Wednesday, August 19, 2009

WSJ: New Residential Appraisal Rules Flawed

The Wall Street Journal chimed in on the current debate over new regulations governing residential appraisals

Since May 1, a Fannie- and Freddie-mandated appraisers’ code of conduct has been in place, in which loan officers, mortgage brokers and real estate agents no longer communicate with appraisers on a transaction.

The goal? To prevent these parties from influencing appraisers and over-inflating real estate values.

Under this new code of conduct, banks now outsource their appraisals to appraisal management companies, which take a 40% or often greater cut of the appraisers’ fees.

Appraisers’ incomes have plummeted, sending them to the far reaches of their regions – often outside their area of expertise – to perform appraisals.

The result? Appraisals have gone from “high ball” to “low ball” – and are dampening real estate values and a potential real estate recovery.

Squeezed by a drop in fees, some appraisers are compensating by driving long distances to handle more assignments. Their wanderings are raising questions about whether they know enough about the neighborhoods to accurately assess the value of homes…

Appraisers are required to follow a set of national rules known as the Uniform Standards of Professional Appraisal Practice. Among other things, those rules require that "an appraiser preparing an appraisal in an unfamiliar location must spend sufficient time to understand the nuances of the local market."

Yet some appraisers who travel long distances to find work may be hard-pressed to spend "sufficient time" in an unfamiliar market. [Wall Street Journal]
What recourse does a buyer or homeowner refinancing have who gets a too-low appraisal?

First, check the appraisal for accuracy. Some comps may not be comps at all, because they inaccurately record some feature of a property. Consumers can point to flaws in the appraisal and can request that more accurate comps be used.

Second, consumers can request that a second appraisal be done. A new appraiser (perhaps with better knowledge of the area) may come up with a different value. The downside of this latter option? Paying for two appraisals.