The appraisal system has received as much – or maybe more – attention over the past three years than at any other time in recent memory. Most of that attention, unfortunately, has been negative, and directly reflects the heightened scrutiny home values receive when the market is troubled.
The frustrating thing is that it’s not clear the media attention focused on the appraisal system so far has driven constructive changes. Even after a number of attempts to reduce conflicts of interest and increase accountability – through rules imposed by Fannie Mae and Freddie Mac, and by the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as through other measures – actual improvements in the valuation process seem to be slow to surface.
Last week, concerns over the appraisal system were in the spotlight again after the Wall Street Journal published a story, “Judgment Call: Appraisals Weigh Down Housing Sales,” that examined some of the issues in play. The story led with a reiteration of what builders already know: “One of the conclusions from the housing bust: The appraisal system was broken. One of the conclusions some have drawn from the struggling recovery since then: The appraisal system is still broken, but in a different way.”
Credibility erosion
One of the most problematic issues is the use of foreclosed properties as comparables – a target of repeated complaints by homebuilders and a matter of particular concern to those in markets burdened with delinquencies. In addition, the Journal story notes, many appraisers in the field today are less experienced, unfamiliar with current building trends (particularly green building features), sometimes rely too much on automated valuation models, and are pressured by lenders to be more conservative in their valuations.
The Journal cited a National Association of Realtors survey showing that 10% to 12% of members had a contract canceled in 2010 as a result of a low appraisal, 10% to 13% had a contract delayed, and 16% to 20% reported that the sales price was negotiated lower due to a low appraisal.
Lenders are “instructing appraisers to be a little conservative, and that responsibility on the one hand is seen as credit tightening and, on the other, as exacerbating the housing problem,” Columbia Business School economist Chris Mayer told the paper.
One of the potentially positive things about the Journal story is that it spent most of August 12 as one of two lead items on WSJ.com, and likely got a ton of hits. That’s a big forum, with a broad readership. Maybe it won’t prompt rapid remedies for problems in the appraisal industry, but it certainly can’t hurt.
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I recently bought a home and as usual the mortgage company required an appraisal. The appraisal came back with the purchase price as the appraised value. Seems the bank forwarded the purchase agreement to the appraisal company which to me invalidates any subsequent from that company. In my mind that's a practice that isn't in my best interest or the bank's. I feel my money was wasted.
In addition the sole comparable sale in the appraisal was from 8 months prior and the other comps were houses that were still for sale. I doubt the appraiser did more than tour the home to take the supporting pictures. The rest of the work he did could have been done on the internet in a very few minutes. He was overpaid for his paltry efforts. I voiced my concerns to the mortgage company but I fear they fell on deaf ears.
While I feel sorry for builders trying to compete with short sales and foreclosures that is the market and they do and should have an effect on values. The best thing a builder can do is point out the significant differences between his property and others of similar size in the market. The only way these problems will disappear is by educating the appraisal community and by forcing them to do their jobs in a proper, professional manner.
I recently had issues with a custom house where the appraiser did nothing more than a cursory look at the home and took absolutely no credit for the energy improvements or construction materials and workmanship.
The material cost of the house literally could not be covered by the appraisal value that was assigned to the home. After petitioning the bank and appraisal company, the appraisal was discarded and a new one performed. Needless to say it was an extremely frustrating experience. If this is a "fixed" process, I'll take the old broken one any day.