New lending laws complicate home appraisal process

Tampa lender Don Pratt of PA Mortgage recently had a client order two appraisals for a $300,000 home he was interested in purchasing. The appraisals - independent judgments of the market value of the same home - valued it less than the sales price, one by $30,000, the other by $15,000.

The appraisals were so far off the sale price that the owner pulled out and the deal fell through. Pratt's client was out $650 for the cost of the appraisals, frustrating Pratt and the client alike.

"We'll never get these home values moving back up in the right direction or stabilizing with this type of direction," Pratt said. "You tell me how that's going to benefit the buyer and the seller?"

The source of Pratt's irritation is new appraisal regulations that went into effect May 1. The Home Valuation Code of Conduct is an agreement between lenders Fannie Mae and Freddie Mac - which combined own about 70 percent of the nation's residential mortgages - to buy only loans from homes appraised under that code of conduct.

Under the guidelines, brokers can no longer order appraisals directly through the appraiser of their choosing. Instead, a third-party appraisal management company (AMC) must act as a firewall. As a result, appraisal fees are on the rise, some by as much as 50 to 70 percent. The goal is to prevent brokers from choosing appraisers who they believe will inflate a home's value to an arbitrary amount set by the banker, something many say contributed to the current subprime mortgage crisis.

However, there is growing concern in the industry that appraisal management companies are selecting their panel of appraisers based on price and quick delivery guarantees rather than expertise in the local market. As a result, some appraisers are assessing the values of homes in markets unfamiliar to them.

"The net result is that lenders can't select appraisers based on their expertise, knowledge of a particular area, or professionalism," said appraiser Michael Gann, of Isaacs & Isaacs Appraisals Inc. "Certain assignments and/or certain markets require expertise and experience that not all appraisers have. Now, the lenders rely on third parties - often, nationwide companies with no understanding of local conditions - to make these decisions."

In addition to paying more, consumers also are being asked to pay for the appraisal up front, instead of the fee being worked into the loan closing costs. If the deal falls through - or a better deal becomes available - they'll have to pay for the unused appraisal as well as having to pay for another appraisal.

Recently, Congress took action, with Reps. Travis Childers, D-Miss., and Gary Miller, R-Calif., introducing legislation requesting an 18-month moratorium on the conduct code. The National Association of Mortgage Brokers, which estimated the code's rules would cost consumers $2.8 billion a year in extra fees, released a statement applauding the move.

Not every loan is affected by the code; the old appraisal rules still apply for FHA-backed and other non-Fannie and Freddie loans. Homeowners can also still order their own appraisals to assess their home's value before testing the market.

Trent Johnson, a mortgage broker at Cascade Financial & Co., said his company stopped doing conventional loans in order to avoid the conduct code restrictions.

"Over the years, brokers established relationships with appraisers," Johnson said. "The ones I had could get me an appraisal within a day or two and provided updates of the status. Now, you don't have that contact with appraisers. You just don't know."

Managing your appraisal

Check the appraiser's licensing and certification: The Home Valuation Code of Conduct requires that all appraisers be licensed and certified in the state of the property they are appraising. Check with your state's appraiser regulatory agency to view your appraiser's status and any disciplinary measures. Go to www.myfloridalicense.com/wl11.asp.

Ask questions: When the appraiser calls to schedule the appointment, determine how familiar he or she is with your market area. If you are uncomfortable with the appraiser's level of knowledge, let your lender know immediately and request a different appraiser.

Be prepared to accept the appraisal: Consumers have very little recourse in disputing the value of an appraisal. The lender has the discretion to challenge any appraisals, not the mortgage broker, but in most cases, lenders are not allowed to obtain a second appraisal to dispute a value.

Consider other options: If an appraisal comes back lower than you expect, as a buyer your primary recourse is to find another lender and pay for another appraisal. Use information from the first appraisal to make any specific home repairs or improvements that could help increase the value. Also, buyers can still pay whatever they want for a home, but any difference between an appraised value and a higher sale price would have to be made up in cash.

Get a copy: Your lender is required to provide you with a copy of the appraisal. Be sure to ask for one so you can review it and make a timely challenge to any errors, if needed.

Voice your concerns: The Federal Housing Finance Agency has called on the National Association of Mortgage Brokers to collect data from consumers and real estate professionals who have had problems related to the conduct code, including increased costs, appraisal quality, portability and regulatory issues. To learn more, go to www.namb.org/namb/HVCC_Resource_Center.asp.