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Appraisers Blamed for Killing a Market Recovery

There's a Catch-22 that always arises when home prices start to increase near the end of a recession. Even though buyers are willing to pay more, appraisals often come in lower than the agreed-upon price because they're based on comparable sales from three to six months earlier, when prices were bottoming. Real estate agents and mortgage brokers say it's happening now, and that it's disrupting sales.

But this time they're placing the blame on new appraisal rules, the Home Valuation Code of Conduct, put into effect by Fannie Mae and Freddie Mac on May 1. At the heart of the new Code of Conduct is a rule prohibiting mortgage brokers from ordering an appraisal directly from the appraiser. They now have to go through the lender, and increasingly lenders are using third-party appraisal management companies to parcel the work out to individual appraisers.

The idea is to insulate the appraiser from pressure to inflate home values. During the housing boom, many appraisers complained that they felt pushed, directly or indirectly, by mortgage brokers and lenders to come up with home valuations that justified high sales prices. If they killed too many deals, appraisers feared mortgage brokers would take their high-volume business to someone more accommodating.

But critics say the appraisal management companies have boosted fees to consumers by around 40 percent, while drastically cutting the amount paid to the appraisers doing the actual work, and pocketing the difference. Inexperienced appraisers, often from out of town but willing to work cheap, are rushing through jobs and making costly mistakes, they say.

Earlier this week, when the National Association of Realtors released its home sales report for May, chief economist Lawrence Yun said sales volume was not as high as expected based on the number of pending home sales they had reported earlier because "faulty" (Yun's word) valuations were preventing buyers from getting loans.

"In the past month, stories of appraisal problems have been snowballing from across the country with many contracts falling through at the last moment," he said in the press release. "There is danger of a delayed housing market recovery and a further rise in foreclosures if the appraisal problems are not quickly corrected."

The Appraisal Institute fired back with its own press release: "We take offense with the notion that an appraisal is only good if it happens to come in at the sales price. That mentality helped cause the mortgage meltdown to begin with."

Ding!. End of Round One.

Round Two: I asked a few local real estate agents if appraisals are derailing sales.

Brett West, a McEnearney agent in Old Town Alexandria, said "Thus far, no." He recently had an Federal Housing Administration lender ask for a second appraisal at the 11th hour, just before closing, because of concern over declining market values. And another recent appraisal came in at $10,000 below the sales price, but the seller agreed to the lower price.

Donna Evers, president of Evers & Co. Real Estate in the District, said, "Yes, we are having trouble with appraisals. ... Lenders are pulling back too much (like the pendulum swinging too far in the opposite direction) and the appraisers are under-appraising like mad."

Jacqueline A. Thomas, a Keller Williams agent in Upper Marlboro, said, "No. More than anything, they are too high." She was trying to get the bank to approve a short sale, but the high appraisal made that more difficult.

Toni McIntyre, a Long & Foster agent in Reston, said, "Oh yeah, big time." But the worst experience she has had -- when an appraisal came in $75,000 below the sales price -- happened last September, before the new rules went into effect.

Sue Goodhart, a McEnearney agent in Alexandria, said, "I think it will be less of an issue as we get into the next few months." That's because there will be higher, recent sales prices to back up appraisals. But she complained about appraisers who are unfamiliar with the area. "They have no clue. It is extremely frustrating."

Bob Jurgensen, a Weichert agent in Manassas, said, "Local appraisers seem to have less issues than when the scheduling service assigns appraisers [from] out of the area to do appraisals in Prince William or beyond. They struggle with the comps and I get regular calls from these appraisers to verify my own listings that they intend to use for comps. But personally, of my deals, all have appraised just fine, and I've done about a dozen so far this year."

Thanks to The Post's Emma L. Carew for contributing to this post.

What are you buyers and sellers seeing out there?

By Elizabeth Razzi  |  June 25, 2009; 6:00 AM ET
Categories:  Mortgages , The economy , The market  
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What are the experiences of current homeowners trying to refinance their mortgages through the government relief program? Our mortgage servicer just told us we don't qualify for the Relief Refinance program because Freddie Mac's home appraisal system (Home Value Explorer) said our condo's value was too low to qualify. I wonder if anyone else is having problems with the HVE software producing appraisal numbers that are much lower than they should be.

Posted by: postreader30 | June 25, 2009 2:20 PM | Report abuse

I see the realtors are at it again.

Let's hope the appraisal industry restores its integrity. Unfortunately, realtors will drive undermine this effort by driving business to those appraisers who are willing to support whatever sales price the realtor got a buyer to sign off on.

Appraisers, for fear of losing the realtors' business, will slowly but surely cave in and start reinflating the bubble.

Good luck, general public. Let's hope you smarter this time.

Posted by: mblive | June 25, 2009 4:31 PM | Report abuse

OMG... Realtors are the idiots that drove up prices andcreated this mess. And the buyers were "sheep" as well.

The real value of anything is what the next person pays you for what you have to sell. Sorry Realtors, your math is "fuzzy" and your industry need to go the way of GM...

Posted by: mlimberg | June 26, 2009 8:20 AM | Report abuse

It is amazing to me that from an article where 4 of 6 agents said they weren't having trouble with values from appraisers (except in the case of one too high) that you conclude it is the Realtors fault. Is it possible that we could set blame aside and just look at a situation objectively? Anyone who thinks it was the Realtors alone that caused the mortgage/housing meltdown is ill informed of how much power Realtors have.

Posted by: scf211 | June 26, 2009 10:53 AM | Report abuse

It was more like the Buyers were slugging it out on the football field, and the Realtors were the cheerleaders....

Posted by: mlimberg | June 26, 2009 7:38 PM | Report abuse

As a Realtor/Broker, I have had quite a few appraisal issues recently, but very few have been value related.

I had an instance just this week in which the appraiser suggested on the report that the carpet needed to be cleaned. No wholes, only a few stains. What is he - Martha Stewart now?

The other thing I don't get is when, as the listing agent, I get a call from the appraiser asking me for a copy of the sales contract. Ok - so the new rule says that there is to be limited contact between the lender and the appraiser. Then I will assume that since they did not give you a copy of the contract, they either did not want you to have it, or due to the new rule they could not give it to you. Either way, seems like an end run to me. It seems that an appraiser should be coming up with an independent determination of value. Giving the appraiser a copy of the contract seems to me sort of like the Judge saying to the jury "go ahead - read the papers - get your information wherever you like"

Posted by: remaxbravofredericksburg | June 27, 2009 10:19 AM | Report abuse

Elizabeth, Another great article…NOT… I am glad to see you are now speaking with more then one bitter agent and you are now also driving around a bit. Good for you!
Here are the issues you left out of your article this morning;
1. Inexperienced out of the area (sometimes out of state) appraisers are bidding on jobs in areas that they are unfamiliar with. They (out of town appraisers) are now bidding on batches of work (say 70 appraisal in the metro area). The lowest bidder wins even if the bidder has never done an appraisal in our area. Try driving 3 hours any direction and put a value on the first single-family house you see.
2. The appraiser must use two closed comps and two active comps within 90 days of closing. This is very difficult if the neighborhood doesn’t have a lot of closings. Areas like Great Falls and McLean are very difficult areas to close a deal in because they’re so few recent normal sales (appraisers will use distressed homes as comps!).
3. Cost and time! It used to cost $300 to $400 and 3 to 5 business days to complete an appraisal. I am now seeing it cost as much as $1,000 and up to 3 weeks to complete.
4. Banks are now using desktop appraisals as bases for approving loans. If you want to know how accurate a desktop appraisal is just go to zillow and plug in your home address. In my neighborhood alone (I live in Loudoun County) there are houses next to each other that are $100,000 off in price!
5. Lenders now have the right to do a field spot check on any appraiser. This means that they will send out another appraiser (without the first knowing) to double check the first report. Depending on how much love exists between the first and second appraiser this can become contentious as each is bidding for more jobs!
6. Finally, appraisers now have to report if an area is in decline or has over supply. This report can lead to the lender dropping the loan amount down by as much as 10%!
I don’t mean to be too hard on you Elizabeth but I can’t tell you how many times I’ve had clients read your reporting (also the reporting of others) and come away with only half the facts. The Washington Post is a national treasure and one that I’ve been reading regularly for 20 years. Facts Elizabeth more Facts!

Posted by: crifae | June 27, 2009 12:34 PM | Report abuse

I liked your article but wonder why most of the quotes were from Virginia agents. What about your readers in Maryland?
As a realtor, I have encountered problems with appraisers lately. When the appraisal comes in low they sellers in this market have no choice but to lower the price to the appraisal price. On one of my listings in King Farm,in Rockville, MD, I listed a townhouse for $589,000. Within 10 days we accepted an offer for $580,000 with $10,000 back in seller subsidy. The appraisal came in at $574,000 and they would not consider the seller subsidy as part of the price. Two doors down, the almost identical townhouse except they had wood floors upstairs too and a nice patio area out back, listed for $619,000; sold for $600,000. They had to get 2 appraisals. (I don't know why) and they both came in at $600,000. Do you really think a patio and hardwood floors gives $26,000 worth of additional value?
I had another listing where the appraisal came in $25,000 less and they had to take it. Because another buyer might get a similar appraisal. So the sellers are almost "blackmailed" into accepting whatever these appraisers say. There is no recourse or appeal.
In another case, a buyer was scheduled to settle on a Wednesday. The Monday before, the underwriter said they needed a second appraisal and more information about the wife's income. Who is going to pay for this second appraisal? It couldn't be done quickly so the settlement date had to be delayed causing lots of logistical problems for everyone.
I think when the buyer and sellers agree that should be the price.
Amy Musher, Prudential Carruthers Realtors
Office: Bethesda MD

Posted by: amymusher | June 28, 2009 8:29 PM | Report abuse

Agree with Amy: "...when the buyer and sellers agree that should be the price."

We are in the process of selling our home in Germantown. We have a contract on ours and we have made a bid on another house. We're reaching, so there's not a lot of wiggle room. If our appraisal tomorrow comes in low it is goodbye contract, goodbye new home, goodbye upward mobility. We will stay because that's what the market dictates.

Posted by: jceppard | June 29, 2009 8:53 AM | Report abuse

"...when the buyer and sellers agree that should be the price."

That is true if the buyer is paying cash, but when they are spending the bank's money the bank is entitled to an objective 3rd party assessment of the home's value. Just because the buyer fell in love with a home doesn't make it worth whatever they paid when the bank has to foreclose 6 months later and try to sell it again.

Posted by: jlp7t | June 29, 2009 11:01 AM | Report abuse

There are a lot of small minds here who think realtors control the marketplace. I can assure you that is a hilarious thought to think that one can artificially create demand. Do they not teach economics anymore in government schools? Realtors can't even really sell houses and they are not supposed to on the buyer side--they are only consultants. Buyers have to sell themselves homes, period. I have nothing to do with whether demand increases on the real estate market place or goes down. What does impact demand are not realtors but rather unemployment rates, schools, interest rates, job growth in regional markets, population increasing versus decreasing, current events.

Anyway here is a more thorough dicussion of this issue from myself weeks ago....

enjoy and comment please.

RE/MAX Allegiance

Posted by: JustNewListingscom1 | June 30, 2009 9:27 AM | Report abuse

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