Change in appraisals causing uproar

By Russell Grantham


The Atlanta Journal-Constitution

Homeowners who have watched nervously as the economy has eroded the value of their homes may have another reason to fret: a change in the real estate appraisal system that critics say is driving values down and disrupting the housing market.

Appraisers, mortgage brokers and others blame the new rules, which change how appraisers are assigned, for lost revenues, delayed and faulty appraisals, collapsed deals and other problems, even in some of Atlanta’s toniest neighborhoods.

Atlanta mortgage broker Steven Alexander of National Guaranty Mortgage Corp. said an out-of-town appraiser hired to evaluate a Buckhead mansion he handled recently came up with a value $500,000 below the $2.1 million he thought the house deserved.

He said the appraiser ignored the fact that the home was designed by a well-known architect, was located in a more desirable school district than comparison homes, and included luxurious features such as copper gutters, a patio fireplace and a basement entertainment center.

As a result, the owners, who were refinancing, ended up having to get a loan with a higher interest rate because the lower appraisal made the loan appear riskier, Alexander said.

That scenario has been repeated often in the real estate industry since the new rules, known as the Home Valuation Code of Conduct, went into effect in May.

The code was intended to make home appraisals more reliable by making appraisers independent of mortgage brokers and real estate agents. Banks and appraisal management companies now assign jobs and forward fees to the appraisers, rather than the people who earn commissions on home or loan sales.

The aim: to reduce the pressure on appraisers to produce the sort of inflated home values that helped justify ever-bigger home prices and mortgage loans in once white-hot markets like metro Atlanta.

Instead, say critics like Alexander, who is president of the Georgia Association of Mortgage Brokers, the change has resulted in many faulty value estimates. Appraisers, who are generally earning lower fees in the new system, are often rushing through assignments and sometimes traveling far from their local territories to do valuations.

“Quite honestly,” Alexander said, “lenders are getting appraisals that are worse [quality] than they ever were.”

Many appraisers are not happy with the new rules either, but say they have done some good.

“I think at the end of the day, you’ll stop the fraud,” said Daniel Fries, owner of an appraisal firm in Cumming.

Some people, worried that an off-base valuation could derail their plans, are paying for an extra appraisal by someone familiar with their neighborhood.

“For $350, I’ve got some defense, some insurance in my corner,” said Drew Holahan, who is hoping to complete the purchase of a two-bedroom home in the Buckhead area for $380,000 at month’s end. He hired an appraiser based in town who valued the home at $401,000. If the lender receives a lower figure from its appraiser, “I’ve got some leverage to say something is not appropriate,” said Holahan, a construction estimator for an architectural firm.

‘Unintended’ impact

To be sure, with record numbers of foreclosures driving home prices down, many homeowners are already struggling with shockingly low appraisals anyway.

But critics say that problem is being exacerbated by the new appraisal rules, which affect the handling of any loan being sold to the two giant federal agencies, Fannie Mae and Freddie Mac, lenders that help fund most U.S. home mortgages.

“In this marketplace, we need people to go the extra mile to come up with a good value because the market is so convoluted” by foreclosures and other distress sales, Alexander said.

Still, says University of Georgia real estate professor Richard Martin, the large-scale disruption of the real estate market by the bursting of the housing bubble has created much bigger challenges than those caused by the new appraisal rules. “Appraisers have a really hard job right now,” he said. “There are so few sales.”

Appraiser Fries said he believes that some type of reform was needed.

“The bottom line is for 50 years they let the guy that earns the commission be in charge of ordering the appraisal. That’s probably not very smart,” said Fries. The new code “gives the appraiser independence. It is going to eliminate fraud.”

But, he added, it’s also causing “unintended consequences.”

Some would call that an understatement.

‘Not a pretty picture’

Laura Sosa-Rocha, vice president of Truth and Lending Team, an Atlanta loan broker, said she had to tell a desperate homeowner she was rescheduling a loan closing meeting because of a delay in getting an appraisal done.

“The seller’s about to file bankruptcy,” she said. “It’s ridiculous. This law is supposed to protect you.”

Sosa-Rocha said she fears that home values are being driven lower not just because of the record numbers of foreclosed properties, but because appraisers are being pressured by lenders to be “ultra-conservative.”

Appraisers say they have reasons to gripe, too.

“My income took a dramatic hit,” said Greg Wilkinson, owner of Worth Every Dollar Appraisals in Atlanta.

Wilkinson said the modified rules cut him off from most of the people who had sent business his way, cutting his revenues by roughly 40 percent.

“Things just died,” he said.

His fees now are often smaller than before because the appraisal management companies typically pay him $325, while charging customers more than the $400 he typically charged.

To adjust, he has cut expenses and stopped referring assignments to apprentice appraisers.

The new rules have done some good, he said.

“It took some pressure off of us, but now we’re getting dinged on the other side,” he said. “They’re telling us we’re killing deals.”

‘Like a bonanza’

What’s behind the uproar?

The Home Valuation Code of Conduct came about as part of a settlement last year between New York Attorney General Andrew Cuomo and lenders Fannie Mae and Freddie Mac, effectively making it a nationwide code.

In the wake of the mortgage meltdown, Cuomo sued an appraisal management company, accusing it of inflating property appraisals under pressure from its largest client, Washington Mutual bank, which later failed.

The new rules apply to appraisals for loans that will eventually end up at Fannie Mae or Freddie Mac. Lenders must use a separate staff to choose appraisers or use a third-party known as an appraisal management company to hire an appraiser.

As a result, appraisal management companies — some owned by major banking firms — are gaining market share as more lenders outsource the task.

“It’s like a bonanza,” said Fries, the appraiser in Cumming. “They hit the lotto.”

Meanwhile, their larger role in appraisals is pushing costs for consumers up and pay for appraisers down, said Fries.

Many of the appraisal management companies pay significantly lower fees than independent appraisers charge, he said. Only less experienced appraisers, he said, are willing to take many of the assignments, sometimes in unfamiliar markets.

“You’ll probably have less quality,” he said.

Seeking repeal, relief

Loan brokers have begun pushing for legislation to suspend the new code of conduct for 18 months. At the urging of lenders, real estate agents and appraisers, the Federal Housing Administration is tweaking a similar code scheduled to go into effect Jan. 1 to cover FHA loans.

The FHA’s new code will allow appraisers to disclose what they’re paid on their appraisal report, allowing consumers to see whether an appraisal management company has charged a large mark-up. The FHA will also allow appraisals to be transferred to another lender.

But some in the industry believe other fixes are needed, ranging from requiring management companies to find appraisers located near the properties they’re evaluating, to cutting such management firms out of the process entirely.

“The people in Washington don’t know what the hell they’re doing,” said Sosa-Rocha, the loan broker. “It has to be revamped.”

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What to do about 
a problem appraisal

Some industry experts say about a third of metro Atlanta homes are being appraised at significantly lower values than they were bought or refinanced at a few years ago. But what can you do when you think a recent appraisal is faulty?

Some loan brokers and homeowners are challenging appraisals by contacting the loan underwriter to offer comparison sales they consider more realistic and requesting an adjustment. But procedures vary from lender to lender.

In some cases, the customer may have to request a second appraisal, which can cost $375 or more, and may not produce a more favorable valuation.

People who believe an appraiser acted incompetently can also request an investigation by the Georgia Real Estate Appraisers Board (www.grec.state.ga.us/about/greab.html). However, the agency says it does not investigate complaints based solely on valuation disputes.

-- Russell Grantham

How we got the story

The Atlanta Journal-Constitution interviewed appraisers, loan brokers, an official with the Georgia Real Estate Commission and Appraisers Board, and home owners or buyers who were recently involved in real estate transactions.