Fed appraisal rules sink home values

New regulations kill home sales, industry groups say

Louis Aguilar / The Detroit News

Federal actions intended to stabilize inflated real estate prices that led to last year's financial meltdown are instead depressing prices and killing some sales in an already weak market.

At issue is the Home Valuation Code of Conduct for mortgages securitized or held by Fannie Mae or Freddie Mac, which deal with about 70 percent of U.S. mortgages.

The new rules, which took effect May 1, were intended to prevent cozy relationships between appraisers, agents and brokers that could lead to bias, fraud and inflated home values.

But a chorus of industry groups representing builders and real estate agents say the new rules have damaging, unintended consequences: Some appraisers, they say, are unfamiliar with communities and neighborhoods, so they undervalue property. And that can kill a deal when the agreed-to sales price was significantly higher than the appraisal.

The National Association of Realtors says 20 percent of its members report losing more than one deal because an appraisal came in well below the purchase price agreed to by the buyer and seller. The National Association of Home Builders contends the code is impeding new construction as well. More than half of the 500 builders who responded to a recent survey said at least one of their new homes was appraised at less than the cost of construction.

Metro Detroit real estate agents tell horror stories about the new appraisal rules.

An out-of-state appraiser, for example, valued a Grosse Pointe home at $270,000, although the seller and buyer agreed to $360,000. A lakefront home in St. Clair Shores listed at $480,000 was appraised at just over half that. And three appraisals on a new home in Detroit's Woodbridge Estates ranged from $150,000 to $230,000.

"We lost the sale because the couple didn't know what to believe," Realtor Todd Craft, of City Life Realty in West Bloomfield, said of the Woodbridge properties. "That's what we are dealing with now."

If an appraisal falls below the negotiated sales price, the lender can refuse to finance the deal or require the buyer to come up with the difference. Or the seller may lower the price.

While home sales are up in Metro Detroit, thanks to the buyer's market, prices continue to plummet. The median sales home price in Metro Detroit in Sept. was $65,500, a 23 percent drop from a year ago, according to Realcomp II Ltd., a Farmington Hills-based real estate listing service.

Existing and new home sales aren't the only ones that are affected. The new rules also impact homeowners who want to refinance their mortgages, because they need to get an appraisal as part of the process.

"In a city like Metro Detroit, where there are pockets of stable and upcoming areas, the new appraisals make it tougher for someone who doesn't know the area to come in and get an accurate gauge," said Brian Cooley, a Realtor with O'Connor Realty Detroit in Corktown.

Banks use new system

Under the old rules, mortgage brokers, who act as intermediaries in selling loans on behalf of individuals or businesses, also arranged appraisals.

But critics say the relationship between brokers and appraisers was too cozy, and that likely contributed to inflated appraisals. Under the new rules, mortgage lenders are in charge of that part of the appraisal process. The lender can use an in-house appraiser or farm it out to an appraisal management company that may or may not be local, or have knowledge of the community.

The new appraiser may not know, for example, about upscale neighborhoods of mansions in Detroit, just blocks from seriously run-down areas where houses are going for next to nothing.

Michigan banks have adopted the new system.

"We're using it for all our (home) loans," said Gail Madziar, vice president of communications for the Michigan Bankers Association. "Banks are used to compliance and adherence guidelines and these are the new rules."

Banks neither lobbied for the new code, nor are they expressing opposition to it, now that it's been in effect for several months.

But housing industry groups such as the National Association of Home Builders and the National Association of Realtors are howling mad. The two groups support a U.S. House bill that would slap an 18-month moratorium on the new rules of the Home Valuation Code of Conduct.

Two Michigan representatives, Democrat Gary Peters of Bloomfield Township and Republican Fred Upton of St. Joseph, are among 110 co-sponsors of the bill. It was introduced in late June but hasn't budged in committee.

Most industry people want changes, said Norm Thomas, president and chief appraiser of R. S. Thomas & Associates Inc. of Livonia. The veteran appraiser is former president of the Detroit chapter of the American Society of Appraisers and a current board member of Michigan Council of Real Estate Appraisers.

"It's something that needs to be refined," Thomas said. "The biggest issue, I think, is the lack of geographic competence among some of the outside appraisers."

Many Realtors say new appraisals rely too heavily on the prices of foreclosed homes and "short sales" -- houses that sell for less than what the homeowner still owes on them.

Foreclosures and short sales can artificially depress other home values in an area, and lead appraisers to undervalue nearby homes on the market as well. And in an area hard hit by foreclosures, as Metro Detroit is, it's a significant factor.

The Grosse Pointe home that was listed at $360,000 but appraised at $270,000 was "distorted because of a foreclosure and its proximity to Detroit," Craft said.

"Everybody is just scared," said Hugh Gedrich, founder and president of the Complete Appraisal Co. in Southfield.

There's also a financial issue for appraisers, and consumers.

"The general effect has been to get these appraisals in fast, and do it for as low as price as you can," said Gedrich, who has no choice but to accept the new rules. "People are now turning (appraisals) around in two, three days and for about half the amount we used to make. That may prevent fraud, but it doesn't mean thoroughness." The appraisers may be getting paid less, but the consumer can end up paying more, Gedrich and others say, because they often have to request multiple appraisals.

Fannie Mae and Freddie Mac, the nation's two largest mortgage finance lenders, stand by the new practices. So does the Federal Housing Finance Agency, the agency that oversees Fannie and Freddie.

laguilar@detnews.com (313) 222-2760