Recently, Congress passed a requirement that eliminates the ability of a loan officer to order an appraisal for their clients seeking a home mortgage. Whether they are trying to refinance their existing mortgage or purchase a home, consumers are now at the mercy of the lenders and must gamble whether to have an appraisal conducted.
Let me digress a bit here. In the past, loan officers had been slot game able to order appraisals for their clients. The advantages of this system are several: they were able to obtain the appraisal quickly, work cohesively with the appraiser regarding the subject property, gain an understanding of the attributes and potential problems with the property, and review and discuss home comparisons (comps) to help determine a potential valuation range for a particular property. While this valuation range is not a guarantee of actual property value. It substantially lessen’s the risk that an appraised property could meet lender requirements with concern to valuation.
With the recent home mortgage crisis, the federal government has determined that taking the ability of ordering an appraisal away from the loan officer is a means of deterring fraud. This decision was based on the dishonesty of a minority of dishonest loan officers and appraisers, who would discuss properties and pre-determine the values necessary in order to complete a refinance or purchase. Rather than using the accepted codes of ethics for appraisal valuation, a loan officer would work with a specific appraiser that he/she knew would be willing to inflate the value of a property so that the loan desired by the borrower would be granted by a financial institution. You can see that this could lead to huge problems with financial institutions making loans on properties that are not worth what was stated in the appraiser’s report. The sad part is that this has hurt the majority of ethical loan officers and appraisers who make up our mortgage industry. This new regulation is supposed to help the consumer in safeguarding against this type of fraud.
So, let’s look at how this government regulation hurts the consumer with regards to obtaining a home refinance or home purchase. Picture this if you will: Consumer A wants to complete a home mortgage refinance or purchase. The loan officer may not make contact nor speak to the appraiser during the mortgage process. The loan officer must order the appraisal through a lender whom he wants to complete a loan transaction. The lender in turn, requires the borrower to pay for the appraisal in advance. The lending institution, along with all of its other requirements in underwriting this loan, now has to order the appraisal through an HVCC company which takes, on average, 2 to 3 weeks to complete. This in itself places time constraints on loan locks of 30 days or less. Now, let’s say the home for which the appraiser is completing the appraisal has a value that does not meet the lender’s criteria. The consumer has paid the appraisal fee in advance for absolutely nothing. Most appraisals today cost in the $400 to $450 dollar range. The consumer pays this cost and yet, cannot obtain financing. This created risk on the part of the consumer may cause the consumer to reconsider the refinance or purchase of a home. With the economy in its current state, I am unaware of anyone who has an extra $400 to $450 dollars they want to gamble on when it comes to home mortgages.
Under the traditional methods that have been in place for years, the loan officer had the opportunity to review, with an appraiser, valuation ranges for a particular property. This would have taken place before the appraisal was ordered and conducted. If a property’s valuation range was less than the amount needed for the loan, the loan officer would have advised the consumer that they failed to meet the lender’s criteria for obtaining the loan. Before paying for an appraisal, the consumer can make the wise and informed choice and either look for a different home to buy or wait to refinance their home when valuations return to more traditional levels as the market improves and home values increase. Under the new requirement, the consumer is spending valuable dollars on a gamble — with the hope that their home will appraise at a certain value and meet lender guidelines in order to refinance or purchase a home. The consumer does not have the benefit of a pre-appraisal discussion between the loan officer and the appraiser to preliminarily determine if the range in value of the home will meet the lending requirements.