Home appraisers who were willing, persuaded or strong-armed by mortgage brokers, real estate agents, or loan officers into valuing homes at ever-climbing heights during the boom years have been blamed in part for the housing bubble.
But rules enacted as a solution to the problem have created unintended consequences that have everybody from the home builders, real estate agents, mortgage bankers, mortgage brokers, and even the appraisers themselves complaining.
The Home Valuation Conduct Code (HVCC), which went into effect May 1 for all conventional loans to be sold to Fannie Mae or Freddie Mac, is designed to isolate appraisers from pressures from various parties that have a stake in a loan being approved.
Under the new rules, lenders are responsible for ordering appraisals for loans, but they can’t be ordered by the lender’s department that issues the loan, because those employees might have a stake in the loan being approved. Instead, the appraisal orders must come through an independent department at the lender that would not profit from the loan issuance. The lender also has the option of farming it out to a third-party appraisal service.
While the code is meant to create appraisals that are more accurate because they made in an environment free pressures of vested interests, critics say it’s not working entirely as planned.
Here are seven unintended effects of the change.
1. Builders and real estate agents say the new rules are increasing the number of sales that fall through or require builders to make bigger concessions because appraisals are falling short of contracted sale prices.
More than a fourth of the builders surveyed by the NAHB said they are having signed contracts canceled because they are coming in below the contract sales price. Nearly 60% blamed the cancellations on “inadequate appraisals,” and 54% said some appraisals were coming in for less than it cost to build the homes. Real estate agents, too, reported lost sales, with 20% reporting they lost more than one sale, and 17% saying they lost one sale in a recent National Association of Realtors (NAR) survey.
Faced with buyers who can’t or won’t kick in extra cash to get to the closing table, builders have the choice of letting the sale go or lowering the price to match the appraisal.
The biggest complaint among builders is that the new homes are being compared to foreclosure and short sales, which builders argue are not proper comparables to a new home ordered by a buyer. NAHB has called for regulatory officials to issue clear and concise guidance to help appraisers develop more realistic and correct evaluations based on true comparables.
2. Property values are being deflated further.
Once a builder lowers the price of a home to get it sold after a low appraisal, it sets a new comparable, assuring that the next house, too, will be similarly appraised, creating a home price deflation spiral.
“Home builders are increasingly concerned that inappropriate appraisal practices are needlessly driving down home values. This, in turn, is slowing new home sales, causing more workers to lose their jobs and putting a drag on the economic recovery,” said NAHB chairman Joe Robson, a home builder from Tulsa, Okla. in a statement.
3. Many lenders are turning to appraisal management firms, which charge lower fees than independent appraisers with more experience but may not have appraisers with as much local market knowledge. Borrowers are often paying more for these new appraisals.
Rather than worry with the complexities of separating the ordering of appraisals from its lending departments, many builders are farming out appraisals to appraisal management companies. This often eliminates independent experienced appraisers with more local knowledge.
The number of appraisers who get more than half their work from appraisal management companies climbed from 14% to 39% according to the NAR survey of its appraisal members.
At the same time, many appraisal management companies are dropping prices to gain volume and cover administrative costs. This is also resulting in fees dropping to a level at which more experienced appraisers decline to do the work or, if they do accept the assignment, they spend less time on the appraisal, which hurts the overall quality of such appraisals.
About half the appraisers surveyed said their fees had been reduced and 70% said consumers’ fees had increased. They also reported they were getting a “significant” number of assignments in unfamiliar geographic areas with 16% saying that more than 11% of their work is now in territories with which they are less familiar.
Critics say the work of inexperienced appraisers or those unfamiliar with the market are contributing to these low-ball appraisal figures. About 85% of the appraisers reported a “perceived decrease in appraisal quality.”
Learn more about markets featured in this article: San Diego, CA.