Real Estate Is Local: Appraisals and real estate sales
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By JIM WATSON - Published: July 4, 2009
The appraisal industry adopted May 1 the Home Valuation Code of Conduct. These new rules apply to mortgages that will be owned or guaranteed by government-backed mortgage companies Fannie Mae and Freddie Mac, which recently have accounted for approximately two-thirds of all new home mortgages.
The new rules are the direct result of efforts made last year by New York Attorney General Andrew Cuomo, who accused Fannie Mae and Freddie Mac of failing to protect appraisers from pressure to inflate their appraisals. The new code forbids mortgage originators, loan officers or Realtors from any role in selecting appraisers. Fannie Mae and Freddie Mac agreed to the new rules late last year.
Many banks now outsource their mortgage underwriting in order to remove any questions of undue influence in the final result.
The appraisers are chosen at random and sometimes the fee offered is less than the appraisers have received in the past. This is because the process managers are being partially compensated by part of the appraisal fee.
One result of this has been that the least qualified appraisers or appraisers who are willing to travel get the work. They may not be as skilled at doing the job or familiar with the local market and may not have access to all of the sold comparable properties (comps).
Lenders have added a few new requirements for appraisals. Appraisers now have to analyze properties listed for sale as well as sold comps. If the active listings indicate a lower value than recent sold comps then the appraiser has to use the lower value. In theory this protects the lender and the consumer buyer from overpaying in a declining market.
Lenders are asking for sold comps from sales that have closed in the last three months instead of six to 12 months previously. In some cases one sold comp must be from the past 30 days. This turns an already difficult situation for sellers into a nightmare, as there are few sales to use as comps. In some instances the only fresh sold comp is from a distress or foreclosure sale that has closed at a discounted price.
The new code and rules will prevent some abuses, but it also removes flexibility from the process.
Realtors used to be able to supply appraisers with comp sales that they knew of that would help support the value on the contract of sale. Mortgage originators used to be able to consult with appraisers in advance to learn if an appraisal was going to work. If the result was unlikely it would save the consumer money for the appraisal.
The buyer currently has few choices if an appraisal comes in below the contract price. Many sellers are already down to the lowest amount that they can accept and walk away with nothing. The buyer can apply at a different mortgage company and start the process over again and get a different appraiser, where the result may be different. Homeowners who are trying to refinance and get better mortgage terms may be out of luck unless they find a new lender and start a new application.
Appraisers are being asked to certify additional items in the appraisal. One of these items that has been problematic is verifying that the well and septic are more than 50 feet apart. Sellers should be prepared in advance to clearly identify where these are located.
Otherwise the appraiser cannot finalize the appraisal and the lender cannot issue a mortgage commitment. It is very stressful for both the buyer and the seller to have these kinds of issues to deal with a few days before the closing.
The best advice for all consumers is to consult with the professionals in the real estate industry and professionals that actively serve the real estate industry before jumping into the deep end. Having current information about a process that has changed significantly just in the past year is critical to obtaining a successful result.
Jim Watson is co-owner with his wife, Joan, and principal broker of Coldwell Banker Watson Realty, with offices in Rutland, Castleton and Ludlow. jim_watson@cbwatson.net; www.cbwatsonrealty.com.