The Real Story …
News and commentary about the real estate market and related topics.
Dave Parrish, ABR, CRSA, CSP, GRI, ePRO, Realtor
Continuing on the topic of appraisals … or
What … Why is that all my house is worth???
As mentioned in last week’s column, appraisals are an integral part of the real estate market, both from the aspect of the lender who uses real estate as the collateral or security for a loan (they want to be sure they are safe) and for the purchasers of real estate (nobody wants to pay more for something than it is worth).
For that matter sellers are concerned as well with appraisals because this is generally the most they can sell a home for even in a strong Seller’s market (as a bidding war price)! Yes, that day shall return … but that’s for another column.
We, as I am sure you are aware, are in the middle of an economic downturn … some call it a crisis while others see it as the part of a constantly recurring cycle. Almost universally, this down turn was seen first as a crisis in the U.S. real estate market.
Now this problem is a complex problem and there is no way to adequately address its complexity in this brief space, so forgive me as I attempt to simplify the issue a bit as I focus on that part of the problem most closely related to this week’s topic.
At the core of the economic downturn and as prelude to it, we experienced a real estate boom caused by an over exuberance in the performance of the U.S. real estate market forgetting Newton’s Law (my apologies, to Sir Isaac) … What goes up must come down! We do have short memories!
Following the 2001 Dot Com Crash, the world sought the safe haven of a stable growth market … Real Estate met that need for many investors, not just within the borders of the U.S. but to the international investor market who saw the U.S. market a safe haven. It seemed that there was no limit to the appreciation of home values within our borders. Combine that exuberance with poor lending practices (i.e. No Doc Loans, 100% and 100 plus % financing), American consumerism, the unabated extension and use of credit, and an under regulated derivatives market, little if any checks on the home appraisal process, uninformed borrowers, and the list goes on … we had the perfect storm.
While the downturn in the U.S. real estate market began mid 2006 it took about a year for the issue to reach general awareness of the public and until late 2008, early 2009 for the issues to be addressed in any substantive way. That course correction is still underway and will continue for at least a couple of years before a more stable and sustainable path is reached. When a ship is allowed to get as far off course as this ship did, there is almost always the tendency to over correct so as to get immediate results.
That’s where we find ourselves today in terms of the home appraisal process. On May 1 of this year new rules went into affect governing the home appraisal process and the relationships between: lenders, real estate agents and home real estate appraisers.The new rules put forth by the Home Valuation Code of Conduct (HVCC) are intended to promote independence in the appraisal process and, thus, help ensure that appraisers and the appraisal process may be relied upon as part of sound underwriting for financial institutions. An absolutely on target goal!
In a nut shell the new rules state the following:
- The Real Estate Agent and Appraiser may have no direct contact other than for the agent to provide access to the property for appraisal.
- Appraisers are to be selected via an independent process.
- Appraisers must complete a more extensive appraisal report than previously required.
- There will no re-appraisals of properties.
Critics say new rules from Fannie Mae and Freddie Mac, which force lenders to use appraisal management companies, are raising appraisal costs for home buyers. But perhaps of more concern is that appraisal management companies may well lead to the selection of the low cost provider rather than the best qualified appraiser based on local knowledge of the market place subtleties. Some fear that the new rules and trend toward the use of AMCs (Appraisal Management Companies) has led to an increase in questionable or stingy valuations by appraisers who are leery of producing estimates that are too high, or who may be from outside the target housing market and unfamiliar with the nuances of neighborhoods to which they’re sent.
Lawrence Yun, chief economist for the National Association of Realtors, recently said poor appraisals are “stalling transactions” nationwide.
“Lenders are using appraisers who may not be familiar with a neighborhood, or who compare traditional homes with distressed and discounted sales,” Yun said. “In the past month, stories of appraisal problems have been snowballing from across the country with many contracts falling through at the last moment. There is danger of a delayed housing market recovery and a further rise in foreclosures if the appraisal problems are not quickly corrected.”
There does however seem to be some swinging of the pendulum back toward center. Fannie Mae and Freddie Mac have recently agreed on a revised code of conduct that aims to improve the reliability of appraisals on mortgage loans purchased by the two home funding companies. Among the main changes is that lenders will be able to use in-house assessors, which was banned in the initial code of conduct, but must use various firewalls to ensure their independent views. The intent is to prevent improper influence in the valuation process, according to the agreement.
“The Code strikes a balance of assuring enhanced protections for appraisers while maintaining lender ability to address unprofessional appraisal practices and to perform quality controls on appraisals received,” FHFA Director James Lockhart said in a statement.
Even so, all involved in a real estate transaction can expect lower home appraisal values than would have been seen earlier this spring despite some positive news in the real estate market from activity generated during the past 90 days. Add to that some additional delays for the appraisal process which may negatively impact the interest rates purchasers can lock in and you do have a mixed bag of results.
HOME VALUATION CODE OF CONDUCT
No employee, director, officer, or agent of the lender, independent contractor, appraisal management company, or partner on behalf of the lender, shall influence or attempt to influence the development of an appraisal report.
Withholding payment is considered improper influence of an appraiser.
Requesting a pre-determined value is considered improper influence of an appraiser.
Providing to an appraiser a desired value for a subject property or a proposed or target amount to be loaned to the borrower is considered improper.
The lender or any third-party specifically authorized by the lender shall be responsible for selecting, retaining, and providing for payment of all compensation to the appraiser.
The lender will not accept any appraisal report completed by an appraiser selected, retained, or compensated in any manner by any other third party (including mortgage brokers and real estate agents).
Loan production staff of the lender are forbidden from participating in appraisal selection, review and management functions.
Lenders shall not utilize any appraisal report prepared by an appraiser employed by:
·the lender,
·an affiliate of the lender,
·an entity that is owned by the lender,
·an entity that owns the lender,
·a real estate “settlement services” provider (as defined by RESPA), or
·an entity that is owned, in whole or in part, by a “settlement services” provider.
The lender shall provide the borrower with a copy of the appraisal report immediately upon completion and no less than three days prior to the closing of the loan.
The lender will establish a telephone hotline and an e-mail address to receive any complaints from appraisers or other entities concerning the improper influence or attempted improper influence of appraisers.
The lender shall quality-control test, by use of additional appraisals, the appraisals or valuations that are used by the lender, including the results of automated valuation models, broker’s price opinions or “desktop” evaluations.
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