New Private Appraisal Rules Follow FHA Standards

by Peter G. Miller
May 4th, 2009

If you want to get an FHA mortgage then you have to get an FHA appraisal done by an actual human who goes inside the property.

Making sure that a property exists and is in good shape may not seem like much of a standard, but of course our friends in the world of private banking have been working diligently to assure that full appraisals are not required. Why? Appraisals cost money and money paid to properly underwrite a loan is money that could otherwise been used to increase lender profits and executive bonuses.

Substitute Appraisals

Lenders have tried over the years to substitute appraisals with broker price opinions and automated appraisals. In the first case a real estate broker estimates the value of the property, not a bad option in many cases because a good broker can typically give a pretty good valuation. The problem, though, is that brokers are paid to buy and sell homes. There is an inherent conflict in their valuations, no matter how good. If I am a buyer I certainly do not want to rely on the seller’s broker for pricing advice and if I’m an owner I don’t care too much what a buyer broker thinks.

Appraisers, however, are paid to appraise. They have an
independent perspective and are paid whether their valuation is high or low. At least that’s the way the system is supposed to work but in reality many appraisers report being pressured to raise valuations so lenders could make bigger loans and thereby get bigger fees. The people screwed in this process, of course, are buyers because they will pay too much for the home.

Automated appraisals actually work well for areas with large numbers of like houses. The problem is that such mathematical systems do not physically see the inside of a home. Since the inside of a house is part of the asset being valued, this seems like a huge omission.

Cuomo Standards

The newly-minted Home Valuation Code of Conduct from Fannie Mae and Freddie Mac is part of a settlement with New York state Attorney General Andrew Cuomo that regulators in Washington absolutely hate. Why? Because a state official crossed into their turf. Not that Cuomo was wrong, not that Cuomo didn’t see a problem that needed to be corrected and not that better appraisals would prevent lenders from making loans which were too big and too risky. Nope, the problem was turf and territory.

For FHA borrowers the issue is moot. If you get an FHA loan you don’t have a choice, the FHA demands an appraisal for new loans and refinances except for a streamline refinance with no cash out. The no appraisal standard for an FHA streamline refinance makes sense because the loan amount is not being increased by a cash take-out and the borrower has a solid payment record on the existing loan. In other words, the purpose of an FHA streamline refinance is to get a lower rate and smaller monthly payments — things which are good for borrowers and make loans less risky for lenders.

And so with an open hand we welcome the private-sector to the world of sane appraisal requirements. It won’t hurt and, honest, you’ll have less risk.

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