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The Secret Of Electronic Value

The number was so low it sent me into a tailspin.  How could a one-bedroom co-op on the Gold Coast of Greenwich Village, that would have sold for over $850,000 at market peak have plummeted to a mere $521,000? Yes, prices were down, but not that much.  Yet there was the number staring up from the refinance application in front of me and my fellow board members.

I needed a valium or an explanation.

“It’s not market or appraised value,” explained the voice at the other end of the phone, a knowledgeable loan originator at Chase who didn’t want to be identified.  “Electronic value is a number constructed by Fannie Mae and Freddie Mac, used in connection with streamlined refinancings.”

Huh? I didn’t know what he was referring to, and apparently neither do lots of other people because, according to the loan originator, they’re not taking advantage of a great deal that a little question about electronic value – E.V. – uncovered.

As part of the government’s plan to make housing more affordable for regularly paying owners, Freddie and Fannie offer what’s called the Home Affordable Refinance Program (HARP) that you may qualify for if you meet two requirements: 1) your original loan is owned by Freddie or Fannie, and 2) you have been current on all mortgage payments for the past 12 months. Add to that you can’t take any cash out. The idea is to give responsible owners whose properties decreased in value due to market conditions an opportunity to avoid default by paying lower interest rates.

What that interest rate is depends on the E. V., which tends to be below appraised market. The way it works it’s not the precise number that matters, but what interest rate rung it puts you on. As the loan originator explained, you can borrow up to 125% loan to value.  Generally, the lower the ratio, the lower the interest rate, but you get most of the benefits as long as the loan stays below 95% of E.V.

So even if you think that the value is too low, there’s no point spending money on an appraisal unless the real value is so much higher that it will push your refi below the 95% ratio — or unless it’s so out of whack that you need a reality check. For example, you think the worst case scenario for what your apartment is worth is $800,000, yet the E.V. is only $400,000.

Don’t worry, it’s not a number prospective buyers will ever see so it won’t have a downward drag on the price of your apartment, just on the interest rate you pay — all  in all a win-win. If you and your building are lucky enough to qualify for a HARP loan, you don’t have to pay for an appraisal and costs are lower. And often you won’t have to pay the reduced costs upfront, but can tag them on to the loan through a slightly higher interest rate. Say, you’re looking at a $400,000 loan at 5%, with costs of $3,000.  By increasing the interest rate to 5.125% you get paid ¾ point, which will cover the $3,000 in costs.

Even better, generally no income verification is required. “What’s the point if the borrower has been making timely payments and the new payments will be lower?” the loan originator explained.  Of course, that doesn’t mean boards won’t ask for income and other information.  Most will, but usually a lot less than if you are seeking to increase the amount of your loan or looking for a first mortgage on a new purchase.

Buildings get off easy, too, with most banks only asking for proof of proper insurance and fidelity bond, instead of the pile of stuff that has become the new norm in this post-debacle environment.

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