therefore less likely to come back for more documentation and explanation from the appraiser.

The pendulum may have swung too far among the big national lenders, as well as Fannie and Freddie, in their attempt to avoid any appearance of impropriety. Their one size fits all model — with appraisals farmed out to AMCs and underwriting decisions made in far off processing centers using criteria more appropriate for far off suburbs — just isn't working for places like Sullivan County. Either they need to find ways to adjust their procedures to be more responsive to non-core areas or cede the territory to local lenders who are.

Comments

[Bix]

The stuff about comps is bad news for buyers and sellers alike. Last year I had a hell of a time getting comps, and I was saved by a spate of last minute sales. Not sure I'd have gotten cleared at all under the new system.

As for local banks, David I recall that, at least a year ago, they weren't offering 30-year conventional mortgages and/or not on the terms one could get from the big banks.

[Marc S]

I have had nearly the same problem. I live in rural New Hampshire, have a custom Timber Peg post & beam home with atypical features like geothermal heat, fed energy star rating, 12acre lot and etc. We invested in solar panels and off-grid electric backup recently too figuring this would help our value and give us piece of mind (power out 13 days last year with ice storm).

Started a loan process with BoA (was countrywide). The appraiser BoA sent in was not just from a differnet county but from the other side of my state and via third party LandSafe. According to their report, my investment in building this home lost 60% in three years! They said in the report that the energy efficiency features were typical (they were shown the certificate and equipment. 70k invested in green solutions). We put our life savings into building our dream home and thought we did it responsibly with 50% equity at move-in time. We got duped into a countrywide "one easy closing" construction loan with a fixed rate converstion. Fine print: the conversion was to a 1YR ARM only and did not apply to other products. (we refi'd into a 5YR 2.5 years back). Broker blamed the bank, bank blamed broker and with some contracts already signed, we were stuck. Rates rose for 14 months during construction.

Anyway, now, according to an appraiser who can't find comps and who misses all sorts of details like a bathroom, I am under water and unable to get out of a jumbo ARM product. Having had new twins and my wife now out of work to care for them, one might think a modification may be possible to at least lock the existing rate beyond the 5yr term. Afterall, our tax dollars are paying for this right? I found that even a trial modifiction would ruin our credit. We are stuck forced to watch the rates rise from historic lows as the clock counts down for reamortization. We hired our own appraiser to try to find comps in support of a reconsideration request. BoA would take no action on our issues list with the appriaser. Only interested in comps. This second person came up with 120k more value! This still fell short of the LTV by 100k. He also told us that our solar panels actually may detract from the home's value and certainly did not add value on paper since no comparables he says existed. We lost $750 out of pocket to the more experienced person who happily took our money.

I am glad to see this story. It is nice to know that our case is not so unique. Trying to keep the faith and the house we worked so hard to buy and build...