Home purchases occasionally fall through at the last minute when the lender’s appraisal comes in at a lower figure than the price set by the buyer and the seller. When this happens, the lender rejects the loan and counters, offering to lend a reduced amount set at an LTV based on the new appraised value of the home.
This reduce loan amount frequently causes the buyer to cancel rather than continue with the purchase agreement and close escrow, since the buyer will have to pay the difference through a larger down payment.
The reason behind these cloak and dagger appraisals is that lenders may be lowering the valuations on appraisals to avoid accusations from the secondary mortgage market of inflated appraisals. When a lender sells their loans to Fannie Mae or Freddie Mac, these government agencies force the lender to “buyback” loans that were based on inflated appraisal values.
When reviewing an appraiser’s valuation for accuracy, lenders order low-cost electronic valuations based on publically assessable data, no on-sight inspection and no human reasoning. If the electronic appraisal comes in under the appraiser’s valuation, the lenders solve the problem by cutting the loan value of the home to that of the electronic appraisal. This often destroys the real estate transaction.
However, electronic models are often inaccurate, are not able to fully survey the property’s condition and frequently use dissimilar comparables. Effective September 1st, 2010, Fannie Mae is no longer allowing lenders to cut appraisal valuations to appease Fannie’s valuation expectations, even when other valuation reviews suggest a lower figure. If the appraisal has a discrepancy, lenders must resolve the appraisal disputes by either contacting the appraiser or ordering a second appraisal.
Last year, Fannie Mae and Freddie Mac adopted new rules that encouraged lenders to use appraisal management companies to value properties. However, brokers, builders and mortgage lenders have complained to Congress that these Fannie and Freddie endorsed companies have minimal access to local data, travel long distances to do evaluations, and use short-sales and foreclosures as comparables— lowering values of non-defaulting sales in that area.
The appraisal companies also greatly reduce the appraiser’s fee, to half of normal rates in some cases, and require appraisals to be performed much faster than industry standard turnaround times. [For more information regarding real estate owned property (REO) resales setting “comps,” see In re Serda in the February 2009 first tuesday Recent Case Decisions.]
Now, Fannie is putting its foot down on inexperienced appraisers who are unfamiliar with local market conditions. They have changed the appraiser selection standards so that the experience of the appraiser, with the requisite knowledge about local market conditions, is at the top of the list of requirements. The appraiser’s experience will always trump fees and turnaround time — two variables appraisal management companies cut in order to outbid other appraisers.
first tuesday take: Why are lenders biting the hand that feeds them? Lenders want to make loans since lending is their business. However, ordering an appraisal and then sabotaging the loan transaction is a strange practice.
Something else is going on here. California has plenty of licensed fee appraisers, independent and ready to meet the buyer’s price, so perhaps lenders are trying to get Fannie Mae to recognize this by dumping the appraisal management companies.
According to agents, inexperience and out of area appraisers are killing deals, not because their appraisals are too high, but because they are under-evaluating the properties they appraise. We can expect higher conforming appraisals so the loan will be the amount the buyer’s needs.
So here we go again: loan values that are determined by the buyer rather than by factors that will keep the prices from getting out of control when the market starts to move again. This will be great for speculators who want to buy low and sell high within a short period of time. In the past they have found themselves stuck with the price they paid as setting the property’s value.
Re: “To boost quality, Fannie Mae calls for experienced appraisers” from the Washington Post