There’s no doubt that there has been a lot of abuse with home loans and that led to the real estate problems we are cleaning up now. There were many questionable loans made with poor documentation. Well, it wouldn’t surprise many to know that there were also questionable appraisals made to help get those questionable loans.
Compounding the problem was a rapidly rising housing market. Appraisals are based on actual sales. So how do you attach a value on homes that are getting multiple offers and selling above both list price and the last sale price?
During the go-go years of 2004 and 2005, many homes here were selling with very few appraisals falling through even though there weren’t comparable sales to justify the rapidly rising prices.
As I’ve said before, the banks and federal government have clamped down on a lot of the lending abuses by eliminating many types of no-documentation type loans. It was only a matter of time till the Feds started clamping down on the appraisal abuses of the past too.
So now getting an appraisal is going to be more difficult because many of the lenders are being directly removed from dealing with appraisers and appraisals. Now there’s a new layer of bureaucracy.
In the past, your mortgage broker or direct lender would order an appraisal on the home you want to buy from an experienced local appraiser. Because the appraiser was local, he would be familiar with the area and any special circumstances.
Well, Congress thought that the lenders had too much influence on appraisals so things are changing. Now a lender will order an appraisal from an appraisal management company and the appraisal company will randomly select the appraiser. The lender isn’t allowed to contact the appraiser for fear of attempting to influence him. As an aside, the buyer must pay for the appraisal at the time of ordering it with a credit card as opposed to billing it to escrow or paying for it at the day of the appraisal. Also the buyer now has three days to approve the appraisal. This is kind of like the –three-day recession period for refinances.
To me what’s really bad about this new procedure is there may be either unfamiliar or inexperienced appraisers doing the appraisal on your home. This can create huge problems in that an out-of area appraiser may be off on the valuation so the property doesn’t appraise at the purchase price.
Either the seller is going to have to take a lesser amount because the home didn’t appraise at the purchase price, the buyer is going to have to come up with a larger down payment or the deal will fall apart. In today’s market, I’d put my money on the buyer forcing a price reduction from the seller or the buyer backing out.
This can impact the financing contingency period. Also, if the appraisal comes in low, another one may be ordered and that takes time. And then there might be a few more days of re-negotiating the price. Taking all this into consideration, you may want to have a longer escrow period.
So, when you are talking to your lender make sure you ask how this will impact your financing approval and the timeline. Sometimes our elected officials have the best of intentions but they don’t execute the plans well. This seems to be one of those situations and will most likely get fine-tuned over time.
Steven Hyman is the broker and owner of Century 21 Sunset Properties. He can be reached at 726-6346 or century21sunset.com