Real Estate Investment:New Appraisal Standards Complicate Real Estate Market

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The problem used to be that lenders and appraisers were too cozy. The lender hired an appraiser for the borrower and more often than not, the appraisal miraculously came in at the buyer’s purchase price. Appraisers felt pressure by their client (the lender) to justify the purchase price so as not to ruin the deal and lose future business. Buyers were skeptical because they thought the appraisal should be a completely independent opinion of price.

In response to a lawsuit from the State of New York, Fannie Mae and Freddie Mac instituted new appraisal guidelines in May 2009 called the Home Valuation Code of Conduct (HVCC).  The new code prevents local mortgage brokers from selecting local appraisers; rather lenders will hire appraisers.  Also, 10% of all loans bought by Fannie or Freddie will have a second appraisal ordered to validate/invalidate the first appraisal.

To comply, many lenders are hiring appraisal management companies (AMCs) who in turn hire the appraisers.

According to reports from appraisers, the AMCs are demanding appraisers work for less and hand in their reports faster.  The initial results seem to indicate that these changes are driving appraisals lower and lower because appraisers can’t spend the time on reports they once did, appraisers hired may not have the local expertise needed, and appraisers are concerned about coming in “too high” on an appraisal and losing future business.

From  The Wall Street Journal,

“Lenders burned by huge losses from defaults now are pressing appraisers to be more conservative. And appraising itself is more difficult with home prices fluctuating rapidly and transactions few and far between in some markets; sale prices from a few months back may no longer reliably indicate the value of nearby homes.”

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