Appraisal Quality Getting More Attention
Will it appraise? That is the number one worry of buyers, sellers, real estate agents and mortgage brokers ever since a new set of appraisal rules, the Home Valuation Code of Conduct, went into effect May 1. It governs all mortgages that are sold to Fannie Mae and Freddie Mac--in other words, most of the market.
Low-quality appraisals done by appraisers parachuting in from a different market are among the top complaints this summer. Freddie Mac recently issued a reminder to lenders that it's their responsibility to make sure that appraisals are performed by people who are well-qualified and familiar with the local market.
The new rules that went into effect this spring are supposed to place appraisers and loan officers at an arm's-length relationship. No longer, for example, can mortgage brokers phone their favorite, less-than-flinty-eyed appraiser and order a price evaluation, or threaten to take their business elsewhere if an appraiser kills too many deals. Now appraisals have to be ordered by someone at the lender's office who is not directly involved in the deal.
One of the effects of the new rules has been lenders' increasing reliance on appraisal management companies that take the appraisal orders from lenders and ship them out to the appraisers of their choice. Critics in the real estate and loan brokerage industries say that has increased the cost to consumers while reducing the fees paid to the appraisers who actually perform the work. And they complain that the appraisals often come in lower than they should, killing deals unnecessarily.
Among the biggest complaints: The appraisers hired by these companies sometimes are not even familiar with the neighborhoods they're working in, and too often they base their price estimates on recent sales that are not at all comparable properties, including too many deeply discounted foreclosures and short-sales.
Tom Pietsch, an agent with Tom & Cindy Associates, part of Long & Foster, e-mailed me an example of the problems. His firm focuses on the Alexandria to Lorton market. "I got a call last week from an appraiser who is going to do the appraisal for one of our listings," Pietsch said. "He's coming from Richmond! He doesn't even have multiple listing service access, so he can't do the proper research. He asked me to get the comps for him. That never used to happen. And how could he possibly have expertise in the marketplace?"
Freddie Mac is putting the burden of appraisal quality on the lenders. "Freddie Mac recognizes the challenges that current market conditions pose in connection with determining accurate property values," says its recent bulletin to lenders. Lenders selling loans to Freddie "are accountable for the quality, integrity and accuracy of the appraisal and other collateral documentation."
Among their best practices: Lenders have to allow enough turn-around time for appraisers to do their work. "Unreasonable turn times may adversely affect the quality and accuracy of the appraisals."
Also, Freddie said the agency does not require that appraisers use foreclosures or short sales as comparables. "However, if the appraiser determines that these are representative of the properties available to typical purchasers for the market in which the property is located, appraisers must consider their use," the bulletin says.
Are you seeing deals being undercut by bad appraisals? Or do you think real estate industry pros just want to continue their old ways of doing business?
July 16, 2009; 6:00 AM ET
Categories: Buying , Foreclosure , Mortgages , Selling , The market
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