New Appraisal Rules Could Help Free Up Lending
Along with tight credit and unstable home values, a new set of rules governing home appraisals have been blamed for making it hard to buy a home or refinance a mortgage over the past year. Now those rules are being replaced, which hopefully will lead to more accurate valuations and make home loans a bit easier to obtain as well.
But don't hold your breath. The rules don't take effect until April 1 and even then, it's not clear how much effect they'll have on current appraisal practices. The so-called "interim final rule" was issued by the Federal Reserve Oct. 18 for a 60-day period for public comment.
Allows feedback on appraisals
Among other things, the new rules allow lenders or builders to ask an appraiser to take into account additional information that may have been overlooked in the initial appraisal. They also require that appraisers be paid "customary and reasonable" fees to encourage the use of well-qualified appraisers who are familiar with the local housing market involved.
"The interim rule makes it clear that home builders and others can ask an appraiser to consider additional information about a property, including information about additional comparable properties," said Joe Robson, immediate past chair of the National Association of Home Builders, one of the groups that has pushed for a change. "That's critical to our members because in far too many cases we're seeing appraisals based on inappropriate comparables."
The new rules effectively replace the much-criticized Home Valuation Code of Conduct, which was one of the measures adopted following the collapse of the housing bubble. The HVCC, as it's known, was primarily designed to shield appraisers from undue pressure to over-value a home so it would qualify for a loan.
The HVCC has done that, by prohibiting lenders or their agents from hiring appraisers for loans they sought to issue. Instead, appraisers are now hired by third-party appraisal management companies.
However, lenders and realtors often complain that they hire inexperience appraisers who are unfamiliar with local markets, give overly conservative appraisals and treat foreclosures as comparable sales. As a result, they say, the pendulum has swung too far the other way, and appraisers are now undervaluing properties rather than overvaluing them as occurring during the housing bubble.
Continues main elements of HVCC
The new rules continue many of the major elements of HVCC, including a ban on the use of coercion to get an appraiser to base an appraisal on anything but their professional judgment. They also require that incidents of appraiser misconduct be reported to the authorities.
Many in the real estate and lending industry are welcoming the changes, but say the big question is one of enforcement. Although the new rules set out somewhat tougher penalties for violations than under the HVCC, it remains to be seen how strictly they're interpreted and applied by federal regulators and how much wiggle room appraisal management companies can find. Depending on how that plays out, the new rules could either be a step in the right direction or just more of the same.