Now, it has happened again, in only a week. I lost a client to a bank based in North Dakota. The bank had a rate 1/8% lower than mine. And I had even explained that a distant bank would have no relationship with local appraisers, and he was almost guaranteed to get a lowball appraisal. Here is what the client got for that 1/8%:

"The appraiser came out to my house this week. To my disappointment, he valued the house at $503K. As I said, my expectation was $553K based on a lot of research and recent sales. He mentioned that there were not too many comparable sales recently, but I disagree. It sounds like he does not know the local marketplace. So, in order to be within the 80% LTV range, looks like I need to pay a lot of the old loan amount off, out of my own pocket."

Did he get a better deal than I offered? The 1/8% equals about $29/month on his loan amount, to get that he'll likely have to pay tens of thousands of dollars of his loan off, because of what is likely an inaccurate appraisal.

I can only say it so many times everyone, then I am going to have to move on to some other blog topics, ASK ABOUT THE APPRAISER! Maybe no one reads my blogs…so no one is learning all this? Hello? Is anyone out there? Is anyone reading this? Is no one getting benefit of my 25 years in the mortgage business? PLEASE, I AM BEGGING YOU, ASK ABOUT THE APPRAISER!

Large banks, distant banks, and online lenders are very likely to be completely out of control on how they source the appraiser and the quality of the appraisal work. Search my other blogs for "appraisal" and "HVCC" if you want to know the nuts and bolts of why that is, otherwise, ASK ABOUT THE APPRAISER. If a lender cannot guarantee a local, experienced appraiser; run away; I don't care how low the alleged lower interest rate is.

I don't know how many times I'll have to say it, "WHEN SHOPPING FOR A MORTGAGE ASK ABOUT THE APPRAISER!" In fact, don't ask, just read what I have to say first. I have repeatedly said on this blog that many sources for mortgage loans are not to be trusted when it comes to the appraisal. Why? Because most lenders use large Appraisal Management Companies (AMC's) populated by dozens and dozens, usually more like hundreds of appraisers, that are coming from all over the place geographically. What has happened is this:

-The Feds changed the laws, because they are so smart, and said that individual loan officers cannot choose the appraiser, because the Feds feared collusion between the loan officer and appraiser, or the Realtor and the appraiser, on the appraised value.

-Now appraisals are ordered through the bank or lending institution, and the appraisal is ordered through a large AMC. The appraisal order is put out for bid, or ordered from the next appraiser in line. This almost assures you'll never get the highest quality appraiser. You'll get the cheapest or the lowest quality, which is inane on a mortgage application. The AMC gets an appraiser to do a $400 appraisal for $250 and pockets the difference. The large banks have turned this into a profit center. Guess what type of appraiser you'll get for that type of discounted fee? Do I even need to say it….I did not think so.

You CANNOT simply shop mortgage lenders by price, or some promises made. You have to shop appraisers, experience, fees, service, turn time, and on and on. Just picking the lowest rate is almost guaranteed to cause problems. Never in history has there been a more critical time to ask a lot of questions, and shop service first and price second.

Large banks use large AMC's where appraisers come from all over geographically. And if you get a loan through a mortgage broker you should question who they are brokering the loan through, and what the AMC is like, and where the appraiser may come from. If a mortgage broker ends up brokering a loan through a big bank, its the same result as going direct to the big bank, which means a large, unresponsive and unaccountable AMC. Make sure a mortgage broker goes to a small-medium sized mortgage banker as the source of the loan, or someone they have used before and whose AMC they know and trust.

A mortgage banker (i.e. a Direct Lender) usually sets up their own AMC, populated with a small group of appraisers who are all local, and whom they know, and as a result they can trust the quality of the appraisal work. So these days, a mortgage banker/direct lender is always a good source for a sound appraisal.

"Why does this really matter", you ask? "What is the harm in letting any licensed appraiser come out to appraise the home, right?" "Isn't the appraised value of the home the appraised value of the home, no matter which appraiser comes out?" NO! If you send out 10 different appraisers to appraise a home, you'll get 6-8 different appraisal values. Below is a very recent story to help illustrate:

I had a potential refinance client who ended up using another lender. I tried to explain why a local lender like myself would be better able to get a more accurate and successful appraisal, and since my rate was the same as all others he had heard, he should use me. But he said:

"I am going to use the large bank I worked with before when I bought the place. They are going to make it easy on me." I always fume when I hear that. What exactly does that mean, "make it easy"? How? Did you ask how? Or did they just say, "we'll make it easy on you since we already have the loan" and you just believed it? I truly believe that in some big bank marketing manual it says, "tell people we'll make it easy on them since we already have the loan, they'll simply believe it without question." Fannie Mae, Freddie Mac, FHA and VA all require the same paperwork of each lender, no matter who is presently servicing the loan. It is literally impossible for one lender to make it easier than another, the requirements are universal!

The client ultimately said, "I regret to tell you that I have decided to go with a different lender. I ended up choosing the same lender who carries the mortgage now. Turns out, they'll make it easy on me, and I am comfortable since we have interacted with them for several years. But thank you for your time, I can tell you are efficient and anyone that my neighbor refers must be good, we have high regard for her. We will consider you in the future"

I thanked him for checking in with me, and wished him well. I followed up a few months later to make sure he got his mortgage OK, and that everything worked out as planned. His reply was astonishing:

"Brian, thanks for checking back in. It turns out the house appraised for $625,000, which is $85,000 lower than my lowest expectation. I had to bring $45,000 in cash to the settlement table to pay the loan down. On the positive side, they lowered the interest rate by 1/8% to 4.875% on the 30 year fixed. Thanks for checking in."

Huh? I offered him 5% in the beginning which is where the market was at the time, and it sounds like the large bank he chose started him at 5% only to drop his rate 1/8% to 4.875% at a later date. So that is good for him, that interest rate drop saved him about $33/month on the size loan he was refinancing.

More importantly, had he had a local appraiser that knew the marketplace I bet his house would have appraised for what the thought it should, and he would not have had to pay his loan down by $45,000! Did you hear me? I said he had to pay his loan down by $45,000! Who does that? But hey, at least they made it easy on him, and he saved another $33/month on that lower rate they gave him.

Let's see if I can do that math. He spent $45,000 to pay the loan down, he is saving $33/month more.

45,000 divided by 33 = 1,363

That means in 1,363 months he'll break even on the $45,000 cash outlay. 1,363 is 113 years. Hope he is in good health….

ASK ABOUT THE APPRAISER!

When buying a home the appraisal contingency addendum in a sales contract says the home buyer has a certain number of days (the date is negotiable) to get an appraisal that is equal to or greater than the sales price in the sales contract. If the appraisal is less than the sales price the buyer can still continue with the transaction, but they would have to pay the difference between the contract price and the lower appraisal in cash, or the buyer can propose that the seller agree to drop the contract price to the lower appraised value, or the buyer can declare the contract null and void.

But assuming the appraisal comes in at the agreed upon sales price, or higher, there still may be problems.

The underwriter may asked for a "desk review" of the appraisal, which may find cause for lowering the value. The underwriter may even ask for a second appraisal, which may come in below the value of the first appraisal. These types of appraisal "cross checks" are usually only asked for on higher loan-to-value loans, but the underwriter may ask for them for any reason. So there is obviously a cause for concern in some cases.

Another issue is that the turn around time of the appraisal is out of the control of the lender. There have been changes, the most important one is called the HVCC, that have caused turn times of appraisals to be uncertain.

There are answers to these problems. If the underwriter asks for a second appraisal this of course causes a question of whether to release the appraisal contingency based on only one appraisal when the second one may come in lower, and the loan may be rejected or altered. Usually if a buyer has proceeded in good faith, the seller will grant an extension to accommodate for the second appraisal, to allow for the extra time needed.

So if these problems occur it is not the end of the world. But buyers and sellers need to be aware of the potential for problems, should ask their lender a lot of questions up front as to the appraisal process, and should stay on top of the appraisal process the whole way.

HVCC, the acronym for “Home Valuation Code of Conduct”, is the result of a legal settlement between NY attorney general Andrew Cuomo and Fannie Mae & Freddie Mac to assure that appraisers would not be unduly influenced by lenders in the appraisal process. Before this ruling, mortgage brokers and bank loan officers would order the appraisal for a new home loan from any licensed appraiser, usually one they knew professionally for many years. After this ruling, appraisals are not allowed to be ordered by the mortgage broker or loan officer, the bank now orders them from an "Appraisal Management Company" (AMC). Mortgage brokers and loan officers are no longer allowed to have any direct contact with the appraiser.  Appraisers are supposedly being more scrutinized by the AMC's. The law became effective on May 1st 2009 and has been causing problems ever since for buyers, sellers, and industry professionals across the country.

With evidence of mismanagement and fraud in the industry in the past, the attempt to ensure that residential properties are not appraised for more than their true worth is understandable. The intention was to stop lenders from pushing appraisers for higher values to help "make the deal work." The belief was that this, in part, is what drove property values to unrealistic levels. The process under the new law takes ordering the appraisal away from anyone with a vested interest in getting the loan done.

But, as often happens, the attempt to right a wrong in an industry becomes over-regulation or has unintended consequences. We are losing excellent, qualified appraisers due to the effect the law is having on their incomes. Now, the orders for appraisals are being sent by Appraisal Management Companies (AMCs) to those who charge the least and have the least experience. AMCs rotate the appraisal orders through their members, tacking on a fee for doing so. Good appraisers who have grown their businesses based on their contacts and relationships in the industry with mortgage brokers and loan officers, are now competing side by side with newer appraisers who will work for less. Some of the downsides of the new process are:

-Appraisal costs have gone up so AMC's can take their piece of the fee. A standard appraisal fee was $350, it is now $400-$500, and the AMC may take half, leaving half for the appraiser. It used to be that the appraiser got 100% of $350, now they may get 50% (or $225) of $450. So you can see how the cost has gone up to the consumer, and…

-Excellent appraisers have been leaving the industry since they are suddenly working for substantially less money.

-Accuracy in appraisals has been reduced, since less experienced appraisers willing to work for less are now competing for appraisals.

-Appraisers are coming into a marketplace like Washington DC from Frederick, Richmond and points beyond, with no idea how the local marketplace works! Before this new ruling local appraisers were hired who knew the market and usually had street level knowledge of the neighborhood they were appraising.

-Should the loan not go through, the consumer must start the process all over again and get a new appraisal with a new lender. This not only adds even more cost to the buyer, but adds a lot of time to the loan processing as well.

Consumers are paying more for appraisals now. Yet, these are the very people the law was designed to protect! Appraisers have seen their income approximately cut in half. Lenders are finding it takes much longer to get an appraisal from someone they have no contact with and no history with, so turn-around times are rising and loan processing times are increasing. Lenders are having trouble meeting settlement dates in contracts.

And the Feds that dreamed up this new policy for Fannie Mae and Freddie Mac thought this would  help how?

I do believe that there has been occasion where a lender pressured an appraiser to "make a deal work" and make sure a home appraised at a contract price. And I do believe there have been Realtors that have pressured lenders to pressure appraisers to make a deal work. But I think this was the exception, by far, as you cannot make up fake comparables or make up values for a home. There is also something called "the underwriting process", let's not forget it is difficult to get improper comps past an underwriter. And I simply think there must be a better way to root out the occasional fraud. Common sense? Buyer beware? Require two appraisals? Require appraisal reviews? There has to be a better method beyond overbearing, problematic, and ineffective federal policy.