Could This Bill Jeopardize the Illinois Housing Recovery?
April 8, 2011 1 Comment
Good afternoon Chicago Real Estate, Mortgage and Appraisal professionals! I don’t know how many of you follow the Chicago Tribune’s Home Selling Guide, but there was an important piece posted online this morning. The article discusses proposed legislation in Springfield that would mandate that appraisers NOT use a judicial (foreclosure) sale as a comparable in residential real estate appraisals for a period of 12 months.
The article, written by Mary Ellen Podmolik, can be found here.
Why is this important?
Simple. At first blush, this may seem to the average real estate and mortgage professional like a good thing. I mean, which one of us hasn’t had issues with an appraisal or two (or 42) since 2007? In a down market like the one we’re experiencing, a natural reaction would be to support any measure that purports to remove one of the biggest obstacles standing in the way of our transactions. However, it is critical that, should the legislation advance (which, I will admit is somewhat unlikely considering it’s been in the rules committee since January), real estate professionals speak with a unified voice against it. In my classes and presentations, I’ve often referred to the “law of unintended consequences,” and it is in full effect here. In my own frequently not-too-humble opinion, this bill won’t help things in the Illinois housing market. In fact, it will likely have quite the opposite effect.
How could this bill jeopardize the Illinois housing recovery?
The problem is twofold.
- The bill ignores the free market and the law of supply and demand. In some areas the majority of comparable sales are judicial! To ignore them is to ignore a neighborhood trend that any buyer, acting in his or her own best interest, would not ignore. Investors, who are beginning to enter the market again, would continue to make the same offers for properties – many of which are short-sales or already bank-owned. Their offers would NOT in many cases be accepted (especially on short-sales) because the appraisals would (falsely) indicate that the market value of the property was much higher than the offering price. Underwriters and bank loss-mitigation employees alike are already nervous about short-sale transactions that drastically over-appraise as indication of a potential “flop-sale.”* This would essentially stop home sales across the state in many depressed areas. Sales that DO occur will have a high likelihood of involving uneducated buyers who may be being taken advantage of by unscrupulous professionals. In other words, the very transactions that state and local governments across the United States have been trying to stop since 2008.
- This legislation would have massive negative consequences even in areas that are NOT rife with foreclosures. It would make every Illinois property INELIGIBLE for Fannie, Freddie, FHA, VA and USDA financing because Illinois appraisers would be required by statute to completely disregard USPAP guidelines! (USPAP stands for the Uniform Standards for Professional Appraisal Practice, which are the guidelines that all appraisers are required to follow in appraising all “federally-related mortgage loans”.) USPAP already addresses these issues by providing that appraisers must give weight to distressed sales in their valuations when those sales are common for the area and have a direct impact on the value of the subject property.
I would be very surprised if this bill ends up on Governor Quinn’s desk, but stranger things have happened, and we must keep a watchful eye to avoid a possible complete shutdown of the residential real estate market in the State of Illinois.
*A flop sale occurs when a buyer, generally in collusion with an industry expert, makes a short sale offer that appears to be supported by a broker price opinion, but in reality the value is much higher than the BPO indicates. The transaction closes and the buyer then proceeds to sell the property at the true fair market value, making a large profit at the expense of the bank who would not have approved the short-sale if it had all the facts.