It used to be so simple. Your bank or real estate agent would call a trusted local appraiser who would estimate your home’s value. And that was it. Deal closed. |
But a new set of national rules has now made it much tougher to get an appraisal.
One Waukesha County broker – who spoke only on condition of anonymity – estimates the new rules are killing 25 percent of all potential sales. Brokers are alarmed, but reluctant to complain openly, for fear of getting blackballed by lenders or other officials.
The new Home Valuation Code of Conduct went into effect last May, the result of a lawsuit brought by the attorney general of New York. The suit argued that real estate agents and mortgage lenders often colluded with appraisers, telling them what value they needed to qualify a property for a particular mortgage. That practice, lawyers argued, contributed to the housing bubble by artificially pushing home valuations higher.
In the settlement, two quasi-governmental agencies, Fannie Mae and Freddie Mac, agreed to new rules micromanaging the relationships of real estate agents, homebuyers, bankers, mortgage brokers and appraisers. Now, real estate agents and mortgage lenders must rely on an impartial middleman to randomly assign an appraiser from an ostensibly qualified pool.
The action affects Wisconsinites because Freddie and Fannie are the secondary market for many, if not most, local mortgages. (FHA mortgages are exempt at the moment, and that is suddenly increasing their popularity.)
Under the new rules, brokers complain, a “qualified” appraiser may come from outside the metro area and know nothing of the nuances of the local market.
Many appraisers are now so afraid of appearing to be in collusion with real estate agents or lenders that they intentionally lower appraised values. The new rules are pushing prices even lower in an already deflated market.
With sales volume extremely low, it was already difficult to find the required three comparable home sales within the previous 90 days. Now, experts say, because appraisers are unfamiliar with the markets they’re working in, fire-sale prices of foreclosed homes are finding their way into the mix, driving appraisals down further.
Particularly affected are higher-priced homes with jumbo loans (those in excess of $417,000) in Ozaukee and Waukesha counties, says Bill Druck of the appraisal firm Chudnow Druck Lauenstein.
Many real estate agents and lenders have to rely on new clearinghouses (called appraisal management companies) to randomly assign an appraiser. But those appraisers must split their fees with the management company. Because of that, many local appraisers refuse to work for them. Druck says there’s now an oversupply of appraisers from Northern Illinois who have gotten reciprocal licenses to work in Wisconsin.
Appraisers working for the pools sometimes try to make up for their lower fees by doing more appraisals, warns Judy Hearst, regional vice president of Coldwell Banker Residential Brokerage. That often results in overlooking details like upgraded materials and recent improvements. “It is extraordinarily difficult to see what’s different about an individual property,” she says.
If an appraiser misses something – even something as obvious as an addition – neither the real estate agent nor the mortgage broker can point it out because any contact with the appraiser
is illegal. But appraisals that ignore subtle differences in properties, such as square footage, materials, the number of bathrooms or enhanced closet space, can squelch a sale that should have closed.
The only remedy for an appraisal that comes in too low to qualify for the required financing is to obtain a second appraisal at added expense. But there’s no guarantee it will be any better, and it can delay the closing or jeopardize financing.
The new rules also affect mortgage refinancing. Take the case of one Mequon homeowner looking to refinance an adjustable rate mortgage. The first appraisal she got came up $100,000 short because the appraiser used comps from newly built subdivisions instead of her more established one and didn’t look at improvements she’d made.
She walked a second appraiser through her house, pointing out the high-end materials and special features she’d installed, and she researched the comps herself so she could point out the ones that were more relevant. The appraisal came in where she needed it to be – but by then, the financing had fallen through, so this homeowner, like many, had to start over.
The old system, it’s now clear, had serious problems, but are the new rules too stringent? The U.S. Senate is now considering legislation to postpone the new code for 18 months. In the meantime, a real estate market that’s trying to rebound is getting stifled by the new rules.
