New Appraisal Standards Complicate Real Estate Market
July 1st, 2009 categories: Mortgages & Finance
The problem used to be that lenders and appraisers were too cozy. The lender hired an appraiser for the borrower and more often than not, the appraisal miraculously came in at the buyer’s purchase price. Appraisers felt pressure by their client (the lender) to justify the purchase price so as not to ruin the deal and lose future business. Buyers were skeptical because they thought the appraisal should be a completely independent opinion of price.
In response to a lawsuit from the State of New York, Fannie Mae and Freddie Mac instituted new appraisal guidelines in May 2009 called the Home Valuation Code of Conduct (HVCC). The new code prevents local mortgage brokers from selecting local appraisers; rather lenders will hire appraisers. Also, 10% of all loans bought by Fannie or Freddie will have a second appraisal ordered to validate/invalidate the first appraisal.
To comply, many lenders are hiring appraisal management companies (AMCs) who in turn hire the appraisers.
According to reports from appraisers, the AMCs are demanding appraisers work for less and hand in their reports faster. The initial results seem to indicate that these changes are driving appraisals lower and lower because appraisers can’t spend the time on reports they once did, appraisers hired may not have the local expertise needed, and appraisers are concerned about coming in “too high” on an appraisal and losing future business.
“Lenders burned by huge losses from defaults now are pressing appraisers to be more conservative. And appraising itself is more difficult with home prices fluctuating rapidly and transactions few and far between in some markets; sale prices from a few months back may no longer reliably indicate the value of nearby homes.”
From Housing Wire.com,
“An issue emerging among critics of the code — by the National Association of Realtors and other industry groups — is the way lender-owned AMCs pose a disconnect between appraisers and the geographic areas where they are assigned to conduct valuations. One of HousingWire’s sources, an industry veteran with nearly three decades of experience in the appraisal business, says he’s seen appraisers from AMCs drive up to two and a half hours away to complete an assigned appraisal.
Critics say this situation leads to faulty valuations by appraisers with little or no background in the local housing market and the history of house prices there.”
If I were a home buyer or seller right now, I’d be concerned.
The problem for home buyers, sellers and home owners refinancing is that they still may not be getting an accurate picture of real estate values.
For example, the best comparable for a 3 bedroom, 2 bath Cape with detached 2 car garage on Elm Street would be the same house in the same condition on the same street that closed the day before the appraisal. Since this rarely occurs, the appraiser has to make adjustments - they look for 4 bedroom Capes, 3 bedroom Capes with no garage that sold in the last 30 days in the same neighborhood. If they can’t find enough comparable sales, they have to look further away from the house being appraised, further back in time and maybe even a different style house.
From what I’ve heard, lenders are demanding comparables within the last 30 days - period. Not as much importance is being placed on style, location or condition (foreclosures). Add the fact that appraisers are not familiar with the home’s area, are on a rushed time frame and are getting paid less and you have appraisals that are off - sometimes by tens or hundreds of thousands of dollars.
Who gets hurt? Buyers because they pay for a lesser quality appraisal. Sellers because they can sell their house and the buyer may walk away due to a low appraisal. Home owners who are refinancing to a lower rate can’t refinance.
The old practice of mortgage brokers directly hiring local appraisers didn’t serve buyers. And the new practice of banks hiring appraisal management companies doesn’t serve buyers either.
I understand you point and I agree with you, since the two practice really don’t serve better for buyers and sellers, I believe that buyers really need to be more aware of what they are buying and sellers need to find something what really buyers look for and work from there.
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I agree with your view. It will be situation like one servant has two masters. I think buyer should make scrutiny before buying anything.