Appraiser guidelines
We keep talking about the appreciating market we’re back in, which is looking similar to the run up to the real estate bubble. But there are several changes and guidelines that were enacted in 2010 after the bubble burst that were designed to avoid some of the same careless behavior that went on at that time. One of the most important changes is related to the role of the real estate appraiser.
The role of the appraiser in a real estate transaction is quite different from that of the broker or sale associate, who is a representative of either both the buyer and the seller or one or the other. The real estate appraiser, however, represents no one in the transaction. An appraiser is mandated to develop a report that is impartial, objective and represents an independent opinion of the value of the property. An appraiser must be free of bias and is specifically prohibited from advocating the cause of any party.
As a result of the crisis following the bursting of the housing bubble, new laws were enacted under the Dodd-Frank Wall Street Reform and Consumer Protection Act. These new regulations have had a significant effect on all of the financial services including mortgage loans and real estate appraisals. One of the more important aspects of The Dodd-Frank Act is to provide mortgage applicants important information about their home’s value.
Specifically, creditors are now required to disclose to applicants that they have the right to receive copies of appraisals and written valuations. In addition, creditors are also required to automatically send a free copy of home appraisals and other written valuations promptly after they are completed, regardless of whether the mortgage is granted or denied.
Previous appraiser independence policies were enhanced and amended in December 2010 with one of the key stipulations that the valuation process of the property must be isolated from the lending institution’s loan production staff. Appraisers must avoid any conflict of interest and are prohibited from any direct, indirect or prospective interest in the property or the transaction.
Also in 2010, Fannie Mae and Freddie Mac, the largest purchaser of residential mortgage loans, established detailed Appraiser Independence Requirements (AIR). The new AIR regulation is specific that the lender must select the appraiser and may not accept an appraisal prepared by an appraiser selected or compensated in any manner by a third party. Therefore, appraisals completed by an appraiser selected by a mortgage broker or a real estate agent are not acceptable to Fannie Mae and Freddie Mac.
Like most government regulations, all of this is a mouthful, but it is essentially designed to keep the appraiser independent and at an arm’s length from other interested parties to the transaction. With values going up and appraisals coming in short, we are getting back into the danger zone of overstated appraisals and under qualified buyers.
So what are your options if an appraisal comes in short? I can tell you, you will never get the appraiser to change his opinion especially since 2010 and Dodd-Frank. That being said, individuals involved in loan could ask that the appraiser consider additional information, correct factual errors or provide additional supporting information. As a last resort, Dodd-Frank also provides for an appraisal complaint hotline where complaints will be referred to the appropriate state and federal agencies. Good luck with that.
Real estate appraisers are the absolute key to any property sale that is dependent on a mortgage. It’s important to keep everyone honest based on recent history, but you can expect some rough going for the next few years until the market gets back to normal – whatever that is.
