Just after the housing bust, then-New York State Attorney General Andrew Cuomo sought to reform the appraisal industry by convincing Fannie Mae and Freddie Mac to bar loan officers, mortgage brokers, or real estate agents from any role in selecting appraisers. The Dodd-Frank financial overhaul law that went into effect in 2010 went one step further and now regulates both the appraisal industry and the fees they are paid.
Some in the real estate industry take issue not with the intent, but with the scope of new regulatory requirements.
NAR President Ron Phipps said in a statement earlier this year that "asking for up to 10 comps, reducing turnaround times, and expanding the scope of the assignment without appropriately adjusting the fee is adding unnecessary risk to an already fragile mortgage market system. We must maintain an environment where our independent appraisers are treated fairly as they are the lynchpin of the mortgage transaction."
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Rather than hire appraisers whose work is known to them, banks now outsource their selection to appraisal-management companies, some of which are even units of other banks and financial companies. These appraisal-management companies take a sizable cut of the fee, leaving the appraisers under pressure to work faster, asserts some criticism of the reforms.
"There's mixed reaction in the industry," says Gary Painter, associate professor at the University of Southern California School of Policy, Planning and Development and an affiliate of the USC Lusk Center for Real Estate. "An independent appraiser may mean someone with expertise in an entirely different market, with no idea about the neighborhood, the schools, and little understanding about available comps except for their price. A lot of business relationships have been broken and it will take time to build those up again under the new rules."
"Many are worried about a Lemons Problem," he said, referencing the vernacular of the economics discipline in describing quality uncertainty, for cars or other big purchases.
For its part, the Mortgage Bankers Association has said in white papers on the topic issued both during the period of alleged overinflated appraisals and in the tougher market conditions since, that anti-fraud rules already existed. The emphasis should have been on enforcing those rules ,not creating new ones.
Limited examples. By most accounts, the biggest impact on home appraisals currently is the light volume of sales, which limits the number of comparable properties.
JoAnn Roberts, an agent for Coldwell Banker in Florida's Miami Dade County, says she, as the seller's agent, recently attended an appraisal that the buyer's agent opted to skip. The appraiser made several remarks and spent several moments at the outset confirming the lending bank's name in his pre-appraisal notes—an emphasis on the appraiser-bank association that made Roberts uncomfortable.
She also bristles at the outcome of that appraisal. The property, which she describes as a 4,000-square foot contemporary home built in 2002 near Miami, had an $810,000 contract price. To get enough comparables, the appraiser's search criteria included houses in a wide $500,000 to $800,000 range, she says, and the appraisal came in well below the contract.
Banks do not consider multiple appraisals. Agents have to go back to the same appraiser and make their case, and some banks are willing to accept an adjusted number from the original appraiser. But fighting for an adjusted figure is often a losing battle. The buyer can opt to roll the dice by moving the loan to a different bank with a different appraiser, often costing the seller, and less often, the buyer, an additional $300 to $500.
It's a fee that may be worth the effort, considering that a new appraiser can deliver very different results, real estate professionals say.