Less than three months after new rules for home appraisers kicked in, the real estate industry is in uproar.
Real estate agents, homebuilders, mortgage brokers and the appraisal industry itself all agree the rules are causing problems. Some are backing a bill in Congress to kill them.
The new guidelines essentially put a firewall between lenders and home appraisers. They also ended the practice of lenders using their in-house staff for initial home appraisals and prohibit the use of appraisal-management companies owned or controlled by lenders.
But since they went into effect May 1, the rules have created a slew of unintended consequences that critics say are causing delays in closing sales, or undermining sales because botched appraisals are coming in too low.
"This thing is not only preventing the housing market from recovering, it's destroying the housing market," said Marc Savitt, president of the National Association of Mortgage Brokers.
After a homebuyer and seller agree on a price, the buyer applies for a mortgage. The lender then orders an appraisal to ensure the value of the property, because if the borrower defaults the property will be sold to satisfy the debt. The appraisal fee, which can run between $250 and $500, is usually paid by the buyer.
To determine what a home is worth, the appraiser compares prices of similar homes that were recently sold in the area and makes adjustments for different features, such as a swimming pool or extra bathroom. If the property appraisal comes in below the agreed upon price, the buyer usually has to make up the difference and may instead walk away.
Suzanne Wilhelm, who has been trying to sell her home in Henderson, Nev., for six months, blames an appraisal done under the new rules for scuttling what had been a done deal with a buyer several weeks ago.
The appraisal valued her four-bedroom, 2,000 square-foot house at $190,000 - $45,000 less than the price the buyer agreed to pay. Wilhelm, who paid $187,000 for the house in 2001, believes the appraiser based his estimate on the
sale of several foreclosed homes in the area but ignored sales of regular homes that would have reflected a higher price.
"It's very unfair that we're put into the same bracket as those people who were so irresponsible in buying their homes," said Wilhelm, a teacher.
The rules, dubbed the Home Valuation Code of Conduct, are meant to eliminate conflicts of interest that created pressure on real estate appraisers to inflate the value of a property. Lenders, agents and brokers have been known to pressure appraisers to "hit the number" that the homebuyer and seller agreed on so the deal would close and everyone could collect their fees. Inflated appraisals were partly blamed for fueling the housing bubble.
But under a settlement last year New York Attorney General Andrew Cuomo, Fannie Mae and Freddie Mac agreed only to buy loans from lenders that don't directly hire appraisers. The move sent shock waves through the industry because Fannie Mae and Freddie Mac own or guarantee about half of all U.S. home loans.
So lenders started giving more business to appraisal management companies, which critics say draw appraisers from a pool of candidates willing to do the job for less money and who, in some cases, may be unfamiliar with a neighborhood.
Almost 60 percent of builders are reporting that inadequate appraisals are causing serious problems in the market, often comparing newly built homes to foreclosures without considering the money needed for property repairs. Of those reporting appraisal problems, more than half said the appraisal amount was actually less than the cost of building the home, according to a survey released by the National Association of Home Builders.
Cuomo's office maintains the rules are necessary, and that critics are using the appraisal rules as a scapegoat for a declining housing market made worse by the recession.
"With homes prices falling and foreclosures rising, this complaint is simply wrong and risks returning us to a corrupt system filled with conflicts of interest that promoted artificially inflated values," said Emily Browne, a spokeswoman for Cuomo.
But the real estate industry is coming out against the rules in force.
The National Association of Mortgage Brokers went to court in February to block the changes, which it claims limit competition. Since then, other key industry groups, including the Appraisal Institute, have voiced their opposition to all or elements of the home appraisal guidelines.
The National Association of Realtors urged members of Congress to support a bill that would impose an 18-month moratorium on the new appraisal guidelines. The measure is still working its way through Congress.