Good rates, good inventory, bad appraisal process
Fall homebuyers and sellers should be prepared to deal with one very exasperating issue: off-base appraisals. At a time when home prices have been under downward pressure, appraisers have continued to scuttle contracts with low appraisals.
The problem is the current crop of appraisers being used has included some who are inexperienced in or unfamiliar with the local market. In addition (or, perhaps, as a result), too often they have used distress sales (foreclosures and short sales) to provide comparable sales data. A recent clarification of acceptable procedures may start to improve things soon, we hope.
The problems all started with the Home Valuation Code of Conduct, which was implemented May 1 by Fannie Mae and Freddie Mac. The HVCC was created to settle a lawsuit that had been threatened by New York State Attorney General Andrew Cuomo. The HVCC was meant to make appraisals more accurate and reliable by keeping the appraisal process at arm’s length from the undue influence of real estate agents and mortgage lenders.
The way that many lenders have chosen to deal with HVCC is to engage appraisal management companies (AMCs), even though the code does allow lenders to engage individual appraisal companies directly. The AMCs redirect each appraisal to one of its contract appraisers (at about half the fee they were getting when they worked directly for the lender).
Unfortunately, in the recent past, that has not always been someone who has the kind of local knowledge that is necessary for an accurate appraisal. Local expertise is crucial in a market where there are fewer comparables and where many of the ones that are on the books may be distress sales.
Recently, Fannie Mae and Freddie Mac took several steps to address appraisal issues that had the real estate community hopeful, though the jury is still out on whether they will have the desired effect.
First, they re-emphasized that appraisals need to be done by appraisers who are knowledgable in the local market. But the AMCs argue that they are sending out appraisers who know the local market (even if they are from a different market 30 miles away).
Second, Fannie & Freddie clarified that appraisers are not prohibited from talking with Realtors about such issues as finding better comps or correcting errors. They are, however, insulated from being jawboned to come up with a set valuation, to “hit the number” necessary for a contract to go through.
Unfortunately, the time for a dialog between Realtor and appraiser is before the appraisal is completed, but there has been little demonstrated willingness to do that. Getting an appraisal changed after it is done is like getting a baseball umpire to change a strike call.
In late July, the Federal Housing Finance Agency, which oversees Fannie and Freddie, issued a rather defensive update on how HVCC was being implemented, in which it addressed several pieces of “misinformation.” The FHFA attributed the additional cost of appraisals to tightened loan underwriting that requires additional comparables or second valuation opinions, not HVCC’s tilt toward management companies. Maybe.
The FHFA also addressed whether, if you change lenders before closing, you have to pay for a new appraisal. It is at the discretion of the original lender whether they will transfer the appraisal to a new lender, FHFA says. Sadly, while FHA hasn’t adopted the HVCC, many FHA lenders are using AMCs and charging even more than for Fannie and Freddie loans.
The bottom line for buyers and sellers this fall is that, until we see more reliable appraisals, be prepared to take steps to get better comparable sales data (and hope for the best) or renegotiate terms of the sale. © 2007, Real Estate Information Services, Capitol Assets & Choice Finance®
