In this type of market, we have all been there; a property under contract appraises for less than the purchase amount and the sale falls apart. Unfortunately, more often than you might think, it is not solely the appraisers fault. Many times the fault lies with the mortgage lender. And, believe it or not, the practice of lenders cutting value off the appraisal has been going on for years. It’s just that during a normal market times, the practice isn’t as noticeable as it is today.

How can this at be? Well, lenders are now really fearful that the government agencies like Fannie Mae, Freddie Mac and FHA/VA (all of which have policies that will punish them if a home is overvalued) could force them to buy back mortgages if there is any suggestion of an inflated appraised property value. In the lender’s eyes, it’s better to be safe than sorry. The bottom line is they simply put the property in question through a valuation model program and if there is a question, their underwriters simply reduce the appraiser’s value estimate. The problem is, these types of programs are less than reliable and typically cause more harm than good.

Hearing the ground swell of complaints that have arisen across the country, Fannie Mae is instituting a new rule that will become effective on September, 1. As of that date, lenders selling their loans to Fannie Mae will no longer be able to reduce the appraiser’s value estimate. In guidance issued June 30, Fannie Mae told its participating lenders that they must contact the appraiser to “resolve” valuation issues. And, if that process doesn’t work out, then the lender must order a second appraisal.

Fannie Mae’s guidance also attempts to deal with other appraiser complaints, such as the use of inexperienced appraisers who travel to unfamiliar territories by clarifying its “Appraiser Selection” standards. Specifically, appraisers should be experienced and “have the requisite knowledge” about the local market conditions including having access to local data resources. In addition, the guidance also said that having an “experienced appraiser” trumps Appraisal Management Company (AMC’s) fees and turnaround times, a clear slap in the face of such company’s appraisal bidding criteria.

Regarding Fannie Mae’s announced rule changes, Freddie Mac said they’re “looking at it.” And, FHA/VA is also currently considering making a second appraisal the norm when there are questions about a property’s value.

Let’s hope both jump on this bandwagon in short order.

Gulf Coast Associates, Realtors
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Tags: buyers, mortgages, real estate, sellers