Home buyers that take out home loans insured by the government will soon learn that their loan officer or Realtor cannot have anything to do with the ordering or choosing of an appraiser. The change comes months after already making the change to Fannie Mae and most conventional loan programs. The reason for the change is the belief that over the last few years appraisers were pressured into giving a loan officer or Realtor a value they needed to make a deal work. With all of the loan fraud and pressure on overvaluing homes the industry feels this is the root of one of the problems that needs to be corrected.
Moving forward Realtors & loan officers will no longer have the power to order appraisals for FHA-insured loans. What does this mean for the typically consumer? It’s hard to say. One thing is for sure. Appraisers are going to have a hard time being aggressive on their appraisal value. It’s going to be their name and their license on the appraisal and since they have no contact with the Realtor or loan officer they won’t feel the pressure to come in with a certain value.
Here is a brief explanation of what would happen in the past.
Loan officer or Realtor need a value of $300,000 to make a purchase or refinance deal work.
If the appraiser comes in at $300,000, everyone is happy but if the appraiser comes in at a value of $290,000 that throws a BIG WRENCH in the deal! Why would this be an issue?
On a purchase deal it means the seller is only going to sell their home for $290,000 which is $10K less and that means less money in their pocket. The seller may just cancel the deal and wait for another offer to come along at $300,000. Hopefully this appraiser is pushed to come in at this value. Perhaps the agents provide listings of recent sales to help support their sales price of $300,000. Believe me, agents, buyers, seller’s and loan officer’s PUSHED appraisers as much as they could to come in at a value they needed. If a commission was on the line, great lengths were taken to close that deal.
What about a refinance? You have similar things to deal with. Cash out refinance means it’s less money going to the home owner and less money for them to take a trip, buy a boat or just blow in Vegas!
The thing that makes this difficult and why I would imagine appraisers would support this change is that the appraisers who were inflating home values were being rewarded by MORE BUSINESS. (More Likely To Get Repeat Business) It made it difficult for a good appraiser to continue to work when the Realtor or loan officer controlled who they ordered the appraisal from. Do you think a loan officer or Realtor would order another appraisal from an appraiser that prevented them from closing their last deal? Probably not, this was a major problem in the real estate industry.
This would mean that consumer home appraisals are going to reflect the value of a home much more closely since brokers that would usually profit from approved loans won’t be choosing appraisers that could declare higher values.
However, there are certain organizations that state that changes and other attempts to reform the industry of appraisal hurts both appraisers and consumers because the new rules will result in home values that are extremely low since the appraisers are not familiar or experienced with the local markets. If you have appraisers coming from miles and miles away to perform an appraisal they may not be familiar with the area like a local appraiser.
The changes started last year when a code was adopted and made to divide loan officers from ordering appraisals. Although the entire process has been changed, it still remains to be seen whether it was a smart move and only time will tell.