Shock to the System

A well-intentioned new rule may hurt homeowners more than it helps.

By Matthew Halverson August 13, 2009 Published in the September 2009 issue of Seattle Met

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.

And it’s those middlemen that have loan originators like McConnell steamed. Since AMCs entered the valuation equation, costs for appraisals have gone up by as much as $150, yet appraisers are making less. Before May, Auburn-based appraiser Tom Love charged $400 for the service. Now, he’s routinely offered $225, a drop that has forced half of his staff out of the business. Fewer appraisers can afford the new rates, and those who are left are either unqualified or have to work twice as hard to pay the bills. In either case, loan originators say, the quality of appraisals has significantly declined.

At the end of July, all seven Seattle-area loan originators interviewed for this story blamed the HVCC for killing at least one—and in some cases, several—home sales or refis they’d worked on since May. Jeff Tisdale, a loan officer with Sky Mortgage in Bellevue, watched a refi fall through in July when a home he conservatively estimated at $650,000 was appraised for $500,000. His client lost out on a $500 monthly reduction in mortgage payments.

Randy Ramig was finally able to refinance his mortgage, but he had to bring nearly $2,000 to closing to improve his loan-to-value ratio. McConnell is still seething. “This is one of the clearest indications of just how bad the HVCC process can be,” he says. “It’s a well-intentioned but poorly conceived and executed policy.

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