Fannie Mae and Freddie Mac Change the Appraisal Process
Freddie Mac and Fannie Mae will implement a revised Home Valuation Code of Conduct beginning May 1, 2009. In an attempt to increase the reliability of appraisals, the revised code builds on existing seller-servicer guidelines and will apply to lenders that sell single-family mortgage loans to Fannie Mae and Freddie Mac.
One major difference in the code is that lenders will be required to order appraisals from one central clearing house, which will in turn select an appraiser. Your loan officer or lender will no longer be able to have any communication with the appraiser before they go out to appraise a home.
The upside of the new appraisal code is intended to help assure that borrowers, home buyers and secondary mortgage market investors receive fair and independent property valuations. In the past few years, many unscrupelous lenders and appraisers put customers and the end lender in bad positions with phoney appraisals.
A typical scenerio is one where a customer had a real loan-to-value of 95% (a high risk loan). The customer may have wanted to pay off $20,000 worth of credit cards, but with a 95% appraisal, this would be impossible. Therefore a bad lender would get the appraiser to sharpen his pencil and get an appraisal of 80%. This is a much lower risk loan and would not require PMI - saving the customer money and giving them the cash they wanted.
The problem is the customer was now really at 115% loan-to-value. A bad position for everyone. Especially in todays market.
The downside is that lenders will no longer be able to ask appraisers for ball park estimates before commiting to a full appraisal. Your Loan Officer won't have an opportunity to have a discussion or touch base with appraisers before they go out to appraise the house.
This also means customers will HAVE TO PAY IN ADVANCE for a full appraisal, typically by credit card before a lender can do anything. If the appraisal comes in short, the deal is dead, and the cost of the wasted appraisal will surely annoy homeowners everywhere.
In some areas, lenders have already implemented these changes, and in the next few weeks and months, more will have to begin the process.
Additional Resources:
Federal Housing Finance Agency's News Release
Federal Housing Finance Agency's Home Valuation Code of Conduct
