Are the new home appraisal rules good for consumers?
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Structural Appraisal On May 1st a new set of home appraisal rules called the Home Valuation Code of Conduct was put into effect by Fannie Mae and Freddie Mac in order to distance realtors and mortgage brokers from appraisers. This was put in place because during the housing bubble appraisal fraud was rampant and some appraisers felt pressured by realtors and brokers to hit the desired numbers. How is this affecting consumers?
The biggest change in the Code is that loan officers, mortgage brokers, or real estate agents can no longer have any role in choosing appraisers. The lender is responsible for choosing the appraiser and following the Code if they want to sell the mortgage to Fannie Mae or Freddie Mac. The lender could also accept an appraisal prepared for another lender if the other lender also followed the Code.
As a result of the new rule some lenders are outsourcing the selection of appraisers to appraisal management companies, and some say that this is increasing appraisal fees for consumers because these companies take a cut of an appraiser's fee. The appraiser has to increase his or her price accordingly to recoup the loss. Another critism is that these appraisal-management companies do not always choose local appraisers that know an area well. As a result some appraisals may be inaccurate.
Right now the National Association of Realtors does not like this rule very much and their chief economist Lawrence Yun said the following:"In the past month, stories of appraisal problems have been snowballing from across the country with many contracts falling through at the last moment." The NAR also sent legislators letters protesting this rule and it is also suggesting that regulators put an 18 months hold on the rule.
Bill Garber, the Director of Government and External Relations at the Appraisal Institute issued the following response to the NAR's complaints, "In a typical real estate transaction [such as a buyer seeking a loan], our clients are the lenders. Appraisers provide lenders with information that protects them from making questionable loans and investments and helps them minimize risk. However, that should not suggest a bias toward lower valuation. Appraisers reflect the market, and sometimes, the markets don.t act like we want them to or hope they will. Nonetheless, competent and professional appraisers understand this and develop credible estimates of value that ultimately ensure that lenders loan the proper amount, buyers don't pay too much and sellers get a fair price."
I think Bill Garber's response is right on the spot and lower appraisals are simply reflecting the market now. It is beneficial for consumers to get lower prices on homes, but I have also heard anecdotal stories of faulty appraisals where information such school districts and home size were wrong. It is very frustrating for home buyers and sellers when a low appraisal stops the loan process. If I were a home buyer in that situation I would probably check the appraisal report for errors first, because any factual errors can be reported to the lender. If the report seems to contain no errors then I would attempt to negotiate the price to be at the appraisal because I would not want to pay too much. I do not think that a low appraisal is the death of every single real estate transaction as long as everyone involved are willing to compromise.
In conclusion, I think it is a good thing if an honest and accurate appraisal shows you that you are willing paying too much for something. I think the new code does have some problems because it adds a layer of bureaucracy and pricing through appraisal management companies. However, this new process does remove a lot of bias in appraisals because it is a lot less likely that the appraiser chosen has a previous relationship with the real estate agent or mortgage broker involved in the deal. I am hoping that this reduces appraisal fraud by a great margin, and I think that is good for everyone involved in a real estate transaction.
What do you think of this new code? Have you faced difficulties in your real estate transactions lately due to appraisal issues?
Tagged: Personal Finance, Consumer Affairs, Real Estate and Housing, home buying, home selling, laws, real estate, rules
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From the front lines, there are two problems with it. The first is cost. Adding a bureauacracy to the mix means one more level must be compensated for appraisals, and that is added right to the appraisal fee paid by the consumer.
The second is preliminary value. Since the lender doesn't know who the actual appraiser will be before hand, there's no way to get a preliminary estimate of value in advance, when a purchase or refinance can be modified or even decided against based on the value. Under the new system, a consumer can pay for a full appraisal, find that the value is lower than the agreed upon purchase price or expected value for refinance, be unable to go ahead with the transaction, and be out of pocket the full cost of the appraisal to no good end.
I give it a thumbs down.
Though I live in Canada and the mortgage lending practices are more secure here, I can shed some light on some of the issues you have mentioned.
The appraiser should ALWAYS tell you the fee up front. I run an office for an appraisal firm, and we deal with both Management companies & private clients. Dealing with a management company has it's ups and downs, they try and dictate prices, and set sometimes unreasonable turnaround times. BUT they also always pay you, unlike private clients, whose cheques are known to bounce. But back to my first comment, whenever I call a client that expected to pay at the door, I always state very clearly the cost (including taxes) that is to be paid.
Now the reason for paying at the door, and not after the client recieves the report is another issue. See once the client or the lender knows the value of the home, they are able to proceed with getting there money from the lender(bank), and we have no way of actually getting paid. And often if the home value is less that what they figure it is worth, you will never get paid, even though the work has been done.
With Appraisal Management Companies they act as the middle man, and the ones we work for do not allow us to have any contact with the lender. This prevents any sort of "pursuasion" that the lender may have.
This is a good thing, tho many of you may not see it yet. It prevents many swindly things that lender may do, and it holds the right parties accountable. And hopefully in the long run one will never hear horror stories of mortgages being packaged and resold mulitple times. I know it's kept us north of the border safe(er). Hope some of this sheds some light, and clears up some things.
I think the biggest point of this rule is to prevent appraisers to be in collusion with the realtors/brokers. It may take some time for people to get used to it, though.
Considering the potential loss that could come from buying an overpriced property, I think that money spent on an appraisal is worth it, similar to the value derived from a solid home inspection. You can get a sense of the value by looking at public records, such as tax values and recent sales -- that would give a good prelim value. And a consumer or investor can still buy a property for a price that is higher than the appraised value, it's just that now lenders have a better information to make a lending decision (and could more easily recoup losses if the borrower defaults).
I believe that there is still communication between the bank and the appraiser. It took over 3 weeks from order for my appraisal to be completed. When it came in, it was exactly at my purchase price, which was different from the asking price.
Among the dozens of charges and fees I just paid to buy a house (title search, title insurance, county environmental fee, city fees [it was a foreclosure], etc.), the appraisal fee was a drop in the bucket. And dealing with yet one more bureaucracy was hardly a show-stopper considering I was already dealing with my real-estate agent, the seller's agent, the lender, the closing company, and, in my case, local authorities who needed to clear code inspections and vacant-building listings. Really, what's one more?
Besides, I see an independent appraisal as another kind of inspection. No one should buy a house without an independent physical inspection to determine if the house will stand up without endangering its occupants. So why not hire someone who will determine if the *value* of the house will stand up without endangering the pocketbooks of its occupants?
I got stuck in an over priced property - for those who bash this change in procedures, this change is good!!!!
When i bought my house, the bank had to have their appraiser appraise the house. He charged almost twice as much as any other appraiser at the time.
My Realtor repeatedly told me the appraisal was final & the appraiser wouldn't put the house at any thing other then what it's worth. Not only did I not get a copy of the appraisal till over a month after I closed but the appraisal said the house had amenities it didn't have & didn't site any damage that was in the home inspectors report. A month and a half later, a local bank did a free appraisal for me - I was trying to finance new windows & discovered the house was worth 20k less then the appraisal.
A friend who is an underwriter has told me the appraiser that did my house is notorious for taking money under the table. If this change keeps stuff like what I've gone through form happening then, great! It needs to happen.
Yes, I could sue however, legal fees for something like that are through the roof. I've spoken to multiple attys :(
If I'd been allowed to retain an unbiased appraiser who had no ties to the bank then I wouldn't be in this mess.
I agree that there's a huge benefit to have some separation between the bank and the appraiser.
However, if you're working with time constraints under the current rules, you have no way of working with an appraiser to get a report prepared more quickly - you're always working through a bureaucratic third party.
It's also much more difficult to make sure you're getting a good appraiser who actually understands the local area, as you're never able to figure out who they are. It's important to get an accurate idea of the value, but a blanket of comparables within a half mile radius won't help if you're looking at an area where small individual neighborhoods have a huge affect on property values.
HVCC is complete crap.
The entire reason HVCC was implemented was because of a lawsuit filed between Washington Mutual/E-appraise IT and NY attorney General Cuomo.
The suit contends that E-AppraiseIT, an AMC (appraisal management company) was in collusion with and inflated values for WAMU.
WAMU owned E-AppraiseIT.
WAMU is a RETAIL bank. not a broker. Not an appraiser.
This was a lawsuit between a RETAIL bank and an AMC. Had nothing to do with mortgage brokers or individual appraisers.
So, what was the verdict. Cuomo forces Fannie and Freddie to implement HVCC, which requires the use of AMC's or third party communication for all lenders, yet allows banks to still own those AMC's
Brilliant. Solved absolutely nothing except to make appraisals more expensive and lesser quality.
I'm a banker, and we used to be able to personally choose appraisers when processing a loan request. We had to choose from our bank's "approved appraiser" list, but it was pretty open. This puts appraisers in a tough spot because if their client is the bank/banker - so they want to please and keep business coming their way by making values come back as high as possible. This can be done perfectly legally and without the banker's knowledge - but appraisers were incented to choose only the highest comps and overlook foreclosures, etc or else risk making the banker lose the deal and not getting future business.
Now we have to go through another independent dept of our bank to request an appraisal. They come back and give us three bids from "anonymous" appraisers and we blindly select one. I'm in the DFW metroplex, and I've ended up with appraisers who focus in an area 50 miles away doing homes for me.
We've had problems with appraisals coming back for far under what the market will support (i.e. you might have a home with multiple offers all over $500K but the appraisal comes back at $350K because of one foreclosure 6 blocks away - which happens to be in a totally different neighborhood/school zone/etc).
You can contest it but banks are reluctant to order multiple appraisals because to the OCC it might look like we're shopping around until we get a value we like. Appraisers are reluctant to change comps for the same reason.
Appraisal were $350 prior to May 1. Last appraisal, my client paid $500 for it. Appraiser only received $280 of the $$.
The appraisal management company collected and kept the rest.
Does anyone realize it is a couple of senators that own the major appraisal management companies!
Another way for the government to get their fingers involved and untimately have only 5 large major banks doing any loans.
Another issue that brokers now have to contend with is the appraisal that is ordered by the banks, are only good at the banks they are ordered with. So if you want to switch banks to get your borrower better financing terms, you have to order and pay for another appraisal.
You or the new lender should be able to to pay for a "Letter of Transmittal" this is a legal document from the appraiser that allows the new lender to use the document. The cost is minimal (50-100 dollars).
We just had this happen. We were denied a loan by Wells Fargo, who made us believe they could do the loan only to tell us no. Our appraisal is only 1 week old. The new lender said they cannot use the FHA appraisal that we have and we will have to pay for a new. This is not a good deal for buyers. If you have to go to a couple of companies you are out $1000 to $1500 dollars with no guarantee of a loan. If the bank is the "client" as far as the appraisers are concerned why doesn't the bank pay the appraisal fee?
how much is the local governments tied into thisa? I own properties in va and nc that were reasessed within a few months of one another both are similar. Both counties used the same outside firm. this was before the bubble popped and neither would sell for much more than half the asessed tax value. both were raised tax value exact the same. How much doe's our local government's profit from over valuing property. these laws are passed to protect us from bad buisness practice. but who will protect us from bad government practice that is doing neer the same thing.
I think the rule is silly. It seems they want to regulate the majority to straighten up a very small minority. We purchased in April 07 (in Pennsylvania). We attempted to refi this spring, and the deal died with the appraisal. We only wanted a lower rate, and why would I take a lower rate if we needed Mortgage insurance to get it?
Supposedly our house lost 25k in 2 years, in an area where the losses are not even hotting a 10% average. Did I mention we have 2200 square feet, and the closest comp was 1700, and they were not all sold comps? Yeah, so those houses were selling for an average of $145 per square foot, but mine is valued at $95? The appraiser left out a half bath, the new windows and other upgrades, which is hard to believe, because I gave him a copy of what was reported in 2007.
Our poor broker couldn't get a break and has apparently had 10-15 deals dies this same death.
Another issue that nobody brought up is that these "appraisal management companies" don't seem to care about assigning appraisers who know the local markets.
I just had a contract where the appraiser is from another county, his office is over an hour away, and is someone I have never heard of. In some areas that is considered 'local enough' - but he isn't using good comparables from similar neighborhoods because he doesn't know the area. Instead he is using homes that are on more land, or 30 years older because the homes match the subject by his definition (in some way I can't figure out myself).
There are 50+ good appraisers working in this city, but because the mgmt co. pulled in someone unfamiliar with the area the appraisal came in low, and now we get to try cleaning up the mess.
Not good for the buyer, not good for the seller. Not good for the bank either.
Kathleen.. I wrote about that in my original article in the third paragraph.
My comment on the new law. I am a realtor. An appraiser called me last week for a complete contract telling me that they now had to review and comment on the contract as part of the appraisal. This infuriates me. 1. What gives them the knowledge to judge a contract? 2. I don't think they need the contract price, as an appraisal should be a supported opinion of value. I think they should come to their conclusion of value without the help of a contract price. As for choosing our appraisers, we are not able to and never have been able to as agents. (at least where I live) The lenders choose-although there is not much choice. Yes they have gone up in price. They also will not transfer, they make you pay for a new one. Small town. Small town also means there are also only 2 V.A. appraisers, this is a military community and 80% of my loans are V.A. - So I have a darn good guess of who will do the appraisal! V.A. appraisals cost more than conventional ones.
If an appraiser hired by an appraisal management firm makes a comment that a minor repair is needed, then that likely means that the consumer seeking a refinancing would have to pay another fee for the follow-up inspection. This is where the underwriting process and the dangling of the notion that one is closer to getting refinanced works against the consumer. It is also the point in time when all involved turn the consumer upside down and shake out any lose change. So, in the end, even the poor appraiser still gets the chunk of money deprived him/her by the appraisal firm the first time around. But now the consumer's out-of pocket expenses spirals upward, while the process is prolonged.
An inspection and an appraisal are two completely separate things. Once a consumer pays for an appraisal that money goes to the appraiser/appraisal management company.
The idea behind the new rules are great. Over-valued appraisals and collusion was a major problem. However, the rules need to be tweaked, and soon, because of the serious unintended consequences they are having to individuals and potentially the economy in general. There are numerous cases of deals falling through because of low appraisals. Not situations where an appraisal comes lower than the agreed upon selling price simply because that's the way the market is. But cases where the appraiser knows little to nothing about the locale, and frankly doesn't have to do a good job because he/she is not accountable in any way. They get their (now reduced, and thus even less incentive to do a good job) pay, accuracy be damned. Numerous appraisals are being made based upon median prices and price per square foot values for "comparables" that are in no realistic meaning of the word comparable in any way. "Comps" for a pristine, remodeled, beautiful home in a quiet cul-de-sac are frequently now run-down, bank-owned houses that need serious renovations and are on a busy roadway...but they happen to both be within a 1/2 to 1 mile and have similar sizes/configurations. Therefore someone trying to buy the pristine house for an amount that is appropriate even in this reduced market, STILL can't as the appraisal comes out way below the agreed-upon price since the selling price of the wrecked home is being used as a comp!
So keep the premise, but do something NOW to fix the unintended problems before the nation's economy is further distressed by holding down legitimately priced real estate sales.
Here is the problem that I am currently experiencing:
I have a contract on a property that is scheduled to close 7/31. The appraisal was done 2 weeks ago and came back with the purchase price. I actually spoke to the appraiser and he told me I was getting a great deal. I know that I am because I have been researching the market in my area for about 1 year. However, the lender sent the appraisal for review & they came back with an appraisal of $30k LESS than the asking price. The only way I would be able to find a property at that price would be to look at a much less desirable area or purchase a distressed property.
And why is this happening? Because the appraiser is unfamiliar with this area. He is including very undesirable neighborhoods, as well as distressed properties in his valuation. In addition, he is unwilling to examine the market data that my agent is providing him for the area. I will have to end up going to a local lender in order to close this deal.
I plan to file a complaint against the appraiser. I do not mind paying additional fees, and I do not mind having the appraisal reviewed. But the level of incompetence being exhibited in this transaction is an example of why the housing market is going to continue in a slump.
The problem with the process is that there is no accountability for the appraiser. WE recently had a re-fi, and while we didn't need a large appraisal..... the fact was that the appraisal was plain wrong. Wrong information, previous sale info was listed with the wrong date and a price diff of over $20k lower. The appraiser comp'ed our 1.5 acre property with small .20 acre zero lot homes. He did not adjust for this. the appraisal was scheduled within 2 hours of contacting me and completed the next morning. Oh, and the appraiser also used foreclosed properties to comp with. We attempted for 3 weeks to contact this guy and he never called us back. I tried going through the appraisal mgmt firm and they were no help. This appraiser got the money and didn't even halfway do the job. If this was a sale or purchase, we most definately would have had to pay for a second appraisal. There is no accountability for the appraiser. He could be a newbie with no experience and you have no way to know if he is competent or not.
It's good for consumers if they love paying twice the normal appraisal fee ($450 rather than $300) two to three times before getting their loan completed.
It's good for the consumer if they love paying beyond top dollar for a professional service that is near worthless because it's now being bid out to the cheapest and least competent appraisers.
It's great for consumers if the prefer having an appraiser value their home who has driven 100+ miles into their town (which they have never stepped foot into before).
Bottom Line: HVCC has ruined the appraisal profession by forcing tens of thousands of PROFESSIONAL APPRAISERS out of business. HVCC did however achieve one thing. It helped banks turn appraisers into profit centers from which they now reap billions of dollars in additional income.
Sorry appraisers with over 2 years experience...you'll need to find new work.
Sorry borrowers who are now paying $450 to $1,400 in appraisal fees for junk appraisals you'll get over it.
However, some appraisers say they could end up working about four times as hard for about half the money.
I have been trying to purchase a house for 2 years. I've had contracts on 4 properties and every time my appraisal comes back too low and kills the deal. I don't mean a couple of thousand dollars but 10s of thousands. I have lost $1750.00 in appraisal fees that I will never get back. I have learned a valuable lesson that I can pass on to my kids and grand kids. This lesson cost me $1750.00 but I think it is worth it. Never take your real estate agents word that a property will appraise if he insits then ask him or the seller to pay for it and you will reimburse him at closing and watch what happens. If they disagree then you move on to the next property. Some one will know what there property is worth and take you up on it , if they want to sell . What would they have to loose. Except the appraisal money if don't appraise . Or at the least go half. But you as the buyer have to take control of the sale.