Business - Business News

POSTED: Friday, Jun. 26, 2009

New appraisal rules roil Whatcom County real estate market

Closing the sale on a home is getting more expensive and time-consuming thanks to new nationwide rules that took effect May 1.

Many local real estate agents, appraisers and mortgage brokers are hoping those rules can be rolled back.

Tom Follis, who has been appraising Whatcom County real estate for 40 years, says he understands the reasoning behind the rules.

Just a few years ago, the residential real estate market was brisk and prices were rising fast almost everywhere. Follis said he often got three or four calls a week from out-of-town mortgage companies who had a potential home buyer and borrower in hand. All Follis would have to do to earn a fee was to appraise the home at a high enough level.

"They would shop for someone who would give them the value they wanted," Follis said. "That's what got them into this mess."

But the new rules aimed at stopping that kind of abuse are having some nasty side effects.

"I think they've overreacted and gone overboard," Follis said.

"They" are Fannie Mae and Freddie Mac, the big, quasi-government outfits that play a crucial role in keeping cash moving in the mortgage market. Fannie and Freddie don't make mortgage loans to individuals, but they buy up those loans from retail lenders and enable those lenders to make new loans.

After prodding from New York Attorney General Andrew Cuomo, Fannie and Freddie agreed to impose a Home Valuation Code of Conduct that is supposed to prevent the kinds of abuses Follis described. Lenders who want to sell mortgages to Fannie and Freddie - as they often do - must play by those new rules.

Among other things, the rules prohibit mortgage brokers and real estate agents from playing any role in picking the appraiser who must determine the fair market value of a home before a mortgage loan can be made to close a home sale.

Why is that a problem?

Mortgage broker Tom Mercadante of Creative Mortgage Solutions noted that the new rules still allow big banks to use their own in-house appraisal services, even though that might seem to run contrary to the spirit of the new rules aimed at protecting appraisers from improper influence.

That causes problems when a broker finds his customer a different lender with a better rate. The customer may need to shell out a few hundred dollars for a new appraisal, because the second lender won't accept the first lender's appraisal.

A more serious problem is delay. Many lenders now use larger appraisal service firms instead of smaller local appraisal offices, and the big firms often take longer to do the job.

"It's creating constipation basically in the whole lending industry," Mercadante said.

Real estate agent Mike Kent agreed.

"It's taking longer for closing," Kent said. "People better figure 45 days now instead of 30."

That often means an additional fee for a buyer-borrower who wants to lock in an interest rate, but not everyone is willing or able to do that. The result, Kent and others say, is that some deals fall apart at the last minute.

"Time is of the essence in real estate," agent Brandon Nelson said. "Sellers tend to get very nervous. ... There's just more time for things to go sideways."

Real estate agents also complain that the out-of-town appraisal service firms are bringing appraisers into the county who have no local expertise.

"They're more likely to err by being too low," Kent said, acknowledging that not so long ago, the reverse was true.

"In the past it was too high," Kent said.

Agent Kristi Coy said the larger economic worries appear to be weighing on appraisers and lenders, helping to create some downward momentum on home prices.

"They're coming in quite a bit lower than what the buyer is willing to pay," Coy said. "That's killing a lot of deals."

Appraiser Mary Remington said the new rules - and the way banks are reacting to them - are putting the squeeze on local appraisal firms like hers.

Local appraisers typically charge about $450. The large appraisal firms charge a similar amount, but they sometimes try to hire a local appraiser to do the job. They typically offer less than half the usual fee, Remington said, adding that she's been turning down those kinds of offers.

"We're putting our foot down," Remington said. "I think a lot of the local appraisers are putting their foot down. ... We're trying to hold our ground. We're in a position where we can do that right now. It's not something we can do forever. ...We're kind of hoping something will change."

Mortgage broker Dustin Brumley said the National Association of Realtors and other industry groups are pushing for changes in the new rules. He has started a blog (fighthvcc.wordpress.com) to help campaign against them.

"It's a huge issue," Brumley said.

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