Our Government just announced a complex, $75 B plan to fix housing. An easier way would have been to change appraisal rules to consider ‘replacement cost and income approach’ in residential appraisals. Commercial appraisals consider what a property can rent for, and what it would cost to replace or rebuild a property. Residential appraisals rely only on the comparable sales approach - what was the lowest price of a home in a given neighborhood - this is a flawed “mark to market” approach to valuation and it caused the great run up and the rapid deterioration in property values.
Comp approach is keeping thousands of homeowners from refinancing their mortgages at today’s lower interest rates. Comp approach is telling borrowers they are ‘underwater’ on the value of their homes. Many people are simply making the rational decision to walk away from their homes because they believe the bank when the appraisal says “you owe $50,000 more on your home than it is worth.” Hopelessness has set into our collective home owner mindset and is encouraging more foreclosures, which by comp approach, encourages lower prices and more lower appraisals… a vicious cycle than can be slowed or stopped by looking for intrinsic value in real estate prices.
What is a home worth? It is worth what it can 1.) rent for, 2.) be rebuilt for 3.) resold for in today’s market - and in future markets. For some reason we don’t want to do the simple things like considering all three approaches to valuation. We want to fixate on #3 and only #3 and this is not rational. It is killing the real estate market, and will continue to, no matter how much the government throws at the problem.
NEW YORK (CNNMoney.com) — President Obama is unveiling a $75 billion multi-pronged plan Tuesday that seeks to help up to 9 million borrowers suffering from falling home prices and unaffordable monthly payments.
The long-awaited foreclosure fix marks a sharp department from the Bush administration, which relied mainly on having servicers voluntarily modify troubled mortgages.
The Obama plan calls for:
- Helping borrowers who owe more than 80% of their home’s value to refinance and reduce their monthly payments.
- Creating a $75 billion homeowner stability initiative to reduce monthly payments for at-risk borrowers by subsidizing interest rates. The goal would be to bring payments to no more than 31% of a borrower’s income.
- Providing multiple incentives to servicers to modify loans and to proactively help at-risk borrowers while they are still current in their payments.
- Creating a $10 billion fund to protect investors and servicers against further home price declines.
- Requiring all financial institutions receiving government funds to participate in a standardized loan modification program, while seeking to have all federal agencies that own or guarantee loans also apply the guidelines.
- Allowing judges to modify mortgages during bankruptcy, a measure the financial industry has strongly opposed.
- Providing more Treasury Department backing of Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) and expanding the number of mortgages the agencies back.
“In the end, all of us are paying a price for this home mortgage crisis,” Obama was expected to say in a speech Wednesday. “And all of us will pay an even steeper price if we allow this crisis to deepen — a crisis which is unraveling homeownership, the middle class, and the American Dream itself. But if we act boldly and swiftly to arrest this downward spiral, every American will benefit.” 
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