New home valuation code becomes barrier to closings
By Yudislaidy Fernandez
In a tough economy in which sellers and buyers want to close on a deal quickly, real estate professionals must leap over hurdles caused by new home valuation rules.
The new federal Home Valuation Code of Conduct is delaying financing approval, inaccurately valuing homes and employing inexperienced appraisers, some real estate leaders say.
Two longtime appraisers also forecast more residential appraisers leaving the industry as a result of the changes.
The decision to establish the code was made last year, when government-regulated mortgage giant Fannie Mae, along with the Federal Housing Finance Agency, decided to set up new appraisal policies to create more separation between appraisers and lenders.
Ron Shuffield, president of Esslinger-Wooten-Maxwell in Miami, says the new rules have resulted in a lack of communication among Realtors, appraisers and mortgage brokers which, in turn, is frustrating buyers and sellers.
The regulations are slowing the process for potential homeowners to get financing, he said, with the process now taking about 30 days when before it took only a few days.
Mr. Shuffield said the delay in approval gives an added advantage to some buyers.
With residential inventory starting to fall, "for those properties in short supply, the buyer that doesn't have to go through the mortgage process will have the advantage," he said.
While he hopes the new regulations can help exclude those who scam the system, he said others in the market are paying a big price.
For example, Mr. Shuffield said some appraisers are doing below-value appraisals on properties.
"Sellers are so desperate to sell that they will accept the appraisal," he said. "But I think the best indication of value is what a buyer is willing to pay, especially now that we have several buyers willing to buy."
It's important for appraisals to be accurate, he said, adding that the best way to do that is to work with local appraisers who know the market.
Ashley Bosch, president of the Builders Association of South Florida, agrees on the importance of having not only an objective appraiser but one who understands the market and is familiar with the area to make a fair assessment.
Mr. Bosch said the biggest problem builders are having with the appraisal process is that some appraisers are taking into account real estate owned (REOs) properties owned by a bank as a result of foreclosure and short sales as comparables.
"If that's a distress sale, obviously it will be sold at a lower value than the market will accept because they [banks] need to get rid of it," he said.
A National Association of Home Builders survey shows that the problem is causing some signed sales contracts to fall through the cracks.
About 60% of builders surveyed reported inadequate appraisals and labeled as the biggest issue the use of foreclosures and distressed sales as comparables for new single-family homes.
In the survey, 54% reported appraised values coming in lower than the cost of building the home.
"If they are not taking into account the true cost of building the home, they are saying the home is not worth what it cost to build the home," said Mr. Bosch, who is a local residential and commercial developer.
Mr. Bosch said the builders association is calling on federal regulators to adopt concise guidelines that let appraisers assess values more fairly.
Philip Spool, an appraiser for 36 years in Miami-Dade, agrees that some inexperienced appraisers aren't making appropriate appraisals because they're getting pressure from the appraisal management firms for a quick turnaround.
Mr. Spool said with foreclosures and short sales common today, rushing through an appraisal cuts time for looking at fair comparable selling prices of similar properties in the area and conducting a proper home inspection.
"The physical condition of the interior of foreclosed homes is often far inferior" to non-distressed houses, he said, and sometimes appraisers don't make the appropriate adjustment.
The decision of some lenders to use appraisal management companies to comply with the new regulations is also cutting profits for appraisers.
Joni Herndon, chair of the Florida Real Estate Appraisal Board, said some management companies use rotational lists when sending appraisers to conduct valuations. That's why real estate professionals are complaining about the inexperience of some appraisers, Ms. Herndon noted.
Another factor, she said, is that since the companies keep a percentage of the appraisal fee, some seasoned appraisers are refusing to work for less pay.
Ms. Herndon, an appraiser in Tampa, said she recently experienced an instance in which an Orlando appraiser went to Tampa to appraise a waterfront home and spent only 30 minutes there.
The lender was notified of the appraiser's lack of experience by the homeowner and asked her company to do the appraisal, Ms. Herndon said.
Since the new rules were enacted, Ms. Herndon said she has lost professional relationships she had built over 20 years with some ethical mortgage brokers.
"It took me 20 years to develop relationships with people and now those relationships are broken," she said. "Now, we are back to going to the lowest common denominator."
The changes are driving some appraisers to move away from mortgages, she said. They instead are working more with Realtors and doing more litigation and divorce estate work.
Mr. Spool, the longtime appraiser who also teaches appraisal classes at Miami Dade College, also forecasts more appraisers leaving the field or working with non-lenders.
"As time goes on, better appraisers are going to leave the industry or not work for AMCs (Appraisal Management Companies) because they are not taking a pay cut."