Despite the repeal of a rule unpopular with appraisers and agents alike, low appraisals are still killing deals across the nation, slowing sales at a critical time in the housing markets.
Since the housing bubble burst four years ago and values began to fall, appraisers have been under fire for failing to account for actual market conditions. A new home valuation code of conduct enacted in 2008 by Fannie Mae and Freddie Mac was blamed for contributing to inaccurate appraisals, but the controversy over low appraisals continues despite the code’s repeal this year.
Whether it’s for a purchase loan or refinancing, a low appraisal can kill a deal. And the risk of that happening is greater now since the subprime mortgage meltdown and the housing market crash. Appraisers are being pushed to be more conservative, prices are soft, and comparative properties hard to come by.
Foreclosures, which are typically discounted 30 percent or more below the going rate, continue to exert a huge influence on local market values. In June, the distressed property share of the overall national home sales fell to 24 percent, down from a peak of 35 percent in early 2009, according to CoreLogic. But now that the homebuyer tax credit has ended, the market share of foreclosures is expected to rise.
Appraisers try to minimize the impact of foreclosure sales when appraising a non-distressed property. Bill Geiger Jr., an appraiser in Cocoa Beach, Fla. Told Florida Today that the ideal situation is to base appraisals on other “normal” sales, not short sales or foreclosures. But in many cases that’s not possible because of the paucity of such sales in a given neighborhood. Geiger said when he has to use a distressed property while doing an appraisal he contacts the real estate agents involved in the sale as well and reviews computerized listings for the property to find out as much as he can about the condition of the home when it sold. He adjusts the appraisal value accordingly.
Foreclosures actually contribute to more foreclosures. Declining prices have left about 11 million homeowners owing more on their mortgages than their homes are worth, making it more likely to default on their mortgage, which, in turn, helps drive prices down even further, leaving even more owners “underwater.”
Lenders are another force driving down appraisals. Rob Johnson, vice president of lending at San Diego Funding, a mortgage company in San Diego, attributes the increase in home appraisal reviews to lender-specific requirements imposed because of past problems with certain types of home loans. For example, a mortgage lender might demand more scrutiny of an appraisal if the borrower has a marginal credit score or high debt level relative to income or if the property was a foreclosure that was fixed up and flipped by an investor. Yesterday, Zillow said that 29 percent of the lenders participating in its mortgage platform require a credit score of 630 or better.
Finally, there is the common problem of fluctuating prices and changing market conditions. “Any time you have a market in transition, appraisals aren’t going to keep up because the appraisal is based on historical data,” Johnson said in an interview with Florida Today.
Buyers and sellers are paying the price for confusion in the appraisal process. Deals often fall through when buyers refuse to sell at a price lower than the buyer’s offer.
Before the repeal of the home valuation code, the National Association of Realtors says nearly one in four of its members has reported clients losing a sale due to botched appraisals. The National Association of Home Builders, meanwhile, said low appraisals were sinking a quarter of all new home sales.
“In recent weeks we have several deals fail to close because of appraisals that have come in with either non-comparable properties or under estimates of the quality and condition of a property, said a Maine Realtor on the Active Rain web site. ‘The housing market, no matter where you live, is being affected by powers that we small people have no control over. Unless you’ve been living under a rock for the last 2 years, you’ve probably heard that appraisals have been coming in really low. These low appraisals are disrupting the housing market. I’m not talking about an appraisal that comes in a little low and has evidence to back it up. I’m talking about appraisals that come in extremely low with the lowest possible comparables to back up the claims.”
“We all know the housing bust has caused many people to lose equity on their homes. But this is going to cause more people to lose equity that is righteously theirs,” he said.