Appraisals: New Rules to an Old Real Estate Game

When President Obama signed the Dodd-Frank Act in late July, he ended the controversial Home Valuation Code of Conduct or HVCC, now set to expire in 90 days. HVCC was implemented in May 2009 by the Federal Housing Financing Agency "as an attempt to improve the independence of appraisers by prohibiting lenders and third parties from influencing appraisals, " according to HousingWire.

Understanding the effects of the Dodd-Frank Act is a key component of making sure you get your home, or the home you want to buy, appraised at a fair market price.

The importance of appraisals and their oversight and regulation have seen many changes in the past few years as the housing industry struggled to get accurate information on a home's value and ensure proper valuation. With big money involved, ensuring an appraisal is accurate and not tampered with is in the housing industry's best interest.

Under HVCC, banks could no longer chose the exact appraiser it wanted to use for a home. It created a system where a middleman was used as a liaison, and from a pool of bank approved appraisers the liaison assigned the work. This process added more time to the process and took money from the appraisers. The idea behind this was to create space between the lender and the appraiser thus enabling an accurate home value clear of fraud, but instead of helping, it created many problems.

Replacing HVCC will be a set of "appraisal independence standards." While many appraisers and lenders are awaiting the new standards, some things are already known: The bill will include a requirement that lenders and their agents pay appraisers fair market rates and, unlike HVCC, it will allow Fannie Mae or Freddie Mac to accept any appraisal report completed by an appraiser selected or paid by a mortgage loan originator.

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Some important aspects will remain. As Housingwire notes, "The new standards will still subject loan originators to any state or federal laws that prohibit it from making payments, threats or promises to an appraiser to influence the work. But nothing in the standards will prohibit a person with an interest in the transaction from asking the appraiser to consider other information, provide further detail or correct errors in the appraisal."

While appraisals are an in-depth way to determine a home's market value, there are some other methods lenders and brokers use to determine a homes value -- often with little bearing on what the actual market value will be. Below are some of the most popular methods of getting a price for a home.

--CMA or Comparative Market Analysis. When a Realtor wants to calculate your homes value or to determine an offer they use this computer generated calculation. Some agents use sold property with similar features in your area and/or similarly listed properties to determine a figure. You can get CMAs free from an agent, however, as one blog notes: remember they are done by the agent and they want to get your business so the numbers could be skewed to your liking.
--AVM or Automated Valuation Model. Lenders use this computer generated program with an automated process to arrive at a number. At the end of the data analysis, the report has a value range and a value for a home (a la Zillow.) One thing to note: AVM's don't take into account renovations or other things that would increase or decrease the value of a home.
--BPO or Brokers Price Opinion. BPOs are used by lenders in situations where they don't want to get a full appraisal as they cost more and take more time (i.e.: pending foreclosure.) However, BPOs are not appraisals, they are merely used to get a property's value.
--Appraisals. Appraisals are done by licensed professionals to determine the market value of a home.

Who is doing your appraisal and how they do it matters because you want a number that has not been tampered with by the interests of another party. But you also want it in a reasonable amount of time. These new standards are eagerly awaited by appraisers, lenders and homeowners as they will provide the framework for this important part of the home-buying process.

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