New Home Appraisal Rules Rankle Industry

MELISSA BLOCK, host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.

The housing market appears to be stabilizing, but just barely. And many realtors are complaining about new regulations that are causing headaches for homebuyers. The problem, they say, is home appraisals. The new rules were intended to get more accurate and unbiased estimates of home values. But many in the industry say the rules are having unintended consequences that are gumming up the works.

Here's NPR's Chris Arnold.

CHRIS ARNOLD: In a townhouse in Framingham, Massachusetts, home appraiser Ken MacDonough is about to crawl up into the attic.

Mr. KEN MACDONOUGH (Home Appraiser): Go up the drop stairs to the attic.

ARNOLD: It's a folding stairway up to the attic here.

Mr. MACDONOUGH: I want you see if there's insulation. And they want you to observe the roof from the inside to see if there's any water damage.

ARNOLD: Any time somebody buys a house or refinances, somebody like MacDonough has to show up, measure the square footage and see how new the kitchen is and go on a little safari hunt looking for problems. MacDonough, with his tape measure and pencil, checks the furnace room, the bathrooms.

Mr. MACDONOUGH: It's just, don't miss anything.

ARNOLD: Appraisals are a cornerstone of the whole housing market. But right now, many realtors and mortgage brokers are complaining that problems with appraisals are delaying sales and refinances. Many blame new regulations for tangling things up. The National Association of Mortgage Brokers estimates that this is actually costing homeowners upwards of $2 billion collectively and it definitely isn't helping the housing recovery.

Mr. PAUL VAN WART (Mortgage Broker): Okay. First things first, let me pull this and I'll be back to you in a bit.

ARNOLD: Paul Van Wart is a mortgage broker in Westwood, Massachusetts. He gets off the phone with a new customer and says a lot of appraisals these days are coming in at values that are way too low and that are often full of mistakes, which he says creates big headaches for homebuyers.

Mr. VAN WART: Once it gets to an underwriter, the underwriter tears the appraisal apart and says, well, I need the appraiser now to comment on this, go back and do this. Then we can't meet the closing date. We have to extend their rate. Okay? There's a cost to extend an interest rate. The borrower, who's going to pay that, and on a $200,000 loan, that's going to be $1,500, okay?

ARNOLD: At the next desk over, Nicole Rubino says that she remembers one couple who was buying a house and planning on moving in the next day. They had no place else to live. And an appraisal problem just barely got sorted out at the very last minute, literally just minutes before the closing deadline.

Ms. NICOLE RUBINO (Mortgage Broker): And of course, that infuriates everyone involved. You have a closing attorney who's upset. You have buyers who are, you know, out of their minds because they are - got moving vans, you know, and, oh, she was so out of her mind…

ARNOLD: Van Wart puts a big part of the blame on what's called the Home Valuation Code of Conduct. During the housing boom, some appraisers broke the rules. Mortgage brokers pressured them to inflate home values so the brokers could get more loans approved and make more money and that left a lot of people stuck, having borrowed more than their house was worth.

ARNOLD: So, a few months ago, new regulations went into effect to prevent that. But even a lot of appraisers say the new rules are causing all kinds of problems.

Mr. MACDONOUGH: It's horrible.

(Soundbite of answering machine message)

Unidentified Woman: Kelly (unintelligible) for a property…

ARNOLD: Back at his home office, the appraiser Ken Macdonough has a message on his answering machine about an appraisal job. It used to be that he'd get these calls from mortgage brokers, but since the new rules took effect…

Mr. MACDONOUGH: My mortgage brokers, who I built up relationships with over many, many years, they can't call me anymore and ask me to do work for them.

ARNOLD: The rules insist on a firewall. Mortgage brokers cannot deal directly with appraisers. So, these days, many lenders have turned to middlemen called appraisal management companies. They now get paid by the lenders to hire the appraisers. And so here's the problem. MacDonough says that those companies will sign up just about any appraiser that they can find who will do the appraisal on the cheap, even if they don't know the area very well and don't have much experience.

Mr. MACDONOUGH: For the appraisal management company, that's what it's all about. When they send an appraisal assignment to a dozen appraisers or more and say, hey, the first guy that takes it for $200, they're obviously bottom fishing.

ARNOLD: The appraisal management companies say they are not to blame. Don Blanchard is an attorney with Lender Processing Services, which works with 20,000 appraisers.

Mr. DON BLANCHARD (Attorney, Lender Processing Services): The average tenure of our appraisers on our panel of appraisers is 13 years. So we think we have very good coverage and experienced appraisers, as opposed to a lot of the sort of anecdotal criticisms that you hear.

ARNOLD: Blanchard also says that home prices are just especially hard to estimate accurately right now. And he thinks that some of the frustrations are due to just falling home prices, not bad appraisals. Meanwhile, regulators say they're working to tweak the rules.

Chris Arnold, NPR News, Boston. Transcript provided by NPR, Copyright National Public Radio.