Home valuation conduct codes are rules that Fannie Mae and Freddie Mac are expected to put into effect in 2009. They will bring marked changes in real estate lending. Here’s what these changes may mean to a home buyer or home owner.

The Good:

No one who stands to gain financially from a real estate transaction — including loan officers, mortgage brokers, or Realtors — will be allowed to order an appraisal to get property financed or refinanced. Only the actual lender can order it, and those involved in the loan production area will be precluded from ordering an appraisal or communicating with the appraiser in any way. This effectively eliminates the chance of anyone having influence over an appraiser. No one involved gets to have any choice in who is hired to appraise the property. No one gets to communicate a desired valuation to the appraiser.

These safeguards should make it easier for appraisers to independently value the property without fear of blacklisting or repercussion. Buyers can be more certain that the property is worth what they are paying and lenders can be assured that the mortgage is adequately collateralized.

The Bad:

Because appraisers cannot be specifically requested by anyone who would have contact with them or be affected by their service or work quality there is no incentive for them to provide good service. Being willing to do the extra work or research for unusual properties or getting out to perform a final inspection on short notice won’t get an appraiser extra business. So there will be no reason to provide anything beyond minimal service or develop special expertise.

Appraisers are like professionals in all fields — some are experts, some are sloppy and some are lazy. Yet homeowners looking to buy or refinance may end up with less capable appraisers. Or an appraiser unfamiliar with the area may come up with an undervaluation. And appraisers not affiliated with lenders will have to register with appraisal management companies (AMCs) who will farm out the appraisal requests and serve as a buffer between the appraiser and interested parties. These companies charge appraisers between 25 and 40% of the total fee to refer them. Anything that increases the cost of mortgage financing is likely to be born by the consumer in the end.

The Ugly:

Others have expressed concerns that an AMC will simply be an additional middleman who will have to be paid but will not provide transparency. It’s possible that a mortgage broker or Realtor will simply choose the AMC that comes up with the desired value and the AMC will pressure the appraisers to play ball if they want to work.

And, finally, appraisals will no longer be assignable. Currently, borrowers who pay for an appraisal and then decide to go with a different lender can have the appraisal reassigned to the new lender. This allows the borrower to avoid getting and paying for a new appraisal. Under the new system it is very likely that borrowers will pay more to get a loan and have more difficulty switching lenders prior to closing.

Tags: appraisal reform, consumer news, Home Valuation Conduct Codes, mortgage borrowers, mortgage reform

This entry was posted on Monday, May 5th, 2008 at 2:31 pm and is filed under Daily Pick. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.