Home-Price Recovery May Be Undermined by Appraisals

2009 June 25

June 25 2009 - There may be another culprit scuttling a U.S. housing recovery: low home appraisals.

Flawed appraisals are derailing real estate sales and depressing values across the U.S., the National Association of Realtors said yesterday as it reported that existing home prices declined 17 percent in May from a year earlier.

“It’s pointing to thousands of delayed or canceled transactions,” Lawrence Yun, chief economist of the Chicago- based Realtors group, said in an interview. “We’ve had a massive inundation from members saying this is a big problem.”

Appraisal rules that went into effect on May 1 require lenders that sell loans to Fannie Mae or Freddie Mac to set up a firewall between appraisers and loan officers to prevent improper influence. The rules are the result of an agreement between the mortgage buyers and New York Attorney General Andrew Cuomo, who said an investigation found appraisers inflated values under pressure from lenders.

The agreement mandates that banks order a second appraisal on 10 percent of the loans they sell to Fannie Mae and Freddie Mac, and warns against accepting the higher of any two valuations. The guidelines have led to more conservative valuations by many appraisers and a “chill” in lending, according to John Brennan, research director at the Appraisal Foundation, a Washington-based trade group. A low appraisal is one that comes in under the price a prospective buyer has agreed to pay for a property.

“Sometimes policy can lead to unintended consequences,” Yun said.

Low appraisals have become a focus of the California Office of Real Estate Appraisers, which oversees licensed appraisers in the state. Investigations by the Sacramento-based agency rose 36 percent to 418 at the end of May from the same period last year, said Bob Clark, director of the office. The probes are looking into allegations including flawed valuations and use of comparable sales too far from the subject property, he said.

The new guidelines require lenders to order valuations through third-party vendors called appraisal management companies that increase costs to prospective home buyers, said Brandon Chamberlin, president of Ashcroft & Associates PC Real Estate Appraisal Services in Vancouver, Washington.

Home-Price Recovery May Be Undermined by Appraisals

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