You’ve probably seen distressing news reports about the failure of the new home appraisal process (called the Home Valuation Code of Conduct) for loans eligible for purchase by Fannie Mae and Freddie Mac. It doesn’t apply to FHA loans or jumbo loans. Since the new system went into effect on May 1, 2009 it has sent home appraisals into chaos. Some deals are falling apart, and appraisers, loan officers, consumers, and real estate agents alike are complaining about the whole process.
The New Appraisal Rules
Under the old system, your loan officer would review a list of approved or known appraisers familiar with the location of the home and then choose one to schedule the appraisal. It usually cost the consumer about $300 and took about 3-5 days. The appraiser, the lender, and the real estate agents could all communicate with each other. Some large banks did use appraisal management companies (AMCs), but loan officers could still contact the appraisers assigned by the system. If your bank didn’t approve your loan, you could take the appraisal to another bank without paying again.
Under the new system, the loan officer can’t speak to the appraiser. Instead, the lender orders the appraisal from the AMC. The AMC assigns the next available appraiser in the geographic region. The appraiser conducts the appraisal and enters the report into the system within 24 hours. The appraisal is reviewed be a supervisor who may not be local. It is then sent to the loan officer.
Why the New System is Bad for Everyone
Consumers: the major reason this new system is bad for consumers is the cost. Instead of the average $300, it now costs at least $400. Ours cost $540 because our home is worth more than $500,000. In addition, we had to pay that up-front via credit card rather than pay it at closing.
Appraisers: Rather than receiving the bulk of the appraisal fee, most appraisers now receive $200 or less and have to turn it around faster. In addition, they may have to conduct an appraisal far outside of their area of expertise. In our case, the appraiser came from a different county, nearly 40 miles away.
Real estate agents: Real estate agents are concerned because the appraisals are derailing contingency periods, while REO sellers (banks) are pushing for shorter contingency periods. They’re also concerned that appraisals are coming in low. Low appraisals may be valid if they reflect the market, but they’re a problem if the low value is based on inaccurate comparables.
Lenders: Finally, lenders don’t like the new system because they’re cut off from the process. The loan officer can’t call the appraiser to check on a late report. If there’s a problem, they can’t contact the appraiser to have it corrected or supply more accurate comps.
I spoke to our loan officer today and he said about 2% of appraisals come in high. 70% come in on target. Nearly 30% come in low.
Our Appraisal Story
We’re buying an REO, which means the bank insisted on a 10-day contingency period for our inspection, appraisal, and loan application. Traditionally, appraisals are conducted before inspections to avoid wasting money if the appraisal comes in low. Initially, were going to have to do our inspection immediately because of the short timeframe, but the bank was slow to assign an escrow company, which bought us enough time to get the appraisal done first. Here’s the timeline from the day our offer was accepted.
Day 1: Offer accepted. Interest rate locked. Appraisal ordered.
Day 2: Updated financial documents delivered to complete loan application.
Day 3: Appraiser calls our agent to confirm appraisal.
Day 5: Appraisal conducted.
Day 8: Escrow opened. Contingency period starts.
Day 9: Appraisal returned. It came in exactly at our purchase price, and our file was sent to underwriting.
From what I hear, this was a relatively quick process. Some people wait 10 days or more to get an appraisal.
Why the New System Was Introduced
As we all know, there was fraud in the system. Washington Mutual had a cozy relationship with appraisers and would demand that they “hit the number” or risk not being assigned another appraisal. This led to the rapid increase in valuations, many of which were not sustainable or were tied to fraudulent loans.
New York Attorney General Cuomo threatened to sue over this fraud unless the new system he created was instituted by Fannie Mae and Freddie Mac. The irony is that Washington Mutual was using an AMC it owned. Furthermore, AMCs are unregulated. Independent appraisers are regulated. So he took a regulated system with some bad actors and replaced it with an unregulated system that does little more than reap massive profits for AMCs, most of which are owned by banks.
We were lucky. Our appraisal was returned quickly (but not without a week of stress for me.) The appraiser did a good job and pulled appropriate comps. Most of all, we can afford to pay the appraisal fee up-front. Although it will be credited back to us at closing by the lender, but we’ll have to pay our credit card bill before we close.
If you’re in the process of buying a home, you need to be aware of this new system and plan accordingly. You may also want to ask your agent to pull his or her own comps in case you need to make a case for your purchase price.