Appraisal Watchdog to Oversee Your Home's Equity

A new watchdog agency is being created to ensure that property appraisals are objective, not tainted by lenders or other parties who may have a vested interest in the valuations.

As the housing crisis in the U.S. continues, so do the investigations into why it's happening. One culprit appears to be widespread industry abuse of the property appraisal process. Critics-many of them appraisers who are fed up with being pressured to tweak the numbers-complain that market values are often arbitrarily inflated to help mortgage and real estate brokers earn bigger commissions. When home prices are artificially inflated, it can also be a boon for those on Wall Street who trade mortgage-backed securities to investors.

Many within the industry have been crying foul for years, and New York Attorney General Andrew Cuomo eventually took the fight to the courts. He even issued subpoenas against Fannie Mae in an effort to find out whether the agency was lax, or perhaps downright negligent, in the execution of its responsibilities.

Fannie Mae Fights Back

With Fannie Mae agreeing to provide $12 million to create a special appraisal oversight agency, the Attorney General declared victory and dropped his threat of lawsuits. Reuters news agency reported that the announcement of the formation of the oversight body, which is scheduled to begin its work on January 1st, 2009, was proclaimed by Cuomo to be, "One of the greatest, most dramatic reforms of the housing industry in the last 20 years."

The watchdog agency will oversee the appraisal process for both Fannie Mae and Freddie Mac, the two largest underwriters and insurers of home loans in the U.S.  The department will operate within the Office of Federal Housing Enterprise Oversight, and its main job will be to make sure that home appraisers remain free of outside influence from mortgage lenders. By maintaining a higher standard, it's hoped that appraisers will be able to do their jobs more objectively, and will determine valuations without regard to how the results might impact banks, brokers, and investors.

Good for consumers?

While all of this is supposed to be good news for homeowners, the news may create some consternation for anyone trying to sell a home, refinance, or take out a home equity loan or line of credit. As price scrutiny increases, appraised values will most likely shrink, evaporating equity. Already, many major banks and mortgage companies have begun requiring more than one appraisal if the first one appears to be too high. Before approving loans, they now use ultra-conservative valuations, which makes it much harder to qualify.

After years of popularity, the trend toward loose and liberal real estate appraisals has suddenly gone out of fashion. Now that the pendulum has begun to swing in the other direction, it will be a harsh wake-up call for many homeowners who have been banking on their homes for easy cash.