Buying and selling real estate takes sharp peripheral vision. You focus on the events in front of you, only to find you aren't seeing what clearly affects you most. Unfortunately, many events have ripple effects. One of these events -- the financial crisis -- has prompted a number of changes. One change is the Home Valuation Code of Conduct (HVCC), enacted May 1, 2009, in response to concerns that appraisers were being unduly influenced by outside forces. It was hoped that the HVCC would provide guidelines to insure appraiser independence. One safeguard in the HVCC required that someone uninvolved and independent of the mortgage loan process select the appraiser. Thus emerged a new entity, the Appraisal Management Company (AMC). Buyers, sellers or Realtors no longer have any input regarding appraisers. The most restrictions are on employees involved with the mortgage lending process; they are not allowed to have an appraisal-related conversation with either the appraiser or AMC.
However, these safeguards may have some unintended consequences, especially in the Anchorage market. Now that AMCs are being used, problems are arising in the price and quality of appraisals, according to a National Association of Realtors survey.
For instance, a whole new industry has emerged due to the requirement for a third party -- an entity other than the department directly working on the loan -- to coordinate ordering the appraisal. One problem with these third-party partnerships or affiliations is that they push profits ahead of the quality of the appraisal. Interestingly, these third-party affiliations are frequently owned by the lenders themselves.
For example, a typical Anchorage appraisal costs $600-$650. Since the AMC can boast of being the conduit for ordering the appraisal, they can negotiate with a select group of appraisers at a discounted amount. When the discounted invoice comes in, the AMC tacks on its fee of $100-plus for services before forwarding the appraisal and revised invoice. The lower the amount an appraiser agrees to charge, the better the profit margin.
The second problem is a reduction in the quality of the appraisal. Concerns about quality come in two areas. The first is price. Quality isn't usually available at the cheapest price. If the AMC selects the appraiser based on profit margin, quality likely decreases, particularly if the assigned appraiser is unfamiliar with the housing area or price range, or is given an unrealistic time limit to turn in the appraisal. A rotating list of appraisers doesn't solve this problem, either, especially if the next appraiser on the list isn't familiar with the area, price range or able to handle a unique property.
The second area is timing. It is difficult to rush a quality job. The AMC boasts a quick two-day turnaround, but who can set an appointment, inspect a property and prepare a thorough report in that short a time? In the real estate industry, these companies have become known as "rocket shops" because of the speed with which they produce paperwork. After all, the more you can complete, the more profit you make.
Is a quick turnaround bad? Most definitely! The appraisal value affects the biggest investment sellers have --- their home. An error in value affects a seller's net worth. Unfortunately, by the time the appraisal is done both buyer and seller are in a time crunch to complete the transaction. Although this sometimes happened before the rules changed, now the lender may be reluctant to challenge an appraisal for fear of appearing to influence the results. Additionally, battling the firewall of the AMC feels futile, so parties relent. Even if a national AMC reviews the report, it has no idea if the appraisal data accurately reflects the local market, so errors create false values.
Unfortunately, even with a blatant appraisal error, a seller doesn't have a place to complain. With implementation of the new rules in May, the Independent Valuation Protection Institute at (www.independent-valuation-protection-institute.org/) is still in development.
In Anchorage, this error is compounded because the seller customarily pays for the appraisal. If the seller pays an inflated fee, he is overpaying an actual buyer-generated cost. The matter becomes even worse if the transaction doesn't go through. The seller may not be able to use the appraisal for the next buyer and has to pay another inflated appraisal fee. Perhaps the solution to create a better balance between the parties would be to change the custom of who pays for the appraisal. After all, customary means it is still negotiable.
While many of these changes were necessary, some may have been an overreaction. Perhaps instead of creating another profit center, a better course of action would be for a lender to strengthen internal quality control. This seemed to have worked well in the late '80s when loan underwriters paid attention to their individual markets and the quality of the appraiser.
Only time will tell if the change in rules results in the desired effect. It is hoped we haven't simply set the foundation for additional abuse of the system -- again.
Clair and Barbara Ramsey are local associate brokers specializing in residential real estate. Their column appears every month. Their e-mail address is email@example.com.
30-year fixed 5.22% (5.25% last week) (6.52% last year)
15-year fixed 4.63% (4.69% last week)
5-year adjustable 4.73% (4.75% last week)
1-year adjustable 4.78% (4.8% last week)
Average national rates reported by mortgage company Freddie Mac