New appraisal rules cause chaos By Marcie Geffner of

New appraisal rules cause chaos By Marcie Geffner of

New appraisal rules cause chaos
By Marcie Geffner

The new "code of conduct" that was supposed to protect lenders and borrowers from faulty appraisals has caused higher costs, delays and considerable chaos in home sales and loan refinances.

Mortgage brokers, appraisers and real-estate agents are up in arms over the new rules, which dictate how lenders select an appraiser when they originate certain home loans. Few borrowers care much, if at all, about how appraisers are hired or paid, but those borrowers whose loans have been delayed or derailed due to the new rules may take a very keen interest, indeed.

At the center of the controversy is the Home Valuation Code of Conduct, which outlines appraisal-related practices that lenders must follow with respect to so-called conventional or conforming loans that they want to sell to Fannie Mae or Freddie Mac.

The practices are intended to reduce the incidence of appraisal fraud and prevent inappropriate pressure being placed on appraisers to inflate home valuations. The code, which became effective May 1, does not apply to FHA loans, which are insured by the Federal Housing Administration, or VA loans, which are guaranteed by the U.S. Department of Veterans Affairs. (Fannie Mae and Freddie Mac have both posted FAQs about the code.)

New rules protect borrowers from inflated appraisals
David Feldman, president of First American eAppraiseIT, an appraisal software and management company in Irvine, Calif., says the code is "very good for borrowers" because the new practices will help to ensure that home valuations will be "less inappropriately influenced."

What's your home worth?
"(Homebuyers) don't want to pay too much, and they want to pay the right price," he says. "For refinances, if you were hoping for a 'higher value,' prior to the code, if there was any pressure, you might have gotten it or not. Now that will be lessened, so it protects borrowers from themselves."

1. Accuracy. The accuracy and credibility of an appraisal should be the borrowers' chief concern. Appraisal management companies, which now perform more than half of the appraisals nationwide, contract with tens of thousands of appraisers but typically assign jobs only to several thousand, who complete their work "quickly and with good quality and good service," Feldman says.

John Stafford, a loan officer with Reliant Mortgage in Dallas, takes exception to such claims. He says there are two types of appraisers: the "slapdash" kind, who base their valuations on the first comparable sales they can find, and the more competent kind, who "work very hard to get the absolute best value, but fair value within the regulations as they are.”

Borrowers should be concerned, Stafford says, because "a lackadaisical effort on an appraisal can easily create a value that is 10 percent lower than it should be." An artificially low value can kill a home purchase transaction if the appraisal doesn't support the sale price or derail a loan refinance if the appraisal results in a higher loan-to-value ratio and, consequently, a less attractive interest rate.

2. Timeliness. The timeliness of an appraisal is also a prime concern for borrowers because they typically need to meet the time frame of a purchase-contract contingency or interest-rate lock.

Rob Carter, a real-estate agent with ZipRealty in Washington, D.C., says the code has introduced much more uncertainty into the appraisal process.

"We are all used to knowing when the appraisal is going to get done and what the outcome is going to be," he says. "It's a little frustrating when you don't know.”

Feldman disputes the notion that the code has caused delays.

"The turnaround has not been affected even a twitch," he says.

3. Cost. Borrowers are also naturally concerned about the cost of an appraisal. Stafford says appraisals have become more expensive as a result of the code because lenders had relied more heavily on automated valuation models, or so-called drive-by appraisals, which required only a confirmation that the home hadn't vanished from the property. Now, he says, lenders are more inclined to require a full appraisal, which is more costly.

Moreover, borrowers may now be required to pay for an appraisal upfront, which means they'll be paying out-of-pocket for that expense even if the loan doesn't close. Borrowers also may have to pay for a second appraisal if the first proves problematic or they want to switch their application to a different lender. The code allows appraisals to be transferred, but lenders aren't required to facilitate that and must make sure an incoming appraisal complies with the code.

A related issue is whether appraisers should be better compensated for their services. Feldman acknowledges they're paid significantly less for jobs they're assigned through appraisal management companies, but he believes their pay is a "cultural question" that shouldn't concern borrowers.

"Should borrowers pay more so appraisers can make more and therefore be happier?" he asks. "Or is this a new model that appraisers make less per order, although they may become more efficient, so at the end, they may be OK?”

Cultural questions aside, there's no debate that appraisal management companies have gained market share as a result of the new rules. Some of these companies are independent; others are owned in whole or in part by lenders or title insurers. These companies schedule the jobs and keep as much as half of the fee for their services.

4. Disclosure. Borrowers may like a new rule that requires the lender to supply a copy of the appraisal to the borrower three days before the loan closes. That right may be waived, though not at closing.

Lenders are careful to comply with this rule, Feldman says, because an inability to demonstrate that they did so will void their certification of the loan to Fannie Mae or Freddie Mac.

That may give comfort to the two mortgage companies, but the code offers no recourse to the borrower if the appraisal isn't handed over on time and, thus, causes a delay in closing.

How to cope with new appraisal rules
Borrowers are well-advised to have a frank conversation with a loan officer, mortgage broker or real-estate agent before they apply for a loan, since they no longer can rely on behind-the-scenes "value checks" to find out whether an appraisal is likely to return a high enough value for the proposed transaction.

Feldman advises borrowers to check into sale prices of comparable homes, online home valuations and news reports of home value trends before they apply for a loan, as difficult as that research may be for individuals not schooled in such matters.

"The hard part for homeowners (is) to be as realistic as they can, so they don't waste their time and just get disappointed," he says. "A good lender or mortgage broker will guide you."

Carter advises homebuyers not to waive the appraisal contingency in a purchase contract, because that may be their best protection against an inflated sale price, perhaps as a result of an overly exuberant bidding war.

The code itself calls for an "Independent Valuation Protection Institute" to operate a compliance-and-complaints hot line and promote "best practices for independent valuation." That may sound like a good idea; however, this institute has yet to be established.


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Thanks for the post.


Residential Connection Group LLC
Gilbert, AZ


Thanks for the comments. It is always good to know what is happening in the real estate market and how that news can effect pricing of properties. Good luck on all your future real estate deals. Believe and Achieve! Smiling - Joe


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Great info as always. Thanks alot, this really helped me understand a few things. I have been experiencing some minor difficulties with appraisers, largely due to the "Code of Conduct". Now I feel I have a better understanding of where I stand and where they are coming from.

Much appreciated! Smiling
-Mike Hutchins


Thanks for the comments and the additional insight. Besides Bankers, Appraisers can be a great resource for all real estate investors. I enjoy talking to appraisers about comps, general areas, market trends and understanding how they are preparing their appraisals. The more we as real estate investors understand, the better it will be when reviewing future deals. Continued success with all your deals. Believe and Achieve! Smiling - Joe


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I agree. I'm really looking forward to networking with other industry professionals and gain a more thorough understanding of all the ins and outs. I'm having fun already just learning and going thru the beginning motions. I can't wait to really get the ball rolling!

Thanks again Joe and continued success to you as well. I can't really tell you good luck like I normally do lol, it is quite apparent that you no longer need luck to be successful. But hey, good luck anyways! Smiling
-Mike Hutchins

Fannie and Freddie are Ridiculous!

Thanks for the article Joe. I just read something similar from a CA newspaper. It’s posted below. It amazes me that we’re still seeing problems with integrity in our housing industry and government. Will we ever see an ethical bone from our government and lending institutions?


The Sun- San Bernardino & the Inland Empire
Appraiser sheds light on questionable industry practices
Matt Wrye, Staff Writer
Posted: 08/14/2009 01:01:34 PM PDT

Appraiser Steven Smith has a bone to pick with colleagues in his industry - especially the ones doing business across the Inland Empire.
"Imagine being licensed to do something in a market where nobody wants you to do your job right, where all the other participants want you to rubber stamp the sales price," said Smith, owner of Smith Realty Advisors, which serves clients across San Bernardino County.
Welcome to the world of residential real estate appraisal.
Don't get him wrong. He's not slamming every appraiser out there.
But most appraisers the expert court witness has met don't have a clue about performing their jobs accurately. And even when they do, many choose the wrong path, he says.
"They've been conditioned to be helpful to the transaction instead of being neutral," said Smith, who's also an associate accounting and finance professor at Cal State San Bernardino and a member of the Appraisal Institute trade association.
The sloppy work can enable fraud. Higher appraisals mean higher property values, which means the consumer is taking out a bigger mortgage.
A new rule - the Home Valuation Code of Conduct - is aimed at changing this.
But Rep. Gary Miller, R-Brea, has co-sponsored legislation asking for an 18-month moratorium on the new rule, arguing that it's having unintended and devastating consequences for appraisers and the real estate market.
Fannie Mae and Freddie Mac - the nation's two largest mortgage buyers - started enforcing the new standard on May 1.
Lenders and mortgage brokers who loan Fannie and Freddie mortgages to home buyers can't order appraisals directly from appraisers. Instead, lenders and brokers must hire an independent appraisal management company, which contracts with independent appraisers.
Miller, in a statement, says there are problems with this.
Lenders are hiring appraisal management companies that are based outside of the region, or even the state.
Because of this, appraisals are "flawed" since the appraisers are "incorporating distressed sales as comparables," Miller said.
The problem goes deeper, Smith says.
For one thing, companies are "charging $600 for appraisals and paying the appraisers $200," which is impetus for appraiser contractors to do shoddy work, he says.
Many opponents of the new guidelines say they are putting honest appraisers out of business and causing good deals to fall through.
Bill Hillestad, strategic director of Think Big Work Small, which provides resources for the real estate industry and is pushing to have the rule repealed, says his research shows the rule is having a chilling affect on any recovery in the real estate sector.
In his online poll of industry professionals, about two-thirds of respondents said they had had at least one appraisal come in under the purchase price since the new rules took effect, with the average difference being more than $13,000. And 90 percent of respondents said they had lost at least one transaction.
Hillestad said the code has the potential to kill the country's budding real estate recovery by depressing prices even more than the foreclosure crisis.
Reform is necessary, Smith argues.
Overall, the industry has a history fraught with inaccurate appraisal techniques, he said.
Instead of researching 20, 30 or 40 comparable homes in a neighborhood and analyzing price trends and other data, many appraisers "have gone looking for the three properties that'll help make the deal work," Smith said.
Appraisers are supposed to compare the property being assessed to similar properties with similar characteristics. Over the past couple of decades, it's been just as easy to pick a home that's worth $10,000 or $20,000 more, yet omit the fact that it has a swimming pool or remodeled kitchen.
The appraisal industry has bred a culture that caters to the whims of lenders and mortgage brokers, Smith says.
For instance, before the new rule was instituted, loan officers working on Freddie or Fannie mortgages could pressure appraisers to inflate a property's value. They might not have threatened appraisers outright, but they would complain if the appraisal came in too low, Smith said.
If you're the appraiser, you had two choices. You could comply with the loan officer's complaint, redo the appraisal and keep doing business with the bank. Or you could take the road less traveled by sticking to your guns, and risk having your reputation dragged through the mud.
"If they bad-mouth the appraiser, he's going to be out of work," Smith said.
Bob Clark, director of the California Office of Real Estate Appraisers, wouldn't comment on Smith's accusation that the appraisal industry is "conditioned" and ripe for abuse, although Clark said he's heard the argument plenty, he said.
He did say the office takes disciplinary action "very seriously."
"We're endeavoring to administer a vigorous enforcement program," Clark said.
The office - which issues licenses and responds to complaints - has a staff of 30 and will soon add four on the enforcement side.
"Appraisers that bow to pressure from lenders and do not let the market tell what the value is on a property are likely to eventually become respondents to our office," Clark added.
This pandering could still happen in theory, because some lenders own a stake in the appraisal management companies they use, Smith says.
Appraisers have a code of rules to go by, but they make a living based on the volume of appraisals they do.
If it were up to him, Smith would require would-be appraisers to take a 40-hour ethics course, plus courses in law, principles, practice and finance relating to the real estate world, and top it off with a bachelor's degree. Only after completing those requirements should you be able to take your appraiser licensing exam, Smith said.
Accusations of appraisal fraud have begun focusing on corporate homebuilders in recent months.
A Mentone resident is a leading plaintiff in a proposed California class action lawsuit filed in federal court against Los Angeles-based home builder KB Home.
The suit claims KB Home fraudulently inflated homes' prices during the appraisal process.
The suit claims KB Home steered home buyers to a joint-venture lending unit it had with Countrywide Financial called Countrywide-KB Home Loans - a lender that ordered appraisals from an accomplice at LandSafe Appraisal Services.
It says the LandSafe accomplice made sure appraisals were inflated to satisfy the lender, and ultimately KB Home.
"They used comparables that weren't proper comparables, or they'd use something close by, but it wasn't a comparable house," according to attorney Steve Berman, an attorney with Seattle-based Hagens Berman Sobol Shapiro.
A KB Home spokesman declined to comment.
New code of conduct Ingrained practices Focused on enforcement Taking on the lenders The San Jose Mercury-News contributed to this report.


Thanks for the comments. Before long everything will start clicking for you. If you build a solid foundation of knowledge and a good team to assist you, then you will be ahead of the game as the deals start to roll in for you.

Think of all the preparation atheltes go through for the big game. Often, in baseball I had heard the extensive routine a pinch hitter goes through each game and they do not even know if they will get into the game. Well, the same thing may be true about real estate because we prepare to be ready when the deals come our way.

Thanks for the well wishes, I always feel I can take all the good luck I can get because I want a reserve for some of the bad days that do come up every now and then. Thanks again and keep us posted on your progress. Believe and Achieve! Smiling - Joe


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Thanks for the comments and sharing the information and article with us. It is unfortunate, sometimes their are people that are not ethical can hurt an entire profession at times. In every story sometimes their are a cast of characters and everyday we decide what character or role we are going to be in as we live day to day. However, that is part of life and I believe "the good guys (or girls) always win"!

Thus, as real estate investors we can set the example and raise the bar on ethics and intregrity with all the people we may deal with. A reputation takes years of hard work and can be changed very quickly. Thus, if all the DG Members set the example for real estate investors we can make it a better place, state by state and city by city.

I believe Dean is a role model for everyone and has proven you can do the right thing, still be very successful in business and be able to help people along the way. I often reflect and discuss with my friends to enjoy success from their hard work, but do not "forget where they came from". Good luck with all your real estate deals. Believe and Achieve! Smiling - Joe


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Great info. Thanks for the informative article, much appreciated. Smiling
-Mike Hutchins


Thanks again for the feedback. I think the same way and am doing my best to have as much lined up as possible. That way once things gain momentum I can hopefully have a "snowball effect." Great analogy by the way.

In that case, good luck to you my friend! I'll be sure to update as I progress in my REI endeavor. Smiling
-Mike Hutchins