Appraisal Roulette

Beginning May 1st, a new policy was put into place by Fannie Mae & Freddie Mac designed to make appraisals more impartial and immune from bias. Before this, lenders (including banks, Mortgage Companies, and Mortgage Brokers) had their own appraisal contacts that they would use for appraisals on loans. Lenders learned over time who the best appraisers were, and used them regularly. They screened appraisers for responsiveness, accuracy, and flexibility in transactions. Appraisers have lots of data available to them, and part of the appraisal process is using judgement to arrive at the appraised value of the property. Unfortunately, there were lenders who abused this close relationship with their appraisers, pressuring them to appraise properties at unrealistic prices in order to complete the transaction, or at worst fraudulently inflating an appraisal for financial gain (not a good idea unless you like wearing orange jump suits and making license plates).

Now, federal regulators, along with Fannie Mae & Freddie Mac, have instituted policies designed to sever the connection between the lender and the appraiser. All appraisals must now be ordered through a 3rd party Appraisal Administration Company, who will then order the appraisal on the lender’s behalf. This eliminates direct contact between the lender and the appraiser, with the aim of eliminating undue pressure and influence on the appraiser from eager lenders. While this is a noble goal for federal regulators and mortgage investors, it is having some effect on real estate transactions locally, including:

* Longer turn around times on appraisals. Because appraisers are no longer dependent on a good working relationship with certain banks, they are under less pressure to turn around appraisals quickly. We are already seeing appraisals take significantly longer in most transactions

* Increased cost of appraisals. Now that there are these 3rd party appraisal administration companies, they need to be compensated. This is adding to the cost of the appraisal, and guess who gets to pay it? The consumer.

* More appraisal volatility. Appraisers now are like a box of chocolates… you never know what you are going to get. While in theory these 3rd party appraisal companies screen their appraisers to make sure they are competent in the areas they will be appraising, there is no guarantee. What is to stop an appraiser who is based in Turloch for example from doing appraisals on the Peninsula? There are limits to how much local knowledge an appraiser can have, and the further away from their home base they go, the less understanding of the local market they will have.

* More sales falling through. While federal regulators and the large mortgage investors want to see very conservative appraisals, the ripple effect is that more sales will have a hard time appraising at the sales price. This leads to more transactions falling through, as buyers are reluctant to pay more than appraised value for a given property. And while many lenders have instituted an appeal process in the event of a low appraisal, it still makes the buyer uncomfortable.

Just another thing to worry about. Now, back to the recovery…