Low appraisals may be chilling home sales

/ There may be another culprit scuttling a U.S. housing recovery: low home appraisals.

Flawed appraisals are derailing real-estate sales and depressing values across the U.S., the National Association of Realtors (NAR) said Tuesday as it reported that existing home prices declined 17 percent in May from a year earlier.

"It's pointing to thousands of delayed or canceled transactions," said Lawrence Yun, NAR chief economist. "We've had a massive inundation from members saying this is a big problem."

Appraisal rules that went into effect on May 1 require lenders that sell loans to Fannie Mae or Freddie Mac to set up a firewall between appraisers and loan officers to prevent improper influence.

The rules are the result of an agreement between the mortgage buyers and New York Attorney General Andrew Cuomo, who said an investigation found appraisers inflated values under pressure from lenders.

The agreement mandates that banks order a second appraisal on 10 percent of the loans they sell to Fannie Mae and Freddie Mac and warns against accepting the higher of any two valuations.

The guidelines have led to more conservative valuations by many appraisers and a "chill" in lending, according to John Brennan, research director at the Appraisal Foundation, a trade group. A low appraisal is one that comes in under the price a prospective buyer has agreed to pay for a property.

"Sometimes policy can lead to unintended consequences," Yun said.

Low appraisals have become a focus of the California Office of Real Estate Appraisers, which oversees licensed appraisers in the state. Investigations by the Sacramento-based agency rose 36 percent to 418 at the end of May from the same period last year, said Bob Clark, director of the office. The probes are looking into allegations including flawed valuations and use of comparable sales too far from the subject property, he said.

The new guidelines require lenders to order valuations through third-party vendors called appraisal-management companies that increase costs to prospective home buyers, said Brandon Chamberlin, president of Ashcroft & Associates Appraisal Services in Vancouver, Wash.

Appraisal-management companies hire valuators who use automated systems and work at a discount, instead of experienced appraisers who have knowledge of neighborhoods and include factors that can increase a property's value, such as home improvements or proximity to schools, Chamberlain said.

At Universal Mortgage in Brooklyn, N.Y., brokers reported at least 15 sales that fell apart due to appraisals that came in below the agreed upon price.

Broker Isaac Shalom, who reported at least four deals collapsed, said one buyer who wanted to buy a home at $850,000, delayed the purchase after an appraisal came in at $750,000.

Real-estate broker Vince Saragosa had an $185,000 offer in April for a three-bedroom home in Royal Oak, Mich. An appraiser valued the property at $128,000 and the deal fell through.

"It's almost like appraisers are interfering with the market," said Saragosa, owner of World Showcase Realty in Shelby Township, a Detroit suburb.

The discrepancy between pending home sales and the actual number of home resales reported on Tuesday partially illustrates how flawed appraisals are thwarting home sales, said Walter Molony, an NAR spokesman. The Pending Home Sales Index rose 3.2 percent in March and 6.7 percent in April. Completed sales of existing homes in May rose 2.4 percent.

"March and April contracts suggested that we should be seeing higher levels of sales than we're seeing," Molony said, citing longer times between contracts and closings, due in part to appraisals that come in low.

In the first quarter, loans eligible for purchase by Fannie or Freddie account for 70 percent of all lending, according to newsletter Bethesda, Maryland-based Inside Mortgage Finance.

"Just as the lack of careful regulation led to inflated prices, the return to regulation is reinforcing the downturn," said Susan Wachter, a real-estate professor at the University of Pennsylvania's Wharton School in Philadelphia. "It's making the cycle worse."

When home values come in below the sales price, that's not the appraiser's fault, it's a reflection of the market, the Appraisal Institute, a professional group that represents more than 25,000 appraisers, said in a statement yesterday.

"We take offense with the notion that an appraisal is only good if it happens to come in at the sales price," the group said. "That mentality helped cause the mortgage meltdown to begin with."

More deals are falling apart in a housing market that needs transactions to recover from a three-year slump that has dragged the U.S. into a recession. Low appraisals join a list of suspected obstacles standing in the way of a rebound that includes rising interest rates, a glut of foreclosed properties and the highest unemployment rate since 1983.