Fannie Mae will ban lenders from cutting appraised values

Did you know that lenders across the country have been appraised values when they decide that an appraiser has over-valued a property? It's true, and it has been going on for a couple years now. But, thankfully, Fannie Mae is stepping in to ban this practice, at least on loans that are pre-sold to Fannie Mae.




To understand the problem we need to back up a little to what has transpired with appraisals over the last few years. When the housing crisis began, part of the bank "almost failure was that lenders were being forced to issue was due to forced buy backs of home loans that had been sold to Fannie and Freddie if it was found the appraised values were over-inflated.



The answer to this issue was passage of HVCC (Home Valuation Code of Conduct) which mandated that all appraisals for loans to be sold to Fannie and Freddie, had to be performed by AMCs (Appraisal Management Companies). Seeing yet another opportunity to make more fees, many lenders, including the biggest banks, opened their own AMCs and kept up to half the appraisal fees that were being charged.



Most independent appraisers refused to work for these companies because they were being paid half what they were used to making for the same amount of work, so the AMCs were forced to hire inexperienced appraisers, and often sent out these inexperienced appraisers to areas they were unfamiliar with. To make matters worse, these appraisers didn't even have access to local real estate information. The result was these new appraised values became a "crap shoot.," Real estate agents, sellers, buyers, builders, and anyone else involved in the process never knew where a value was likely to come in. We saw wildly low values, because foreclosures and short sales were being used as comparable sales, and sometimes we saw crazy high values as well because the appraisers did not know the areas.



Historically, lenders have always required the down payment amount to be based on either the sales price or the appraised value, whichever was lower. So, when appraisals started coming in very low, lenders increased the required down payment to keep the loan to value ratio the same, based on the appraised value. The result was sales were falling apart across the country. There are too may stories of builders losing sales on new homes because the appraisal came in below the actual cost to build, nevermind a profit for the builder.



Buyers often will not, or cannot pay the additional down payment - sellers usually will not, or cannot come down on price, so sales have been falling through in astonishing numbers since this fiasco began.



Enter the lenders - becoming ever more cautious - some lenders have taken this to another extreme and have actually been reducing the valuations their own appraisers brought in, for fear of potentially having to buy back a loan they thought they had sold to either Fannie or Freddie. They base their lower valuations on a computer value (such as Zillow - we all know how inaccurate Zillow is). The computer values do not reflect the condition of a house - they don't increase values for remodels, are often lacking information even on room additions - so, like Zillow, they can be grossly inaccurate. There is never an on-site inspection with computer models, as there is with a real appraisal. Nevertheless, lenders are using these valuations as justification to reduce appraised values, and sales continue to fall apart.



Fortunately, Fannie has announced that effective September 1, lenders will no longer be permitted to reduce appraised valuations. Instead, they will be required to contact the appraiser to resolve discrepancies between their value and the computer model. If the disagreement cannot be resolved on that level a second appraisal must be ordered by the lender. It has not yet been disclosed who will be responsible for the cost of the second appraisal, should one be required by the lender.



In addition, Fannie is looking at some other issues that have arisen due to HVCC (which was recently adopted by FHA as well.) Among issues being researched is the increasing number of inexperienced and non-local appraisers employed by AMCs. The dilemma here, of course, is that if AMCs are required to utilize only more experienced appraisers, either they will have to accept a lesser share of the fees, or appraisal costs will very likely rise.



Experienced appraisers are applauding this new action as there has been an uproar among the appraisers, builders, real estate agents, and independent mortgage brokers since HVCC went into effect.



Fingers crossed that fewer home sales will fall apart due to appraised values soon. This has been a nightmare for buyers and sellers alike

Contact mwilkins@capitalfmc.com   with any questions   http://www.themortgagemark.com/