Daniel Kim’s Story: Refinancing His House Increased his Financial Burden
The story of Daniel Kim:
- Kim bought a two bedroom house for $560,000 with no money down.
- A year after, he was feeling the pinch.
- He got intrigued by a call of a mortgage company; ALG Capital through loan officer Mia Yi
- He was convinced to refinance his house and cashed in the equity
- Yi sent an e-mail to various appraisers that she needed "a value of $650,000 or more. Please let me know ASAP with max value."
- Paul Chasteen, an appraiser in Discovery Bay was able to produce the highest appraisal; closest to the value Yi needed which is $642,000.
- ALG refinanced Kim’s loan for the full appraisal value.
- Kim now owes $62,000 more than what may be the true value of his house. He used the money for a dry-cleaning business and to pay off a car loan.
- Verdict: Now he can’t move without foreclosing.
" Many homeowners are finding out that the equity they were led to believe they had in their house is not actually there," says John Taylor, president of the National Community Reinvestment Coalition.
This is not an isolated case. CNN Money had in fact gathered more than 100 e-mails and faxes by loan officers to appraisers nationwide. It was a common theme to ask if a predetermined value is possible and a promise of more business if their appraisal will match.
My Analysis:
Everyone’s motivation is the M O N E Y; from the borrower, the loan officer to the appraiser.
It is not a case of who is to blame, because each party was compelled to do the inappropriate because of the underlying reasons:
Borrower - Needed some extra money
Loan Officer - In her desire to close the account, she needed to source for highest appraisal close to the amount required to convince the client to refinance his loan.
Appraiser - He denied inflating his figures, however he admitted that they’re under the gun because up to 10 appraisers can compete for the same account.
Solution:
Borrower - There is nothing wrong with refinancing your home. However, make sure you consider the following:
- Check the values of similar properties
- If possible, hire an independent appraiser different from the one hired by your loan officer
- Compare the values of similar properties, the report of the independent appraiser and the report of the one hired by the loan company.
- Be conservative, by refinancing your property to the amount of the lowest appraisal.
- Make sure you can comfortably pay the new repayments with some allowance for a possible increase in interest rates.
- If you need to refinance during a stagnant or declining market, make sure you have a good use for the money. Eg. Use it to buy assets that could possibly generate you an income.
- If you need the money to finance things that you want but don’t really need, hold it off. If you can’t afford to pay for it now without taking out a loan, then it is a reality check that maybe now is not the appropriate time for it. It is better to save for it than get a temporary gratification that will cost you an increase in repayments for the life of your loan.
Loan Officer - Everyone wants to earn money. There is nothing wrong with refinancing a client’s loan. However, it is suggested that you consider the following:
- Assess your client’s capacity to pay not what he wants to borrow.
- Guide your client on what is the comfortable amount to borrow. If someone is emotional due to his need to have the money, practice due diligence by explaining to him the actual increase in repayments and how it will impact his current finances now.
- Don’t get a loan for the highest appraisal but up to a maximum of the average appraisal.
- Don’t pressure or influence the appraiser about the valuation of the property.
- Make sure the client understands his new financial obligations before actually taking out the loan.
Appraiser - Everyone wants to grow and expand his business. There is nothing wrong in competing with other appraisal companies, but don’t compromise your integrity.
- Think of long-term business. Establish business relationships built on trust instead of appraisal values.
- Make sure you can justify your appraisal value.
- Make sure your appraisal value is comparable to the current market values.
- Don’t cut corners.
- Offer other premium services such as prompt delivery of appraisal report, good communication or a discount on fees for bulk orders in order to win a business.
- Make sure the final appraisal report has been well drafted; all factors were considered and is no way influenced by the loan officer or the client.
Cashing in on inflated appraisals can give the borrower a debt that he can’t possibly repay. It can temporarily give him the money he needed, in exchange to being tied down with the subject property. He won’t be able to exercise the sale of the property in case he gets into financial difficulty. The total proceeds of the sale won’t be enough to pay the loan. In the end, the inflated appraisal equates to a negative equity.
Source of Daniel Kim’s story : CNNMoney.com
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