If you haven't bought or sold a home since May 1, 2009, you may not be aware that there have been drastic changes to a part of the process previously considered perfunctory: the appraisal.
Last year, a new regulation called the Home Valuation Code of Conduct (HVCC) went into effect. It was designed to protect consumers, and help prevent another mortgage crisis. However, some claim it has brought unintended consequences that can complicate a real estate deal.
One thing is for sure: The HVCC has made the appraisal process something that homebuyers and sellers need to be more involved in. Here are the highlights of what has changed, and what you can do to ensure a smooth, fair real estate transaction.
Where does the appraisal fit into the mortgage process-and the mortgage crisis?
An appraisal is an independent valuation of your home. A licensed appraiser calculates the value of your home based on many criteria: location, condition, size, amenities, etc. Lenders use this number to help decide how much money they will loan you to buy the house. (For example, they won't loan you $400,000 to buy a home appraised at $385,000 because if you default, the bank is left holding the house and cannot recoup its losses.) Appraisals also are used in refinancing.
Some believe inflated appraisal values gave lenders a green light to lend more money than a house was worth. Others (including those in the appraisal industry) say appraisers were pressured to give high values so deals would go through, which allowed everyone involved to make money.
Is the HVCC a law?
No. It is optional. However, it is widely followed because any lender that sells its single-family home mortgages to Freddie Mac or Fannie Mae must abide by the code. Freddie Mac and Fannie Mae are shareholder owned, government sponsored companies that buy mortgages from primary lenders, i.e. banks. Approximately 55 percent of all single-family mortgages are currently held by Fannie and Freddie.
What was the HVCC designed to do?
Its primary purpose was to act as a "firewall" between those involved in loan production (such as loan officers or mortgage brokers) and appraisers. It prevents communication between them about the appraisal, purportedly so the appraisers can give a fair value of a property without being pressured to hit a certain number. It also aims to prevent consumers from buying an overpriced home.
How has the appraisal process changed?
Like most things in banking and real estate, it used to be relationship based. When a loan officer, mortgage broker or Realtor needed an appraisal, they simply called one they knew who was familiar with the area or type of property. Appraisers worked as independent contractors or for an appraisal company, which they still do. But since the HVCC prohibits direct contact between loan production staff and appraisers regarding the appraisal, a third party has come into the picture as a go-between. These third parties are called appraisal management companies, or AMCs.
What is an AMC, and what does it do?
Appraisal management companies are hired by lenders to schedule appraisals, hire the appraiser to do the work, review the appraisals, then submit them back to the lender that ordered them. It is the AMC alone that decides which appraiser it will send to appraise your property. If there is a problem with the appraisal, the AMC handles it.
Have there been consumer issues with the new process?
The biggest complaint is that of non-local appraisers being sent to areas with which they are unfamiliar. This is an issue in a city of diverse neighborhoods like Chicago, where similar houses can be worth substantially more or less if their location varies by just a few blocks.
This unfamiliarity can lead to low appraisals, which can cause problems with financing. For example, if you've agreed to buy a $400,000 house and it appraises at $385,000, you have three options: make up the difference in cash (i.e. borrow less); try to get the seller to drop their price; or cancel the deal.
The second complaint is that appraisals cost the homebuyer more now because two entities are doing work instead of one: the AMC and the appraiser. Appraisals used to cost $300-$350 for an average home in the Chicago area. Now it varies widely, up to double the cost. To avoid surprises, ask your lender. They are the one ordering the appraisal from the AMC. Your lender decides how much of the cost they pass on to you.
A third complaint is that appraisals can take longer to schedule, lengthening the loan process. The longer you lock in an interest rate, the more it costs.
Are new home builders and buyers affected by the changes?
Yes. For example, one builder said it no longer offers finished basements as an option because subterranean space is not appraised at the same rate as above-ground space. (A finished basement raises the cost of a home, but the full retail cost of constructing it might not be reflected in the appraised value, causing a borrower to come up short.) Buyers who want finished basements must finish them with a contractor on their own. Also, buyers have to be careful about loading their new home with expensive finishes, which increase the size of their loan but might not reflect fully in the appraisal.
Will I receive a copy of the appraisal of a home I'm buying?
Yes, at least three days before closing. Some lenders do the appraisal the beginning of the lending process, and some at the end. This could mean weeks of difference. Ask when you will receive it, and request to get it early if possible.
How can I make sure I get a qualified local appraiser to appraise the property I'm buying?
Nothing prohibits you from contacting the AMC or your lender regarding your appraisal. Call your lender and/or AMC and tell them what you expect. Ask about appraiser credentials (there are different designations), locality, years of experience, etc. Ask whom to contact if there is a problem later.
Is there anything I can do to help the appraiser accurately determine the value of a home I'm selling?
Yes. It is OK to communicate with the appraiser about the facts of the home. You can even prepare a packet to hand the appraiser that includes recent (last three to six months within one mile) comparable sales, upgrades and renovations, etc.
What if I think my appraisal was done wrong?
Call your lender and/or AMC immediately. Factual or procedural errors in appraisals can be corrected.
Sources who provided information for this story:
Pamela Ball, Baird & Warner, Gold Coast OfficeChris Cosentino, Title/Appraisal Vendor Management Association (TAVMA), New YorkSteven Albert, Allstate Appraisal LLP, Chicago HeightsLeslie Sellers The Appraisal Institute, ChicagoDave Smith, Cambridge HomesDennis Gerwing, Gerwing Appraisals, ChicagoFreddieMac.com