Have you had your Line of Credit reduced recently because your house value has gone down? Well, if your answer is yes, the following might be one of the reasons, so take note.
I came across an article in MSN Money yesterday which caught my eye because it referenced a study by one of my favorite whipping posts, Zillow, the free property valuation service available on the Web. See our earlier blog on May 24, 2007 – “Zillow and Others Help You Research the Value of Your Home” on the risks of putting too much faith in on-line valuation services. By now most everyone has probably gone to the www.Zillow.com Web site to check on the value of their or another’s home and has come away in disbelief at Zillow’s sometimes wildly inaccurate valuations. They may be too high or too low, but no big deal because it’s only meant to satisfy our curiosity anyway, right? Well no!
What I found interesting in the article was that not only do we as consumers utilize Zillow and similar valuation services to determine our home values, but that ALL major mortgage banks utilize similar services to price our homes. It was a startling revelation that although we may find this property valuation information interesting, banks are actually using similar and possibly inaccurate valuations to make policy decisions. As the article explains, banks like Wells Fargo “….holds tens of thousands of mortgages on its books, each backed by a unique house. It’s impractical to regularly review each home for a fresh value, so Wells and other big banks like Citigroup, JP Morgan and Bank of America rely on analytics firms to provide property values churned out by what are called Automated Valuation Models, or AVM’s”.
Well, unfortunately these AVM’s are quite likely to provide data as inaccurate as Zillow’s. “By its own admission, Zillow’s values are merely estimates based on amalgamating sales data from nearby homes, comparing bedroom counts, living area, lot size and other salient characteristics.” In any case, all of these valuation models are similarly flawed because they are taking only the available data and ignoring such very important factors as location, architectural style, condition, quality, post sale improvements, etc. I suppose that in some cases these AVM models might be fairly accurate if comparing brand new condominiums or tract homes of the same design and floor plan, but not my house, and probably not yours either.
So, what can happen? The surprise letter from your mortgage company reducing or eliminating your mortgage backed Line of Credit is a result of your company’s just having used an AVM to determine your house’s value. Never mind that it may be grossly inaccurate; your home’s new value is now a fact, at least as far as the bank is concerned. What can be done about it? I’m not sure. If you have better data to support a higher valuation and really want to argue with your bank, go for it. The bank might even provide that option, but that’s not the point here. The point or two points are: understand that the bank’s perception of your home value may be detached from reality, and secondly, if you are going to work towards reinstating your Line of Credit, use an experienced Realtor to assist you in determining your house’s current value. He is in the best position to provide you the most relevant comparable sales figures. Good luck!
Alternatively, if you’re like me, maybe it’s just better to learn to live with less credit and pay off the dang credit line! Read more at Bank Practices.