by Jim Stefanile, Realtor/Associate, Prudential New Jersey Properties
Back in the “good old days”, pre-meltdown and bubble burst, properties in a real estate transaction always appraised. By “appraising” I mean the process by which a lender sends an appraiser to evaluate the property under contract. If the appraiser’s report justifies the contract price the transaction proceeds to closing as the lender issues a mortgage committment. If the appraiser’s report indicates a value lower than the contract price, either the seller has to reduce the price or the buyer kicks in the difference or, perhaps, the lender cancels the loan application.
When all these properties successfully appraised, was there collusion between lenders and appraisers? Was there undue pressure on appraisers from lenders and buyers? Maybe. There was also the roaring yearly appreciation of property values fueled by an anomolous and overly robust market which justified ever increasing prices.
When the correction started to occur (in 2006 after an unusual 10 year upswing) prices drifted down but appraisals were not a big problem. Buyers were not as competitive and not as willing to “bet the farm” to win.
When the bottom fell out (late 2008 on the heels of the financial crisis) there was still no particular problems with properties (what few were closing) appraising for the contract price.
What’s happening today in 2010, a year into the recovery of the real estate markets? Properties are not appraising in discouraging numbers. What happened? Have prices fallen so low that real values are out of synch with buyer, seller and broker price opinions? Prices, on the contrary, have begun to recover and even rise in some markets. So, why this pervasive appraisal problem?
In short – HVCC – the Home Valuation Code of Conduct.
Some of the HVCC provisions:
Prohibits lenders and 3rd parties from influencing appraisals;
* Requires lenders to ensure that borrowers get a free copy of appraisal reports at least three business days before closing;
* Allows lenders to have in-house appraisers, so long as they’re completely independent of the sales staff and their compensation does not depend on their estimates or on loan closings;
* Requires lenders to test a randomly selected 10 percent (or other statistically significant percentage) of appraisals and report any problems to Fannie Mae or Freddie Mac, which may force lenders to buy loans back from them;
* Requires lenders to report appraisal misconduct to applicable state agencies;
The origin of the rules was in New York State, championed by the State Attorney General and now candidate-for-Governor, Andrew Cuomo. When Fannie Mae and Freddie Mac adopted these rules in May of 2009 they, essentially, became a national standard.
Mortgage lenders are, in most cases, required to go to a third party clearing house to schedule an appraiser. The clearing house then hires the appraiser and schedules the appointment. These appraisers work at cut-rate prices and may or may not be familiar with the area they are working in. They get their information the same way realtors do, through access to local multiple listing service data but they may not have the same local knowledge that area real estate practicioners have.
Appraisers themselves complain that, because the lender is completely in charge of assigning appraisers (mostly through the third party clearing houses) they have even less buffer between them and the lender and can experience the same pressure from the clearing house (also known as the management company). Appraisers are also under pressure to perform at very low prices and that has led to an emergence of inexperienced or less talented practitioners who will accept the lower rates.
The result of all these new rules has been a glut of under appraising properties, in many cases, derailing real estate transactions. Another consequence has been an increase in the price the borrower has to pay for the appraiser because there is now a middle man (the management company).
I do not disagree with the intention of shielding appraisers from undue influence. But the amount of transactions under appraising leads me to believe there is a problem with the new system. Sellers and brokers have become more realistic, buyers rarely (with some excepted markets) offer full price offers and contract prices, in my opinion and experience, are close to where they should be. There should be no widespread problem which leads me to believe the problem is systemic and not market-driven.
The National Association of Realtors shares my opinion (of course with bias) and has urged Congress to declare a moratorium on these rules. The Code is actually scheduled to expire in the not too distant future but the consensus on the street is that, even then, it will be the defacto standard.
This isn’t the first time a well-intention legislation or regulation has had unintended consequences. With all the expressed dissatisfaction in the real estate industry and among appraisers themselves, and with the amount of transactions failing to close because of this situation, it’s time to move swiftly to re-gain stability in the real estate marketplace and re-examine and eliminate obstacles (however well intentioned) from that goal.