The Appraisal Dilemma


The real estate appraisal business has been under increased scrutiny in the wake of the national housing bust. An article in today’s Wall Street Journal highlights the current challenges in securing an independent, yet accurate, property valuation.

Appraisals are an important part of a real estate purchase, helping to make sure that the negotiated purchase price is in line with recent comparable sales. Mortgage underwriters require an appraisal so that they can feel comfortable that the loan they extend to the buyer is adequately secured by the underlying property. Essentially, they want to be sure the deal’s Loan-to-Value Ratio is correct.

During the boom times, appraisals were often seen as an unnecessary step. Some mortgage lenders were more interested in writing the loan than in making sure that the home was a solid asset. They knew that the loans were going to be securitized, so the focus was on doing the deal and then handing off the risk to someone else. Unscrupulous mortgage lenders would have go-to appraisers that they could count on to value a property at whatever price was needed to make sure the deal closed. Appraisers were no longer seen as objective, writing reports that supported whatever value was needed by the mortgage lender that hired them.

These days appraisals are taken more seriously by banks and the unscrupulous mortgage lenders are generally out of business. In the meantime, different problems have emerged. The appraisal industry is being pressured to break the direct relationship between mortgage brokers (though not banks) and appraisers. Regulators want to see Appraisal Management Companies (AMCs) in charge of assigning appraisers to deals, hoping to restore objectivity to the process. As of May 1, 2009, Freddie Mac and Fannie Mae adopted the Home Valuation Code of Conduct, effectively creating a national standard for appraisals in single-family mortgages.

The unintended consequence of creating AMCs is that there are increasing complaints about the accuracy of appraisals. The Journal article highlights a number of examples in California where the appraiser assigned to a deal traveled outside of their local area for a job. Because real estate is a local industry, the dynamics of a market can be quite different one town, or even neighborhood, away. An appraiser not familiar with a market’s specific dynamics could assign a wildly inaccurate value to a property, which could unfairly impact the deal.

Local appraisers we have met who receive business from AMCs echo the concerns expressed in the article. They are being asked to travel further for jobs, do more work for each appraisal, and accept less compensation. It’s putting them in a difficult position, challenging their ability to make a living as an appraiser.

The informal solution to the dilemma seems to be to work around the new rules. Lenders that have underwriting capabilities are still able to hire appraisers directly, so many mortgage lenders are not actually impacted. Full-time appraisers with strong reputations are able to fill their schedules with work from the unregulated lenders, allowing them continue on with business as usual. All sides are watching the regulations closely, waiting to see what happens next.

The current direction of the regulatory activity seems to have two possible outcomes. In one scenario the AMCs increase the appraisal fee charged to lenders, which allows them to pass more money through to their appraisers. The higher fee would very likely be passed on to the buyer, adding to the closing costs associated with a home purchase. The other scenario is that appraisers are forced to find second jobs, or new careers entirely. If enough appraisers were forced out of the business, it’s possible that there would be a shortage of appraisal capacity during the busy spring market.

Neither scenario seems particularly attractive, and the regulation itself feels like it is addressing problems that have already been corrected by market forces. Since the new rules are not uniformly applied across all lenders, and workarounds have already been established, perhaps it would be better to roll back the regulation.

Copyright GHREB - Greater Hartford RE
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