Question: We read your column last week about the person who was having trouble getting a copy of his appraisal. We are refinancing and we have a slightly different problem with an appraisal. We locked a loan with a mortgage company a month ago to take advantage of the low interest rates. It has now been almost a month and the mortgage company says they still don’t have the appraisal back. We are about to lose the 4.375 percent interest rate we had locked in because our lock is about to expire and they can’t close the loan without the appraisal. Now that mortgage rates have gone up, we may never get a chance for that low rate again. We are very upset and we complained to our loan officer and he says there is nothing they can do about it because of some new law that makes it illegal for him to talk to the appraiser. That sounds crazy to me. Is there really such a law, and why would they make it illegal to talk to the appraiser? We are going to lose our mortgage rate because the appraiser didn’t do his job on time.
Answer: The mortgage industry is in a state of chaos because of the implementation of the Home Valuation Code of Conduct on May 1st by Fannie Mae and Freddie Mac.
The valuation code prevents mortgage loan officers from having any contact with appraisers. Mortgage companies must now use an independent third-party firm called an “appraisal management company” to order their appraisals.
The idea behind the new rule is to prevent the kind of undue pressure that some unscrupulous loan officers had been putting on appraisers to produce unrealistically high home values. Illegitimate appraisals are partly to blame for the housing crash because banks made mortgage loans based on artificial home values and when those home values fell back to reality, the borrowers and the banks found themselves underwater because the loan balance was higher than the value of the home.
While the new rules sound good in theory, they have turned into a nightmare for those of us in the mortgage business for several reasons. First, the appraisal management companies are charging between $380 to $425 for an appraisal, but they are paying the appraisers only about $200 for doing the work. Appraisers used to make about $425 per appraisal, and since they are now making only half as much money, they don’t want to work as hard and the quality of the appraisal reports has decreased dramatically over the past month. This has led to mortgage underwriters calling for more examples of sales prices for comparable homes, which slows down the underwriting process and costs the borrower extra fees for the underwriting review.
Another problem with the new system is that appraisers are assigned randomly and are often sent to appraise properties far outside their area of expertise. For example, an appraiser in Marysville might be assigned to appraise a home in Bellevue. Since the appraiser is not familiar with that local housing market and because they don’t want to spend much time on research due to the low fee paid for the appraisal, the appraised values are often far out of line with the true market value of the home they are appraising.
And customer service has gone out the window because now all appraisers are treated equally. They get work by the luck of the draw rather than earning it by doing a good job and turning in their appraisal reports in a timely manner. As a result, the poor-quality appraisers who were struggling to get by in the past love the new system because they are guaranteed work no matter how badly they perform, while the top quality appraisers are considering getting out of the business because they don’t want to work cheap and now have no incentive to do a good job.
It is very frustrating for those of us in the mortgage business because there is nothing we can do about it. Before the code went into effect, we typically got our appraisals back in one to two weeks. Now, we have some appraisals that are taking more than a month and we are not allowed to call the appraiser and ask what the problem is.
Another problem with the system is that now consumers bear the entire risk of the appraisal report coming in too low. In the past, we could ask an appraiser if a house would appraise for the value that the homeowner estimated it was worth. If he or she said “no,” the appraisal was cancelled and the homeowner didn’t lose any money. Today, homeowners have to pay the appraisal fee up front and hope that they have enough equity to do the loan. If not, they have just wasted $425.
Mortgage industry trade groups are fighting to have the rules repealed, but until that happens we are stuck with a system where you never know if you’ll get your appraisal in a week or a month, or whether you’ll get the value you need or waste your money on a worthless report. It’s frustrating for everybody, borrowers and mortgage lenders alike.
Mail your real estate questions to Steve Tytler, The Herald, P.O. Box, Everett, WA 98206, or e-mail him at economy@heraldnet.com.
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