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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.


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