Appraisals

Today’s appraisal process is almost an “overcorrection” – the process has been primarily shaped by the Home Valuation Code of Conduct (HVCC), a 2009 policy jointly adopted by Fannie Mae and the Federal Housing Finance Agency that established a new era of structure and separation for appraisals. To combat appraisal manipulation, the HVCC stipulates that loan officers are prohibited from influencing the appraisal process, and can have no contact with appraisers.

Instead, lenders now interact with what are known as appraisal management companies, or AMCs, which act as the middlemen in the process and choose which appraisers will evaluate which properties. Though mortgage underwriters, who have no direct relationship with the loan, can still drill down to the appraiser level and choose which appraiser they’d like for a certain property, the loan officer maintains no contact with the appraiser. No contact, the new system goes, no pressure, and therefore, no questionable appraisers, no running up of housing prices and no sequel to the housing bubble.

Except regulators made one critical error in their formulation of the new HVCC appraisal rules, one they perhaps could not have anticipated. The new rules abolished what are known as “positive time adjustments,” or, an adjustment that an appraiser makes to account for a possible discrepancy in time between the property being appraised and its comps.

So as a hypothetical: Property A is being sold, and Comp A matches the property almost perfectly – except Comp A was sold six months ago, and the market, by the measure of the major housing price indices (the Case-Shiller in particular), has appreciated; thus, the appraiser (pre-HVCC) would have made a positive time adjustment, factoring in the market appreciation. It’s a logical tool for appraisers to have access to, but with it no longer available, appraisers are often severely limited by the data available to them.

The elimination of positive time adjustments was a decision made during the recession, and was therefore crafted with a depreciating market in mind; what happens, though, when the market inevitably begins to recover? How will there be an appreciating market when the appraisal process does not take into account an appreciating market?

“The biggest challenge to increasing market prices is lending appraisals. I’ve had several of my listings sell for over asking, only to have the appraisal come back low and complicate the deal,” Stultz says.

It’s not just Stultz experiencing problems with appraisals coming in low, as you might be able to imagine. According to anecdotal evidence from various agents in the Chicagoland area, and even evidence as demonstrated by a previous Chicago Agent issue (“The Truth About Appraisals” vol. 10, issue 9, 5.16.13), several deals agents have are afflicted with some sort of appraisal issue.

In some cases, not only is the appraisal coming in lower than the list price, but there may have been multiple offers on the property, and therefore several bids over the list price. Stultz says she recently had a situation where several buyers bid on a home, and after multiple offers were bid, the sellers accepted a bid that was $80,000 over the list price. But when the appraisal came in much lower than the list price, it added unnecessary headaches to the transaction.

It also is making agents wonder about the appraisal process, even though they understand that appraisers need to follow strict guidelines – especially since the recession. But if several buyers are willing to pay an amount that is well over the home’s list price, doesn’t that mean that the value of the home is higher than the official appraisal it receives, as well?

It’s a tricky area. The most heralded tips are often to make sure the appraiser has all the nearby comps and all the correct information about the house, and if anything seems inaccurate about an appraisal, question it. As prices slowly recover in the next three to five years, the housing market will start to gain new inventory, leading to more things for people to buy and a balanced market, where the number to sell is fairly equal to those seeking to buy a home.