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Appraisers and Mortgages These Days

Oh boy, here we go again -- with appraisers...

By Dr. Danielle Babb
Dr Dani BabbThink it's hard to get a loan? Thanks to the government, it might be juuuust about to get a littttle bit harder (sense any sarcasm?)

Home appraisers played a very big role in the build up and subsequent tear down of the housing bubble. I can tell you some stories from the trenches that would make you cringe and may even take the blame off of the Bush Administration (for awhile) on this whole "housing mess".

So let's look at how appraising works, and what role it has played (so far) in the housing business. Appraisers are generally retained by brokers or lenders. There are shady people in every business (mortgage brokerage companies are full of them) and these brokers (in particular, but lenders too) seemed to find people who would support numbers that they wanted to get deals done. Many of these numbers were overinflated. Appraisers are one of many on the long list of real estate food chain that get paid for a service that really either isn't needed, or could be done online very easily. Some have found Zillow to be more accurate than their local appraiser because Zillow isn't freaked about getting sued.

There are many, many written stories of collusion and fraud so I won't even bother to go into them here, you can google that and have hundreds of thousands of them from reputable sources. But here is the problem - the government.

See, appraisers pulled back after they took a lot of the heat from the inflated market. No one wants to go to the pen over a house appraisal that they made an extra $500 bucks on. They started doing the opposite - being VERY conservative on appraisals such that buyers would often have to come in with another 10 or 15%, just because an appraiser cut an appraisal to cover their asses - not because the house was really worth that but because it "could be later on" (some lenders creatively call this a declining market). This caused lots of sales that would have proceeded just fine to be yanked out from under the buyers and sellers.

Here is the catch. The government has decided it's in "everyone's best interest" to have yet another middleman in real estate (by the way, they already exist - they are called real estate agents - see my former book Commissions at Risk available on Amazon).

A new code of conduct will exist beginning May 1 that requires the nation's 60000 freelance appraisers and lenders and brokers to use Appraisal Management Companies (AMCs), which will prevent lenders and appraisers from actually talking to each other. No, Im not kidding (see previous blog about Countrywide fiasco that I personally went through with appraisers).

This gets better. See added onto the new rules are players in a game of rules that were broken years before and full of shady characters. There is one company exposed in several stories called NovaStar Financial out of Kansas City. This was a subprime lender during the boom and they were slapped on the wrist by three states for employing unlicensed brokers and charging unlawful fees (nawh.. mortgage brokers NEVER do that! See previous blogs about never using a mortgage broker!)

After its collapsed business (like many other brokers), they reinvented themselves into the -- yep --- AMC model and bought an appraisal company, and call themselves StreetLinks National Appraisal Services. One of the very same companies that led to the trouble to begin with is now going to be part of this new group that is designed to police the problem.

There are a few issues here.

  1. Screening AMCs - who is going to do that exactly?
  2. The communication between lenders and appraisers - it must exist for any deals to get done!
  3. This gives appraisers even more power than they had before, and may kill deals particularly in the prime or jumbo markets
  4. The government is involved - the fed housing officials will regulate (aHH!)
  5. Added processes, and less money to the actual appraiser

So when you buy a house, it should work like this (well it shouldn't - it should be easier - but it has):

  1. Borrower goes to get a mortgage or a refinance
  2. Lender sends an order to an appraiser
  3. Appraiser appraises, sends underwriter the appraisal
  4. Bank does their "thing".

Now it will go like this:

  1. Borrower goes to get mortgage/refi
  2. Lender sends order to AMC
  3. AMC sends to a local appraiser
  4. After reviewing the appraisal, the AMC may seek changes on behalf of the lender (ah ha!)
  5. Borrower pays $300 to $500 - and the AMC keeps half of the change

Do you think appraisers are going to work as hard to be as accurate when they aren't getting the full cash for the appraisal? My guess is we're just going to have even more ticked off appraisers who on top of feeling blamed for the mess (particularly the good ones who did their diligence and take this personally), are also underpaid.

Under the new rules, if AMCs are applying any 'undue pressure', they will be in violation of Freddie and Fannie rules and they will "take action". They will have immense power over freelance appraisers. To earn a living, most have determined that they will have to be part of AMCs preferred group, or most major banks won't use them - they will lose a lot of business.

Fannie and Freddie cannot even lend Grandma $200k to buy a house worth $400k - you think they can handle this too? Oh, and the taxpayers now own a big chunk of yet another government wasteful project that will not only hurt housing, but create yet another layer and another obstacle to get all of this inventory off of the market! All in an effort to save people from themselves -- which could easily be done by reading a contract. I know, crazy huh?

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