Homeowners and New Home Appraisal Laws
Fannie Mae (Stock Quote: FNM) and Freddie Mac (Stock Quote: FRE) are busy tweaking and recasting home ownership rules, with the Home Valuation Code of Conduct their latest act of tinkering. The Act takes direct aim at home appraisals and savvy homebuyers (and sellers) should know what’s in store for home appraisals with the new rules.
Fannie and Freddie implemented the HVCC on May 1 and Under the new rules, appraisers are now used by appraisal management companies, hired by lenders, to value for-sale properties. In recent years, mortgage firms or real estate agencies mostly managed that task. According to some estimates, appraisal management outfits can command up to 50 percent of the appraisal fee forked over by the consumer.
The goal of the Code was to cordon off real estate agents and mortgage brokers from independent home appraisers. After the real estate boom of 2005 and 2006 and before the housing market collapsed, some appraisers complained that they were being aggressively pushed into valuing a house for more than it was actually worth, so buyers could get their asking price and agents and brokers could earn bigger commissions.
A 2003 study from Richfield, Ohio-based October Research Corporation reported that 55% of appraisers questioned felt pressured to inflate home property values. A subsequent study by the research group in 2007 estimated that the number of “pressured” appraisers grew to 90%.
The result -- the push for a “church and state” separation between real estate professionals and appraisers. But now that the Home Valuation Code is in place, what impact can consumes expect?
First and foremost, real estate professionals, notably mortgage brokers and real estate agents can’t get involved in picking an appraiser. That responsibility has fallen back into the laps of the lending institutions (as late as the mid 1990’s, banks handled the vast majority of appraiser selections). If a bank wants to eventually sell the mortgage to Fannie or Freddie, it has to manage the appraisal process now.
But rather than keep the appraisal management process in-house, lenders are turning to appraisal management companies, which add yet another layer of fees (the appraiser also earns a fee, which are passed on to consumers by lenders.)
Consumers may also suffer by having an appraiser who is not highly experienced and who may not know their communities (and, by extension, their community’s home values). The National Association of Homebuilders says that appraisal management firms are apt to hire appraisers with less experience who will accept less compensation to handle appraisals.
Another potential issue for consumers is that, based on Code statutes, their real estate agents or brokers are experiencing limited communications with appraisers. A real estate professional can only contact the appraiser if they believe the home appraisal was off base, numbers-wise, or if an error was made in valuing a property.
The backlash in Washington has already begun. A proposed 18-month moratorium on the appraisal code has been introduced in Congress (sponsored by Travis W. Childers (D-Miss.) and Gary G. Miller (R-Calif.). Legislators say they are acting on behalf of consumers and real estate professionals who charge that the Code is hiking consumers’ costs, fouling up property values, and crimping home sales – all at a time when the housing market needs a boost.
The end game? Look for either Freddie and Fannie, or even Congress to eventually step in and modify the Home Valuation Code of Conduct. Any threat to home sales is a threat to the economy.
With elections looming in 18 months, nobody knows that better than Washington politicians.
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