More Government-Induced Headaches for the Housing Market


When the housing market crashed, our government began looking wildly around to see who to blame. Rather than examine the government policies that led to the crisis, they focused on all the other people involved in a real estate transaction.

One such group of people was appraisers. The claim was that it was “their fault” because they reported artificially high values in order to please the mortgage lenders and real estate agents who sent them business. Of course that was nonsense, because appraisers use the actual sales prices of comparable homes that have sold recently. If their adjustments were unreasonable, the underwriters would have rejected the appraisals.

But never mind the truth.

The result of this part of the blame game was the Home Valuation Code of Conduct (HVCC). It went into effect on May 1, 2009 and affects any mortgage that will be sold to Fannie Mae or Freddie Mac.

To prevent conflict of interest, mortgage brokers and real estate agents are no longer allowed to choose appraisers – or even talk with the chosen appraiser. A third party chooses the appraiser, and of course, takes a share of the fee.

In their zeal to make sure there were no conflicts of interest, someone decided that the best course of action was to bring in appraisers who didn’t know anyone – and that meant they were unfamiliar with the neighborhoods in which they were appraising.

They had never seen the homes they were using for comps. They didn’t know the neighborhood values or whether a neighborhood was improving or declining. If they had to use different neighborhoods, they didn’t know which were fair comparisons.

In other words, they didn’t know what they were doing. Worse, they were now sharing their fee with the 3rd party, so they had no desire to take extra time for research.

One result was that appraisers used bank owned homes in their appraisals of non-distressed homes. Since bank owned homes almost always sell below market value (due to condition and other factors) this served to lower the values of all homes in the community.

Just as rising prices and the resultant appraisals drove the market upward, below market bank owned homes have driven the market downward.

The perhaps “Unintended” consequence of this move is that buyers who make market value offers on non-distressed homes are seeing their loans denied because the appraisals came in too far below the agreed upon price.

The second consequence is that sellers who “should” have some equity are now being forced to seek short sales – which delay the selling process even longer.

I’m fond of the phrase “It’s all good.” But in this case, it’s all not good.  But it gets worse.

Now the government is adding yet another layer of bureaucracy with the implementation of the new “UAD” requirements for all Fannie and Freddie loans.

Under these new requirements, appraisers will be required to determine whether a sale was an “arms length transaction” (between 2 unrelated / uninvolved parties) and if it was a short sale, bank-owned, court ordered, estate sale, relocation, or a listing.

Appraisers will have a “uniform” form to fill out and submit prior to submission for loan approval. This will, of course, add some delay and expense to the loan process.

The idea may be good, but the implementation is apt to be yet another disaster for buyers, sellers, real estate agents, mortgage lenders, and – of course – appraisers.

Unless all appraisers are diligent in determining the status of the sale, statistics could become badly skewed. How many underpaid appraisers will take the time to call the agents associated with each of the comps and learn the sales status of those homes? How many will simply guess?

How about we take all the 3rd parties out of the process and simply require the appraisers to use comps with a similar status – or adjust appropriately? As a safety check, their standard appraisal form could have a space in which to note the name and number of the person who verified the selling status.

How about we let the mortgage underwriters take responsibility for reading the appraisal reports to see that the comps make sense – just like the used to?

Then we could go back to allowing lenders to choose appraisers who are familiar with their cities, and go back to paying the appraisers their full fee.


Author: Mike Clover


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