Tuesday, February 26, 2008

OFHEO: HPA diverges between purchases and refis

(Housing Wire) U.S. home prices in the conforming mortgage market diverged sharply depending on whether the mortgage was a purchase or refinance transaction, according to data released Tuesday by the Office of Federal Housing Enterprise Oversight.

A price index looking only at conforming purchase transactions — excluding appraisals used for refinancing — found that prices fell dramatically, dropping 1.3 percent between the third and fourth quarters of last year. That’s a sharp decline when compared to the 0.3 decline posted between Q2 and Q3, and it led to a 0.3 percent annual price decline during 2007 for purchase transactions, OFHEO said.

The annual price decline was the first four-quarter decline in the purchase index since the series began in 1991.

Adding in refinancing appraisals, however, erased any evidence of a price decline: home prices actually appeared headed upwards when refinancing activity was included in the fourth quarter index. As a result, OFHEO’s all-transactions housing price index posted a 0.1 gain in the fourth quarter on a quarter-over-quarter basis, and 0.8 percent gain over the past year.

Evidence of inflated appraisals?
OFHEO director James Lockhart only indirectly addressed the divergence in price trends, saying that the results illustrated greater stability in the conforming mortgage market.

“Both OFHEO’s purchase-only index and the all-transactions index show relatively greater house price stability than do other nationwide house price indexes,” he said. “That may reflect, in part, the greater stability in the prime, conforming mortgage market served by the Enterprises than in other segments of the mortgage market,” Lockhart said.

Or it may reflect inflated appraisals, according to sources interviewed by Housing Wire, who said that appraisers face greater pressure to be aggressive on their valuation opinions when the transaction is a refinance.

During the housing boom, that pressure was to hit a target value often so that the borrower could obtain cash-out from the transaction. During the bust, the new pressure appraisers face may be to hit a target value high enough so that the same borrower doesn’t lose their house.

“You’re not looking at the potential loss of a home if an appraisal comes in too low for a purchase transaction,” said one source, who asked not be named in this story. “So the appraisals are sort of more free there to come in where the appraiser really thinks market value is. That’s not always the case if we’re talking about refinancing in this market.”

The mortgage industry has been under intense pressure from the public and from government officials to help millions of borrowers that are faced with the prospect of a mortgage rate reset refinance into a GSE-backed or government-insured fixed-rate loan. But faced with prices that are declining in many neighborhoods, refinancing has become increasingly problematic as highly-leveraged borrowers find themselves owing more on their house than it is currently worth.

It’s pressure that some industry sources think appraisers feel, even if only indirectly.

“Do you think an appraiser wants to be the reason that someone didn’t get refinanced, and as a result lost their house? No way, no how,” said one source that spoke with HW on the condition of anonymity.

Both Fannie Mae and Freddie Mac, who are regulated by OFHEO, were subpoenaed in November of last year by New York Attorney General Andrew Cuomo, who is suing the First American Corp. over the appraisal practices of its subsidiary eAppraiseIT.

The Wall Street Journal reported Tuesday that both GSEs are nearing a deal with Cuomo’s office that would eliminate broker-ordered appraisals completely, potentially in response to claims that appraisals were being inflated as housing prices rose — and, now, that in some cases they’re being inflated as prices drop.

No comments: