New appraisal rules come at a cost
If you're buying or selling a home, you need to know about new home appraisal regulations that could slow the progress of your purchase and even cost more than you might expect.
The Home Valuation Code of Conduct went into effect May 1 and is a set of guidelines between lenders Fannie Mae and Freddie Mac, which combined own approximately 70 percent of the nation's residential mortgages. All Fannie and Freddie loans must now comply with the HVCC guidelines. The purpose is to prevent brokers from choosing appraisers who they think will inflate a home's value.
Many, including some members of Congress, believe that this practice was widespread and helped contribute to the current subprime mortgage crisis. HVCC guidelines require brokers to order appraisals through an independent third-party appraisal management company (AMC), which in turn offers work to appraisers of its choosing.
The new regulations have increased the cost of appraisals — some by as much as 50 to 70 percent. And many professionals in the real estate industry say it's created another problem because the AMC-hired appraisers may not be familiar with the properties they're evaluating.
As a result, some are assessing the values of homes in markets with which they are unfamiliar and getting the market value wrong. Appraisers new to the field may be willing to work for the AMC at a discount, and may not be as familiar with local market conditions as an appraiser with more experience. Quality appraisals often take time and rely on precise market comparisons.
We contacted more than a dozen highly rated mortgage brokers and appraisers on Angie's List, and the consensus view on the HVCC was the cost of appraisals have jumped in price from $300 on average to $500 or more. The National Association of Mortgage Brokers estimates it will cost consumers an estimated $2.8 billion a year in extra fees.
In addition to paying more, consumers must also pay for the cost of appraisals out of pocket and up front, instead of the fee being worked into the closing costs of the loan. Lenders cannot reuse or transfer an appraisal done for a specific loan, so if the deal falls through — or a better deal becomes available — the customer must pay for another appraisal. This has lead to higher fees and increased time in closing a Fannie or Freddie loan.
The old appraisal rules still apply for FHA-backed and other non-Fannie and Freddie loans. As a homeowner, you can still order your own appraisal to assess your home's value before testing the market.
The debate on the benefits of the HVCC versus its potential shortcomings is far from over. In late June, Congress took action, with Reps. Travis Childers (D-Miss.) and Gary Miller (R-Calif.) introducing legislation requesting an 18-month moratorium on the HVCC and a review of the process, which has been sent to committee for review. We'll keep you posted with updates as the tweaking of the appraisal process continues.