Are Appraisal Numbers Intentionally Lowered?

Have you had the strange feeling that lenders are lowering the numbers on appraisals? Hearing stories about deals that are all set to go- contract signed, buyers have the mortgage, you’re ready to sign the papers- until the appraisal comes back dramatically lower than the price in the contract and the lender demands the mortgage is cut. Of course you say no and suddenly the deal is off.

It’s not just a strange feeling- it’s happening across the country. The Real Deal reports http://therealdeal.com/newyork/articles/low-appraisals-sabotage-more-deals that lenders may “unilaterally be lowering the numbers on appraisals submitted to them.” Why? To avoid accusations that the loans they want to sell to Fannie and Freddie are based on even slightly inflated appraisals.
Even Frank Gregoire, the vice chairman of the National Association of Realtors’ Appraisal Committee, says it’s a big problem, and he points to high numbers of sales “sabotaged by lenders and underwriters arbitrarily reducing the value estimate.”

Here’s what happens: The lender gets a cheap electronic valuation based on public data with no on-site visit and puts that up against the numbers from the appraiser. If there is any difference, lenders will simply cut the value and/or demand an explanation from the appraiser.

NEW RULE

As of September 1 all this may change, as that is the date Fannie Mae will prohibit lenders from changing appraisers’ numbers, requiring instead that they contact the appraiser to work it out or order a second appraisal. Appraisers are, understandably, happy, and they think buyers should be too. The comparisons used by electronic systems can be wildly inaccurate, and the Real Deal even tells one story of a “comp” being a vacant lot, which would obviously come in well under the home being appraised. Add to that the growing use of inexperienced appraisers by some management companies and you can see why the situation is deteriorating.

Which is why Fannie Mae’s new “appraiser selection” standards will be a big shift. They want appraisers to “be experienced, ‘have the requisite knowledge’ about local market conditions, plus access to all local data sources.” They even say that experience is more important than fees or turnaround times.

When September comes, look for less of those strange feelings and more honesty in appraisal numbers to come.

Photo Credit: Patrick Q

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