New appraisal rules demand Buyer & Seller caution
A controversial agreement between New York Attorney General Andrew Cuomo and Fannie Mae and Freddie Mac with respect to real estate appraisals is not set to take effect until January 1, 2009. However, lenders are already starting to adopt aspects of the pact. The agreement was intended to provide safeguards that will ensure appraisal independence and more reliable valuations. Notably, it prohibits using appraisers selected by local mortgage professionals or in-house appraisers in favor of those who are “independent.”
To the extent that it prevents interference with the appraisal process and inflated valuations will be a good thing. As a buyer expect to pay for your appraisal up front and if you decide to switch lenders later, expect to pay all over again for a new one. Many in the mortgage industry are unhappy that the agreement was struck without the usual input from federal regulators and industry groups. Fannie Mae and Freddie Mac asked for comments and there may be some modifications before the stipulated January 1 start date.
Nonetheless, many lenders are forging ahead, wanting any kinks to be ironed out before next year. Some lender/investors are using past appraisal problems as an excuse to review appraisals during the underwriting process and insist on adjusted (lowered) valuations, which can throw sales contracts into turmoil.
Buyers and sellers need to be aware of the new appraisal reality. More than ever, appraisals are not final until underwriting approval. Buyers should be wary of lifting any appraisal contingencies and Sellers should be prepared to deal with last-minute snags.
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..more comments on these new appraisal rules
Brent Mendelson, Choice Finance®
September 19th, 2008 at 6:55 am
The article is very sweeping in scope. The agreement is between the NY AG and Freddie/Fannie, and that’s it. If your dealing with nonFreddie/Fannie business, then it is likely business as usual.
Also, lenders are not using past excuses to review appraisals; they’re just doing what the should have been doing in the first place. Many lenders that don’t deal with GSEs actually review 100% of the appraisal reports that they received; it’s simply common practice.
What lenders are doing is cracking down on incompetence. If a questionable appraisal report is sent to a lender via a mortgage broker, make sure you’re strapped into your seat. They’re going to start looking at everyone. They will also keep a watchful on both the appraiser and the mortgage broker…so I’ve been told by big-money investors.
September 19th, 2008 at 9:59 am
The word is that Fannie and Freddie have recently been hiring review appraisers to comb through past appraisals for substantial errors. Specifically, they’re looking at appraisals contained in loan files on properties they’ve taken back in foreclosure.
I would be surprised if the GSEs stopped at merely examining the appraisals in those loan files. Based on my experience, the loan files that contain blatant overvaluations will also include other substantial problems. After all, no appraiser - even our donkeys - will volunteer to overvalue a property on their own accord. At most, an appraiser is only an enabler. They only do bad things at the behest of their clients; and a loan originator that will solicit a blatant overvaluation from an appraiser will also commit other serious violations with respect to income and employment verifications.
Going forward, I think a lot of people are about to find out that the half-life on information in the information age is a lot longer than the length of time it takes to book a loan.