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Is The Party Over For Local FHA Borrowers?

February 13th, 2010 categories: Buying, Loans / Financing

StreamersBig Change For Benicia-Vallejo FHA Buyers Starting Monday


The party may not necessarily be over FHA borrowers just yet, but starting Monday, one of the big advantages that FHA borrowers have enjoyed for the past 9 months goes away.

I’m talking about the ability for a lender to send out their favorite appraiser in hopes of making sure nothing goes awry in the buyer’s attempt to buy the home of their dreams.

Come Monday, all FHA appraisers will have to follow many of the same rules that appraisers on conventional (Fannie Mae/Freddie Mac) loans have been following since last May.

New Appraisal Policy Starts Feb. 15

The new FHA policy is supposed to help ensure that lenders provide financing based on the true market value of the home rather than on a potentially trumped-up/inflated appraisal.

If you look at FHA’s appraisal policy for the past 16 years, you’d have to agree that it wasn’t the most cleverly designed system. For, the person with the most motivation for the loan to go through — the loan officer — was also the one who selected the appraiser.

So you had a system that put appraisers between a rock and a hard place.

Do Your Job Or Help Your Business?

They could be truly objective and run the risk of not getting any more appraisal business if they continually came in low and killed the loan officer’s deals.

Or, they could make sure every appraisal came in just where the loan officer wanted it and ensure a steady stream of repeat business from that lender.

Now, not every loan officer nor every appraiser took liberties like those I just suggested. In fact, the vast majority did a reputable, honest job and avoided the temptation to put self-gain above professionalism.

But neverthless, there was a very small minority who clearly put their own interests above those of the company lending the money.

They Finally Realized What Was Happening

But it wasn’t until the mortgage market collapsed that lenders fully realized how some lenders and appraisers took full advantage of the system by working in cahoots with one another in transactions that were out-and-out fraud.

The Home Valuation Code Of Conduct (HVCC) was adopted in May and it made radical changes to the way appraisals were done on conventional (Fannie Mae/Freddie Mac) loans.

And the new FHA appraisal policy is another attempt to take away the opportunity for unscrupulous loan officers, mortgage brokers and real estate agents to push through deals where the home isn’t worth anywhere close to what the trumped-up appraisal says it is.

The Pendulum Swings To The Other Side

By adopting this new policy, FHA has swung the pendulum from one side of the room all the way over to the other. For, while it takes the selection of the appraiser out of the loan producer’s hands, which is probably a good thing, it also eliminates the opportunity for a buyer to get an idea of whether or not the house might have an appraisal problem before making an offer.

Up until now, a buyer could ask their lender to call the appraiser ahead of time to get a read on how much he could legitimately offer without creating an appraisal problem.

So if you looked at the comps and felt that $265,000 seemed like a fair price, your lender could usually run that price by the appraiser before you wrote your offer just to make sure he or she agreed. You could make your officer with confidence and also provide the sellers with the peace of mind that if they accepted your offer, the loan should sail through without any appraisal surprises.

Now Nothing You Can Do Now But Wait

Now, though, FHA buyers can look at the comps inside and out and make an offer that they feel shouldn’t pose any appraisal problems. But you won’t really know for sure until the appraisal comes back, since your loan office can’t select the appraiser nor have any contact with him or her.

When Fannie & Freddie adopted their HVCC, they unknowingly created a system whereby many lenders went to outside appraisal management companies who raised appraisal fees and then often sent out appraisers who were either inexperienced, unfamiliar with the areas they were being sent to or had limited access to local comps and other market data.

FHA has attempted to prevent many of the problems that has plagued the HVCC by requiring appraisers to certify that they know the area and have full access to the area’s relevant market data.

Ever since the HVCC came out, there have been all sorts of horror stories about appraisal injustices that have caused some buyers to lose the home of their dreams.

Whether FHA’s new policy will simply make sure that appraisals are legitimate and accurate or instead create problems similar to what’s occurred in the months following adoption of the HVCC remains to be seen.

FHA Learned From The HVCC’s Mistakes

I think the FHA policy-makers are starting out with a program that is vastly better than what conventional loan borrowers encountered last May when the HVCC went into effect.

It will probably take a few months before we see just how much the new FHA policy affects the real estate purchase market. Hopefully it will do just what it was designed to do and nothing else.

But we shall see.

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This entry was posted on Saturday, February 13th, 2010 at 11:59 pm and is filed under Buying, Loans / Financing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

  1. eValueLogic said at February 14th, 2010 at 2:42 pm

    “I’m talking about the ability for a lender to send out their favorite appraiser in hopes of making sure nothing goes awry in the buyer’s attempt to buy the home of their dreams.”

    Please say what you mean. You want an appraiser to “hit the value” and not cause problems. Correct? And if your “favorite appraiser” falls short of the prime directive, sales price, you lean on him to see things your way. Correct?

    And if your “favorite appraiser” sticks to his or her guns you call the lender and whine about them and get them black balled from the lender. Correct?

    Yeah. I thought so. Sleep well.

  2. Rod Herman said at February 14th, 2010 at 11:18 pm

    Thanks for your comments, but I think you may have taken what I wrote out of context. I have never condoned agents, appraisers or lenders trying to manipulate things to arrive at a pre-determined number. Rather, I believe an appraiser should have the freedom to call it as he or she sees it…as long as that appraiser is experienced and knowledgeable in that market area and has access to all the relevant market data.

    I would never and have never put any pressure on an appraiser to “hit the value.” I would like to think that if you and I are looking at the same comps and have the same market knowledge, we would arrive at the same approximate value.

    That said, I do have a problem when an appraisal management company sends out someone from 150 miles away who has no local market knowledge and expects them to make a competent evaluation of the property.

    I would hope that a good appraiser would absolutely stick to his or her guns and defend their appraisal. Prior to FHA’s new policy there was no doubt a lot of arm-twisting and undue pressure on the appraiser. So from that standpoint, the FHA policy is a good thing, for it will let good, reputable appraisers do their job without fear of losing future business if the number doesn’t match the contract price.

    I would never ask or expect a lender or appraiser to hit a pre-determined number. It was always helpful, though, to be able to have our lender ask their appraiser for a ballpark figure on those offers that were at the top of the comps, so our client had an idea of whether the offer they were about to submit had a realistic chance of appraising. Unfortunately, that’s no longer an option under the new FHA policy (as well as the HVCC).

    I too abhor those who try to influence an appraiser’s evaluation or complain to the lender or ask them to remove that lender from their list simply because the appraiser’s number didn’t match their number. If the appraiser has the same local knowledge and market data that I have, then he or she should have the freedom to call it as they see it!

    I hope that clears up whatever misconception you may have had. Thanks again for reading!

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