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Buyers, Sellers, Appraisers Damaged by New Home-Appraisal Policy

July 31, 2009 03:49 PM
by Anita Gutierrez-Folch
A new rule that puts appraisal management companies between brokers and appraisers is threatening to put appraisers out of business, hurting home buyers and sellers in the process.

Tough Times for the Real Estate Industry

A new home-appraisal rule that went into effect May 1 has caused commotion in the real estate industry. As San Jose Mercury News reports, the new rule—known as HVCC (Home Valuation Code of Conduct)—aims to “reduce the possibility that brokers and lenders would pressure appraisers to raise house values to match sale prices, regardless of the true value.”

According to Mercury News, the new rule attempts to prevent fraud by “forbid[ding] brokers from hiring their own appraisers and requir[ing] intermediaries—called appraisal management companies—to choose them instead.” This clause has significantly reduced business for independent appraisers while “pushing up fees and derailing sales” at a time when the market isn’t strong enough to withstand it. 

As a result, there’s been a significant drop in appraisal values, which in turn prevents buyers from obtaining loans and derails sales. According to a Mercury News editorial, after the rule took effect, “the average appraisal has come in $13,000 below the sale price agreed upon by the buyer and seller.” Apart from increasing the difficulty of the lending process, the rule adds additional management company fees that hurt both clients and appraisers.

The new rule, which affects all loans backed by Fannie Mae and Freddie Mac, creates a disconnect between lenders and appraisers that doesn’t protect home buyers or sellers; neither does it help spur the housing industry. According to Matthew Moran, owner of Interstate Appraisal Services in Massachusetts, a better way to protect appraisers from coercions would be to have more random audits of appraisals, “looking for the originator who has every loan ‘make the number.’”

Reactions: Real estate industry up in arms

The new rule has elicited strong reactions from government officials and industry organizations. As Mercury News reports, many appraisers have signed a petition asking for a repeal of the rule. Republican Rep. Gary Miller of Southern California has also joined the cause: He is calling for an 18-month moratorium. According to the Mercury News editorial, some industry organizations are taking a more direct approach, asking government lending agencies such as Fannie Mae and Freddie Mac to abandon the rule altogether.

Background: The appraisal process

Appraising a property helps to determine its worth, and can also be useful for tax purposes and mortgage insurance. Domania offers a list of FAQs about the appraisal process, how it works and its overall function. According to Domania, appraisers come up with their values by “analyzing market data, including both historic and current comparable sales, current offers, pending sales, and proposed improvements.” They also compare individual properties to the broader market in the area.

It’s interesting to note, however, that property valuations may vary significantly due to different appraisal techniques. For instance, “a complete appraisal that includes an interior inspection might vary from a drive-by appraisal, which wouldn't provide accurate information about the updates, features, or condition of a property,” Domania explains.

Still, making an appraisal is a complicated process. According to Moran, the appraisal process is an art rather than a science. It takes multiple variables into account and even considers the buyer’s emotional response to the property.

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