Don’t be Fooled by the Power of the Appraisal in New York

How was it that during the “heyday” of the credit spigot the “lender’s” appraisal for real property in New York always ended up at or close to the exorbitant purchase price and inflated mortgage sought by the purchaser. That is the question that New York’s Attorney General threatened to investigate, leading to immediate guidelines seeking to revamp how appraisers are getting paid by the lenders who hire them.

The problem– often the lender was charging borrowers $300 to $600 for an “appraisal,” but paying the appraiser only half of the fee, leading to inferior and suspect appraisal. Obviously, the most inexperienced an morally susceptible appraisers conducted millions of these “appraisals” during the height of the real estate market, “hitting the numbers” sought by the lenders.

Often the appraiser (who was not getting paid very much to work on the valuation) would be pushed to value the property quickly, even overnight. The low pay resulted in improper inspections and inaccurate evaluation of comparable properties, and missed comparisons to pending sales contracts and local market trends.

So, how is the industry going to address this rampant problem, which in some measure caused the crisis we face? Fannie Mae and Freddie Mac, the giant mortgage investors, have now pushed a “home valuation code of conduct.” The code, scheduled to take effect May 1, 2009, was instigated by a settlement involving New York Attorney General Andrew M. Cuomo, the Federal Housing Finance Agency and the Congressionally chartered mortgage companies.

As part of the agreement between New York’s Attorney General, the agencies, and the regulators agreed to create standards designed to ensure accurate, independent appraisals, insulated from pressure (from lenders, mortgage brokers, real estate agents) to hit the numbers.

For example, the new code prohibits brokers who originate a share of new mortgages from selecting appraisers.

Bottom Line–this matters to you because quick, slipshod appraisals severely undervalue some properties, forcing buyers to come up with larger down payments, prevent refinancings, and overvalue houses causing loss in equity. Sound familiar.