Photo credit: Alan Cleaver
What changed and how to protect yourself.
Concerns are rising among mortgage loan officers about low appraisals. Traditionally, declining housing markets bring about low appraisals because of the lack of recent comps, which adds to the appraiser’s difficulty in determining the subject property’s current market value. When foreclosures and short sales are added to this, appraisal values can vary widely.
Matt Hodges, a sales manager for Presidential Mortgage Group said that in the previous few weeks, over half of his refinancing appraisals had come in low compared to the weeks before, but none of the purchase appraisals, came in low. “This made a certain amount of sense”, he said, “given that appraisal requests for refinancing cannot carry any guidance about value or the size of the intended loan. Requests for purchase appraisals, on the other hand, are accompanied by the sales contract making appraisers at least aware of the approximate target.”
A recent appraisal on a unit in a Jersey City building underlines this issue. Scott Valins, principal of Scott Capital Group in New York City, arranged financing on a unit that was appraised for $590,000. The owner of this unit referred another building unit’s owner to Valins to get financing on a larger unit with an unobstructed view of the Manhattan skyline. This owner was looking for a valuation of $680,000 which Valins looked as reasonable since the most recent sale closed in the building for $711,000. The appraisal came back for $580,000, $10,000 below the smaller unit, ironically one without a view.
This problem is scattered across the country, notes Nathan Miller, Mortgage Loan Originator for eRates Mortgage. Citing states such as Indiana, Michigan, Oregon and California among the 15 states eRates is licensed in, with the growing low appraisal issue. Miller notes that the problem originally started with refinancing appraisals, but is now seeing more low purchase appraisals. The majority of loan types represented are conventional or conforming- recent borrowers who were hoping to get rid of private mortgage insurance or FHA premiums. Because of the expense involved with his appraisal management company (AMC), he hasn’t had many of the low appraisals reviewed. He also did not have an incentive to do so as he found that nine out of ten reviews came back unchanged.
Leslie Sellers, President of the Appraisal Institute in Chicago notes that the root of the problem may be how AMCs are compensated. “They are paid a fee and they make their money on the spread between what they can get paid from the bank and what they can hire an appraiser for,” Sellers says. “Over a period of time, the lesser and lesser quality appraisers are the ones that end up getting all the work. As a result, we have appraisers who do not have competency in how to properly verify sales in declining markets and are using improper sales (comps). Many times they aren’t doing fraudulent things; they just don’t know what they don’t know.”
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Home-owners and appraisers don’t always agree on valuations and while this topic has been coming up significantly more in the first quarter of 2015, this “age-old” issue may have another explanation as to why there’s been an increase lately: Fannie Mae’s Collateral Underwriter (CU). Valins posits that although CU may not be a direct cause of low appraisals, it correlated with the issue. Miller believes that appraisers are being ultra conservative as CU came online January 26, fearing backlash from AMCs. CU promises to make the appraisal review process simpler with a risk score which would allow segmentation of appraisals by risk profile, allowing lenders easier identification of higher quality issues, compliance violations and overvaluation risks.
Timothy Baron, a licensed loan originator with NOVA Home Loans echoes this sentiment, “My personal opinion,” he said, “is that appraisers are being overly conservative in choosing comps because of CU. If CU questions the comps, adjustments, etc., the appraiser would have to do a lot of extra work to justify them. I had anticipated that CU would cause delays because of this extra work, but it seems that appraisers are one step ahead and are being ultra conservative, thus avoiding the extra work in the first place. I haven’t spoken to an appraiser about it, this is just my interpretation of what I am seeing.”
The appraisal profession has seen many changes over the past decade and if CU is behind the recent increase in low appraisals or at least a magnifying agent for other factors, this response to the latest change may be short-lived. Adding to this, in a Housing Wire article, SWBC Lending Solutions’ Chuck Mureddu writes “However, I have to say that after all the anticipation and skeptics discussing how much CU will make our lives miserable, I find that not to be the case. Yes, like any new quality initiative there are some bumps in the road but overall they seem to be quite minor.”
Time will tell what the main causal factors are. In the meantime, if you are thinking of selling or buying a home, here are suggestions on how you can protect yourself from low appraisals:
Mortgage News Daily. Conservative Appraisals Increasingly Mentioned in 2015; Did Something Change?
Bankrate. How to Avoid a Low Home Appraisal