During the height of the housing boom, appraisers were pressured to up the value of homes. Now, during the housing downturn, appraisers are being pressured to lower the value of homes.
Either way, consumers, both buyers and sellers, are caught in the middle.
“It’s an ever-changing pendulum,” says Jim Amorin, president of the Appraisal Institute.
No longer arrived at by using a simple drive-by inspection, computerized automated valuation model (AVM) or even just comparative analyses of similar properties, appraisals have become yet another sticking point along the already viscous road to home ownership.
“Everyone got seduced by double digit property value increases and never thought the bottom would come. Doing an appraisal today is a complex deal with foreclosure sales, short sales and fewer sales. You want to get the most experienced folks doing appraisals,” Amorin added.
An appraisal of a home is supposed to be a fair, imp
artial and professional evaluation of a property’s true value. The risk-management tool is designed to assure the owner gets a fair price, the buyer pays the right price and the lender’s risk in making the loan is commensurate with the property’s true value.
A appraisal can make or break a sale, refinanced mortgage or equity loan. It can also attract or repel buyers.
During boom times, in the first half of the decade, lenders typically used desk-bound, in-house appraisers to determine home values when skyrocketing values boosted the use of drive by inspections and computer generated values.
Now, lenders are compelled to send appraisers out into the field to inspect a property before making a final assessment.
But that doesn’t mean lenders take that approach, especially when the property is a foreclosure or other distressed property.
Appraisers who complained about pressure to up the value of homes when values were skyrocketing, are now not only under pressure to lower values, but also work in a market where values are skewed by unprofessional appraisals.
Appraisal practices lacking uniformity
A primary culprit is the Broker Price Opinion or BPO. BPOs are used when lenders and mortgage companies want to expedite the sale of repossessed (real estate owned or REO) properties, foreclosures, short sales and other unconventional, distressed properties.
A BPO involves a real estate broker conducting a drive-by inspection or internal comparative analysis to come up with the value. The broker conducting the valuation is also often the broker who lists the property for sale.
“There’s a lot of controversy about this end run. The person contracted to do the BPO is the sales person who is going to get the listing. How can you be impartial and objective when your conclusion is based on you getting the listing of the property?” asks Ted Faravelli, Jr., a forensic appraiser, expert witness and executive director of the California Association of Real Estate Appraisers.
There’s also fallout for the homeowner with the foreclosed property. If the property is priced to move at a level lower than the amount the foreclosed owner owes (and, perhaps, lower than the house could actually sell for) the owner will have to come up with the difference to clear his or her name from bad credit hell.
“It’s a real hot button for appraisers when brokers are doing work appraisers should be doing,” says Amorin.
Also, the values of the BPOs get thrown in the pot of homes appraisers later must consider when doing professional valuations. That makes it tough to decide when, when not to and how to use properties assigned BPOs.
“One of the biggest problems we see is the conflict over the use of short sales and REOs and foreclosures. They are dominant in some segments of the market and we have to take them into consideration, but we have to temper our opinion when we use those,” said Faravelli.
Recognizing how the pressure cooker property valuation process contributed to busting the boom and how it now may be prolonging the bust, the Feds recently put in place, the Home Valuation Code of Conduct (HVCC).
In an agreement, effective today, May 1, 2009, between New York Attorney General Andrew Cuomo, Fannie Mae and Freddie Mac, and federal regulator, the Federal Housing Finance Agency, HVCC is designed to enhance the independence and accuracy of the appraisal process, and provide added protections for homebuyers, mortgage investors and the housing market.
The hope is that by relieving appraiser pressure, appraisals will become more reliable across the board.
Unfortunately, good intentions don’t always pave the way, according to the Appraisal Institute.
Amorin, testifying before the U.S. House of Representatives’ Financial Services Committee said the institute believes HVCC has too many shortcomings.
The institute says HVCC
• Doesn’t focus enough on appraiser competency.
• Undercuts professional relationships between honest appraisers and reputable mortgage professionals.
• Increases the influence of bottom-line oriented appraisal management companies.
• Encourages the continued use of AVMs and BPOs, which lack relevance in today’s market.
For similar reasons, the National Association of Mortgage Brokers unsuccessfully filed suit to delay HVCC.