THE APPRAISAL PROCESS CONTINUES TO CHANGE!
May 30, 2018
very rare exception, an appraisal is required on every loan transaction. A
final loan amount will be calculated by the using the lesser of the purchase
price or the appraised value whichever is the lower. There can be an element of
surprise should the appraised value be lower than the agreed upon purchase
price. A refinance loan can be similarly impacted should the home value be
over-evaluated when initiating a loan.
the old days, the loan officer was able to call the appraiser and ask for an
opinion of the likely value of a home, especially one in which a refinance loan
was being initiated. If the appraiser suggested that the desired value was
likely not reachable he borrower could cease the refi
loan without having spent the appraisal fee only to learn that there was
insufficient value to allow the loan to proceed. Today loan representatives are
prohibited from discussing value with an appraiser – the result is some
refinance loans become canceled only after having paid for an appraisal that
indicates an insufficient value for the project to be beneficial. This is one
portion of the new regulations that don’t seem to benefit the consumer.
appraisal process is a bit convoluted today. The loan process must be
initiated, a loan file developed and submitted to a selected lender and then an
appraisal may be ordered. The order is placed via the lender’s Appraisal
Management Company (AMC) and the loan representative has little contact with
the actual appraiser. This process was initiated following the recession of
2008 in an effort to protect the borrower. (See the history below for a
perspective on the changes)
many of the original concerns have been addressed in the ensuing years, there
are some impacts that still exist in the appraisal process:
time frame for acquisition remains lengthened – having to submit a loan package
to a selected lender prior to any appraisal order creates some delay.
lack of easy portability (the ability to transfer an appraisal from one lender
to another) limits a borrower’s capacity to change lenders. This has improved
marginally in recent days.
designed system has resulted in increased costs which are unlikely to diminish.
process of having to order an appraisal via the lender which goes to the AMC
and then to the appraiser makes challenging the value or any other aspect of an
appraisal difficult – the appraiser is practically insulated from criticism
from the borrower (who pays the fee) and the loan officer. .
original process was an AMC panel of appraisers from which a given order was
granted in rotation. Difficulties arose when some less qualified appraisers on
said panel were assigned resulting in what were considered poorly completed
reports, etc. A recent good change is that some lenders allow the local loan
office to have submitted local appraiser names (usually 3 or 4) from which the
assignment is made. This, in most cases, assures the likelihood of a more
the process in some locations (mostly rural) is impacted by the lack of a
sufficient number of appraisers resulting in delays in the acquisition of the
final appraisal report. Too often, the loan file is completed and everyone is
waiting for the appraisal so that the loan can be finalized. The industry has
floated the idea of using internet values (via -------) to speed u the process.
Critics suggest that the internet values are mostly lower cannot account for
recent upgrades or other enhancing elements of a home – only a
individual assessment will do. This is a factor that is still undetermined as
to a viable solution.
the process is working reasonably well. A bit of history may be interesting in
understanding the ever evolving nature of the appraisal process.
The Home Value Code of Conduct (HVCC) was enacted in late
2009 in an effort to ensure appraiser autonomy, free of any persuasion from
real estate lenders or licensees. Following the sub-prime meltdown in 2008,
some accused appraisers and mortgage brokers of collusion in the inflation of
home values. Some appraisers, it was said, had complained that if they “did not
make the value number” required by real estate practitioners that they were
sometimes threatened with not receiving any additional business. In retrospect,
it was determined that any such acts of coercion were actually infrequent.
Unfortunately, Congress latched onto the notion that it was the appraisers and
mortgage brokers teaming up to artificially inflate home values and was the
major cause of the mortgage implosion.
Such a simplistic notion allowed Congress to avoid placing
the responsibility where it was justified . . . with the banks who created the
bad loan instruments which were then “sold” to the public as a way to
experience the American Dream of home ownership. While the notion of appraisers
having been the major catalyst for the housing problems was found to be
inaccurate, Congress seized upon the idea to, in their words, “reign in” the
rogue appraisers and mortgage brokers. Here then is what evolved.
THE HOME VALUE CODE OF
Prior to the HVCC process, a mortgage broker typically
called an appraiser to order the appraisal. Deemed to be “too cozy a
relationship” between broker and appraiser, the new legislation made it mostly
illegal for a broker to have any contact with the appraiser. The law spawned
the development of Appraisal Management Companies (AMC’s), a third party from
whom appraisals were to be ordered. The process now required the mortgage
originator to contact the lender to whom the loan would be submitted after
which the lender would contact an AMC. The AMC, in turn, contacted an appraiser
(presumably on a rotating, neutral process) who would perform the appraisal.
Ironically, the big banks became the owners of the AMC’s, providing yet another
profit center for the banks.
Almost immediately the flaws in the system surfaced. Here
are but a few of the problems that emerged:
1. Appraisal fees increased. A $300 to $350
appraisal fee grew to $500 to $600 depending upon the AMC to which it was
2. While the AMC was now collecting the
higher fee, many appraisers complained that they were being forced to accept a
lower fee for their services.
3. Many of the most experienced
appraisers opted out of the AMC registration process, claiming that they would
not work for the reduced fees offered by the AMC’s.
4. This, in turn, resulted in many
newer, inexperienced appraisers acquiring assignments. Complaints immediately
- Poor appraisal quality.
- Appraisers being assigned from outside the
area, with little or no knowledge of the local property to be appraised.
- Plummeting home appraisal values as
appraisers reacted to the “persuasion” of the AMC’s to be conservative in their
- Delays due to the convoluted process which
made it nearly impossible to rebut or question errors in an appraisal. Rebuttal
of any errors had to go from the mortgage broker to the lender to the AMC to
the appraiser and back again.
- Home purchase and refinance transactions
failed because of poorly done appraisals with no constructive way to correct
- With no way to correct a poor appraisal,
lenders and borrowers were too often required to seek a second appraisal with
its additional fee but with no assurance that the second appraisal would be an
- The lack of portability of the appraisal made
it difficult for a borrower to seek another lender in the case of a loan denial
(often over some obscure requirement of the particular lender). In other words,
if a loan was denied for some minor reason at one lender, the borrower’s loan
file could be resubmitted to a more accepting lender but a new appraisal (and
fee) was required.
- Permits took on greater importance. Appraisal
reviewers seemed to be more focused on making sure appropriate permits exist
for any perceived improvements. The result was some absurdity with requests for
permits for wood sheds, out-buildings that have no affect on value, etc.
As complaints mounted during most of 2010, the mortgage
industry hoped that the entire HVCC program would be scrapped. Congress instead
“re-examined” the HVCC process with the intent to make changes. Here are the
changes enacted in late 2010 and our comments at the time:
A second appraisal/field review can be
requested. An appraiser may be asked for a detailed explanation regarding the
comps used and why. If a second appraisal is ordered, the first appraisal will
become null and void, regardless of the value of the new appraisal, higher or
lower. (while this may address the concern that
we’ve had that we were unable to easily challenge even erroneous information
contained in an appraisal, it is unclear how such a request will be made and
exercised. Initial attempts to seek change has resulted in some appraisers
merely commenting “this is my determination of value” and end of discussion.)
Lenders will not be required to order appraisals
via an AMC. (While this sounds great, we do not yet know how the alternative
will be enacted. Lenders may still opt to use AMC’s? While some believe this is
a first step to allowing mortgage brokers the opportunity to again order their
own appraisals, the language says “lenders” and this most likely means that we
will see little change. In fact, )
There is language within the act that indicates
that appraisers “should be compensated in line with what is reasonable within
their community”. (When the AMC process developed, appraisal fees increased
but the appraiser’s actual fee declined. The result was that many of the more
experienced appraisers chose not to participate in the AMC ‘s
as they chose not to work for the lesser fee. Some appraisers have interpreted
this new language as meaning that they will again receive the greater portion
of any fee charged and will encourage the more experienced appraisers to again
become available for appraisal orders. This would be a good thing).
Interior photos are now mandatory, including
kitchens, all baths and main living areas. Photos of any physical
deterioration, remodeling or renovation projects are required. (We don’t
know how much scrutiny will be applied to worn out carpeting, small damages to
door frames, small holes in walls, deteriorating paint or the myriad other now
considered minor items. Will cluttered or “messy” homes become problematic?).
The value of personal property included in the
sale will now be deducted from the value. (Does this mean that if the
agreement that the “refrigerator is to remain”, “window coverings are
included”, the “chandelier is to remain” or the “in wall TV is to stay” will
result in deductions?)
There was an attempt to address the portability
of appraisals by indicating that a lender could accept an appraisal completed
by another lender with the proviso that they guarantee that it was performed
via the HVCC requirements. (The result
has been no portability as lenders are reluctant to guarantee that the HVCC
process was adhered to by the assigning lender. We continue to hope that this
may still change to accommodate borrowers).
In addition to all of the above requirements and continuing
adjustments, every lender has rules regarding when within the loan process the
appraisal can be ordered. Nearly all appraisals are now ordered and paid for
via the borrower’s credit card, often with no knowledge of the actual price of
the appraisal until the bill arrives.
Perhaps one of the most important losses in the new process
is the opportunity for the mortgage broker to call the appraiser prior to
his/her conducting the appraisal to assess the likelihood of the property’s
value. This was particularly helpful to those seeking refinances as we could
“check” to see if it might be possible to obtain the necessary value to make
the refinance transaction viable. Now, we too often obtain an appraisal with
the anticipation that the value will be sufficient only to be disappointed in
the appraiser’s determination of value. Unfortunately, the borrower has already
paid for an appraisal that is useless for the loan purposes. How nice it was in
the past to determine that before having to spend the $500 - 4600 for the
Continuing change is inevitable and we will all make the
necessary adjustments. The key is to determine exactly what is required by any
new legislation and rules and how we must accommodate the changes. We will keep
you informed as we absorb the details.