Real estate appraisers are the latest villains in the continuing saga of the bursting of the real estate bubble. Industry groups including the National Association of Realtors and the National Association of Home Builders are howling that new appraisal guidelines that went into effect on May 1 are producing below-market appraisals that are killing sales and adding yet another tough hurdle to refinancing.
The NAR reports that 17% of its members say they have recently lost one sale due to an appraisal coming in way below a purchase price, and 20% of members say they have lost more than one deal because of low appraisals. NAR’s chief economist Lawrence Yun blamed “faulty valuations that keep buyers from getting a loan” as the reason May home sales data weren't stronger.
The dust-up is a reaction to the new Home Valuation Code of Conduct (HVCC) for mortgages securitized or held by Fannie Mae or Freddie Mac. The new rules prohibit real estate agents and mortgage brokers from hiring the appraiser. The mortgage lender is now in charge of that part of the loan process; the lender can use an in-house appraiser to handle the evaluation or farm it out to an appraisal management company. New York Attorney General Andrew Cuomo pushed through the new regulation as settlement of a 2007 lawsuit that accused mortgage lender Washington Mutual (now subsumed by Chase) of a far-too-cozy relationship with an appraisal management company that used appraisers who were happy to sign off on inflated valuations.
Realtors, builders and mortgage brokers insist this corrective measure has swung the pendulum to the other extreme, threatening any chance of a meaningful real estate rebound. Their main gripe seems to be that lenders are relying more on appraisal management companies as middlemen to handle the assignment and execution of appraisals, and the companies -- according to the howlers -- are assigning appraisers to neighborhoods and entire regions they are wholly unfamiliar with. That then leads to lower appraisals, they say, since only a local would be able to understand the nuances of that particular market.
Another oft-heard lament is that the out-of-town appraisers pull up any old comparable, including foreclosures and short-sales, thus distorting home values. That definitely sounds like some bellyaching from the real estate lobby. If there are recent sales of foreclosed and short-sale properties that are in comparable condition to a “regular” sale (or refinance), how is the value of that property not a rational comparable? Indeed, in a July 10 release, Freddie Mac said distressed properties are fair game, when appropriate:
“Freddie Mac does not have requirements about what comparable sales the appraiser is to use. For example, we do not require appraisers to use Real Estate Owned (REO), foreclosure or short sales. 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.”
Notice that last part about “must consider their use.”
Now that’s not to say the new HVCC is perfect. Bankrate’s Holden Lewis makes the case that it may not be great policy to let one attorney general in one state set national policy. And anecdotal reports indicate that appraisal costs have risen 30% or more since the introduction of the HVCC.
But I'm not buying one solution floated last week: A bipartisan bill was introduced in the House that would impose an 18-month moratorium on the enforcement of the HVCC, during which time various entities (state, federal) aided by the powerful real estate lobby could hash out some new and presumably better iteration of the HVCC. In the meantime, are we supposed to just roll back the rules to exactly the way they were when we got ourselves into this mess? That's a solution?
Here's what I want to know: Among those of you who are trying to buy or refinance, do you feel you have gotten a fair shake on the appraisal? I'm not asking if you liked the appraisal, but whether you think it fairly reflects the current value of homes in your neighborhood.