Archive for August, 2010

New Articles on the Internet About Lender Scrutiny and Extra Costs to Consumers

Thursday, August 26th, 2010

Today, I came across this article on MLS Real Estate :

  It is an interesting and well informed piece, but I feel I must add my own “two-cents”…

The first quote I came across in this article is: “Any time you have a market in transition, appraisals aren’t going to keep up because the appraisal is based on historical data”

Now, that is true to a point; however, most lenders have been requiring appraisals have at least two relevant sales that closed within the past 90 days and at least one or two active or pending sales that support the appraiser’s conclusions – this has been (for at least the past year or two) the “norm”; among the bulk of lenders I work with and most appraisers I know; so, even though a “closed sale”  is “historical data” it stands to reason that a properly supported appraisal will also include at least one or two “currently offered” (listed) properties to balance the “historical” data with current inventory; it is then up to the appraiser to reconcile the current data with historical data. For instance: in a declining market, closed sales will likely be higher than what the available listings support; conversely, in an increasing market, the closed sales may be less than what current listings can justify. The bottom line: a good appraiser will not only look at closed sales, but also current inventory and market trends to make an informed and reasonable opinion of market value that takes the “historical” (closed sales) and “current” (active inventory and pending sales) into account when estimating a property’s value.  This helps to balance the “historical” with the “current”; and helps to recognize and apply market trends when appraising a property.

One other point I’d like to add: there is nothing preventing a home owner (or mortgage broker or agent) from consulting with a different appraiser than the one who performed their appraisal in order to be sure there are no major errors or problems with the original appraisal. A well informed and trusted local appraiser can provide a consultation assignment for a home owner that involves a technical review of another appraiser’s work; if major errors or violations of USPAP (the Uniform Standards of Professional Appraisal Practice – the codes, ethics and general rules for the appraisal profession) are found, the current rules (including the HVCC) require the lender to order a second appraisal; AND (if USPAP violations are present) it is up to the LENDER to provide the second / new appraisal at their own expense, not the borrower’s (under the HVCC).

Under current rules and law, the lender is responsible for selecting a competent appraiser and the quality of the appraisal for lending purposes. The lender is also responsible for being sure that an appraiser is paid a fee that is “customary and reasonable” in the market area; THIS is typically where the problem lies, as many of the large lenders use an Appraisal Management Company (AMC) to handle the appraisal ordering, appraiser selection, and quality control of the appraisals. Surprise!  The big banks also own the AMC they use; it has been common practice for the lender to order an appraisal through their own AMC that engages the appraiser who is providing the fastest and least expensive appraisal product; this results in a less reliable appraisal because the appraiser is often times only given a day or two to estimate a property’s worth and is only being paid a fraction of what has been “customary and reasonable” in their market.  To top it all off: the lender then charges the consumer the “customary and reasonable” fee for the appraisal and keeps the difference as profit (or “cost of business”, as they would argue). This has been a second revenue source for big banks within the lending process and should be considered appraisal “fee skimming”, an illegal practice in most, if not all, states.

I provide appraisal consultation services to home owners, lenders, and brokers; I have found that, when USPAP violations are present, the borrowers have been able persuade the lender to provide a second appraisal at no cost to the borrower -sometimes, this results in a different appraised value – sometimes, it also results in a better appraisal that the lender feels more comfortable proceeding with when providing a home loan – sometimes, it results in a second appraisal that is equally flawed as the first – and sometimes the second appraisal has no significant change in value from the first. At the very least, a borrower (or broker, or correspondent lender, or agent) can feel confident that they have a second set of “trained eyes” to find any errors or issues with an appraisal that may be questionable and a course of action. Most borrowers cannot recognize the most common appraisal errors, because most home owners are not appraisers or bankers.

If you find yourself in this position (with a questionable appraisal that appears flawed), feel free to give me a call (or email).