Fixing The Foreclosure Crisis
Although residential mortgage foreclosures have wreaked havoc on many communities in metro Detroit and Michigan, efforts to stem the damage and boost property values are under way. But do the relief programs go far enough?
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Although the excess supply of homes on the market and weak demand brought on by double-digit unemployment, population flight, and a weak economy is largely to blame for the drop in values, many experts are finding that one of the biggest problems precluding a housing market recovery involves the appraisals banks frequently use when researching potential transactions.
The appraisals often are low — due, in part, to federal guidelines that were tightened in 2009. The result generally means that either the seller is forced to lower the sale price, or the buyer puts down extra cash. If either condition fails to occur, a sale usually can’t be consummated. For experts like Chris Mayer, senior vice dean and real estate professor at New York’s Columbia Business School, the stricter guidelines have exacerbated the housing problem.
According to SEMCOG, low appraisals further threaten underwater homeowners. As a result, they are at a higher risk of deferring maintenance, walking away from a home, undertaking a short sale, or converting the property to a rental. The phenomenon also affects homeowners who wish to borrow money to upgrade or expand their residences. The problem is that the value of the comparables, or comps, is dragged down by a nearby foreclosure.
“Our concern is that the appraisals are coming in lower than they should be, and we are seeing inconsistent appraisals on the same home,” says Vettraino, who is leading a SEMCOG discussion on whether to propose a “blended approach” to arrive at more fair and reasonable appraised values. The approach would include an appraisal by a qualified appraiser, a brokers’ price opinion, an automated valuation model, and the insurance cost or replacement value of the home.
“I often hear about the appraisal problem because we are seeing inconsistent and often ridiculously low appraisals that are causing sales to fall through,” says Claire Williams, president of the Michigan Association of Realtors in Lansing, and corporate manager and partner at Remerica Hometown One based in Plymouth Township.
Meanwhile, Morgan is working with industry advocates to pursue a proposal that would require that appraisers contact a central assessing department that understands the unique attribute of a local market. “When a bank decides to go with the lowest price point, which they always do, it ends up as a comparable that affects everyone else who is refinancing or buying,” she says. “At the end of the day, the entire way we evaluate real estate has to change.”
In the midst of the fallout from the foreclosure epidemic, the state Legislature and the appellate courts are now addressing practical solutions.