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September 6th, 2011

New appraisal standards to impact mortgage rates

by Peter Miller


5-price-reducedIt’s official. We’ve now nationalized the appraisal process.

The idea under the Uniform Appraisal Dataset is that all appraisals should have a common set of descriptors so we’re all on the same page when someone says a “brick” house is in “average” condition.

At first, this seems like some sort of bureaucratic malarkey, but the new rules for Fannie Mae, Freddie Mac and the FHA actually have a very important purpose:

They may allow us to unearth faked, falsified and incompetent appraisals and thus prevent loan fraud, illegal flipping and bad mortgage investing. And such improvements in the valuation process might actually lead to lower mortgage rates by removing excess risk from the marketplace.

Illegal flipping

Consider what often happens with illegal flipping.

A home is purchased by a group of illegal flippers. An appraiser is part of the group. Magically, the property gets a new appraisal on the basis of a suddenly higher valuation, and the property is sold to an innocent buyer.

The key to the process is the faked appraisal.

The appraisal validates the buyer’s sense of value and it’s used to get financing for the over-priced property.

There have been efforts to stop illegal flipping in the past, notably HUD’s anti-flipping rule which–until February 2010 when it was suspended–said no property which had been resold in the past 90 days would qualify for an FHA loan.

The concept was attractive, but the problem was that the rule also impacted legitimate investors and rehabbers who could quickly turn around properties. Once the rule was dropped, HUD reported that it insured 21,000 additional FHA mortgages in fiscal 2010, mortgages that otherwise would have been rejected under the anti-flipping rules, loans worth $3.6 billion.

Catching bad appraisers

While the new appraisal requirements are also an effort to standardize the appraisal process, it’s hard to ignore another purpose:

Tighter appraisal standards make it easier to catch cheats and, also, to drive bad appraisers and lenders out of business.

Under Wall Street Reform, there is something called a “duty of care” standard for lenders. It essentially requires that all loan documents must include the lender’s national registration number.

Now imagine that you’re a mortgage investor. You are considering the purchase of part of a mortgage-backed security, a tranche. As part of your due diligence, you go through the loans and see they include mortgages from lender Smith with a particular registration number. You know this lender has twice the foreclosure rate of other nearby lenders, thus you are willing to buy an interest in the MBS–but not any part which includes loans from lender Smith.

Weeding out the bad seeds

Soon enough it will happen that Smith will be unable to re-sell loans in the secondary market and not long thereafter Smith will be out of business.

In a similar sense, the new appraisal standards will allow lenders and government officials to quickly review past appraisals to see if they conform to national standards. If yes, fine. If not, lenders are likely to provide less business (or no business) to the appraiser with the bad rep.

Some appraisers are screaming that the new standards are being implemented too quickly–but they were, in fact, first announced in December 2010 and finalized in February 2011. There has been a ton of time to see what was coming and to prepare for it.

Lower mortgage rates?

Will the new appraisal standards result in lower mortgage rates? To the extent they reduce lender risk, the answer is yes, so borrowers should cheer the new rules.

11 Responses to “New appraisal standards to impact mortgage rates”

  1. Joel Lobb (@kentuckyloan) Says: September 6th, 2011 at 9:50 am

    Only thing this will do is increase the costs of appraisal.

  2. Troy Says: September 6th, 2011 at 10:25 am

    “The key to the process is the faked appraisal.” Wrong, the key to the process is your “innocent” straw buyer that walked into the home and offered to buy it at whatever price they could negotiate. Buyers typically agree on price long before they ever get an appraiser, who is only really there because the banks require it. How many homeowners or homebuyers choose the person that does their appraisal or negotiate the appraisal fee? Virtually none. For your scenario to make sense, the lender and homebuyer would both have to be crooked and working together. The appraisal industry is an artificial racket that adds little value beyond what Zillow and a good set of eyes can do.

  3. Dee Grisamore Says: September 6th, 2011 at 5:49 pm

    You are dreaming. There are so many more issues that go into good loans or bad loans. If lenders an/or appraisers had done there job correctly we would not have had the financial meltdown to begin with. Also, to try and compare a home in South Dakota with a home in Southern California and come up with a value is foolish and stupid. Somebody is not dealing with the real world.

  4. Chri Says: September 8th, 2011 at 11:08 am

    @troy…zillow hardly qualifies as any sort of expertiese on value and anyone who believes so, I will sell a bridge to in Brooklyn. A market analysis complete with a sales approach to value is almost always the best opinion of FMV or OLV values. But ultimately the checkbook always decides final worth. And while a purchase price is almost always agreed to before an appraisal is requested, anyone who doesnt make their deal with limitations to said property appraising for at least the purchase price is lacking common sense or a good agent. @dee…no ethical appraiser uses a comp from CA for a subject property in SD.

  5. Julia M. Wei, Esq. Says: September 8th, 2011 at 12:56 pm

    I do not this think these new terms will resolve the issue of simple negligence. Bad appraisals can be bad because of poorly selected sales comparables. This could be intentional or just a result of an “out-of-area” appraiser who bid the lowest from a panel. The result would be the same – overvalued property, despite use of proper UAD terms.

  6. Appraiser Says: September 8th, 2011 at 1:32 pm

    It is foolish to pretend that the flipping scenario is the cause of the meltdown and just as foolish to believe that UAD is solely for the purpose of catching “bad appraisers”. The purpose of this initiative is for Fannie and Freddie to automate the appraisal review process. Basically the Fannies and Freddie forms are not USPAP compliant and require supplemental data to meet the USPAP requirements. This data contains the meat of the appraisal and appraisal process. It answers all the questions that arise from the forms, it fills in the blanks. Unfortunately it is rarely read by anyone and cannot be disseminated by the many computer programs, being marketed as quality control programs. We as a society need to realize that there is no substitute for human intelligence. Computer programs are written by intelligent humans, to review large quantities of data, but lack common sense and the ability to recognize incorrect data that has been built into their data base or data set. Automated Valuation Models have been around for more than a decade and are still not reliable, Zillow is a joke. The UAD still leaves room for interpretation and result in a flawed dataset, worse, when the GSE are competent that they have a flawless system, we will be subject to the engineers to build in appreciation or deprecation of real estate and the Independent Appraiser will be irrelevant to the process. Talk about a slippery slope, we are there and sliding. As far as the title, will rates go down with decreased risk, You cannot be serious, expect them to rise, as consolidation will reduce competition.

  7. OurBroker Says: September 9th, 2011 at 4:39 pm

    The use of the flipping scenario was simply to have an illustration, not to say that illegal flipping was at the hear of the mortgage meltdown. I think Dee has the right idea — toxic loans should never have been offered and the proof is that most community banks, credit unions and small S&Ls never originated such loans. Also, neither did some big lenders, such as BB&T. The Federal Reserve failed to use it’s regulatory power under HOEPA to stop the origination of toxic loans in 2002 and 2003. That would have ended the problem — before it began.

  8. brian Says: September 10th, 2011 at 7:54 am

    Don’t you get it? UAD was made only to get rid of the appraiser…duh. It’s so “they” can collect data from our reports that a computer can read, for later loan evaluations. It has nothing to do with making it easier for everyone to read. I don’t know of anyone off the street knows what “0rr0broba0wo” means…yeah that make more sense then “unfinished”.

  9. Steve Says: September 12th, 2011 at 8:59 pm

    The UAD is the most retarded bit of legislation I have ever seen. I did not think some of the past legislation could be topped for that award (Think AMCs). It is easy to see you have no clue about appraisals or who the bad guys in the housing crash were (and still are). AMCs, UAD, just another nail in the coffin of a past honorable profession. Now you get Skippy the appraiser for $99 an appraisal. Since he was probably flipping burgers last week, I am sure it will be accurate and professional.

  10. appraiser Says: September 13th, 2011 at 12:22 pm

    UAD appraisal takes AT LEAST an additional 2 hours to complete. Data entry NIGHTMARE. Turnaround times will increase by 50% UNTIL OBAMA IS GONE YOUR HOUSE VALUE GOES DOWN

  11. Doug Says: September 14th, 2011 at 8:21 am

    If it were not for appraisers reigning in greedy banks, mortgage loan officers and a stampeding public interest in doubling money in real estate, property prices would have skyrocketed 50-100% per year over at least a 3-5 year period. The resulting and inevitable crash would have been far more sever than it has been. We can credit Alan Geenspan and Christopher Dodd for all of this, maybe they should stand trial?

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