Loan Modifications and the Appraisal Business

The Las Vegas market is seeing a lot of loan modification activity since many homeowners want to hang on to their homes even though they are in financial trouble.  Bankruptcy and the rental route are not appealing to many owners especially those who have put a great deal of work into making a home their own.  Before the recession the sweat was often called "sweat equity" because the work often added value to a home, however since many are now upside down with negative positions of $ 50,000 to $ 250,000 the term no longer makes any sense.

Many loan modifications that have been described to me as "acceptable" by homeowners in financial trouble and cannot make payments are simply inadequate to sustain the owners long term.  If a homeowner has a negative equity position $ 150,000 below the current market value of his or her home reducing the interest rate to 2.0% APR for 5 years and increasing his principal balance is simply an effort in futility.  If the purpose of the loan modification is to delay the inevitable default by providing a monthly payment that the owner can afford for the limited period provided then I guess loan modifications are working out just fine.  Many of the loan modifications that have been described to me simply doom the homeowner to a future financial meltdown.

I find it interesting that banks will sell a homeowner a $ 200 per month payment reduction on their first mortgage but fail to mention that the loan modification and payment reduction destroys the $ 500 per month principal reduction that they had on their current mortgage.  Banks use the argument that they are saving the clients home because it is now "more affordable."  Thus making a home "affordable" can be a very expensive deal for a homeowner trying to survive this recession. 

The huge number of loan modifications that are now taking place in Las Vegas are having an impact on the operation of the single-family residential housing market.  They delayed foreclosures that would have occurred in the current year have all been pushed off to some future date.  Individuals who accept a reduced interest rate and payment in an attempt to hang on to their home will only be faced with an unacceptable interest rate increase and payment when the mortgage reverts to its old terms a few years down the road.  While the Las Vegas market will likely rebound you won't be seeing homes worth $ 150,000 now getting back to their previous $ 400,000 high in 5 years, it's just not going to happen. 

Thus, loan modifications are an artificial stimulus to a sick housing market.  Modifications hold off foreclosures and push them into the future.  What loan modifications mean to appraisers is that the market for homes and home prices are being artificially inflated because sellers are being provided with an incentive to keep their homes off of the market.  It also means that foreclosures activity will continue to affect the single-family residential home market long into the future as loan modifications expire and owners recognize that it is easier to walk away from their bloated loans than to pay monthly on their large negative equity balance.

Update 2014: Due to changes in the law most individuals now doing short sales and it appears that there are fewer loan modifications.

For more appraisal information contact Glenn Rigdon, MA,MRICS, ASA a Las Vegas / Henderson Nevada appraiser via email or via his business website Horizon Village Appraisal (http://www.horizonvillageappraisal.com), or you can also click on “Contact Us” on the home page of this website.

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