Faulty Appraisals Maybe Adding To Real Estate Woes
Thursday, June 25, 2009
By AUBREY COHEN
SEATTLEPI.COM STAFF
Are new appraisal rules holding back the nation’s real estate markets?
Lawrence Yun, chief economist for the National Association of Realtors, sure seems to think so. And local real estate professionals agree.
“Some contracts are falling through from faulty valuations that keep buyers from getting a loan,” Yun said in a news release Tuesday, blaming appraisals for May sales totals that did not increase as much as analysts expected.
The Home Valuation Code of Conduct, which took effect May 1, cuts off people responsible for originating mortgages from the appraisal process.
The code is a deal between New York Attorney General Andew Cuomo and government-owned Fannie Mae and Freddie Mac, which own or back most U.S. house mortgages. It aims to prevent pressure on appraisers to hit predetermined values — pressure that many blame for helping push home prices to unsustainable heights in many areas.
But industry professionals have criticized appraisal management companies, which many have used to comply with the code, as doing a poor job.
“Lenders are using appraisers who may not be familiar with a neighborhood, or who compare traditional homes with distressed and discounted sales,” Yun said. “In the past month, stories of appraisal problems have been snowballing from across the country with many contracts falling through at the last moment. There is danger of a delayed housing market recovery and a further rise in foreclosures if the appraisal problems are not quickly corrected.”
An online petition calling for the reconsideration of the Home Valuation Code of Conduct has accumulated more than 37,000 signatures, according to Think Big Work Small, a mortgage industry training company that launched the petition June 1. The company aims to get 100,000 by July 30 and then deliver the petition to policy makers.
Adam Stein, executive vice president of Cascade Pacific Mortgage Co., in Auburn, and a past president of the Washington Association of Mortgage Professionals, called the impact of the Home Valuation Code of Conduct, known by its acronym HVCC, “a nationwide financial pandemic” that’s costing customers 20 percent to 25 percent more for poorer appraisals.
“Literally, while I wrote this, we just lost a transaction in Oregon due to an HVCC appraisal,” he said in an e-mail Tuesday. “There was no communication to the borrower, or lender, that the appraisal would come in short of the tax-assessed value, Zillow value, or borrower’s estimate by $50,000 (a common courtesy extended by many appraisers in the old days). In this case the borrower simply got the privilege of overpaying for an appraisal that did nothing for them by an appraiser who’s qualifications are completely unknown.”
Poor appraising is hindering many purchases and refinances, said Jason Bloom, chairman of Elliott Bay Mortgage in Bellevue and the state Mortgage Broker Commission and president of the Washington Association of Mortgage Professionals. He said the association “believes that HVCC should be immediately suspended.”
OK, Stein and Bloom didn’t like the Home Valuation Code of Conduct in the first place.
Richard Hagar, a Mercer Island appraiser, anti-fraud educator and code supporter, said he thinks the code itself is fine and helping ensure better appraisals in many cases. But he also agreed that increased reliance on appraisal management companies is resulting in bad appraisals that are killing potential sales.
A big problem is that the companies are charging $500 appraisal fees, but only paying the appraisers $175 of that, Hagar said.
“They are looking for nothing but faster and cheaper,” he said. “We have appraisers from Tacoma driving to Everett and Ellensburg because they are the cheapest appraiser they can find.”
The problem is that a Tacoma appraiser generally won’t have the necessary familiarity with local neighborhoods.
Hagar cited cases of appraisers inappropriately using foreclosures as comparable sales and using comparable sales for unsuitable neighborhoods; appraisal management company employees claiming, wrongly, that they’re not required to follow federal guidelines; and companies illegally using review appraisers that are based not only out of the area, but out of the country, in the Philippines.
Hagar said appraisal management companies are telling lenders the code requires use of such companies, which is not the case. For instance, Mortgage Master Service Co., in Kent, created its own, separate appraisal department, according to Rhonda Porter, a loan originator with the company.
But even Porter had one transaction held up for more than two weeks because of an appraisal management company review, jeopardizing the transaction’s interest-rate lock.
“It’s creating havoc for people who are trying to sell their homes and not allowing some homeowners to refinance at lower rates (possibly preventing a future foreclosure),” Porter wrote in an e-mail.
The biggest problem is that an Independent Valuation Protection Institute called for in the code hasn’t been created yet, Hagar said. The institute, as envisioned, would run a telephone line and e-mail address to receive complaints about code violations and publish and promote best practices for independent valuation.
The institute would ensure bad appraisers would be caught more quickly, Hagar said. “I’m just seeing quality going to hell again.”
