Implementation of New Appraisal Rules Has Been a Little Rocky
The new appraisal rules instituted to protect both lenders and borrowers from the hassle of inaccurate appraisals have actually ended up causing costly delay and turmoil in home sales.
From mortgage companies, to realtors, to the appraisers themselves, nobody is happy with the new rules, which basically govern which appraisers a lender can use when making a home loan.
In question is the Home Valuation Code of Conduct, which lays out guidelines lenders are required to follow with any loans they would later want to sell to Fannie Mae or Freddie Mac.
The rules are supposed to reduce appraisal fraud and keep lenders from applying unethical pressure on appraisers to inflate appraisals. The code, which does not apply to VA or FHA loans, went into effect on May 1st.
Experts say that the rules have accomplished their intended purpose of protecting borrowers from inflated appraisals, but there are several unintended side-effects from the code. The timeliness of an appraisal is important because often there is a time frame dictated by the sales contract and also a time frame for borrowers to be able to lock in an agreed upon interest rate. Many real estate insiders have complained that the new code has, in some cases, caused delays and overall uncertainty in the appraisal process.
Cost is another factor which has been affected by the new rules. In the past, lenders would use rely on “drive-by appraisals”, which basically require a confirmation that the home is still on the property and research into the properties in the neighborhood. Now lenders are using more thorough appraisers, which means more cost. In addition, many lenders are requiring borrowers to cover the cost of appraisal up front, an expense the borrower can’t recover if the sale doesn’t close. For appraisers, the new code means that most of their work comes from referrals from appraisal management companies, for which they make less than if they are hired for the job directly. Appraisal management companies, some independent and some owned at least in part by lenders or title agencies, keep roughly half of the fee when they refer an appraiser.
Another change brought about by the new code is the requirement that the lender provide a copy of the appraisal to the homebuyer at least three days before the loan closes. Lenders have closely adhered to this rule because failure to do so could prevent their ability to sell the loan to Fannie or Freddie. There have been occasions when the lender hasn’t gotten the appraisal in time, thus couldn’t get it to the buyer, and closing has been pushed back to comply with the disclosure rule.
Experts advise that buyers ready themselves before applying for a loan in the post-Home Valuation Code world. Check into sales prices of similar homes nearby, research online home valuations, and monitor news reports about trends in property values. A buyer should also have a conversation with either a loan officer or real estate agent to become as familiar as they can with the process before applying for a home loan. Buyers should never waive their appraisal contingency, as it provides their only protection against an inflated sale price.
The code also calls for an “Independent Valuation Protection Institute”, which would offer a hotline for compliance concerns and complaints and promote ethical operating procedures among appraisers. Such an institute, while a good idea, has yet to be established.