Uproar over New Appraisal Rules could Spur Change

It’s been nearly three months since the Home Valuation Code of Conduct formally take effect and changed the system for appraising residential homes. By almost all accounts, the results are not good, as evidenced by the higher costs, less flexibility, lower valuations, longer waits, and delayed/failed closings.

In a nutshell, “The new rule, which took effect May 1, forbids brokers from hiring their own appraisers and requires middlemen — called appraisal management companies — to choose them instead. The change was intended [to] reduce the possibility that brokers and lenders would pressure appraisers to raise house values to match sale prices, regardless of the true value. It affects all loans backed by Fannie Mae and Freddie Mac.”

While the Appraisal Management Companies have benefited by standing in the middle of the process and collecting fees, nearly all other parties are suffering. Homeowners have witnessed rising appraisal costs – in some cases 30% higher than before. In addition, the appraisal fee must now be paid upfront (instead of rolled into the mortgage), and can only be used in association with one mortgage application. “Previously, the broker owned [the appraisal]. That has changed. Now, it’s in the name of the actual lender.”

Appraisers, meanwhile, are equally frustrated, since the new system “effectively commoditized their services overnight, undermining the value of specialization, experience and reputation. Theirs is now one name on a long list that receives seemingly random assignments, often in regions they don’t focus on and for less money than they used to earn.”

This alleged failure to match the right appraisers with appropriate assignments is being blamed for low (some would say “inaccurate”) appraisals. Recent news reports have been full of anecdotal stories of both buyers and sellers that watched deals fall apart at the last minute because the appraisal came in well below the sale price. In some cases, “victims” were able to search out an amenable appraiser willing to certify the sale price, while in other situations, they were forced to go back to the drawing board.

According to an “online poll of industry professionals, about two-thirds of respondents said they had had at least one appraisal come in under the purchase price since the new rules took effect, with the average difference being more than $13,000. And 90 percent of respondents said they had lost at least one transaction.” The National Association of Realtors conducted a similar survey, and found that “37 percent experienced at least one lost sale as a result of the new Home Valuation Code of Conduct, with seven out of 10 reporting an increased use of out-of-area appraisers. Seventy percent of NAR appraiser members said consumers were paying higher fees, while 85 percent report a perceived reduction in appraisal quality.”

Of course the flip-side of the debate is that the new system is working according to plan (minus the higher fees), with low appraisals providing a necessary check on real estate prices, to keep them from rising too high too fast. One industry insider notes that “40 percent of the market consists of distressed properties going at fire sale prices.’The real reason for the appraisals coming in “low” has been that the market is still in turmoil,” he said. “Home sales have not yet rebounded. Home prices are still in many areas still falling.’ ”

This counter argument has not stopped people from challenging the rule change. Many appraisers have “signed a petition (www.hvccpetition.com) to try to repeal the rule — a cause taken up by U.S. Rep. Gary Miller, a Southern California Republican who is co-sponsoring legislation asking for an 18-month moratorium.” They argue that while seemingly good-intentioned, this rule will succeed only in stymieing the nascent recovery in the housing market, if allowed to stand. With such vehemence (not to mention lobbyists) on both sides of this issue, it will probably be a while before any further action is taken. In the mean time, the best you can do is solicit a fresh appraisal if you’re not satisfied with the first one.