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Looking at new rules from the Federal Reserve Board to ensure that appraisers remain independent when they are determining the value of residential properties, the NAHB Residential Real Estate Appraisal Summit III in Washington, D.C., on Dec. 9 reviewed the significant headway that builders have made over the past year in addressing critical concerns over inaccurate appraisals and identified areas in need of further attention to resolve issues that have been impeding the sales of new homes.
Under the direction of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law on July 21, the Federal Reserve is now receiving comments on an interim final rule that, among other things, forbids appraisers from being coerced to reach a targeted value on mortgage transactions secured by a primary home.
The Fed rule will replace the Home Valuation Code of Conduct (HVCC), which had the unintended result of appraisers limiting interaction and in some cases breaking off communications with builders and others who can provide factual information that can help ensure that valuations are accurate.
Opening up communications in the appraisal process was one of the issues reviewed during the two previous NAHB summits, which involved active discussions among association members, industry partners and the housing government-sponsored enterprises.
In a major development on June 30, Fannie Mae released new and additional guidance on its appraisal-related policies, providing good news on many fronts for builders who were being frustrated by faulty evaluations that were based on foreclosed or distressed properties as comparables or made by appraisers who lacked the appropriate knowledge and experience to complete assignments. (For a related story in NBN, click here.)
Included in its clarification, Fannie Mae noted that authorized third parties — including builders — were allowed under the code of conduct to communicate with appraisers to provide additional information or explanation on the basis for a valuation or to correct factual errors in an appraisal report.
The Critical Piece for Home Builders
The Fed rule incorporates the key features of this guidance from Fannie Mae.
“The Fed’s interim rule makes it clear that home builders and others can ask an appraiser to consider additional information about a property, including information about additional comparable properties,” said Joe Robson, NAHB’s immediate past chairman.
“That’s the critical piece for home builders,” Robson said. “We must have a system in which our members can present additional information when the comps being used are foreclosures and other distressed properties. Such properties simply do not reflect the value of a new home, which may have been built to new codes, may incorporate important green building features and may include new appliances and amenities that do not exist in the distressed property.”
Robson noted that many appraisers still have a poor understanding of the many aspects of construction that add value to newly built homes, making it particularly important for builders to be allowed to provide them with relevant information.
“While we have made progress at the regulatory level regarding the need for robust communication between the appraiser and third parties that can provide verifiable data, we have concerns that this message is not getting out to practitioners,” he added. “We continue to hear from builders that appraisers or lenders do not support third-party communication.”
Finding Qualified Appraisers for New Construction
NAHB is in the process of developing a continuing educational curriculum to ensure that appraisers have the necessary experience and education to value new construction.
However, builders are seeing licensed or certified appraisers who do not appear to be qualified to do appraisals of new construction.
The Appraisal Foundation's Appraisal Practices Board is in the process of establishing minimum education, experience and examination requirements for real property appraisers.
In response to a draft of the board’s qualification criteria for appraisers — which are not likely to take effect until Jan. 1, 2015 — NAHB said appraisers must have adequate knowledge of lot values and new home construction when they are establishing values for newly constructed homes.
“It is necessary that an appraiser of new construction make every effort to obtain comprehensive information on the subject property, including lot values, custom features, upgrades and energy efficiency data,” NAHB said. “A new construction appraisal requires the appraiser to have the ability to read plans, review the materials description lists and evaluate the builder’s contract and any other special additions.”
Good Comps Hard to Find
Builders participating in the latest NAHB summit suggested that thought should be given to basing the appraisal process more on the actual costs of construction involved in building a new home than in finding comparable properties as an indication of the home’s value.
In markets where new homes sales have been exceedingly slow, finding comparable properties has been difficult.
“We have experienced wild fluctuations of real estate values during this current housing downturn,” said Robson. “Never before have we faced the level of foreclosures and short sales. In some markets and some situations, foreclosures do accurately reflect market value, but we have seen case after case where foreclosed properties have become the standard comparable.”
Robson said that inaccurate valuations have unnecessarily contributed to the downward spiral of home values, with distressed sales adversely affecting values and unjustly undermining what should have been healthier neighborhoods.
Builders at the summit expressed concern that the new Fed rules might not allow appraisers to look at the sales contract, which should have some relevance because it is an indication of what a buyer in the market is willing to pay for the property. It appears that the Fed rules do not prohibit the appraiser from receiving the contract, as long as it is provided for information purposes and there is no coercion involved.
For more information, e-mail Michelle Hamecs at NAHB, or call her at 800-368-5242 x8425.