Steve Doyle’s Blog

The new rules put in place by mortgage buyers and New York Attorney General Andrew Cuomo are having a devastating impact on the ability of buyers and sellers to fairly negotiate the price of a home for sale.

Dan Levy, on Bloomberg.com writes “Home-Price Recovery May Be Undermined by Appraisals“. Real life examples are coming in from across the country about appraisal nightmares. In an effort to root out “influence” in the appraisal business, the new guidelines have created a series of problems for home buyers, sellers, real estate agents, lenders and appraisers. And, in the midst of all this confusion, the recovery of the real estate industry has again become the unintended victim.

To remove any appearance of impropriety, lenders are now required to utilize a “third party” to hire and manage the appraiser. There can be no direct communication between the lender and the appraiser. The introduction of the “third party” has increased costs and extended delays in getting appraisals ordered and completed. Appraisers are in a difficult situation. They are suppose to provide an independent opinion on valuation. But, in times of economic strife, the natural tendency is to err on the low side for appraisers. It’s the safe position.

However, the charge for the appraiser is to evaluate what the market will determine is the fair price for a property. That is, what a willing buyer and willing seller are able to establish is fair compensation for the change in ownership of the property. It is not the appraiser’s job to tell buyers and sellers the price for the transaction.

My experience with recent appraisals has been very disheartening. Broad assumptions such as “the market will continue to spiral down … forever” have resulted in ludicrous valuations. Over-reaching assumptions regarding loan rates, hold periods, contingencies and the like result in valuations that could never and will never result in a transaction. Even with recent “good news” regarding pricing and absorptions, I still see appraisals that predict dramatic declines in values and completely ignore recent transactions for their comps.

The doctrine of unintended consequences continues to rule American political strategy. If an ounce of cure is good, than a ton of cure should be even better. The pendulum of reasonableness got away from the regulators, I do not claim otherwise. The “hands off” attitude was too much and resulted in too many abuses. Likewise, the swing back of the pendulum has gone too far. Regulatory reform for the sake of political grandstanding will not right the economic conditions of this country. In fact, it may be holding us back from getting on with the business of true economic recovery.  Still a majority of economists, including Alan Greenspan and David Wessel, believe the US economy can not get stronger until housing recovers.

I believe we need to follow the suggestions of the Mortgage Bankers Association, the U.S. Office of Thrift Supervision and the Federal Reserve and declare these new guidelines for appraisers “flawed” and “scrap” them now, before they cause any more damage to the floundering real estate market.