Many real estate agents and home appraisers are complaining that new rules for appraisers are having an unintended consequence — a lot of bad appraisals.
In a townhouse in Framingham, Mass., appraiser Ken MacDonough crawls up a folding attic stairway to inspect the underside of the roof for water damage.
Whenever somebody buys a house or refinances, somebody like MacDonough has to show up, measure the square footage, see how new the kitchen is, and go on a little safari hunt looking for problems. MacDonough, with his tape measure and pencil, checks the furnace room and the bathrooms, and describes his job this way: "It's just, don't miss anything."
Appraisals are a cornerstone of the housing market. But right now, many real estate agents and mortgage brokers are complaining that problems with appraisals are delaying sales and refinances. Many blame new regulations for tangling things up.
The National Association of Mortgage Brokers estimates that this is actually costing homeowners upward of $2.8 billion collectively, and says it definitely isn't helping the housing recovery.
Mortgage Brokers Upset
Paul Van Wart, a mortgage broker in Westwood, Mass., says that a lot of appraisals these days are coming in at values that are way too low. And he says they're often full of mistakes, which creates big headaches for homebuyers.
"The underwriter tears the appraisal apart," he says. That can lead to delays, missed closing dates; that means big fees for borrowers. For a $200,000 loan, it will cost a borrower $1,500 in fees to extend the rate for 15 days, Van Wart says.
Van Wart's colleague Nicole Ravino Rubino says she remembers one couple who was buying a house and planned to move in the next day. They had no place else to live. An appraisal problem got sorted just minutes before the closing deadline. "Of course, that infuriates everybody involved," she says.
A Code Of Conduct
Van Wart puts a big part of the blame on what's called the Home Valuation Code of Conduct, which went into effect in May. During the housing boom, some appraisers broke the rules. Mortgage brokers pressured them to inflate home values so the brokers could get more loans approved and make more money. And that left a lot of people stuck, having borrowed more than their house was worth.
The new rules in the code of conduct created a firewall. Mortgage brokers can't deal directly with appraisers. So these days, many lenders have turned to middlemen called appraisal management companies, which now hire the appraisers. MacDonough would often get paid $350 or $400 directly by the lender for each appraisal. But now, he says, the appraisal management companies often get that money. Then they turn around and hire the appraisers. They're a middle-man.
A Race To The Bottom?
The problem, he says, is that those companies will hire just about any appraiser they can find who will do the appraisal on the cheap — even if they don't know the area as well and have to drive 50 miles to get there.
"When they send an appraisal assignment to a dozen appraisers and say, 'Hey, the first guy who takes it for $200,' they're obviously bottom-fishing," MacDonough says. This practice is resulting in a "race to the bottom" in terms of quality, he says.
Appraisal management companies say they're not to blame. "The average tenure of our appraisers on our panel of appraisers is 13 years," says Don Blanchard, an attorney with Lender Processing Services, which works with 20,000 appraisers.
He says his company has good coverage and experienced appraisers.
Blanchard also says home prices are especially hard to value accurately right now. And he thinks some of the frustrations are due to falling home prices, not bad appraisals.
Meanwhile, regulators say they're working to tweak the rules, and lawmakers in Congress have introduced a bill to suspend the regulations.