Appraisers Blamed for Killing a Market Recovery

There's a Catch-22 that always arises when home prices start to increase near the end of a recession. Even though buyers are willing to pay more, appraisals often come in lower than the agreed-upon price because they're based on comparable sales from three to six months earlier, when prices were bottoming. Real estate agents and mortgage brokers say it's happening now, and that it's disrupting sales.

But this time they're placing the blame on new appraisal rules, the Home Valuation Code of Conduct, put into effect by Fannie Mae and Freddie Mac on May 1. At the heart of the new Code of Conduct is a rule prohibiting mortgage brokers from ordering an appraisal directly from the appraiser. They now have to go through the lender, and increasingly lenders are using third-party appraisal management companies to parcel the work out to individual appraisers.

The idea is to insulate the appraiser from pressure to inflate home values. During the housing boom, many appraisers complained that they felt pushed, directly or indirectly, by mortgage brokers and lenders to come up with home valuations that justified high sales prices. If they killed too many deals, appraisers feared mortgage brokers would take their high-volume business to someone more accommodating.

But critics say the appraisal management companies have boosted fees to consumers by around 40 percent, while drastically cutting the amount paid to the appraisers doing the actual work, and pocketing the difference. Inexperienced appraisers, often from out of town but willing to work cheap, are rushing through jobs and making costly mistakes, they say.

Earlier this week, when the National Association of Realtors released its home sales report for May, chief economist Lawrence Yun said sales volume was not as high as expected based on the number of pending home sales they had reported earlier because "faulty" (Yun's word) valuations were preventing buyers from getting loans.

"In the past month, stories of appraisal problems have been snowballing from across the country with many contracts falling through at the last moment," he said in the press release. "There is danger of a delayed housing market recovery and a further rise in foreclosures if the appraisal problems are not quickly corrected."

The Appraisal Institute fired back with its own press release: "We take offense with the notion that an appraisal is only good if it happens to come in at the sales price. That mentality helped cause the mortgage meltdown to begin with."

Ding!. End of Round One.

Round Two: I asked a few local real estate agents if appraisals are derailing sales.

Brett West, a McEnearney agent in Old Town Alexandria, said "Thus far, no." He recently had an Federal Housing Administration lender ask for a second appraisal at the 11th hour, just before closing, because of concern over declining market values. And another recent appraisal came in at $10,000 below the sales price, but the seller agreed to the lower price.

Donna Evers, president of Evers & Co. Real Estate in the District, said, "Yes, we are having trouble with appraisals. ... Lenders are pulling back too much (like the pendulum swinging too far in the opposite direction) and the appraisers are under-appraising like mad."

Jacqueline A. Thomas, a Keller Williams agent in Upper Marlboro, said, "No. More than anything, they are too high." She was trying to get the bank to approve a short sale, but the high appraisal made that more difficult.

Toni McIntyre, a Long & Foster agent in Reston, said, "Oh yeah, big time." But the worst experience she has had -- when an appraisal came in $75,000 below the sales price -- happened last September, before the new rules went into effect.

Sue Goodhart, a McEnearney agent in Alexandria, said, "I think it will be less of an issue as we get into the next few months." That's because there will be higher, recent sales prices to back up appraisals. But she complained about appraisers who are unfamiliar with the area. "They have no clue. It is extremely frustrating."

Bob Jurgensen, a Weichert agent in Manassas, said, "Local appraisers seem to have less issues than when the scheduling service assigns appraisers [from] out of the area to do appraisals in Prince William or beyond. They struggle with the comps and I get regular calls from these appraisers to verify my own listings that they intend to use for comps. But personally, of my deals, all have appraised just fine, and I've done about a dozen so far this year."

Thanks to The Post's Emma L. Carew for contributing to this post.

What are you buyers and sellers seeing out there?

By Elizabeth Razzi |  June 25, 2009; 6:00 AM ET