Home Valuation Code causes problems
If you think with the right side of your brain and consider business dull and art an adventure, you’ve never met a real estate appraiser, at least the way real estate appraisers once were. Since the Home Valuation Code of conduct was adopted on May 1, real estate appraisers, who once thought with both sides of their brains, are now thinking with only one.
The Home Valuation Code of conduct is the result of a joint agreement made in March 2008 between the New York Attorney General Andrew Cuomo and Fannie Mae and Freddie Mac. The code prohibits lenders and third parties from influencing or attempting to influence the development, result or review of an appraisal report. The code applies to financing for single family homes that are backed by Fannie Mae or Freddie Mac. These types of loans represent about 70 percent of the home loan market.
According to the Wall Street Journal, "The code bars loan officers, mortgage brokers or real estate agents from any role in selecting appraisers. This has encouraged lenders to outsource the selection to appraisal management companies, or AMCs which take a sizeable cut of the appraisal fee."
Two months down the road, the national and local real estate markets are starting to feel the impact of the code of conduct. Appraisals are coming in unusually low, frequently because the comparable sales used include foreclosures, short sales and distressed sales, which are skewing the value of other homes in the area. The consequence of this is contracts for sale, which invariably have a mortgage contingency included, are falling because potential buyers are not being approved for financing based upon the agreed upon sale price.
This is happening across the country as stated by Lawrence Yun, an economist with the National Association of Realtors. He points out that the danger of a delayed housing recovery and more potential foreclosures is very real because of appraisal problems.
As a result of this some, United States Congressmen are sponsoring a bill to put the Home Valuation Code of conduct on an 18 month moratorium, giving the market some extra recovery time. This measure of course has the backing of national real estate groups.
Mandating that appraisers follow a code of conduct and remain independent is in theory a commendable practice. However, what it doesn’t allow for is local knowledge. All real estate is local was never truer when you’re trying to find the correct value of a property. Knowing an area well is the single most important asset an appraiser has. In hot markets with high numbers of properties selling prices change weekly. In slow markets appraisers need to frequently go back further digging to find a comparable sale. If an appraiser is from out of the area, it’s impossible for him/her to understand every aspect of a neighborhood in order to define the correct value.
This becomes even more critical when you’re evaluating a property in a highly specialized area like Anna Maria Island. If an appraiser doesn’t know his/her "stuff" it’s easy to overlook value based on location, condition, building codes, flood areas and a whole range of particulars relative to island living. A waterfront property on the bay has a different value than a waterfront property on the Intracoastal or a canal, but they’re all waterfront.
During the best of times, evaluating property is more of an art than a science. It’s an industry that is always playing catch up, which is why now more than ever local knowledge by appraisers who are not chosen from a statewide pool is crucial. Unfortunately, the government officials who created the Home Valuation Code of Conduct are thinking with the wrong side of their brains, or not thinking at all.