Pub. 4 2016 Issue 4

Issue 4. 2016 9 O ne of the contributing factors to the housing crisis of 2007 was the over valuing of residential real estate by appraisers. Some appraisers would use the “Adjustment” section of the apprais- al to force the value of the comparable properties to meet the value needed by financial institution and mortgage companies so the loan could be approved. This would then encourage the lender to send more business to the appraiser whose income is directly related to the number of appraisal orders received. As a result of the housing crisis, bank regulators published new regulations to attempt to build a wall between the lenders and the appraisers. This was intended to keep the appraisers honest, because they should not be aware of the proposed loan amount or the sales price of a home. Some lenders are using a third-party vendor to randomly select the appraiser to avoid any question of an affiliation between the lender and the appraiser. Some of those third-party appraisal ordering firms also monitor and provide feedback to the lender concerning the quality and turn around of each appraisers’ work. However, many financial institutions and mortgage companies continue to have an employee that is not involved with residential real estate lending or loan documentation process order the apprais- al from local appraisers. Yes, the regu- lation requires the lending organization to use a rotating list of appraisers and to document why appraisers are skipped. However, it is not unusual for these local lenders and local appraisers to go to the same church, have children on the same sports team and know one another. This is the reality of life. All of these new regulations were designed to create an environment where the value placed on each property would be “Fair and Balanced.” However, while the regulators were doing their best to promote a more level playfield, Fannie Mae and Freddie Mac did not change their regulations. Fannie Mae Regulation B4-1.3-02, Subject and Contract Sections of the Appraisal Report (04/15/2014) states under the Contract Section that “The lender must provide the appraiser with a copy of the complete, ratified contract.” Wow! No wonder the appraised value is almost always the amount of the sales price on a purchase appraisal. Appraisers are aware of this clause for secondary market loans and insist that the lender must provide the sales contract. Un- fortunately many lenders are also providing, and some appraisers are requiring, the sales contract on loans that lenders know will be retained in the organization’s portfolio. So when an overly eager buyer pays more than the true market value for a home, guess what, the home ends up being appraised for the over valued purchase price. Does this sound familiar to anyone? Hello, 2007. I understand that the appraiser needs to see the Sellers Disclosure to determine if adjustments need to be made to the appraisal for the heating, electric, roof, gas, water, asbestos and numerous other potential problems with the property. The appraiser also needs to know if there were any personal property concessions includ- ed in the sales contract. This information can be included on the Appraisal Request form sent to the appraiser. However, there is absolutely no need for the appraiser to see the sales contract. Fannie Mae and Freddie Mac should immediately change their regulations so lenders will hopefully receive unbiased appraisals. None of us want to relive the housing crisis of 2007! n Lynn A. David ( Ldavid@bankconsultants.com) is president of Community Bank Consulting Services, Inc., a management consulting firm located in Salt Lake City and St. Louis. Fannie Mae & Freddie Mac and the Next Housing Crisis By Lynn David