Home & Garden

A looming battle over home appraisals

Could a controversial new program by mortgage investor Fannie Mae lead to slower and costlier home sale closings? Could the program, set for launch nationwide this month, lead to more disputes over prices between sellers and buyers, busting deals when the appraised value comes in below what is agreed in the contract?

Fannie Mae doesn’t think so, but many appraisers are worried that the new program might mess up the marketplace.

Starting Jan. 26, Fannie plans to offer mortgage lenders access to proprietary home valuation databases that they can use to assess the accuracy and risks posed by the reports submitted by appraisers. The Fannie data will flag possible errors in the appraiser’s work before the lender commits to the loan, score the appraisal for overall risk of inaccuracy, and may provide as many as 20 alternative “comps” – properties in the area that have sold recently and are roughly comparable to the house the lender is considering approving for financing but were not used by the appraiser.

Lenders can then forward Fannie’s alternative comps and risk scores to the appraiser or the management company that hired the appraiser requesting explanations and changes to the appraisal. Professional appraisers rely on comps as key indicators for value. If houses “A” and “B” in the neighborhood sold within the past three months for $250,000 and are similar in size and features to the house under consideration by the lender, the appraisal should come in close to that number, absent any dramatic recent marketplace changes. But if the appraiser values the house at the contract price of $300,000 agreed by the seller and buyer, the valuation may be judged too high. Excessive valuations create the risk of future losses to lenders and investors if the borrower defaults and the house goes to foreclosure.

On its face, the new Fannie program appears unassailable. Lenders and investors have an inherent right to be sure the appraisals they use for their funding decisions are accurate. If Fannie has developed a high-tech tool to help lenders spot risky appraisals upfront, where’s the problem?

Start with delays to closings and higher costs. Appraisers say if they have to justify piecemeal why they chose the comps for their valuation rather than those selected by Fannie’s computers, it will add days to closing times. Meanwhile, sellers and buyers who had planned on dates for moving may suddenly find themselves knocked off track because the appraisal report was flagged. Realtors’ commission payouts also will be delayed.

Pat Turner, an appraiser in Richmond, Va., said appraisers will have to raise their fees to compensate for the additional time. He predicted his fees could jump by $150 to $200 or more because of Fannie’s new program – all paid for by consumers at settlement.

Another problem: Fannie Mae won’t give appraisers access to the “black box” databases it uses to produce risk-rating scores. A national petition sponsored by the Illinois Coalition of Appraisal Professionals is circulating, demanding transparency. Critics charge that Fannie’s data will not recognize differences between adjacent neighborhoods – a key factor in valuations – because it is based on census tract groupings, which may include mixes of lower-priced and higher-priced homes from different neighborhoods. California appraiser Mike Turner says the risk-rating system will be biased toward lower-priced comparables – something he says appraisers “will figure out quickly” – and will therefore reward appraisers who choose less-costly properties for their comps.

“Lower-risk comps will tend to kill deals,” he predicts, forcing sellers and buyers into needless disputes when appraisals come in below the agreed contract price.

Fannie says appraisers’ concerns are overblown and that if widespread problems arise, it will make adjustments. Andrew Wilson, a Fannie spokesman, denied that the system will be biased to the down side. “It’s going to flag mistakes,” he said, “and frankly everybody should want that.”