Walt Molony of the National Association of Realtors reported that as recently as October, one in 10 member agents said they'd had a contract canceled as a result of a low appraisal, 13 percent said they'd had a contract delayed, and 16 percent said they'd had a contract negotiated to a lower sales price as a result of a low appraisal.
New and proposed federal rules governing appraisals, changes in the way appraisals are conducted, and a still uncertain housing market have hit the appraisal part of the home buying and selling process in a way that is adding to housing market instability.
The world of home appraisals changed on May 1, 2009, when Fannie Mae and Freddie Mac adopted the Home Valuation Code of Conduct. These new rules prohibited lenders from hand-picking appraisers. To comply with those rules, many lenders have started using appraisal management companies that afford them an arm's length relationship with the appraiser. The appraisal management companies hand out assignments to their participating appraisers on a random basis. And they get a significant slice of the appraiser's fee, cutting the amount that actually goes to the on-the-ground appraiser.
It's not an arrangement that traditional appraisers -- who may have built long-term relationships with brokers and lenders -- like. "They want appraisers to produce a product and we provide a professional service," complained Francois Gregoire, a Saint Petersburg, Florida, veteran appraiser. "And they want it turned around in 24 or 48 hours. All those personal relationships that I built over the years are out the window."
Gregoire, who has stopped doing mortgage appraisals because he says they are no longer profitable, asserts that the new rules are resulting in a reliance on appraisers who are inexperienced and willing to travel significant distances to conduct those home inspections. And that results in appraisals that are less sensitive to neighborhood nuance, and less useful to borrowers and lenders.
Borrowers are watching their "locked in" low rates expire -- while they pay for one appraisal after another. Lenders are afraid to trust the appraisals they get, and are ordering more and more of them. Underwriters want more comparables. They want more narrative and more photos. Meanwhile the clock is tick tick ticking on your loan. The appraisers themselves say they're being paid less to work faster in a more confusing market than they've ever faced.
The lenders say they are just playing defense, in order to ensure that the value of the collateral supports the loan amount.
The biggest issue for appraisers, lenders and ultimately, borrowers, is how to evaluate properties in neighborhoods with foreclosures, short sales, and not enough solid sales to provide comparable data. The question becomes, when appraising a market that is so volatile and different from anything ever seen, with one-third of the neighborhood in foreclosures, and another third is short sales, and another third is regular, how do you even determine what is fair market value?
Many mortgage brokers contend that appraisers should mark up the value of homes when comparing them to foreclosures and short sales, because many of those distressed properties are in disrepair or are so complicated to buy that they command unrealistically low prices.
Further complicating the process, appraisers who for years mainly faced pressure to preserve deals, now are facing pressure in the other direction from lenders who want to make sure they have enough equity to cover them even if home prices fall further. Mortgage rates have been near record-low levels, and lenders don't want to commit to bargain rate deals unless they are a sure thing.
Home buyers and refinancers can't always fight the troubling appraisal. Pros are telling consumers to peer carefully over the shoulders of those appraisers. It's important to look at the comparable sales that were used, and if you don't think they are reflective of market, make the lender aware of that, and be more involved in the process.
If an appraisal comes in too low, you can appeal it, and order up (and pay for) another one. However, as many have found out, you still may not be able to get the loan you want.
On December 2, several U.S. regulatory agencies issued new guidelines for appraisals used in mortgages which originate from federally regulated banks, along with a statement noting "financial institutions are responsible for selecting appraisers and people performing evaluations based on their competence, experience, and knowledge of the market and type of property being valued." The statement also noted that these guidelines might be rewritten once again, once the Fed's rules are made final.
Source: Linda Stern, Reuters
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