There was an article by Reuters’ Linda Stone yesterday that I wanted to draw your attention to. It highlights a lot of the ongoing problems with home appraisals that we have been discussing over the past several months. Since the collapse of the housing bubble, there has been a trend toward conservative underwriting and conservative appraisals. In many ways this is a natural reaction to the lax standards that were one of the reasons for the bubble in the first place. Some people feel that there has been an over-reaction, and appraisals and underwriting standards are now too conservative.
Here’s a snippet, I recommend reading the whole article:
“WASHINGTON (Reuters) – Aaron and Beth Stiner are renters, but not by choice and not because they can’t afford to buy a house. They had a move-up home in Phoenix selected and good credit scores. They even had buyers lined up for the home they were selling. Then they entered appraisal hell.
The first appraisal on their chosen home came in at $295,000, a figure that both the Stiners and the sellers agreed upon. The lender didn’t like it, and ordered up a second appraisal. Based on comparable homes that were in a different neighborhood, the new appraisal came in $25,000 lower — too low to allow the loan to go through.
They switched lenders and got another appraisal that, at $290,000, would have allowed the deal to go through. Their new lender was skeptical, and ordered up another appraisal. At the same time, the home they were selling was appraised three times, with each subsequent valuation falling”.
If you are unfamiliar with the situation, a little over a year ago a new system governing appraisals was adopted by the real estate industry. The new system was called the Home Valuation Code of Conduct (HVCC). It was designed to increase appraiser independence from interested parties in a real estate transaction. The new system caused a lot of problems, and is due to be replaced by a new system created by the Federal Reserve. The new system is complex, but the new rules address: coercion and prohibited extensions of credit, conflicts of interest, and fair compensation for appraisers, among other things (click here for complete rules).
With luck the new system will be better implemented than the HVCC. One thing that the new system does not address is one of the biggest issues in home appraisals today, and that is the impact of foreclosed and distressed properties on the value of non-distressed, “regular” homes.
Appraisal values are typically determined by looking at the sales prices of comparable properties in similar neighborhoods. The problem is that the spate of foreclosures and short sales over the past three years has skewed those values, especially in neighborhoods where distressed properties are prevalent. When the large number of distressed property sales is coupled with the generally low volume of home sales, situations occur where the only comparable recent home sales are distressed properties. This serves to drive down the value of “regular” homes. This creates a self-reinforcing whirlpool that drags down property values. The new rules do nothing to curtail the price impact of foreclosed and distressed properties, and this is arguably an area where appraisers need the most guidance.
This is also creating a situation where home sales contracts arecancelled and delayed. According to the article National Association of Realtors research says that ten percent of agents had contracts cancelled because of low appraisals, while 13 percent had home sales delayed, and 16 percent had to renegotiate sales prices due to low appraisal figures.
This adds up to a loss of time and money for borrowers and lenders alike. How do you think this situation be handled to most provide the fairest possible home values? Let me know in the comments section below.
Loading ...
Trine Nelson
October 4, 2011 @ 10:26 pm
I am a homeowner that has been a victim of the over correction of home values following the housing bubble burst. I understand that I will never see the $830k investment break even, yet valuing my home at $390k is pure lunacy. I won’t bore you with the resons why, unless you contact me but I sure want to know how I can protest this gross error and how I can make a change in the process of appraisals. Another question I would like answered is, why do mortgage lenders not have mal practice insurance? My husband is a CPA he has it. Pays thousands of dollars annually, and has never had to use it. I say, lenders should be audited, let’s say biannually or even every 5 years, the munber of loans that the company makes that end up in default for one reason or another, indicates that this lender is taking to great a risk, allowing the system to crash and the lender to make a profit that is unjustifiable. We will then see a surprising change in practices that will change the way they make money I am sure of it. Accountability is what is missing.
Reply
April Keown
February 22, 2012 @ 11:28 am
I am a potential home buyer and this issue is wrecking havoc on my home-buying process. I am angry because bank are literally taking legal action against appraisers if they lose money on a foreclosed home and can shift blame that direction. As a result, the appraisers are purposely downgrading home values, causing home prices to continue to drop instead of rebounding. This kind of practice led to a home I planned to buy being appraised for $58,000 when it had been appraised at $107,000 in 2007. I could not even build this home for less than $85,000 and now I may lose it because my counter offer for the appraisal price was accepted, then Fannie Mae reneged after I signed my copy of the amendment. Worse, they are trying to offer it to another buyer as we speak in hopes of getting closer to my original winning bid.
Reply