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New Appraisal Rules: Another Gov’t Disaster

by admin on June 23, 2010

Background:  Ten-plus years of incompetent and/or nonexistent regulatory oversight of mortgage brokers and lenders resulted in several trillion dollars worth of bad real estate mortgages being sold to Fannie Mae, Freddie Mac and other investors on Wall Street. When huge numbers of those bad mortgages started to default, our banking and economic system started to collapse, and massive government bailouts were initiated to prevent widespread bank failures. In spite of the fact that Fannie Mae had a history of multi-billion dollar accounting fraud, in addition to their criminal mismanagement, Congress declared Fannie (and Freddie) to be the country’s “mortgage experts” — after their collapse required a government takeover. Taxpayers have paid $146 Billion so far to cover losses at Fannie and Freddie, and the Congressional Budget Office has predicted that the final bill could be $389 Billion.

After that lengthy track record of astounding incompetence, Fannie Mae and Freddie Mac announced their new Home Valuation Code of Conduct (HVCC) in May of 2009. The HVCC was a set of real estate appraisal rules that would apply to every loan that Fannie and Freddie purchased.

The new rules were created to prevent a repeat of the mortgage disaster by supposedly eliminating undue influence on appraisers by interested parties to a transaction. So instead of fixing the incompetent and/or nonexistent regulatory oversight of mortgage brokers and lenders (no audits, no prosecution for loan fraud, etc.), we now have a new set of rules. No audits or real oversight, just more rules. They were supposed to transform the mortgage lending business, and they have — the new appraisal rules are a disaster.

Here’s how the new system works: lenders charge homeowners upfront for their appraisal, then they place an order with an appraisal management company, who then solicits bids from appraisers for each job. Most appraisals usually end up being assigned to the lowest bidder, not the most qualified appraiser. And the management companies keep most of the appraisal fees, forcing appraisers to work for starvation wages. (Appraisers are typically paid $160 to $170 for an appraisal, while the management companies charge homeowners about $400. This is why the management companies are fighting a new rule that would force them to disclose the fees they are getting to homeowners.)

What the public isn’t told is that many major lenders have ownership interests in the new appraisal management companies. So the new rules were created to end whatever influence that Realtors, mortgage brokers and homeowners might have had on appraisers, and we now have mortgage lenders that are able to exert tremendous pressure on appraisers — and pocket huge amounts of money without any disclosure.

Appraisals done under the new rules are frequently disasters. Due to the drastic pay cuts that management companies have forced on appraisers, many have left the business. And the ones who are left (the ones willing to work for 60% less money) usually have to cover larger territories than before, which means that they are often performing appraisals in unfamiliar areas. This can result in shoddy, inaccurate appraisals.

Since appraisals are usually going to the lowest bidder instead of the most qualified person, appraisals have been coming in so low that many real estate transactions are being killed. New home builders have been victimized by appraisers using lower foreclosure and short sale comps on older homes instead of comps on similar new homes. Once again, shoddy and inaccurate appraisals.

Many Realtors have seen their transactions blow up right before closing when appraisals come in at significantly lower values. When Realtors discover that higher (valid) comps were not included, they try to get the appraisers to use those comps, but their requests are typically ignored.
There are several reasons that appraisers will typically refuse to update an appraisal with different (higher) comps. First, they are working for 60% less pay, so fixing and re-issuing an appraisal means even more work for less money. Second, they are afraid to turn in appraisals with higher values because they know that lenders want to see lower values and they have to keep the lenders/management companies happy or they will be out of a job.

To make matters worse, the new rules also prevent homeowners from getting another appraisal right away if they are not happy with the first one. They have to wait at least 60 days before requesting another appraisal.

There you have it, another wonderful new government fix for a govenment-created problem. And this fix has the added benefit of helping to drive home prices even lower, which means more foreclosures. Aren’t we lucky to have “the best and the brightest” running things?

{ 1 comment… read it below or add one }

1 Laguna Realtor July 8, 2010 at 11:34 AM

It’s tough to get appraisals to come in now a days. Appraisers are trying to protect themselves as much as possible. Most of the time buyers’ have to come up with more cash to make up the difference.

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