AppraisalsHVCC July 4, 2010

The Appraisal “Crisis”

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;