A lack of comps is compounding the slide in home lending.
Many proposed refinancings and purchase loans have been scuttled because the appraiser could not find enough comparable sales of similar homes. Part of the problem is that lenders have narrowed their definition of an acceptable comp in the past year as part of an overall stiffening of standards. Many appraisers have failed to find the requisite two comps within the prior three months, or even three comps within six months, because there have been so few sales in a given area. This could create a self-fulfilling cycle, where fewer sales lead to fewer comps, which in turn lead to still fewer sales.
At the same time, as distressed sales make up a greater portion of the real estate market, lenders also fear those sales will become the only comps, resulting in lower home values and hence smaller loans.
"The housing market is very fragile," said John Walsh, the chief executive of Total Mortgage Services LLC, a Milford, Conn., lender. "Comps are either distressed homes or you don't have enough data to establish an acceptable value."
For example, "if you have a $1 million home but you don't have anything that sold in the same area to establish the value, you can't do the deal," he said. "We've seen deals where the values aren't supported by the appraisal."
Fred W. Holtsberry, the owner of Mid-Ohio Appraisal Services in Newark, Ohio, said the lack of comparable sales is particularly acute in rural markets or lightly populated urban areas where only 25 to 40 homes might be located within the one-mile range lenders now generally consider acceptable.
This subset makes up about 25% of the country and may have far fewer regular home sales than densely populated urban areas, Holtsberry said.
Underwriters who review appraisals typically work from a checklist and may reject comps that are outside the one-mile range. They also are demanding lengthy explanations from appraisers for the lack of nearby comps, or asking them to compensate with additional comps in a five- to 10-mile radius, appraisers say.
"It's a real challenge to generate a fully supported, well-documented appraisal these days because you're not working in a healthy market," said Robert Palmer, the president and CEO of ValuationLogic Inc., an Aliso Viejo, Calif., appraisal analytics company.
In normal times, the housing market is dominated by "move up/move down" buyers, who already have homes. Because home prices have fallen so dramatically in the past few years, the buy side of the market is now dominated by first-time purchasers, who rushed to take advantage of the tax credit that expired April 30, and by property investors.
"When you don't have normal transactions where you can compare two homes that are similar and both are move up/move down transactions, then it gets really difficult," Palmer said. "There just aren't comps out there that are behaving in a manner that is consistent and predictable; they're all over the board."
One thing that is consistent in many markets, though, is an overwhelming supply of repossessed properties.
"Some homes never were truly worth anything near their original builder sale price, and even those owners who can make their contractual payments cannot sell due to being $20,000 to $40,000 underwater," Holtsberry said. "This creates a lot of highly localized areas where only REO" — real estate owned by banks — "and short sales have closed."
In such areas, "the REO and short sales are the market," he said. (In a short sale, a lender allows the borrower to sell the property at its current value even though it brings less than the amount owed on the mortgage.)
Despite historically low interest rates, the Mortgage Bankers Association's index of applications for loans to buy homes has fallen to its lowest level since April 1997.
Many lenders attribute the drop in the purchase market to the tax credit's expiration. Some suggest that the government consider yet another type of stimulus.
"If there was some incentive for buyers to buy foreclosed properties, that would trigger the demand," said Sanjiv Das, the chief executive of Citigroup Inc.'s mortgage unit. "If there is no incentive for people to buy and meanwhile there is this big pipeline of shadow inventory" — foreclosed or delinquent properties waiting to be dumped on the market — "then any investor would wait until the market drops further." Das said he thinks the housing market will need several years to return to normal.
The drop in purchase transactions is particularly troubling given its timing during the spring selling season, though many lenders are still busy with refis.
"With no buyers and no demand, it could further decrease property values," said Walsh, adding that "a storm could be brewing, because every 1% drop in prices causes more borrowers to consider not paying their mortgage, potentially increasing foreclosures."