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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?

By Elizabeth Razzi  |  July 16, 2009; 6:00 AM ET
Categories:  Buying , Foreclosure , Mortgages , Selling , The market  
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Since appraisers were first licensed across the country in the early '90s, the Uniform Standards of Professional Appraisal Practice have prohibited an appraiser from taking an assignment in a market they are unfamiliar with! All these AMC appraisers who don't take the necessary time to learn the "nuances of the market," as the standards require, have been violating those standards as well as violating the HVCC. Since May 1, lenders have been making loan decisions based on non-complying appraisals. No wonder properties are mis-valued! No wonder real estate agents, mortgage brokers, buyers, sellers and honest appraisers have been upset! Why are FreddieMac, the Appraisal Institute, and others not calling it what it is? Let's call a spade a spade: rampant FRAUD!

Posted by: AppraiserBarbASA | July 16, 2009 8:38 AM | Report abuse

Dear AppraiserBarbASA. I assume you are an ASA member of the American Society of Appraisers. Please note that your organization is a coalition member along with the Appraisal Institute and other professional organizations. Its safe to say that we jointly agree with your argument that many non regulated AMC's are encouraging non USPAP compliant appraisals from non competent appraisers all in the name of offering services which are compliant with the HVCC, but which only result in higher profits to the AMC's. Jointly, we are working hard and making progress in alerting appraisal users of the problems that can occur when using non-competent appraisers. It is unfair to single out the Appraisal Institute as being asleep at the wheel, when in fact, your group and the Appraisal Institute are jointly working overtime on this and other issues.

Posted by: rmaloy3317 | July 16, 2009 12:15 PM | Report abuse

I am trying to refinance as my husband died earlier this year. This article reflects the exact situation I found myself in. The appraiser assigned to do the appraisal a week or so ago is from Front Royal, more than 90 minutes from here. He had never been to the area and he knew nothing about the neighborhood. What's worse, I don't believe he even went to see the so-called comps he used. The pictures he used in his write up show snow on the roof of one and no leaves on the trees in another -- clearly they are not current photos. Had he bothered to actual drive by the other homes, no one in their right mind would have included them as comps to my home. Clearly, he did an "on paper" job, he was ignorant at best, but incompetent and unconsionable at worst. He did a quick and dirty job. How dare he be allowed to undertake this work and how dare such a shoddy job be acceptable. In disputing this, I have advised that the lender ought to use someone that actually knows something about the neighborhood and is willing to put time into doing the right work, and that this person ought not be paid for the awful work he did. It took less than a day for a real estate agent to pull up comps that are reflective of the truer value of my home, which I personally have had to provide. During this process, I received some good advice not only about objecting to this specific terrible job, but also about contacting our State representatives to object to this practice being allowed and to ensure that short sales and foreclosures also are not allowed to be used for appraisals. All that does is punish the homeowners that did not get behind or stop making their mortgage payments and further drive down the market. I am outraged that on top of everything else I have had to go through this year, now I have to deal with an incompetent and egregiously wrong home appraisal.

Posted by: 22308reader | July 18, 2009 11:35 AM | Report abuse

I believe this is a three-sided issue. First real-estate industry pros do want to go back to their old ways, no doubt.

Second, the new appraisal rules do not provide appraiser independence.

Third, removal of the new rules will not provide appraiser independence.

We never had appraiser independence and we never will.

There is no such thing as THE VALUE of a home. There is only the amount someone is willing to lend you based on what they think your home is worth. They can hire someone to make that judgment for them or they can judge it themselves. But there is not such thing as THE VALUE.

Posted by: LMM1 | July 19, 2009 6:19 AM | Report abuse

One more thing. I think we should ask ourselves why the people who are contracting for appraisal services (banks, etc.) so obviously do not care about the quality of the data and the analysis provided to them. It is obvious they do not care and to me that is the bigger issue.

Posted by: LMM1 | July 19, 2009 6:58 AM | Report abuse

This article and a number of others on the topic are just scratching the surface of how bad things have gotten. Our bank called us and said, "hey, you can refinance and get a lower rate". We said great. Then an appraiser they sent from over 40 miles away who had never been in our neighborhood appraised our 2 year old home in the Edgemoor section of Bethesda for $1.25 million less than it appraised for just 2 years ago, or 38% less. Then the Bank sent another appraiser who lives on the beach over 60 miles away to appraise the house. He drove in just to appraise our home, then went straight back to his home on the beach. He came in even lower at $1.5 million less than the two-year's prior appraisal on the then new house -- 45% less. And what is worse is that the appraisal when we originally built the house and put the mortgage on it was already $450 thousand less than we paid to buy the land and build the house. So we are talking about an appraisal that in two years time on a new home, that is over 55% less than we paid to build it.

Our house is unique and the neighborhood is filled with unique homes. These appraisers in both cases only used one home from the actual subdivision we are in. The others were outside and significant distances away, in entirely different neighborhoods in terms of home quality and demand for the real estate. Also, a high percentage of these "comparables" had been on the market an long time and were sold at distressed property prices.

Finally, as one other respondent noted, it was clear that both appraisers worked exclusively from paper over the Internet to evaluate comparables, and had not seen any of them with their own eyes. Our appraisal was pretty much done on a square footage, bath and bedroom count comparison. None of the very high-end features and finishes or other other ammenitities of our home (which I demonstrated to both of them) of our relatively small, but expensive to build home, where even mentioned.

We are disheartened. And it is not because we HAVE to refinance - we don't. Rather it is because it makes us feel that we have been violated by a lack of thoroughness and fair play. We feel these appraisers were both ethical, but they did not do a good job because they simply did not understand how to appraise these custom, one-of-a-kind homes in a high demand, but low turnover neighborhood. Something really needs to be done.

The ultimate irony in our case is that the state and county feel our house is worth more than the original appraisal two years ago. So, we are paying property taxes on a value that is 45% higher than the highest refinance appraisal. It is bizzare.

Posted by: blshu254 | July 19, 2009 1:24 PM | Report abuse

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