San Carlos Real Estate Agent, San Carlos Realtor Friday’s Off-Ramp: It’s Time to Repeal the New Appraisal Law | The White Oaks Blog
San Carlos Real Estate July 24, 2009

Friday’s Off-Ramp: It’s Time to Repeal the New Appraisal Law

by Chuck Gillooley

StopGood Intentions, Bad Implementation…

A few weeks ago, I wrote a post about how the new appraisal laws were tripping up an increasing number of real estate transactions, often very late in the negotiation.   Here’s a very quick recap of how the new Home Valuation Code of Conduct has changed the way appraisals are conducted:

  • Mortgage Brokers are be prohibited from selecting appraisers;
  • Lenders are prohibited from using “in-house” staff appraisers to conduct initial appraisals, and
  • Lenders are prohibited from using appraisal management companies that they own or control.

The new law took effect on May 1, 2009 and the impact of the changes above was immediate and far-reaching.

Here’s Why It’s Not Working…

The intent of the law is to protect the consumer against over-aggressive lending practices.  In theory, by breaking the link between the lender and the appraiser a “checkpoint” is inserted in the lending process that should protect all parties involved from over-inflated home values.   Indeed, if you just take a look at the sheer number of short sales in the Bay Area right now, it’s clear that home valuations became a runaway train in recent years.

There’s a reason why “theory” and “reality” exist in different parts of the dictionary.  This law is a perfect example of this paradigm, and here’s why it’s not working:

  1. Not local:  Appraisers with little or no familiarity with a given area are often assigned to jobs.
  2. Pressure to quote conservative: Because of new, stringent appraiser evaluations, appraisers feel pressured to quote values ultra-conservatively.
  3. “Poison the Well.”  There’s very little recourse when a poor appraisal is done.    There must be a “significant cause” for a re-appraisal to be considered (incorrect square footage, bedroom count, etc..)   And even if a second appraisal is justified, the lender can still choose the more conservative of the two.

There’s an outstanding article in yesterday’s San Jose Mercury News which perfectly illustrates how screwed up this new policy is.  I’d highly recommend reading this:  New Home Appraisal Rules Bring Turmoil to Real Estate Industry.

This Impacts Every Homeowner.

Even if you’re not selling your home right now, this law impacts you.  Your home is an investment, and if a half-baked law drives down the value of homes for sale in your neighborhood, then your investment will be adversely affected, too.

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(The Friday Off Ramp series is an occasional editorial on Fridays about stuff that happens in San Carlos.)

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Comments 5
  • First of all, a home is not an investment. It is shelter, period. It only becomes an investment when it is sold. That’s the kind of upside down thinking that got us in trouble in the first place. Until then, let the appraisers do their job. As one of them said to me last week, ‘a house that is priced like a pig, will sit on the market like a pig.”

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    • Francois,

      Whether a home is an investment or not is really subject to one’s opinion. I will tell you that each and every buyer that I have ever worked with views the home as an investment (as well as shelter, of course.) If they didn’t, there would be no reason to stop renting. I certainly view my home as an investment. But that’s not the point of the post.

      You hit it right on the head when you said “Let the appraisers do their job” because the problem with the new law is that it’s inhibiting their ability to do just that. When an appraiser admits that he’s hesitant to price a home at the sales price NOT because it’s not worth it, but because he’s afraid of a negative review by management (and a possible loss of job) then the system has failed everyone. I don’t disagree that there needs to be some sort of checkpoint in the system, but this arrangement has swung the pendulum too far in the other direction.

      Thanks for writing in.

      Chuck

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  • The 3 points of the law are absolutely correct. Letting lenders have any form of control or select appraisers is a huge part of what got us into this mess in the first place. If the appraisers are being too conservative or not is a matter of opinion, what’s important is that they are able to do their job with total independence.

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  • Great post. This law also negatively affects those trying to refinance their mortgage. I’m going through this now. My house was appraised WAY too conservatively by an appraiser from Daly City. We’re now going through the rebuttal process as we can’t refi without our appraisal. Sucks.

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    • Hi Kari,

      I’m hearing that this is happening more and more often. On top of that, the underwriting procedures are changing so you’ve probably already experienced a increase in the paperwork required — even for a refi.

      Thanks for writing in..

      Chuck

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