Builders hate lowball appraisals; Appraisers like new rules

WASHINGTON, July 13 - Twenty-six percent of builders are seeing signed sales contracts fall through the cracks because they say appraisals on their homes are coming in below the contract sales price, according to a nationwide survey conducted by the National Association of Home Builders. However, the Appraisal Institute applauded Freddie Mac’s newly revised guidelines for mortgage lenders emphasizing the use of qualified and experienced real estate appraisers.

First, the home builders side of the story;

"Home builders are increasingly concerned that inappropriate appraisal practices are needlessly driving down home values. This, in turn, is slowing new home sales, causing more workers to lose their jobs and putting a drag on the economic recovery," said NAHB Chairman Joe Robson, a home builder from Tulsa, Okla.

The survey showed that nearly 60 percent of the builders are reporting that inadequate appraisals are causing serious problems in the market, with the biggest problem being comparables of new single-family homes that are too often based on foreclosures and distressed sales.

"Lost home sales are killing jobs, deepening the housing slump and hurting local economic activity," said Robson, adding that construction of 100 single-family homes adds 324 local jobs, $21.1 million in local income and $2.2 million in taxes and other revenue for local governments with the first year.

Of those who are reporting appraisal problems, 54 percent said that the appraisal amount was actually less than the cost of building the home.

Robson said that foreclosure and distressed sales should not be used without appropriate adjustments to reflect the expenditure that would be required to bring them up to the condition and quality that represents a reasonable alternative for the home buyer.

In what Robson called a step in the right direction, Freddie Mac on July 10 issued a Guide Bulletin publicly stating that it does not require appraisers to use Real Estate Owned, foreclosures or short sales in selecting comparable sales to provide an accurate opinion on home values based on market data. Freddie further stipulated that appraisers must "certify that comparable sales chosen are those most similar to the subject property."

While the appraisal practices currently in use are taking a heavy toll on the housing market, they are also further exacerbating economic distress by affecting the availability of acquisition, development and construction (AD&C) credit.

Falling appraised values for land and subdivisions under development have led some financial institutions to stop lending to developers and builders, to demand additional equity and even to call performing loans, Robson said.

"If the spigot for housing production loans is cut off, there can be no housing recovery, and this has major implications for the economy as a whole," said Robson.

NAHB is calling on housing and federal financial regulators to adopt clear, concise regulatory guidance that will allow appraisers to develop realistic valuations based on sales that are truly comparable.

In neighborhoods where the comps include a large number of short sales or foreclosures, appraisers should have the option of expanding the geographic area or extending the time frame for eligible sales to get a more representative picture of the value of homes sold in the area.

"You can't compare a well-constructed new home with a foreclosed property that has been vacant for months and was probably neglected for a long time before it was vacated," said Robson. "Acting now to establish proper regulatory guidelines for those who use distressed or foreclosed properties as comps when determining home values will help to stabilize home prices and home sales and put people back to work."

Home appraisers get their two cents in

Revisions to Freddie Mac’s guidelines, issued last week, instruct lenders that criteria for hiring appraisers should include one’s affiliation: “Sellers should consider membership in a professional appraisal organization as a qualification criterion,” such as membership in the Appraisal Institute. Freddie Mac and Fannie Mae, America's biggest buyers of home mortgages, are consistent in requiring the use of qualified professional appraisers.

“In this turbulent real estate market, it’s more important than ever that mortgage lenders rely on qualified appraisers with the education and experience necessary to perform the complex appraisals needed today,” said Jim Amorin, MAI, SRA, president of the Appraisal Institute.

“We applaud Freddie Mac for addressing this important requirement that will have a positive effect on millions of home buyers and sellers,” Amorin said. “The recognition of the professionally designated appraiser has been a missing component in mortgage reform. These new guidelines are the right long-term solution for consumers and appraisers and will instill confidence in the safety and soundness of the mortgage lending process.”

Freddie Mac’s revised regulations are similar to those already employed by Fannie Mae, which says that among the qualifications that lenders should review are “the appraiser’s education, the appraiser’s experience … (and) professional affiliations.”

“Professional appraisal designations can be helpful in evaluating an appraiser’s qualifications, particularly when the designation is from a nationally recognized organization that has formal experience, education, and ethics requirements that are strongly administered,” Fannie Mae’s guidelines say.

The Appraisal Institute’s designations have long been recognized by courts of law, government agencies, financial institutions and investors as marks of excellence in the field of real estate valuation and analysis.

“To help ensure they get the most accurate appraisal possible – and to prevent problems from occurring later – it’s important that lenders use only the highest caliber of appraisers. It’s a good investment, and it’s simply good business,” said Bill Garber, the Appraisal Institute’s director of government and external relations. “Members of the Appraisal Institute holding the MAI, SPRA or SRA designation have met extensive experience and education requirements and must comply with a strict Code of Professional Ethics and Standards of Professional Appraisal Practice.”

H.R. 1728, which the U.S. House of Representatives passed in May and which awaits action in the Senate Banking, Housing and Urban Affairs Committee, also includes language similar to Freddie Mac’s newly revised guidelines. The bill states that qualifications to be considered when lenders hire an appraiser “may include education achieved, experience, sample appraisals, and references from prior clients. Membership in a nationally recognized professional appraisal organization may be a criterion considered …”

“The Appraisal Institute strongly supports H.R. 1728 and urges the Senate to join the House in passing this important legislation that will benefit everyone who relies upon accurate valuation of real estate,” Garber said.

The Appraisal Institute is a global membership association of professional real estate appraisers, with over 25,000 members and 91 chapters throughout the world. Organized in 1932, its mission is to support and advance its members as the choice for real estate solutions and uphold professional credentials, standards of professional practice and ethics consistent with the public good. The Appraisal Institute advocates equal opportunity and nondiscrimination in the appraisal profession and conducts its activities in accordance with applicable federal, state and local laws. Members of the Appraisal Institute benefit from an array of professional education and advocacy programs, and may hold the prestigious MAI, SPRA and SRA designations. Learn more at