August 25, 2011

How Appraisal Regs Hurt Consumers

August 25, 2011

How Appraisal Regs Hurt Consumers

I’m not the only loan agent who’s gotten a crap appraisal back during this August refi boom. So I’ll share a story about how regulations make the lending process so difficult and costly for consumers.

I got a refinance appraisal Friday on a single family home a client bought last year for $770,000. The assigned appraiser happened to be the same person who did the purchase appraisal. According to the borrower, the appraiser inspected the home for less than five minutes.

The report, which came in at $750,000, was basically a save-as-new version of the old report, right down to the notes that he didn’t even change from last year that referenced conversations he had with the listing agent. The only new part was updated comparable sales.

Easy money for appraiser.

But here’s the problem: his selection of comparable sales was fundamentally flawed. This is a view home with panoramic views of the San Francisco Bay and iconic Bay Area mountains. But he characterized views as “Valley/Hills” instead of “Bay/Mount Tam” so he chose comparable sales that were all inferior. And appraisers can’t value a home higher than the highest comparable sale they chose.

Many banks don’t allow for any debate on appraisals borrowers disagree with, but I’m fortunate enough to work for a bank that has a rebuttal process, and our appraisal team has seasoned appraisers on staff who review the reports.

Our rebuttal provided comparable recently sold view homes that were excluded from the report, but the appraiser held the line and said his selections of non-view and far-inferior-view homes were correct and didn’t exclude any other relevant properties.

This is a common appraiser response to a rebuttal because they’re more concerned about defending the credibility of their original report(s) than admitting they may have made a mistake. And in this case, he also pointed to the fact that his purchase appraisal went undisputed (which we didn’t dispute because, despite the improper “Valley/Hills” view categories at the time, the comps selected were actually comparable view homes).

Appraisal regulations effective May 2009 say that a loan agent cannot talk to an appraiser before or after an appraisal because the appraiser can’t have any outside influences. So banks run (or contract with) separate appraisal management companies that process appraisal orders from loan agents, hire and assign appraisers to fill orders, then review appraisers’ reports when they come in.

Just like the loan agent can’t influence value, the appraisal management companies can’t either. So when an appraiser refutes a rebuttal, that’s it. The bank—if they’re following the rules correctly—can’t go rebut a second time because that can be construed as the bank trying to influence the process.

What a bank’s appraisal division can do is allow a second appraisal to be ordered to further build the case.

So let’s take a look at how loan agents try to control consumer fees amidst all these regulations.

We used to be able to talk to a local appraiser to pre-screen value estimates before asking consumers to spend $425-625 on an appraisal. Since we can’t do that anymore, me and my team now ask local Realtors to provide recently sold comparable homes for us.

So after getting that data from a realtor on this transaction, the borrower concluded that it was worth spending $625 because the comps plainly supported original purchase price.

Now that the report has come up $20k short and we cannot do a second rebuttal, I’m personally going to invest another $625 in a second report. Not just as an act of good faith to my client, but because I truly believe this appraiser is wrongly defending poor analysis. And the fact that my firm’s chief review appraiser has allowed for a second appraisal to be ordered suggests to me that she agrees.

I’m not sure if I’m even allowed to pay for the second appraisal. It’s possible the rules don’t allow the loan agent to do the right thing for their client, and would require my client to spend another $625 on his own.

But if it’s truly the case that I can’t help a client in this manner, then you regulators know where to find me.