What Are Your Thoughts on the New “Code of Conduct” Rules for Appraisals?

Posted by: Carleton Sheets in Value, Real Estate Market, mortgage broker, Lender, Housing Market, Home Valuation Code of Conduct, fair market value, Economy, borrower, appraiser, appraised value, appraisal on Aug 24, 2009.

There has been much debate in the real estate community about how the Home Valuation Code of Conduct for appraisals that took effect May 1 is affecting the housing market.

The role of appraisers in the subprime mortgage debacle has been closely analyzed ... especially the fact that some appraisers allegedly felt pressured to bump the price of homes upward by providing faulty valuations and to overlook defects on thousands of homes to "pacify" mortgage brokers (and borrowers). If they refused, many appraisers felt they would lose business to other more "compliant" appraisers. This unethical conduct played a major role in the current housing crisis.

As a result, the government came up with new rules, The Home Valuation Code of Conduct, about who will hire appraisers, using local appraisers, and implementing future appraisal guidelines.

An article I read in The New York Times explains why some of the appraisal rules were changed ... and why some feel the new rules will fix one problem but possibly create new ones. Another article in Kiplinger's Personal Finance magazine also focuses on problems associated with the new rules.

Some people in the real estate community argue that these new rules, although well-intentioned, overlook the expertise of honest local appraisers. In addition, when lenders hire an appraiser, they may rely on a partnership with a non-local appraisal company that wouldn't understand the nuances of a particular local market (i.e. school system, etc.). For example, valuations may not be as accurate, which can cause a multitude of problems such as:

  • Declining neighborhood values.
  • Delays in closing.
  • Higher costs.
  • Cancelled contracts.
  • And more!

I realize that changes are necessary, but not changes that will compound the current problem. One of the articles stated there's a bill in Congress to impose an 18-month moratorium on the new rules. Perhaps the new rules can be amended during this period to fix the existing problems with appraisals---and not create new ones!

What do you think? Are the new rules flawed? Or do you think the real estate community is blaming the new appraisal rules for problems that have more to do with the economy than with faulty appraisals?


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Issues with Reverse Mortgage Appraisals and the new rules
written by Doug Bainbridge, January 26, 2010
As a loan officer involved with reverse mortgages, the new rules have proven very counterproductive in my opinion. In both Colorado and California where I work, there are too many situations where the appraiser will not give even the slightest estimate and then the potential borrower who needs some sort of relief then applies for a reverse mortgage only to find out the appraisal comes in too low so then they are liable for the appraisal fee. We spend too much time negotiating those fees down these days. I wish there was a better way to keep the lines of communication open so that estimates and awareness of value was more easily assessed especially in this economic climate when many senior citizen borrowers can barely afford the fees for an appraisal for a loan that will not be able to proceed.
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"Cash Back King Speaks Out" !
written by Daniel Merrick, January 28, 2010
In my area of Pennsylvania the appraisers have gone to far the other way in lowering values. I think of how much it would cost just in lumber, pipe, bricks, and materials to build just a 1000 sq ft home in my market, Still about $100,000 just to do that. The values with the new guidelines has houses going from $20,000 for the older homes in town to $250,000 for larger and I know of only 2 or3 in the market above that. My 4500 sq ft home was just appraised for $70,000 and just 3 years ago it was appraised for $135,000 ~ so my question is where is the justice in that? Build that 4500 sq ft home in my market today and lose 250,000 just to put it up for sale. Call me crazy for thinking logically about it, but the appraisal system needs to be updated to show real building costs and fair market values. One thing is for sure though, in this market, it is a great time to be buying for under value homes and creating cash flow!
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