Concerning FHA Short Sale Dept. using outdated appraisals for comparables.

I am representing a client who is currently marketing his property for short sale.

We are working with the Government Loan Short Sale Dept and have just received a rejection for an offer that was submitted for the purchase of this home.

The reason for the rejection was that we were below lender's desired net price.

I asked our negotiator what that net price would be and was given an amount that, with escrow fees, would hardly appraise in this market.

I then asked for a current appraisal to be done. I was told that 2 appraisals have been done and no further appraisals would be performed.

I have requested a desk review and received back these requirements in submitting request for review - I would need to submit 3 comparables that closed less than 6 months before the effective date of the appraisal (no current market date - pending, sold after appraisal, under contract is NOT acceptable.)

I then asked for a copy of the last appraisal and was shocked to see that the last appraisal was performed on 2/17/2010.

I would have to submit comparable that are 1 year - 1 1/2 years old. The average market price in our area has dropped at least $30 sq. ft. in this time and I'm concerned that this lovely home won't appraise for the prices that were acceptable in our market 1 1/2 years ago.

Can anyone please advise me in how I can best serve my client in moving forward?

Thanks

@ Melissa Brown - I am in the same situation right now with and FHA loan through Wells Fargo. I was referred this seller after another agent tried to work through the initial stages of the short sale process and realized early on, she was in over her head. Unfortunately, the appraisal had already been ordered on the property by the time I took over and the agent had the house listed at the payoff amount rather than the FMV during the appraisal, which caused the lost and confused appraiser to value the home at close to payoff on the property which was about $20k high. The problem came when I took over because the former listing agent did not get paperwork back to WF fast enough so by the time I finalized everything and we got our approval letter, the appraisal was already 2.5 months old. When I appealed the appraisal, I was given every excuse as to why my comps weren't good enough despite the fact that I came up more recent, closer square footage, closer in radius, more similar in style and condition comps than the appraiser that fell prior to his appraisal. The appraiser used comps that were over a year old, outside a 2 mile radius, and stated the square footage of the subject home over 10% inflated. I escalated the file to VP office and they agreed with my findings, however, I was told to wait a week and just let it expire and request a new one be ordered. It is supposed to be ordered tomorrow, so keeping my fingers crossed that this appraisal will better since it's our last shot before DIL. Feeling the same frustration on this file as you did on yours, although, I feel like I am seeing appraisal issues in conventional, FHA, & VA alike. I understand that they have to have policies and procedures in place, but this appraiser stated in so many words that he had a hard time finding comps and I could send them plenty. At some point, there has to be some common sense used as well.

Replies

Ken Bailey February 17, 2012 at 4:29am

Kim--if I may jump in this discussion and share my recent experience...mine is very similar to yours so I won't go into to detail. Just as I was about to throw my hands up, Kevin contact me and gave me some great advice that seems to be FINALLY producing some progress, so I will pass along. First of all, get in touch with the management levels of the Servicer you are dealing with (I couldn't find that info in your post). I didn't know who my mgt levels were at the time, but the good folks on this site (Kevin) were able to steer me in the right direction. Once I contacted them, my file was submitted to FHA that same day! We are still waiting on a verdict, but I am just thankful that I was able to finally able to get it submitted to the investor...something that I had been trying to have done for over 2 months prior at the Servicer's grunt level without success. The mgmt folks I am dealing with now CALL AND EMAIL ME DAILY to give me updates, even though there is no new information. I am shocked by this, and very grateful for this level of service. Thank you Kevin!

One thing I would like to add...where is this 2 appraisal max on FHA loans coming from? I could not find it in the PFSP doc or ML 2008-43. If we could eliminate this silly rule, we would prevent most of the problems we are all having with FHA short sales! Kevin, I hope you are addressing things like this at your HUD summit.
Michael Schneider February 16, 2012 at 4:52am

@Kevin I don't think the variance process is sufficient to address the fundamental problems in PFSP. And, I don't think this would stand up to regulatory scrutiny. Imagine if a lender acknowledged that they have discriminatory lending practices, but claimed a defense on the basis that "they have a variance process". They would get slammed, and rightly so.

And I think this analogy is apt, as I think that it is quite possible that the FHA/PFSP program results in disparate treatment potentially violating ECOA. We have handled 22 FHA short sale files, with six failures, four because of FHA/HUD valuation policies. In these four cases, there was a disparate "low-to-mod" income effect.

Meaning, in my experience, FHA valuation policies produce the disparate outcome that a lower-income FHA borrower is less likely to complete the PFSP option. As PFSP is a "credit granting" process, I think this may be is a violation of ECOA.

To me, it is sadly ironic that the FHA simple ignores this misguided aspect of PFSP.
- Kevin - Greenville, SC > Michael Schneider February 29, 2012 at 8:44pm
  
  FHA Loss Mitigation is Federally Regulated and Mandated.
- Kevin - Greenville, SC > Michael Schneider February 29, 2012 at 8:41pm
  
  I do think the variance process is sufficient in most circumstances (is it perfect, no). I just received an Approval for $12,000 out of the net proceeds (I'd like to see that done on most other types of loans) towards subordinate non-Mortgage lien holder(s) when the 'guidelines' are for $2500 including the PFS Incentive to the Borrower, a $3100 payment to an HOA in a non-super lien State (I'd also like to see this done on other types of loans) and I have received a 2nd ATP months after the previous one had expired. Do you have to fight the Servicer to submit a request for Variance the answer would be yes; I have never had a PFS fail out of about 15. Think of Mortgagee Letter 2008-43 as the Mortgagee's Delegations from HUD (the program is not ridged in my experiences).
Michael Schneider February 13, 2012 at 5:18pm

Just knowing that the bible for the FHA short sale program is ML 2008-43 indicates that this is a program in trouble. Published in 2008, means developed in 2007. Has anything changed in real estate since 2007? Surely, something has.

And, sadly, HAFA was created from FHA/PFSP. Sorta like the dinosaur evolving into the dodo bird.
- Kevin - Greenville, SC > Michael Schneider February 29, 2012 at 8:51pm
  
  You are correct, HAFA is based on the FHA PFS, by Laurie M. and the reason it doesn't work nearly as well is because with the FHA PFS only 2 entities are involved (and really only HUD's decision matters), the Servicer and the FHA. With HAFA, there are probably hundreds of different combinations of parties. By design or default it can/will never work as well.
- Kevin - Greenville, SC > Michael Schneider February 15, 2012 at 6:23pm
  
  Anything that doesn't fit the FHA PFS Program box is eligible for a variance request from HUD.
Melissa Brown February 13, 2012 at 2:49am

I faced a similar situation with a HAFA short sale last summer through B of A (AMS Services). As mandated in the HAFA program, an appraisal was done prior to marketing to determine the list price. The appraisal came back ridiculously high at $126,000, which was $2,000 MORE than the owner paid for it in the height of the market in 2007! I could not get them to change the list price. We had ZERO showings for 90 days - duh, it was way over-priced, and I kept supplying AMS with new data. I finally just lowered the price to where it should have been, and we had a cash offer in a week - a very decent offer, very close to market value. B of A countered at full list price, and told me that the 1-3 month old new comps that I submitted with the offer were TOO RECENT, and had to be BEFORE the appraisal was done back in March. I asked this negotiator if she heard what she was saying, that my comps were too recent, that this didn't make sense. She yelled at me that she doesn't make the rules, she just follows them. We lost the buyer, and the home went to DIL. Unbelievable.
- Jennifer Viger > Melissa Brown February 13, 2012 at 12:39pm
  
  @ Melissa Brown - I am in the same situation right now with and FHA loan through Wells Fargo. I was referred this seller after another agent tried to work through the initial stages of the short sale process and realized early on, she was in over her head. Unfortunately, the appraisal had already been ordered on the property by the time I took over and the agent had the house listed at the payoff amount rather than the FMV during the appraisal, which caused the lost and confused appraiser to value the home at close to payoff on the property which was about $20k high. The problem came when I took over because the former listing agent did not get paperwork back to WF fast enough so by the time I finalized everything and we got our approval letter, the appraisal was already 2.5 months old. When I appealed the appraisal, I was given every excuse as to why my comps weren't good enough despite the fact that I came up more recent, closer square footage, closer in radius, more similar in style and condition comps than the appraiser that fell prior to his appraisal. The appraiser used comps that were over a year old, outside a 2 mile radius, and stated the square footage of the subject home over 10% inflated. I escalated the file to VP office and they agreed with my findings, however, I was told to wait a week and just let it expire and request a new one be ordered. It is supposed to be ordered tomorrow, so keeping my fingers crossed that this appraisal will better since it's our last shot before DIL. Feeling the same frustration on this file as you did on yours, although, I feel like I am seeing appraisal issues in conventional, FHA, & VA alike. I understand that they have to have policies and procedures in place, but this appraiser stated in so many words that he had a hard time finding comps and I could send them plenty. At some point, there has to be some common sense used as well.
  - Melissa Brown > Jennifer Viger February 13, 2012 at 12:54pm
    
    @Jennifer Viger, I feel your pain! It made NO sense whatsoever that my great comps were "too recent." Same as your situation, my comps were in the same condo complex, same square footage, and sold in less than 3 months back. What more do they want for market value? I appealed the appraisal at the time (March), but I didn't have much to go on at the time. But over the summer, there were some sales in the complex that totally justified my position. I escalated and got no where; to make matters worse, my seller had disappeared (he is the son of a good client), and he didn't care about the outcome at all, his credit was SHOT! The whole experience really soured me on HAFA short sales, but I understand that I am in a minority - they have been working well for others.

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