The Real Effects of HVCC

The HVCC (Home Valuation Code of Conduct) law that became in effect on May 1 was designed to "protect" consumers by creating a process in which the appraisal reports are done based on unbiased opinions and without any influence from realtors and loan originators. Under this law, loan originators are no longer allowed to have any direct contact with appraisers during a real estate purchase transaction. The orders are processed through an independent 3rd party company.

With all its good intention, the real effects we have seen under this new process have been quite detrimental to consumers. The average cost for an appraisal has increased by about 40%. The average cost used to be around $375 for a property under $1mil value, an equivolent report today costs around $500. That's real cash taken from consumer's pocket.

For refinance borrowers, especially those whose equity in their house may have eroded to just around 20%, the new process has become an expensive exploration. In the past, we could at least call an appraiser to get a rough estimate of the approximate value without having to go through a full inspection (thus not incurring a cost to the consumers). Under the new law, because we can't have any direct contact with appraisers, the consumers will have to spend the $500 upfront to find out if refinance is a possibility.

There are many other holes in the new process that create new challenges during a transaction. I just hope that the regulators are listening to what people saying, and make some real senses out of this honorable idealistic quest.

Conforming Loan Limits for 1-4 units

I was just asked about the latest conforming loan limits for 1-4 units residential properties. I thought it would be helpful to post this for anyone else who may be looking for the same information. Here it is:

Units General High-Balance
Permanent Temporary (til end of 2009)
1 $417,000 $625,500 $729,750
2 $533,850 $800,775 $934,200
3 $645,300 $967,950 $1,129,250
4 $801,950 $1,202,925 $1,403,400

Rising Mortgage Rates Eroding Affordability

Mortgage rates have been rising for the last 2 weeks. Rates are more than 1% higher than their lowest level. For example, we had seen conforming loans as low as 4.375% for a 30-yr fixed. This past week, they had been hovering in the high 5% range.

How has this change impacted borrowers? Well, many refinance clients who were trying to time the "lowest" market or were hoping for even lower rates (aka below 4%) are now jittery. Did they miss the boat? Maybe. While we may see some improvements in the coming months, it is unlikely that we'll see the same low level of rates that we had seen earlier this year. According to the latest news from the Fed, it doesn't sound like they are ready to purchase additional mortgage-backed securities. With Fed's buying winding down and more investors coming into the market, they will sure demand higher returns than a mere 4% on a 30-yr securities.

What about the home buyers who have been sitting on the fence waiting for the price to drop more and rates to go down further? What has happened in the last 2 weeks in the mortgage market should be a good reminder of the corrolation between home price and mortgage rates. Here's the numerical comparison: 1% increase in rates is equivalent to around 15% change in purchase price. So, here's the question: Rates can go up by 1% in a matter of days, based on what we have seen. How likely are the home prices to go down by 15% in a matter of days? The reality is that the rapid rising rates are eroding the affordability of home ownership. So, for all those buyers out who need to buy a new home this year, remember to focus on the big picture. The long term financing costs outweigh the cost of the purchase many folds.