Are the new home appraisal rules good for consumers?
On May 1st a new set of home appraisal rules called the Home Valuation Code of Conduct was put into effect by Fannie Mae and Freddie Mac in order to distance realtors and mortgage brokers from appraisers. This was put in place because during the housing bubble appraisal fraud was rampant and some appraisers felt pressured by realtors and brokers to hit the desired numbers. How is this affecting consumers?
The biggest change in the Code is that loan officers, mortgage brokers, or real estate agents can no longer have any role in choosing appraisers. The lender is responsible for choosing the appraiser and following the Code if they want to sell the mortgage to Fannie Mae or Freddie Mac. The lender could also accept an appraisal prepared for another lender if the other lender also followed the Code.
As a result of the new rule some lenders are outsourcing the selection of appraisers to appraisal management companies, and some say that this is increasing appraisal fees for consumers because these companies take a cut of an appraiser's fee. The appraiser has to increase his or her price accordingly to recoup the loss. Another critism is that these appraisal-management companies do not always choose local appraisers that know an area well. As a result some appraisals may be inaccurate.
Right now the National Association of Realtors does not like this rule very much and their chief economist Lawrence Yun said the following:"In the past month, stories of appraisal problems have been snowballing from across the country with many contracts falling through at the last moment." The NAR also sent legislators letters protesting this rule and it is also suggesting that regulators put an 18 months hold on the rule.
Bill Garber, the Director of Government and External Relations at the Appraisal Institute issued the following response to the NAR's complaints, "In a typical real estate transaction [such as a buyer seeking a loan], our clients are the lenders. Appraisers provide lenders with information that protects them from making questionable loans and investments and helps them minimize risk. However, that should not suggest a bias toward lower valuation. Appraisers reflect the market, and sometimes, the markets don.t act like we want them to or hope they will. Nonetheless, competent and professional appraisers understand this and develop credible estimates of value that ultimately ensure that lenders loan the proper amount, buyers don't pay too much and sellers get a fair price."
I think Bill Garber's response is right on the spot and lower appraisals are simply reflecting the market now. It is beneficial for consumers to get lower prices on homes, but I have also heard anecdotal stories of faulty appraisals where information such school districts and home size were wrong. It is very frustrating for home buyers and sellers when a low appraisal stops the loan process. If I were a home buyer in that situation I would probably check the appraisal report for errors first, because any factual errors can be reported to the lender. If the report seems to contain no errors then I would attempt to negotiate the price to be at the appraisal because I would not want to pay too much. I do not think that a low appraisal is the death of every single real estate transaction as long as everyone involved are willing to compromise.
In conclusion, I think it is a good thing if an honest and accurate appraisal shows you that you are willing paying too much for something. I think the new code does have some problems because it adds a layer of bureaucracy and pricing through appraisal management companies. However, this new process does remove a lot of bias in appraisals because it is a lot less likely that the appraiser chosen has a previous relationship with the real estate agent or mortgage broker involved in the deal. I am hoping that this reduces appraisal fraud by a great margin, and I think that is good for everyone involved in a real estate transaction.
What do you think of this new code? Have you faced difficulties in your real estate transactions lately due to appraisal issues?