Shock to the System
A well-intentioned new rule may hurt homeowners more than it helps.
IT WAS ONE of the worst appraisals Mark McConnell had ever seen.
After piecing together a refinance package for client Randy Ramig in June, McConnell, president of operations at Elliott Bay Mortgage, ordered an appraisal for Ramig’s 2,600-square-foot Wedgwood home. Online valuation tools suggested it was worth as much as $625,000 (Zillow pegged it at $590,500), but given the depressed market McConnell estimated a more conservative $520,000. Two weeks later, the appraisal came back at $485,000, pushing Ramig’s loan-to-value ratio 5 percent higher than expected and threatening to kill the refi, which would have saved him $340 a month. But it wasn’t just the valuation that shocked McConnell; it was also how the appraisal was handled. Of the five comparable sales the North Seattle appraiser based his report on, three were more than one and a half miles from Ramig’s home and in drastically different ’hoods; one was three miles away. Yet McConnell’s attempt to appeal the appraisal, which referenced comps from within Ramig’s neighborhood, was denied without explanation.
“In all honesty, if it had been a quality appraisal, I would have said, ‘Hey, Randy, bad news. Home values are going down,’” says McConnell. “But I knew with every analytical perspective I have that this report was flawed.”
On May 1, Fannie Mae and Freddie Mac instituted the Home Valuation Code of Conduct, new federal mortgage rules intended to prevent loan originators and appraisers from colluding to artificially inflate home prices. Whereas, in the past, loan officers and mortgage brokers could order appraisals directly from appraisers—and in theory encourage them to hit targeted values that would seal lucrative deals—they are now required to go through a third-party appraisal-management company (or AMC), which contracts out the work.
• Hot 'Hoods
MUKILTEO
In July, the rest of the country finally learned what everyone in Snohomish County has known for a while, when Money magazine named Mukilteo one of the country’s best small towns. The pub pointed to the burg’s “drop-dead gorgeous” scenery, top-notch schools, and low property taxes, but a quick look at the real estate listings proves the housing stock ain’t bad either.
$699,000
Details 9780 Marine View Dr; 2,722 square feet, 4 bedrooms, 2½ baths, built 1989
Price Per Square Foot $257
Selling Points The grandeur of the updated master bedroom (with a fireplace, a sitting room, and a deck, it’s a mini sanctuary) is matched only by the arresting views of Puget Sound and the Olympic Mountains.
Listed By Aranka Bikki, Windermere
$635,000
Details 5628 108th Pl SW; 2,688 square feet, 3 bedrooms, 2½ baths, built 1988
Price Per Square Foot $236
Selling Points Tucked into the end of a quiet cul-de-sac less than a mile from the water, this remodeled two-story is decked out with custom cherry cabinets, granite countertops, and heated marble floors.
Listed By Elena Neely, John L. Scott
$520,000
Details 5313 125th Pl SW; 2,664 square feet, 4 bedrooms, 2½ baths, built 1990
Price Per Square Foot $195
Selling Points Walk just minutes from this Cape Cod to hit the links at nearby Harbor Pointe Golf Course, stay and work on your short game in the spacious backyard, or play a virtual round on your Wii in the bonus rec room.
Listed By Jean Sittauer, Coldwell Banker Bain
Published: September 2009
Without reviewing the appraisal(s) in question I can’t say whether they are valid or not – but bear in mind that loan professionals very, very rarely understand the guidelines that appraisers must adhere to when performing valuations. As an appraiser I’ve had loan officers, realtors and homeowners suggest “better” comparables, when in fact their comps would not be acceptable under USPAP, FNMA, FHA or even individual lender rules…perhaps due to having transpired too long ago, being more than 25% different in gross living area, more than 10 years older/newer than the subject, different in style (i.e. split levels can’t be compared to 2-stories), requiring of more than a 10% single adjustment, etc. Even during the real estate boom when values were climbing 2% per month there was much pressure on appraisers to inflate values so that mortgages could reach that magic 80/20 ratio, usually because the homeowner had refinanced and pulled out most of their equity 8 or 10 months ago (or sometimes just so they wouldn’t have to pay for mortgage insurance).
As for the HVCC, yes – my per-appraisal fee has been cut almost in half due to the AMC’s taking much of the money in exchange for sending me work. But that’s the ONLY downside I see. No longer am I fielding numerous call per day from loan officers looking to see if I can “hit a number” to make their deal work. No more free “comp searches” taking up half my time and rarely resulting in an actual order. No more depending on loan officers to provide me with a living only if I’m willing to dance to their tune, and cutting me off if I don’t. I’m actually getting MORE work (albeit at half price) now because my willingness to commit fraud for $400 a pop (so that loan officers can make thousands per deal) is no longer a prerequisite for getting business. The collusion of lenders and appraisers to inflate appraisals was RAMPANT. I think the general public would truly be shocked if they knew the extent of it.
So the HVCC took the lenders and appraisers out of bed with each other, and that’s a good thing. Quality would be greatly improved if there were some kind of regulation regarding how much of the fee the AMC’s can take, as many skilled professionals are being forced out of business and are being replaced by newbies in sweat shops that work cheap and have to crank out appraisals so quickly to meet AMC-imposed turn times (again, under threat of being cut off) that due diligence simply cannot be performed.
The HVCC is a huge step in the right direction, but does need some fine-tuning. We just can’t go back to the way things were, with the majority of refinance appraisals being inflated and with dishonest appraisers getting all the work and honest appraisers struggling to make a living. And you know, there will always be loan officers,agents and homeowners who are absolutely incredulous that the value of the home isn’t what they believe it to be, or isn’t what the extremely flawed online modules like Zillow say it is. Even 2 of the 3 listings shown on this page have dropped their asking prices considerably – obviously their initial value estimates were too high, but I’m sure the homeowners and agents would never have believed it at the time. It’s just the nature of the beast.
Twice the work for 1/2 of your old paycheck? Wow…what a great concept.
I don’t know of a single intelligent appraiser that is willing to work under those conditions (the emphasis is on "intelligent").
I think the problem here is the difference, not clearly stated about, but implied, between “work” and “jobs”. A fraudulent appraisal takes much more effort that an accurate one, for an honest appraiser. See: “No more free ‘comp searches’ taking up half my time and rarely resulting in an actual order.” Besides if you connection between intelligence and monetary gain held any water, all the the major corporations would be run by MENSA, which, I assure you, they are not.
JohnnyD you do all the free appraisal work that you can handle. It’s all yours buddy. I left that flea bitten “profession” long ago to pursue businesses that actually turn a profit.
Just thinking of you doing twice the work for half the fee gives me pure job. Thinking of you working for less than minimum wage while your expenses continue to increase by 10% or more each year gives me a warm fuzzy feeling. Thinking of your increase in liability skyrocketing at least 10 times over the past 2 years offers me pure elation. I’ll watch for your name on the bankruptcy docket so I visit you on your finest day.