Home appraisals come under more scrutiny
Homebuyers should be prepared for extra costs and delays as cautious mortgage lenders order stricter reviews.
Homebuyers and sellers who expect an appraisal to sail through to closing without a hitch may be surprised to discover that home appraisals today can be problematic. The reasons for the change are complex, but there's no question that mortgage lenders have started to demand more reviews and do-overs.
Rob Johnson, vice president of lending at San Diego Funding, a mortgage company in San Diego, attributes the increase in home appraisal reviews to lender-specific requirements imposed because of past problems with certain types of home loans. For example, a mortgage lender might demand more scrutiny of an appraisal if the borrower has a marginal credit score or high debt level relative to income or if the property was a foreclosure that was fixed up and flipped by an investor.
Appraisals may lag home prices
Home prices are also a factor. When prices are on the rise, perhaps because buyers have bid more in a multiple-offer situation, appraised values might still be lower. The reverse is also the case.
"Any time you have a market in transition, appraisals aren't going to keep up because the appraisal is based on historical data," Johnson says.
Inadequate "comps" can present problems as well. ("Comps" are recent sales of nearby homes that are similar, or comparable, to the home that's the subject of the appraisal.) The mortgage lender may deem the comps inadequate if the homes were too far away or were sold in such nontraditional circumstances as a short sale or foreclosure or if the sales occurred too long ago. If the comps aren't sufficient, the lender may order a review or second home appraisal to verify that they were chosen correctly.
"If (the appraiser) can't find three comps within that area and has to expand, that is where you start to get appraisal reviews or secondary appraisal requirements to make sure the appraisal was valid or that (the lender) was comfortable," Johnson says.
The term "second appraisal" generally refers to a new, start-from-scratch valuation. An appraisal review could be a "desk review," in which the appraisal gets a second look by an office-bound person, or a "field review," in which the appraisal is subject to another drive-by or in-person inspection of the property. A review is more common than a second appraisal.
New guidelines distance lenders from appraisers
Leslie Sellers, president of the Appraisal Institute in Chicago, says a lender might order a new home appraisal if the first one was based on factual errors or the appraiser wasn't competent in the area.
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Some second appraisals, he adds, result from a misunderstanding of the Home Valuation Code of Conduct, guidelines that were meant to prevent undue pressure being placed on appraisers to inflate home valuations, but that may have caused some lenders to cut off communication with appraisers.
"The banks are thinking they can't even talk to the appraiser," he says.
Sellers can offer comps to appraiser
An appraisal review can cost several hundred dollars while a second appraisal generally involves a second full fee, says Sara Schwarzentraub, owner of Inter-State Appraisal Service in San Diego. These costs usually are paid by the buyer.
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"It's commendable that the lenders are being cautious and having stricter criteria to protect themselves, because in the long term that protects everybody, but it does make it more costly," she says.
Home sellers can offer the appraiser information that might affect the appraiser's opinion of the home's value. This information is best handed over before the appraisal is prepared.
"If you know of a sale that's similar to your house and it was a foreclosure, short sale, divorce or anything of that nature, make the appraiser aware of that," Sellers says.
Real-estate brokers can help buyers and sellers find comps to offer the appraiser, Johnson says. If the broker believes comps may present a problem, the buyer and seller can plan accordingly.
"A good real-estate agent is aware of these issues. Many times, an agent will call us and say, 'I know we are going to have problems with comps on this," he says.
Neither the buyer nor seller can choose the appraiser, but Sellers says buyers can insist on a minimum competency, which he defines as having local market knowledge and being certified as well as licensed.
Buyers and sellers also can agree on longer time frames for the home appraisal contingency and closing date. Schwarzentraub says that asking for a 45- or 60-day closing, rather than 30 days, is not unreasonable.
Buyers are entitled by federal law to a copy of any appraisal for which they've paid a fee. Buyers should look over the appraisal and notify the lender of any errors that could have affected the appraiser's opinion of the home's value.
The lenders have eliminated most of the "ethical" and good appraisers during the last two decades (read: since the last crisis "savings and loan meltdown"). In that financial crisis, lenders blamed the appraisers, hence State Certification. The root of the problem is the compensation method lenders use to pay their employees. A base salary of $10,000 and a commission, IF THE DEAL CLOSES. That makes the "Account Exec" working for himself and not the lender, hence most of the fraud that took place in the last decade. This time the lenders blamed it on the Mortgage Broker, hence HVCC. Start to see a pattern here? Lenders now use BPO's (Broker Price Opinions) and AVM's (Automated Valuation Model) for foreclosures and short sales, a cheap, fast, and highly inaccurate estimate of value. Because of lenders fraudulent lending practices in the past, and rising home values, several generations of lenders and consumers have grown accustomed to cheap and fast estimates of value. It didn't matter if it was accurate, the rising home prices took care of inaccuracies. So now we expect the same, same. Not so, we need to go back to when appraisers were valuing property correctly (read: old school). AVM"S and BPO's are the problem, not the solution, and lenders need to get back the good appraisers. The ethical appraisers won't do lender work because of all the fraud that was going on.
The home owner has the control. Force the lender to do quality work or go somewhere else, lenders are pretty hungry right now. BEWARE THE LENDERS APPRAISER, those are the "make the deal work" crooks that got us in this mess.
Kandhall is correct. Many appraisers have been priced out of their profession. I know a very competent, intelligent, hard working one with a decade of experience that just couldn’t compete anymore. I was in a position to see every part of the process. I would say some appraisers got screwed, some were just whiney babies who had their way for a long time and didn’t like sharing, and others just unfortunately weren’t able to adapt quickly enough to a changing industry. The new 100 mile appraisal crap needs to be dealt with though. You can’t have a solid appraisal if the appraiser has no knowledge of the local market. There has to be a solution.
Toto111etc: No, it won’t. A comp must be a transaction which is based on the full market value of the property exchanged. “Court step” sales do not have the proper market exposure to warrant that level of comparison.
I worked for a major bank underwriting home loan appraisals in 2009 and dealing with home loan document accuracy in 2010. I have dealt with thousands of transactions. I am also certified to teach economics. To answer some of your issues:
Disgusted 493: depends on when it happened. For much of 2009 there were record levels of appraisals in the U.S. system (our bank had 50000 waiting to be reviewed when I was hired). 2 mo. is much more reasonable than the 4-6 mo. many people had to deal with. Purchase price determines value. That is a fundamental concept of economics. A widget is worth $5 if someone will pay $5 for it, how much it costs to create can be irrelevant. A valid market price is determined by consistency in prices of similar goods. So if several people will pay $5 for that widget, well then it seems reasonable to assume that its value is $5. What you’re requesting is an appraisal based on Cost. These USED to be acceptable for appraisals, but give the SUPPLY of homes is so high, you can not currently use cost as an acceptable measure of VALUE (nor is it really the best way even if supply and demand are in balance). There are quite a few people who make sure the appraisers do their homework.
Mtgeman is correct on many of his points. But I would contend that there IS a value in creating AMCs, as the appraisal process was poorly managed in many respects in recent history, (as evident by the largest home market crash in 100 years). However it is also creating new problems which he has outlined well. I would say we need to be patient and vigilant. Making sure another crash doesn’t happen is something worth paying a little extra money up front for, at least for now.
I would offer the same advice to backstabbed159, patience and vigilance, and I would offer my empathetic support as well. The process didn’t work like it was supposed to. Partially because it was needed so badly it was rushed, partially because some banks just did a crappy job, partially because there weren’t enough trained people to deal with it. I was one of the first underwriters in the country to specialize in underwriting those loans. Neither the government nor the banks moved enough resources quickly enough to deal with the issue. But remember they’re only human, and I can attest that many people at the banks were just completely overwhelmed with the new workload.
Altit: the underwriter is REQUIRED to operate by certain rules. We do have some leeway, but not on your first appraisal issue. Upper management decides what percentage is “acceptable” when the sales price of the home is above the appraised value. At the bank I worked for it was generally a max of 5%. You are WAY above that with your $100k/$130k at 30%. As the underwriter for that appraisal situation my choices are: request a new appraisal, turn down the loan, or pass it and be fired. Absolutely, unequivocally. The 27 foot difference thing in and of itself should not have required a new appraisal however. It DOES need to be correct, but the underwriter has quite a few way to easily deal with something like that without causing you, the customer, money or a hassle. The 2nd appraisal was rejected for the value again, not the footage. At least that was the main reason. No offense, but the bottom line is, 2 professionals said the home was worth $100,000. 1 said it was worth $135,000. The underwriter didn't do a bad job for you given that information, sounds to me like they bent the bank over backwards to get you into your home. The bank gave you $135,000 for something worth maybe only $100,000. You were lucky, be grateful.
There is double talk that is coming from "Con-gress", saying we want to "help" the average american to buy or to refinance. However, with the new Home Valuation Conduct Code (HVCC) that New York's Cuomo pushed and got passed, allows Lenders who are supposed to distance themselves from appraisers, actually own the Appraisal Management Companies (AMC). What used to cost the borrower $225 to $350 is now costing $445, and the actual appraiser who is doing the work is getting $225-300, so the (AMC) gets this management fee for just ordering the appraisal. And the appraisers that are taking these jobs are mostly not from the area, having to drive almost an hour's distance and not having all comparables available, because the lack there of to share with their competitors. So the house is no longer appraising and it is taking longer to accomplish, and more transactions are falling thru the wayside.
We went from one extreme of no verifying income and property inspection waivers to extreme scrutiny and just not using common sense.
It's sad when a borrower wants to refinance 200K balance and the house appraises for 800K, has 800+ credit scores, and over half million in the bank, and is turned down because the houses in that price range are taking over 2 years to sell and the comparables are 15 miles from each other. How about using some common sense lending? The underwriter told me due to the HVCC rules they are bound and helpless. She told me that "there will be no recovery in housing as long as things are the way they are now."
My husband and I bought our first house 2.5 years ago. The underwriter we ended up with was a real B*&#! and we had to have 3 appraisals done. The first one was rejected because the person we bought the house from had bought it as a foreclosure and flipped it. He paid 22,000 for it and we were buying it at just over 100,000. It was appraising around 135k. The underwriter said that was too much of a difference and ordered another one. She rejected the second one because there was a 27 foot difference in total square feet between the first and the second appraisal. Looking at it later, I think the second appraiser had a moment of dyslexia and accidentally inverted the last two digits of the total square footage (1663 vs 1636 is a difference of 27). But, the appraised value was only about $1000 different from what the first one came up with. So, she ordered another one. This one was accepted. He came up with 1660 for final square footage and appraised at $130,500. But, an expense I was expecting to be $400 turned out to be $1300 because some underwriter was PMSing.
Appraisals now take a lot longer to process due to the added federal and lender specific requirements; however, many of the "extra" items expected have little to do with the development of a reliable value opinion. Appraisers are expected to provide the additional data which adds time to the process but also deliver the finished product in a shorter amount of time (and at a the same or lower fee charged before these new guidelines were implemented). Lenders can no longer order appraisals directly from the appraiser of their choice and must use third party management companys to order appraisals. By the time the request is in the hands of the appraiser 1-2 days worth of time has already ticked off the clock. These management companies often charge the lender an exorbitant fee for their service of which in most cases the person actually performing the appraisal receives less than half. So the appraiser spends more time on the report itself, has to turn it around in less time, and receives less money for his/her efforts. Many appraisers have quit the industry because this is untenable and the result is there are fewer appraisers to spread the work around to which leads to appraisers covering larger territories which leads to the possiblity of having an assignment in an area he/she isn't very familiar with. It's time to stop making the appraisers scapegoats for everything that has gone wrong. Like any industry there are good diligent people and bad apples. The added scrutiny isn't resulting in better appraisals.