In the musical Oklahoma! there’s a happy moment when the cast dances and sings “The farmer and the cowman should be friends.”
Has the time come for the real estate agent and the appraiser to be friends?
Exaggerated valuations led to lawsuits
It’s been a lengthy estrangement that began in 2008 with an attempt to prevent abuses resulting from parties that had a vested interest in originating a mortgage but no risk — like real estate agents and mortgage brokers. They were allowed to select the real-estate appraiser needed for loan approval.
Because brokers only are paid when a loan closes, and the bigger the loan the bigger the payday, appraisers had an incentive to provide exaggerated valuations. The agreement settled a lawsuit brought by the New York State Attorney’s Office against the GSEs.
The compromise, called the Home Valuation Code of Conduct (HVCC), not surprisingly resulted in a rash of lower appraisals when it was enforced by Fannie Mae and Freddie Mac in 2009. A recent study by the Philadelphia Federal Reserve found that the HVCC led to a significant reduction in the probability of inflated valuations and an increased incidence of low appraisals: The odds of low appraisals among HVCC-covered transactions increased by 17.1 percent in the six months after the HVCC, while the odds of significantly high appraisals (5 percent or higher than contract prices) decreased by 15.3 percent.
Buyers, sellers, and real estate agents were unhappy
Among the people made unhappy by that development were home buyers whose lenders required larger down payments to cover the difference between appraisals and purchase contracts. Real estate agents and sellers also weren’t pleased when low appraisals started to tank deals that were five yards from the finish line. The most vocal opponents of the HVCC turned out to be traditional appraisers who were concerned the code encouraged lenders to use low cost appraisal management companies.
The passage of the comprehensive Dodd-Frank reforms in 2010 ended the HVCC but wrote into law the ban against broker and agent involvement with appraisers, who now report only to the lender that hired them. During the deepest depths of the housing crash, when values plummeted, appraisals still came in and brief periods of hope like short-lived boomlet caused by the 2009-2010 housing tax credit confused valuations even more.
Enter the recent turn around
Over the past two years, when national median prices have increased nearly 20 percent, complaints about low appraisals have actually decreased. In its February monthly survey of brokers, NAR found only 6.9 percent reported appraisal issues were major problems prior to settlement or contract termination. By contrast, in April 2011, 35 percent of brokers in the NAR survey had a contract cancelled or delayed as a result of a low appraisal, or had a contract negotiated to a lower sales price as a result of a low appraisal.
Quicken Loans tracks the relationship between contract prices and appraiser opinions and the results are remarkable. For the first time since August 2013, appraiser opinions fell below homeowner estimates in February by just 0.13 percent. Appraiser opinions remain higher than homeowner estimates in 18 of the 27 metro areas analyzed.
“While it’s significant that appraiser opinions are now lower than homeowners’ nationally, this minimal difference is unlikely to derail a refinance or cause headaches for the homeowner,” said Bob Walters, Quicken Loans Chief Economist.
So what has caused this dramatic turn around?
1. Transparency and Consumer Awareness. When their agents and mortgage brokers could “fix” low appraisals, buyers and sellers didn’t worry much about them. All that changed with the HVCC. Agents worked with sellers to counsel them on how to prepare for the appraiser and make sure he got documentation of improvements and good comps. An early outcome of the HVCC was the requirement that lenders send a copy of the appraisal when it was completed, or at least three business days before closing.
2. Appraiser Independence. Over the past three years, new laws, rules, and regulations have been implemented in an effort to protect the independence of the appraiser. Once an appraisal assignment is completed and sent to the client, appraisal industry standards prohibit an appraiser from discussing the results of the report to anyone but the client who ordered the appraisal, or parties designated by the client. In order to ask an appraiser to correct errors in the appraisal report, an agent must use the client, typically the lender, as an intermediary. The client may choose to provide additional data to the appraiser for consideration.
These include:
- Consider additional, appropriate property information, including the consideration of additional comparable properties to make or support and appraisal.
- Provide further detail, substantiation, or explanation for the appraiser’s value conclusion.
- Correct errors in the appraisal report.
3. Quality of Market Data. One of the problems during the downturn was use of distress sales as comps. The appraisal industry has made progress in adapting to market conditions, expanding education and making adjustments for distressed homes used as comparables. The quality and variety of market data available to appraisers has mushroomed in recent years. More MLSs are making current data available and “big data” companies are aggregating data from appraisals, public sales, lenders and MLSs.
Higher-Risk Mortgage Appraisal Documentation: This regulation establishes new appraisal requirements for higher-risk mortgage loans. Mortgage loans secured by a consumer’s home with interest rates above a certain threshold are considered higher-risk under the Dodd-Frank Act. Lenders making higher-risk loans must use a licensed or certified appraiser to conduct an inspection of the interior of the property and prepare a written report. The rule mandates additional valuations – at no cost to the consumer – if the seller acquired the property for a lower price during the previous six months.
4. Fannie Mae’s Collateral Underwriter. Fannie Mae has developed (and this year is using) a new risk assessment tool to help lenders manage appraisal quality. Called “Collateral Underwriter,” it’s not a substitute for an appraisal and does not give a “right” or “wrong” answer. Rather, it is a way to ensure that any appraisal submitted to Fannie Mae meets the GSEs high performance standards.
Appraisers will not have access to CU. The system will review an appraisal only after it is submitted to UCDP, which then triggers the model that includes appraisal data to perform an analysis. CU does not function as an independent property database that allows users to enter an address and receive associated data.
The takeaway
Better appraisals, better understanding of how to work with appraisers, and better consumer education when it comes to pricing, means that making offers should result in better deals where borrowers don’t get in over their heads and sellers get the price that their properties are worth.
Steve Cook is editor and co-publisher of Real Estate Economy Watch, which has been recognized as one of the two best real estate news sites in the nation by the National Association of Real Estate Editors. Before he co-founded REEW in 2007, Cook was vice president of public affairs for the National Association of Realtors.
