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Common Sense Isn’t Common Practice

It used to be that there was logic applied in the world of mortgage lending. An appraiser determined the value of a home by the axiom, “what a reasonable buyer would pay a reasonable seller”. An underwriter weighed the plusses and minuses of a file (after analyzing the income, the assets, the credit profile and the appraisal) and made a judgment call based on their experience.

Loans with sizable down payments used to be more flexible with how income was documented or what quality of credit was required. Even the decision of what made up “good credit” has been reduced to a FICO score. Determining the risk of a loan affected its approval or denial. Further, loans deemed riskier were given less favorable terms (higher rates and/or costs or larger down payments).

But today, everyone has tried to quantify everything and put everything into a matrix. Credit scores are numerical, and the number determines eligibility and cost. Gone is the concept of explaining why you have defects in your credit. We don’t care why, we just look at your score. Appraisers now are being scored and their data being scrutinized to a level most would find mind-boggling. Amenities that make a home worth more for a particular buyer (like a pool or upgraded basement) are virtually ignored. Underwriters have primarily become fact-checkers and quality control as a computer software program underwrites the vast majority of mortgages today.

Gone is common sense. It has been replaced by numerical formulas and a cover-my-behind, justify-everything-with-data mentality. Basically, the pendulum has swung too far. It used to be that lending was too easy (see the subprime debacle), but now we have eliminated too much of the human element. We need common sense back.

People who have saved 30% for a down payment know what they can afford monthly. Don’t they?

People who had a medical challenge two years ago that is not likely to reappear should not have a twenty year credit history destroyed. Should they?

People aren’t likely to overpay for a home with so much inventory and all the media exposure about falling prices. Are they?

Bring back some common sense when we need it most!


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8 replies
  1. Tami Vroma
    Tami Vroma says:

    Amen brother! They have gone from one extreme to the other. I feel sorry for the appraisers. They were forced to appraise before and now the banks are tying their hands behind their backs! But then you look at the world these days and it seems common sense is a thing of the past.

    Reply
    • Jfrewen
      Jfrewen says:

      Tami it is not only the appraisers , but the Realtors, the Sellers, the Buyers and all the businesses that are being affected by the down real estate sales. When people buy houses it is like a dommino effect. Sellers move on and spend what they make and Buyers remodel, paint, buy new furniture, appliances, home deco etc, landscape, buy tools, art etc. It helps keep the economy moving. We need a boost to the Real Estate Market.

      Reply
  2. Susan Ani
    Susan Ani says:

    I couldn’t agree more. Just last night I was contacted by clients who purchased their condo with me two years ago. They want to refi. The appraisal came in at least $10,000 lower than I would have valued the property. So I review the appraisal report, and was aghast at the shortcomings of that report. Key features were simply overlooked by the appraiser as he comp’ed the subject property against nearby condos. Example: he deemed as equal in value a SHARED roof deck (meaning you have to climb stairs through an ugly roof area to get to a deck where you will find several of your condo neighbors also hanging out, maybe in various stages of sobriety or clothed status while you try to entertain your inlaws with a private party) with the TWO PRIVATE decks owned by my clients, one on each level of their duplex unit (including the deck off their master bedroom that is outfitted with beautiful outdoor furnishings and obvious extensive gardening efforts, a true urban retreat. That’s just ONE example of the failings of that report. I detailed all the issues that I could identify and passed that info back to the mortgage officer who is working with my clients. He promised to let me know how effective that information might be in challenging the appraisal they received.

    Reply
  3. Heather
    Heather says:

    Indeed! I wish “they” would stop fixing the system that is already back on track. It was the subprime debacle that got us in this mess – and those types of loans are no longer available. We really do need some common sense injected back into the system.

    Reply
  4. Stacie
    Stacie says:

    When I first got into mortgage lending 22+ years ago it was all about common sense. You had to have some skin in the game and stated income was for self employed w/ equity and money in the bank…

    Reply
  5. Buddy G.
    Buddy G. says:

    the fact is that by law, (thank you Frank/Dodd and clan) mortgage lenders can no longer lend unless there is written evidence (formula-based) in the file that documents that the borrower meets all the underwriting criteria. All these new laws were passed within the past 3 years. Our hands are tied.

    Reply

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