You are finally ready to buy a new home or perhaps you are looking to refinance your current one to pay off some old credit card debt or go on that vacation to Nantucket you have been thinking about. You sat down with your loan officer and agreed on specific terms based on an estimated home value that maybe you found online or based off of your “tax assessed” value. Up to now you have been the ideal client and provided your loan officer all of the required documentation the same day it’s requested. Now you and your lender are patiently, or maybe not so patiently, waiting for the appraisal inspection to be submitted from the appraiser. After waiting for a week or more your lender calls you to give you the bad news that your home appraised for less than originally anticipated. You don’t agree with the value and your loan officer that seemed to be so willing to help you up to this point is all of a sudden left speechless. What do you mean you can’t call the appraiser and be an advocate for my belief that his or her value is incorrect?
The home appraisal inspection is a vital aspect of the underwriting approval process for obtaining mortgage financing. The Massachusetts licensed appraiser will determine a final value that the lender will utilize to determine whether or not the client’s program will stay as originally applied for, or if a lower appraisal value will change loan terms. The final value can decide if a prospective home owner will be required to put more money down, have mortgage insurance on a loan, and it can also affect the interest rate. For those refinancing it could limit the amount of cash out that is allowed for a specific mortgage program.
A Little Appraisal Guideline History-
In late 2009 after the dust from the housing and credit crisis started to settle, legislators began to evaluate the whole process that an applicant goes through for obtaining a mortgage. Through their analysis they focused on areas of the process that contributed to the sub-prime mortgage crisis and housing collapse. Congress along with financial institutions began to develop safe guards to protect the stability and health of lending institutions and the housing market. These initial steps were the blue print for what later became known as the Dodd/Frank Bill. There was a renewed focus put on protecting the consumers from predatory lending. One of the ways this was done was to create various degrees of separation between lenders, real estate agents, underwriters, and appraisal companies. During the housing boom of the mid 2000s, Massachusetts lenders were in direct contact with appraisers leading some to try and influence the value of homes in order to create enough value to make a loan work. This was one of the many reasons home values became so over-inflated. It created “false equity” as the country experienced a sugar high on the belief that home values would just continue to climb.
The spring of 2009 was the darkest period for the US economy since the Great Depression. The stock market had hit a generational low and the unemployment rate was rising on a monthly basis. It was at this time that New York Attorney General Cuomo along with Fannie Mae, Freddie Mac, and the Federal Housing Finance Agency developed a new set of guidelines, rules, and processes for appraisal inspections. This new process was called the Home Valuation Code of Conduct or HVCC for short. One aspect of these new rules was the development of further Appraisal Independence Requirements.
The Dodd/Frank Bill laid out specific language for Appraisal Independence Requirements. The AIR requirements state:
- Requesting that an appraiser provide an estimated, predetermined, or desired valuation in an appraisal report prior to the completion of the appraisal report, or requesting that an appraiser provide estimated values or comparable sales at any time prior to the appraiser’s completion of an appraisal report;
- Providing to an appraiser an anticipated, estimated, encouraged, or desired value for a subject property or a proposed or target amount to be loaned to the Borrower, except that a copy of the sales contract for purchase transactions may be provided;
In other words; activities where a client, lender, or real estate agent attempts to influence the appraiser’s value are prohibited and grounds for a loan being declined or even legal action.
A new world of mortgage financing is upon us and we have no option but to adapt to the swing of the regulation pendulum. For those Massachusetts residents who haven’t applied for a mortgage in the last 5 or 6 years be prepared to submit more income documentation and letters of explanation to your lender. Change is never easily digested but if we can understand why it’s necessary and how it can prevent another recession it will be worth the efforts of all of us.