Cape Coral Florida Real Estate

Effort to Protect Consumer From Bad Appraisal Creates Havoc

Joseph Beauvais Exclusive buyers agent does not have the answer as to what can be done when getting a loan for a home in Cape Coral, Naples, Ft Myers, or anywhere in S.W. Florida.

Chris Griffith / Naples Daily News  / Friday, July 3, 2009

One of the many protective measures that evolved from the housing downturn is the HVCC – Home Valuation Code of Conduct.

It was developed by federal officials to protect consumers purchasing or refinancing homes by eliminating fraud and inflated appraisals. The effort was looked upon by some as little more than closing the barn door after the horses got out.

In a nutshell, mortgage brokers may no longer communicate with appraisers. The communication with appraisers is done strictly with the lender-bank though an “appraisal management company.”

This new code may sound great in theory but the ramifications since May 1, 2009, already have started to be felt.

Gone are the days when mortgage brokers can choose an appraiser on the basis of experience, professionalism or quality of their work. Appraisals are now awarded to whoever will work for the cheapest and fastest.

Here’s how it works: A consumer goes to a bank to get a loan. The bank collects $390 for an appraisal. Yes, the price for an appraisal has now gone up because the bank pays an “appraisal management company” about half of the $390 and the appraiser gets the rest. The best, most-qualified appraisers can’t afford to work at such a discount. The consumer has no idea that their appraiser is probably less-experienced, working at a discount and has often been hired just because they’re the cheapest and the fastest appraiser on the list.

Wait, there’s more. If you’re a consumer in the process of getting a loan with “Bank A” and your mortgage broker finds a better program or you are turned down for a loan with “Bank A,” your appraisal is owned by “Bank A” and not transferable. You’ve just thrown $390 into the wind. Another appraisal has to be ordered for your second lender.

This is affecting the consumers trying to refinance their homes, too.

In the past, mortgage brokers could contact an appraiser and get an estimate on whether a home would be close to the appraisal price before spending money on a full appraisal. Now, a consumer that would like to refinance will have to go through the appraisal process and pay for it regardless of the outcome of the appraisal.

What was meant to protect the home buyers and refinancing home owners is now hurting them by costing them more and dragging out the time to fund loans. It also means rate-lock extensions or longer rate locks, which result in higher interest rates.

There were and still are good, honest and reputable appraisers that didn’t rip anybody off during the housing boom. They’re now being punished and driven out of the business by a system full of flaws, including lack of transparency.

Instead of being rewarded for years of experience and professional conduct, appraisers are being undermined by the Wal-Mart effect caused by HVCC.

In the end, those who are affected the most are consumers who are shelling out more money for less service and the local, small business owners, which include independent appraisers and mortgage brokers who are being micro-managed out of business.

It’s quite obvious that there were considerable problems with the way that appraisals were done during the boom but the way that the system is functioning right now just isn’t working.

Appraisal Rules Under Fire
Ken Harney
Friday, July 03, 2009

WASHINGTON -- It's by far the hottest controversy in real estate this summer, and it could directly affect the value of your house -- probably negatively -- by tens of thousands of dollars.

The issue concerns lowballed valuations and the new rules guiding appraisers in both price-depressed and rebounding markets. Consider these snapshots of what's going on:

-- In San Diego, Steve Doyle, division president for Brookfield Homes, is trying to close out the final 20 houses of a 120-unit single-family subdivision. Prices range from $340,000 to $350,000. But recently there's been a major hitch: Appraisers assigned by banks are coming in with valuations $60,000 or more below Doyle's selling prices. The appraisers, who Doyle says are unfamiliar with local market trends, inexperienced or both, are using distressed sales -- foreclosures and short sales of existing houses -- as their "comparables." Some of the distressed properties are in poor condition, and all of them offer fewer amenities, according to Doyle.

-- In Wilmington, N.C., a loan applicant with a house in excellent condition, and an umblemished payment record, sought to refinance into a 4 3/4 percent mortgage. She had purchased the property four years ago for $160,000 and made about $20,000 worth of improvements in the interim. Her loan application, according to Paul Skeens, president of Colonial Mortgage Group of Waldorf, Md., was "a slam dunk. Nothing to it." The house was worth $180,000 to $200,000, according to a local realty estimate.

But when an appraiser with little local knowledge was sent in by a bank to value the house, he chose two short-sale properties that had both closed in the mid-$140,000 range, and one inheritance sale around $155,000. The last property was "in horrible condition," said Skeens. "I'd call it dog meat." The deal-paralyzing appraised value that came in for the cream-puff refi: $149,000.

-- In the suburbs near Cleveland, Enzo Perfetto, manager of Enzoco Homes, builds custom houses on clients' lots. Recently, according to Perfetto, banks have begun assigning appraisers from far outside the area to value lots as part of mortgage packages on new homes. Some of the comparables they use are foreclosure situations, and that depresses land valuations. A young couple who paid $75,000 for their lot recently had it valued at just $30,000 by an out-of-area appraiser who only looked at online data, according to Perfetto -- discouraging the young couple from proceeding.

"I think the pendulum is swinging way too far in the wrong direction on appraisals," said Perfetto. Bank-assigned appraisers often "don't know the local market and they're going for low numbers to be 'safe.'"

Complaints about lowballed appraisals -- from builders, realty agents, consumers and mortgage companies -- have erupted since May 1, when government-sponsored Fannie Mae and Freddie Mac put their new appraisal rules into effect nationwide. Critics charge the new system is fostering the use of appraisers willing to work for low fees -- sometimes 50 percent below previous standards -- and who are willing to conduct home appraisals far outside their typical areas of activity.

The Fannie-Freddie system -- known as the Home Valuation Code of Conduct -- is complicated by the fact that it is a byproduct of a legal settlement in 2008 between New York Attorney General Andrew M. Cuomo and the two government-sponsored mortgage investors.

Under the code, appraisers are now routinely assigned by appraisal management companies rather than being selected by local mortgage companies or loan officers. The management companies pocket as much as 40 percent to 50 percent of the appraisal fee paid by the consumer.

Frustration with the new system boiled over and made its way to Capitol Hill late last month. The National Association of Home Builders called for an immediate change in the rules governing the use of foreclosures, short sales and other distress transactions as comparables for appraisals on non-distressed, typical homes, whether new or resale.

Two congressmen -- Travis W. Childers, D-Miss., and Gary G. Miller, R-Calif. -- have introduced legislation calling for an 18-month moratorium on the appraisal code. In identical letters to James B. Lockhart, the top regulator of Fannie Mae and Freddie Mac, and Cuomo, the National Association of Realtors also requested a moratorium and complained that the code is raising consumers' costs, distorting property values and killing sales.

Asked for comment, Lockhart said through a spokesperson that his agency is "monitoring" the situation, and considers "the views of market participants important."

Bottom line: Be aware of the issue. It affects your equity, even if you're not currently buying or selling. And watch whether Congress fixes the problem.

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Whew! Big problems for buyers with loans and appraisals