Builders, Realtors attack new regs on home appraisal

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A bill in congress would suspend a set of rules designed to reform the relationship between mortgage brokers and appraisers. The Home Valuation Code of Conduct, which went into effect on May 1, prevents lenders from directly picking appraisers for Fannie Mae and Freddie Mac secured mortgages. This was aimed at eliminating conflicts of interest suspected of inflating home values. Under HVCC lenders must contract with third parties known as appraisal management companies which then select the appraisers.

The National Association of Realtors (NAR), The National Association of Home Builders (NAHB) and other groups say HVCC appraisals under-value properties. In a release, the NAHB said more than a quarter “of builders are seeing signed sales contracts fall through the cracks because appraisals on their homes are coming in below the contract sales price.” HVCC critics say this is because lenders now have to use lowest bidder appraisers allegedly unfamiliar with local market conditions. Another interpretation is that the appraisers are setting prices that show actual – as opposed to hoped for – market conditions.

It is interesting to note that the complaints are carefully worded to imply the problem is with the appraiser and not with the seller’s pricing. As the NAHB put it: “Of those who are reporting appraisal problems, 54 percent said that the appraisal amount was actually less than the cost of building the home.” This is very different from saying the appraisal was wrong. Instead the claim is that the property is no longer worth as much as what it cost to build it. Is that really any surprise?

The NAR used some incredibly artful phrasing in a release: “Among Realtor® respondents obtaining an appraisal for a client, 55 percent reported a perceived decrease in appraisal quality.” (Emphasis added) It is also worth noting that the appraisers are protesting the new regulations because the management companies are taking a chunk of the fees that used to go to the appraisers. They say that paying lower fees means using “appraisers from distant locations with less experience and training, or more pointedly: those who will work for less."

In response to these complaints Freddie Mac issued rules clarification stating appraisers "must be familiar with the local market,” choose "appropriate comparable sales," and certify they are "most similar" to the property being appraised.

We do not require appraisers to use Real Estate Owned (REO), foreclosure or short sales. However, if the appraiser determines that these are representative of the properties available to typical purchasers for the market in which the property is located, appraisers must consider their use.

(PDF of letter available here)

So, yes the appraisers do have to consider all market conditions and not just those that push home prices up.