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:
- Not local: Appraisers with little or no familiarity with a given area are often assigned to jobs.
- Pressure to quote conservative: Because of new, stringent appraiser evaluations, appraisers feel pressured to quote values ultra-conservatively.
- “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.
(The Friday Off Ramp series is an occasional editorial on Fridays about stuff that happens in San Carlos.)
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