Housing Groups Agree on Need for Appraisal Reforms
Addressing an issue with critical implications for the recovery of the nation’s housing market, NAHB on Sept. 21 brought federal regulatory agencies and the major housing and financial institution stakeholder and appraisal organizations to the National Housing Center in Washington, D.C. to discuss constructive solutions to appraisal problems.
Among the problems discussed at the summit was the use by some appraisers of foreclosed or other distressed properties as comparables without making proper adjustments for the run-down conditions of these homes, which appraisers often can’t see just by looking at the exterior of the property. This trend has been driving down the sales prices of homes.
Summit participants also addressed some of the unintended consequences from the implementation of the Home Valuation Code of Conduct (HVCC), which was designed to keep appraisers from being unduly influenced by those with a financial stake in the transaction. Confusion over HVCC requirements, some participants said, is impeding the ability to obtain appraisals of the quality required in today’s complex marketplace.
As a result of this confusion over the requirements of the HVCC, they said, builders and Realtors® have been limited in providing appraisers with important information about the local housing market.
Complaints were also heard that the HVCC has encouraged the use of inexperienced appraisers, many of whom are not familiar with the local markets in which they are working. The costs of appraisals have gone up for consumers, they said, at the same time that seasoned appraisers are being paid significantly less for their work and leaving the industry. There were also complaints that the turnaround times for appraisals have been shortened to unreasonable lengths, making it impossible for the appraiser to gather information on the condition of comparable sales.
An NAHB participant suggested that Fannie Mae, Freddie Mac and the Federal Housing Administration should give serious consideration to an appraisal appeals process adopted a few years ago by the Department of Veterans Affairs under its Tidewater Initiative. This process, which has worked well for the VA, requires an appraiser to contact the lender for additional information on comparables if it appears that the appraised value of a home will come in low.
Participants at the summit also discussed the need for an effective enforcement process for improper appraisals or unqualified appraisers, as well as providing some guidance that would result in more consistency among the states in how they regulate appraisals.
The appraisal crisis has become so bad that a recent NAHB survey of more than 500 builders found that 25% were losing sales because appraisals were coming in below the contract sales price. This is exerting unwarranted downward pressure on home prices at a time when housing and the economy are struggling to emerge from the worst downturn in decades.
Following the meeting, the leadership of NAHB, the National Association of Realtors® (NAR) and the Mortgage Bankers Association were united in calling for immediate action to address their appraisal-related concerns, including clarifications with regard to the HVCC and the establishment of “best practices” for the appraisal process. The groups also urged the regulators to adopt and enforce clear, concise regulatory guidance on the use of distressed and/or foreclosed properties that will allow appraisers to develop realistic valuations based on sales that are truly comparable.
“Appraisers generally are only required to inspect the exterior of a property that is being used as a comparable because they are normally unable to enter these homes and examine their interiors,” said NAHB Chairman Joe Robson. “But all too often, properties that have been subject to foreclosure or distress sales have issues related to deferred maintenance or internal damage that an external inspection simply cannot detect. You can’t compare these properties to new homes that are in market-ready condition. NAHB believes that it’s time for appraisers to have regulatory guidelines that acknowledge such realities.”
As an example of how distressed properties can mislead appraisers, NAHB Immediate Past Chairman Sandy Dunn cited an ocean-front house in Corolla, N.C., with six bedrooms and five-and-a-half baths being sold by the bank for $715,000, marked down from $1.4 million.
A close inspection of the home found that it would cost $200,000 to restore it to livable condition. Before they vacated, the former owners “took everything out of the house,” Dunn said, including the door knobs. For an appraiser taking a picture, it might have looked like a good comp, until they viewed the inside. “When an appraiser uses a distressed property, they should inspect the interior or talk to a sales agent,” she said.
“NAR supports the independence of appraisers and the integrity of the appraisal process,” said NAR President Charles McMillan. “An accurate appraisal is an important part of any real estate transaction, and reforming the appraisal process is critical to the nation’s housing recovery. Quality appraisals are threatened by unintended HVCC consequences and an inconsistency among the various federal regulators. As the leading advocate for housing issues, NAR calls on the federal government to establish consistent appraisal rules for FHA and the GSEs.”
“Ensuring that appraisals are fair and accurate is the lynchpin of our secured lending system,” said Robert E. Story, Jr, CMB, incoming chairman of the Mortgage Bankers Association. “As a lender, it is crucial that I can count on the fact that an appraisal is correct and that the appraiser has not been subject to pressure from any interested party to the transaction. We want to work with appraisers and regulators to ensure that every appraisal results in an honest, truthful evaluation of a property’s value.”
There is an urgent need for an appraisal appeals process even in Tulsa, Okla., Robson said of his hometown, one of the relatively few markets in the country where housing prices have not depreciated. On one $1.3 million home in the area, he said, two different appraisals came in 30% apart. One builder was able to sell a new home without an appraisal problem, but when he moved the same property five miles away, the appraisal came in below cost, Robson said.