August 2009: Get Real

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August 2009: Get Real

The biggest real estate kerfuffle of the summer—lowball appraisals.
 
Many Charlottesville homeowners have had to shelve or cancel plans to refinance or sell their homes due to appraisals coming in much lower—sometimes as much as 12 to 15 percent—than expected.

Why is this happening? Two reasons, explains Bill Hamrick, vice president and branch manager of C&F Mortgage Charlottesville, who sees lowball appraisals as a growing concern among Charlottesville homeowners.

Number one, government-sponsored mortgage investors Freddie Mac and Fannie Mae put new, highly abstemious appraisal rules into effect nationwide on May 1. The new rules are designed to curtail laissez-faire lending practices and freewheeling home valuations that fueled the housing market crash.
 
Number two, “Many appraisals conducted during the boom were inflated to begin with,” says Hamrick. “So a lot of these ‘lowball appraisals’ people are talking about may actually be a more accurate reflection of a home’s real value.”
 
Under the old rules, a homeowner seeking to sell or refinance a home would tell his real estate agent or lender what he thought the house is worth—say, $300,000. The agent or lender would run this number by an appraiser, the inference being this was the target number needed for the sale or loan to go through. If an appraiser came back with a valuation of $270,000—less than the target—the parties involved would obviously want to reconsider doing future business with this person. So it was in the appraiser’s self-interest to manipulate the numbers to better coincide with the target valuation. Not surprisingly, values became inflated. Enter the mortgage meltdown.

The new rules—outlined in a document called Home Valuation Code of Conduct which can be found at freddiemac.com—seek to eliminate the cozy relationship that existed between sellers, mortgage brokers and appraisers.
 
No longer are mortgage brokers allowed to order an appraisal or influence an appraisal report. Indeed, the new code prohibits mortgage brokers and real estate agents from taking any part in the selection of appraisers at all. Critics charge this has led to lenders outsourcing the selection of appraisers to independent appraisal-management companies, who assign appraisers with little to no knowledge of neighborhoods in question.
 
What’s more, appraisers are using short sales, foreclosures and other distressed properties as “comparables,” which distorts property values further. “Banks have suffered huge losses, so they’re leaning on appraisers to be more cautious,” says Hamrack.

What to do if an appraisal comes back less than expected? Unfortunately, right now, not much, says Hamrick.

Last week, the National Association of Realtors urged Congress to pass a bill that would impose an 18-month moratorium on the new appraisal guidelines. The issue is still being debated in Washington.
 
In the meantime, Freddie Mac issued another round of guidelines for lenders (and homeowners) aimed to encourage fair and accurate appraisals. Among their recommendations: utilizing only appraisers who are state licensed and show adequate knowledge of a neighborhood in question.

 

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