Don’t Let
Faulty Appraisals Affect the Housing Recovery
By: Mark Harris
President,
Huntsville/Madison County Builders Association, Inc.
Before
you buy a home, your lender requires an appraisal so they can be
confident the amount of money they are loaning you is comparable to
the home’s value on the market. With the recent turmoil in the
credit and housing markets, however, the appraisal has changed from
merely another box to check off in the process to the step that makes
or breaks the sale.
Refinancing
Difficulties
When
the housing values slumped, many home owners found themselves in a
situation where the amount they owed on their mortgage loan was
significantly higher than their home’s value, called “being
underwater” on their mortgage.
Home
owners who sought assistance from their lender to restructure their
loans to help decrease monthly payments, especially in cases of
adjustable rate, interest-only or balloon payment mortgages, found
that they were being denied due to tighter lending restrictions. Even
those with good credit scores who were allowed to refinance faced
much higher fees and long waits to see any progress from their
lender.
Then
the subsequent recession — which resulted in job losses for
many Americans — forced many home owners into foreclosure when
they could no longer make payments on their home due to their
inability to refinance.
According
to the Mortgage Bankers Association, more than 12 percent of
mortgages are either already in foreclosure or are one or more
payments delinquent — the highest rate since the group began
keeping track in 1972.
How
Foreclosures Affect Other Home Values
One
part of the appraisal process is comparing the property to other
homes in the immediate area that recently sold. However, foreclosed
and distressed properties often are sold for far below market value
due to damaged condition or the seller, often a bank, just wanting to
get rid of the property. So an appraisal based on inappropriate
“comps” might come in much lower than the home’s
true market value, delaying closing and creating headaches for home
buyers and sellers.
Even
worse, lenders sometimes refuse to finance the purchase even though
the buyer and seller have agreed on a fair purchase price.
A
recent survey of 500 new-home builders by the National Association of
Home Builders found that 25 percent of sales are lost due to
appraisals coming in below the sales contract price. In some cases,
the estimates have come in lower than the cost to build the house.
How
can this be fixed?
Mortgage
industry regulators need to adopt and enforce clear, concise
regulatory guidance that will allow appraisers to develop realistic
valuations based on sales that are truly comparable.
New
and well-kept homes need to be compared with other such homes in the
neighborhood, not with homes that are run-down and neglected due to
abandonment. If that is not possible due to a large number of
foreclosed homes in a neighborhood, the area in which appraisers
should use for comparison should be expanded to include more options.
Not
only do faulty appraisals result in decreased sales and home values,
it will continue to depress the housing market, which will retard
economic recovery.
Protect
Your Investment
Home
owners and buyers may feel powerless during the appraisal process.
That is not true. For example, you have a right to receive a copy
of the appraisal upon completion. Thoroughly review it and
immediately bring any questionable items to your lender’s
attention.
If
you do not agree with the appraisal, you have the right to —
and should — ask for a second appraisal through your lender.
Being
educated on the entire settlement process will ultimately protect you
when you are buying or selling a home. For more information, contact
www.nahb.org/forconsumers.
