An elderly couple in the DC area, after much consideration, decides to downsize. They make the decision to move into a condo and put their home up for sale. After researching, they decide on a fair market value of $275,000. The Realtor® installs a ‘For Sale' sign in the yard. Meanwhile, a young couple in MI comes to the D.C. to buy a home as they are planning to relocate for work. They see the sign, tour the home, and fall in love with it. They put down a down payment, make an offer near the asking price, and start the buying process. Then the appraisal comes in at $260,000. The retired couple does not want to drop their price another $15,000 and starts rethink their decision to move. The lender, of course, does not want to write a mortgage for more than the home is "worth." The young buyers are not in a position to pay more down payment to get the amount financed in line with the bank's requirements. A "perfect deal" is put at risk.
What's Going on Here?
What is happening here a result of new regulations recently put into effect. Following the financial meltdown in the US, guidelines were put into place regarding home appraisals and some specific lenders. These rules were set up to protect the consumers against shady and unethical practices involving appraisers and fraud in the mortgage industry. The rules were meant to stop collusion between lending institutions and appraisers.
Effective May 1, 2009 all home mortgages being sold to Fannie Mae and Freddie Mac must follow the new Home Valuation Code of Conduct (HVCC). HVCC sets new guidelines on how appraisals must be ordered and who can have contact with the appraisers. This regulation does not apply to FHA or VA loans. Even though it only applies to loans sold to Fannie Mae and Freddie Mac, it will affect all conventional home loans.
But, only 3 months after these rules took effect, the regulations have backfired, causing quite a stir across the nation. They are having a negative impact not only on mortgage brokers, realtors, and lenders, but anyone who is applying for a new mortgage loan, those trying to refinance and those trying to sell a home - the very people the rules were intended to protect. It is a good example of a well-intended law that is causing more problems than it solves.
Why were the HVCC regulations written? The HVCC regulations were written to deal with some felt were shady and unethical practices of pressuring appraisers to "come in at the value needed." They evolved from a potential lawsuit by the Attorney General of New York (Andrew Coumo) against Fannie Mae and Freddie Mac. On March 3, 2009 the Attorney General, Fannie Mae, Freddie Mac and the OFHEO reached a settlement agreement regarding the issues of appraisal coercion and independence in exchange for the Attorney General dropping the investigation.
Consumers are confused. They hear new rules are in effect for appraisals, but wonder "How do the HVCC guidelines affect the appraisal of my home?" Here are 3 of the most commonly-heard complaints:
Out-of-Area Appraisers Are Performing Appraisals
This could possibly result in a low appraisal on your home. Appraisers who don't know the neighborhood or have little experience are far more likely to produce an under-valued appraisal or otherwise incorrect appraisal. Neither the Realtor® nor the lender is able to interact with appraiser to point out neighborhood factors or extenuating circumstance or to challenge inaccuracies.
Transactions are Falling Apart Because Appraisals Are Too Low
When an appraisal comes in less than the sales price, many sellers refuse to or can't afford to negotiate and buyers don't want to pay the higher price. So the pending sale blows up. The seller loses the buyer, and the buyer loses the home. It is a lose-lose situation. There are other ways to deal with a low appraisal, but cancellation of the transaction is common.
Adding to all these problems, internal bank underwriters are sometimes complicating the problem by lowering values as well.
The Consumer Pays an Increased Cost for the Appraisal - and has to pay upfront.
Because the Appraisal Management Company that selects the appraisers must be paid, consumers bear the cost. Part of the appraisal fee goes to the Appraisal Management Company. Somebody has to pay the fee to the Appraisal Management Company. And it is ultimately the consumer who eats the cost.
Consumers are also potentially having to purchase multiple appraisals when shopping for a mortgage; previously, lenders sometimes accepted appraisals ordered by others. Now, they will not accept these appraisals ordered by others because they can't be sure the other lenders are following the HVCC rules. Consumers may have to change lenders in hopes of getting a better appraisal. This is sometimes worthwhile; in one extreme example, a buyer whose appraisal was $170,000 lower than the selling price successfully got an appraisal for this amount from a new lender. Lender shopping at this point means additional costs for buyers in application and appraisal fees, as well as extra time involved to jump through more hoops. Both the fees and the time are disruptive to anyone on a strict budget and a moving schedule.
Previously appraisal fees were a part of closing costs which the buyer paid at the end of the process. Buyers now have to pay the appraisal company (or companies) in advance - a costly inconvenience to buyers.
Recently, lobbyists have urged Congress to support a bill that would impose an 18-month moratorium on the new appraisal guidelines. But, this measure is still working its way through Congress.
Ultimately, until Congress enacts changes, what can buyers and sellers do to avoid the sting of these new rules and regulations?
• Allow ample time between contract and closing to address all these issues. Contact Rachel Valentino who is an experienced Realtor to help you address any time constraints that may apply to you and your home buying experience.
• Work with a knowledgeable, experienced Realtor like Rachel Valentino who is up to date on the latest rules will ensure that your transaction is structured appropriately to avoid any closing delays due to these new regulations.
• Rachel Valentino also has first hand experience in helping others navigate through the financing to help achieve your goals if an appraisal does come back lower than expected. By contacting her, you increase your chances of achieving your home ownership dreams even with these stricter rules in place.
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