Builders: Faulty Appraisals Threaten Housing Recovery

The Home Valuation Code of Conduct (HVCC) is not one of Tim Kane’s favorite topics of conversation.
"I can feel my blood pressure going up," said the president of Irvine, Calif.-based MBK Homes. He has good reason to be exasperated with the HVCC, which went into effect on May 1. "We've had multiple offers on homes, and appraisers have, on numerous occasions, come in with prices that are lower than the price people are willing to pay. They’re using REOs (foreclosures) as comps and saying, 'This is the value.'"
Kane had one entire neighborhood of six high-end luxury homes appraise well below the contract prices. "We had people ready to go," he said. "We just lowered the prices to get them sold. It cost us $250,000."
No one denies that the intent of the HVCC is laudable. The rules are supposed to protect consumers by eliminating appraiser coercion from lenders, brokers and real-estate agents, who often pushed appraisers during the real-estate boom years to produce values that supported the contract price. In worst cases, appraisers were paid off to inflate property values to facilitate mortgage fraud. The impact, however, has led to industry-wide criticism. Builders and Realtors cite the HVCC — implemented at precisely the time as the housing market began to see some sustained improvement — as the biggest obstacle to a meaningful economic recovery.
Member surveys by both the National Association of Home Builders and the National Association of Realtors report widespread instances of sales cancelled because of low appraisals. Real estate professionals across the country report that appraisers are commonly using short sales and foreclosures as comps for new construction.
"The fact that they’re using a distressed home or a foreclosure for a comp is not a terrible thing to do, but the values need to be adjusted to reflect the condition of those homes," said Bill Renner, director of single-family finance at NAHB. "Often foreclosures have been beat up, and that needs to be examined closely."
Vikki Robbins, a partner in Jacksonville, Fla.-based Pace Builder Services, which handles sales and marketing for several new-home builders, says that another common problem since the implementation of HVCC is that appraisers are not giving value to options, upgrades, swimming pools and lot premiums.
"Let's say a builder has an inventory home they built in 2008 with lots of wonderful stuff," Robbins said. "The house next door is the same square footage but without the bells and whistles. To the appraiser, they're the same value. That's unconscionable. ... They’re not giving value to the things that buyers agree give a house value."

Appraisal management companies criticized

Plus, lenders increasingly are using — or creating — appraisal management companies (AMCs) as a way to meet the HVCC requirement that lenders have no direct involvement in selecting an appraiser. The appraisers hired by AMCs often have limited or no experience with the neighborhoods in which they're getting assignments. They're also getting paid considerably less by the AMCs than they had in the past when they worked directly for the lender, leading them to rush through their research.
"If they're getting paid half of what they were before, they’re just trying to churn and burn," said Jim Amorin, 2009 president of the Appraisal Institute, a professional association for appraisers with 26,000 members nationwide. "I don’t feel bad for appraisers who accept assignments under those conditions. They should just say no. But sometimes you do things you wouldn’t because you have to feed your family."
The Appraisal Institute and others are particularly concerned with the lack of regulation of AMCs and the fact that many of them are owned partially or wholly by the banks for which the appraisals are being done. MBK Homes' problem appraisers are on contract with LandSafe, an AMC that is a subsidiary of Bank of America, which handles virtually all of MBK's loans, Kane said.
"If an appraisal management company is owned in whole or part by the lender using them, there’s a potential for bias or pressure to be applied," Amorin said. "To think that it’s not is ludicrous."

Myths and misinformation

In addition to the very real problems spawned by the HVCC, rampant misinformation about the rules' restrictions has created extra complications. Many builders and real-estate agents are under the impression they're not allowed to have any communication whatsoever with an appraiser, that lenders have to use AMCs to hire appraisers and that appraisals aren’t transferrable from one lender to another. None of those are true. To spread the word about what the rules do require, the Appraisal Institute , Freddie Mac and the Federal Housing Finance Administration Federal Housing Finance Agency have issued statements and clarifications to give real-estate professionals accurate information.
News of the appraisal problems and their impact on a housing recovery has prompted a bill in Congress that would put an 18-month moratorium on the implementation of HVCC. H.R. 3044, sponsored by Rep. Travis Childers (D-Miss.), has 54 co-sponsors but has been stalled for two months; it’s currently referred to the House Committee on Financial Services. NAHB also has called on Congress to address the use of short sales and foreclosures as comps in real-estate appraisals as part of its current lobbying efforts.
Until the impact of the HVCC is addressed — and there’s no guarantee that will happen — builders continue to face yet another obstacle to a substantive housing recovery.
“I think the appraisers are contributing to the continuing downward trend of the market,” said Robert Bloomingdale, partner in Bloomingdale Construction Co. in Rochester, Minn. “Pretty soon, people give up. The whole thing is a nightmare.”