The Problem With New Appraisal Rules

Jim Couture sold his three-bedroom colonial in Metheuen, Mass., last spring in just ten days, for a sum within 1% of his asking price. You'd think he'd have no complaints. Instead, Couture is hopping mad about new appraisal rules supposed to protect consumers.

Couture's sale required two $400 appraisals, the first of which took weeks to schedule and relied on suspect comparable sales, he says, to arrive at a value roughly $30,000 less than the selling price of his home. The second came closer to the mark, but only after blown deadlines nearly derailed the contract. "I can't relay how stressful the whole ordeal was," says Couture.

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The Home Valuation Code of Conduct, which applies to loans purchased by Fannie Mae or Freddie Mac, was designed by regulators to protect appraisers from undue pressure from interested parties. Faulty appraisals got a fair share of blame for the housing crisis, after all.

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Among the practices the new rules explicitly forbid: providing an appraiser with an anticipated, estimated or desired value for a property; withholding or threatening to withhold payment or future business from an appraiser; ordering up a second appraisal without a reasonable belief that the first one is flawed.

Neither you, nor your real estate agent or mortgage broker can hire an appraiser anymore. The mortgage lender can, or can contract with a disinterested third party, such as an appraisal management company. A lender can select an in-house appraiser, but only if the appraiser reports to a part of the company separate from sales or loan production.

It all sounds good -- in theory, anyway. But the fix has so many kinks to work out that a bill in Congress would slap an 18-month moratorium on the new rules. Complaints abound about higher costs, lower quality and long wait times. "For my customers the cost has gone up $50 to $75 per appraisal, minimum," says mortgage broker Kevin Iverson in Denver, Colo. Independent appraisal management companies now assign much of the work, and as middlemen, keep part of the fee, jacking prices higher. Yes, closing costs are up in some instances, says the Federal Housing Finance Agency, which oversees Fannie and Freddie. But that's only because lenders have more exacting standards these days.

Realtors complain of appraisers who don't know the area. "We get appraisers from two hours away," says Rick Coco, Couture's broker in Andover, Mass. And there's a worry that appraisers who now pay a cut of their fee to an agency will have to accept more assignments, spending less time on each, just to maintain their income.

Turnaround times are terrible. "Last year, if a Realtor asked me, 'Can we close in three weeks?' I'd say, absolutely," says Iverson. Now we don't know how long an appraisal will take -- could be a week to ten days, could be three weeks." Consumers should plan on at least 45 days to close a home purchase loan, and allow at least 30 days for an appraisal, advises Iverson.

Anne Kates Smith brings Wall Street to Main Street, with decades of experience covering investments and personal finance for real people trying to navigate fast-changing markets, preserve financial security or plan for the future. She oversees the magazine's investing coverage, authors Kiplinger’s biannual stock-market outlooks and writes the "Your Mind and Your Money" column, a take on behavioral finance and how investors can get out of their own way. Smith began her journalism career as a writer and columnist for USA Today. Prior to joining Kiplinger, she was a senior editor at U.S. News & World Report and a contributing columnist for TheStreet. Smith is a graduate of St. John's College in Annapolis, Md., the third-oldest college in America.