If you haven’t bought or sold a home since May 1, 2009, you may not be aware that there have been drastic changes to a part of the process previously considered perfunctory: the appraisal.

Last year, a new regulation called the Home Valuation Code of Conduct (HVCC) went into effect. It was designed to protect consumers, and help prevent another mortgage crisis. However, some claim it has brought unintended consequences that can complicate a real estate deal.

One thing is for sure: The HVCC has made the appraisal process something that homebuyers and sellers need to be more involved in. Here are the highlights of what has changed, and what you can do to ensure a smooth, fair real estate transaction.

Where does the appraisal fit into the mortgage process-and the mortgage crisis?

An appraisal is an independent valuation of your home. A licensed appraiser calculates the value of your home based on many criteria: location, condition, size, amenities, etc. Lenders use this number to help decide how much money they will loan you to buy the house. (For example, they won’t loan you $400,000 to buy a home appraised at $385,000 because if you default, the bank is left holding the house and cannot recoup its losses.) Appraisals also are used in refinancing.

Some believe inflated appraisal values gave lenders a green light to lend more money than a house was worth. Others (including those in the appraisal industry) say appraisers were pressured to give high values so deals would go through, which allowed everyone involved to make money.

Is the HVCC a law?

No. It is optional. However, it is widely followed because any lender that sells its single-family home mortgages to Freddie Mac or Fannie Mae must abide by the code. Freddie Mac and Fannie Mae are shareholder owned, government sponsored companies that buy mortgages from primary lenders, i.e. banks. Approximately 55 percent of all single-family mortgages are currently held by Fannie and Freddie.

What was the HVCC designed to do?

Its primary purpose was to act as a “firewall” between those involved in loan production (such as loan officers or mortgage brokers) and appraisers. It prevents communication between them about the appraisal, purportedly so the appraisers can give a fair value of a property without being pressured to hit a certain number. It also aims to prevent consumers from buying an overpriced home.

How has the appraisal process changed?

Like most things in banking and real estate, it used to be relationship based. When a loan officer, mortgage broker or Realtor needed an appraisal, they simply called one they knew who was familiar with the area or type of property. Appraisers worked as independent contractors or for an appraisal company, which they still do. But since the HVCC prohibits direct contact between loan production staff and appraisers regarding the appraisal, a third party has come into the picture as a go-between. These third parties are called appraisal management companies, or AMCs.

What is an AMC, and what does it do?

Appraisal management companies are hired by lenders to schedule appraisals, hire the appraiser to do the work, review the appraisals, then submit them back to the lender that ordered them. It is the AMC alone that decides which appraiser it will send to appraise your property. If there is a problem with the appraisal, the AMC handles it.

Have there been consumer issues with the new process?

The biggest complaint is that of non-local appraisers being sent to areas with which they are unfamiliar. This is an issue in a city of diverse neighborhoods like Chicago, where similar houses can be worth substantially more or less if their location varies by just a few blocks.

This unfamiliarity can lead to low appraisals, which can cause problems with financing. For example, if you’ve agreed to buy a $400,000 house and it appraises at $385,000, you have three options: make up the difference in cash (i.e. borrow less); try to get the seller to drop their price; or cancel the deal.

The second complaint is that appraisals cost the homebuyer more now because two entities are doing work instead of one: the AMC and the appraiser. Appraisals used to cost $300-$350 for an average home in the Chicago area. Now it varies widely, up to double the cost. To avoid surprises, ask your lender. They are the one ordering the appraisal from the AMC. Your lender decides how much of the cost they pass on to you.

A third complaint is that appraisals can take longer to schedule, lengthening the loan process. The longer you lock in an interest rate, the more it costs.

Are new home builders and buyers affected by the changes?

Yes. For example, one builder said it no longer offers finished basements as an option because subterranean space is not appraised at the same rate as above-ground space. (A finished basement raises the cost of a home, but the full retail cost of constructing it might not be reflected in the appraised value, causing a borrower to come up short.) Buyers who want finished basements must finish them with a contractor on their own. Also, buyers have to be careful about loading their new home with expensive finishes, which increase the size of their loan but might not reflect fully in the appraisal.

Will I receive a copy of the appraisal of a home I’m buying?

Yes, at least three days before closing. Some lenders do the appraisal the beginning of the lending process, and some at the end. This could mean weeks of difference. Ask when you will receive it, and request to get it early if possible.

How can I make sure I get a qualified local appraiser to appraise the property I’m buying?

Nothing prohibits you from contacting the AMC or your lender regarding your appraisal. Call your lender and/or AMC and tell them what you expect. Ask about appraiser credentials (there are different designations), locality, years of experience, etc. Ask whom to contact if there is a problem later.

Is there anything I can do to help the appraiser accurately determine the value of a home I’m selling?

Yes. It is OK to communicate with the appraiser about the facts of the home. You can even prepare a packet to hand the appraiser that includes recent (last three to six months within one mile) comparable sales, upgrades and renovations, etc.

What if I think my appraisal was done wrong?

Call your lender and/or AMC immediately. Factual or procedural errors in appraisals can be corrected.

ChicagoTribune

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NEW YORK — Home prices showed the smallest annual decline in almost three years in January, indicating there are surprising areas of strength in the housing market.

The Standard & Poor’s/Case-Shiller 20-city home price index fell just 0.7 percent from last year on a seasonally adjusted basis. The index reading of 146.32 was almost in line with analysts expectations, according to a survey by Thomson Reuters.

“There was some positive momentum in home prices in January,” wrote Ian Pollick, a portfolio strategist with TD Securities.

Better still, prices rose 0.3 percent from December to January, the eighth consecutive monthly gain. Among the 20 cities in the index, 12 rose.

The index, released Tuesday, is up nearly 4 percent from its bottom in May 2009, but still almost 30 percent below its May 2006 peak.

Still, there are signs that last year’s housing rebound won’t last. Home sales sank during the winter, and government incentives that have propped up the market are ending.

Another reason for the positive news is simply that the Case-Shiller index measures a three-month average of home prices. So January’s report includes November’s strong home sales.

Many analysts expect that the Case Shiller number will eventually turn downward.

“It is only a matter of time before the index records a double-dip in prices,” wrote Paul Dales, U.S. economist with Capital Economics, who forecasts a 5 percent drop. The market will be tested in the second half of the year, he wrote, when a tax credit that has boosted sales is gone.

AP

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IN ITS early days, the Obama administration argued over whether the financial system or the real economy should be the economic priority. Critics disputed the premise. They argued that no lasting recovery would be possible until housing markets were healthier.

Yet the housing-market recovery has almost run out of steam. Sales of new and existing homes have fallen for three consecutive months. As a result inventories have grown, putting downward pressure on home values. According to some measures, prices are dropping again: the Federal Housing Finance Agency reported national declines in December and January.

Things looked rosier last autumn. An $8,000 homebuyer tax credit helped stabilize both prices and sales, while Federal Reserve purchases of mortgage-backed securities held down mortgage rates. House values climbed across the country, and existing-house sales hit levels not seen since the end of the boom in early 2007. By September building-industry confidence had more than doubled from January’s all-time record low, generating optimism about new employment. Anxious to keep the recovery going, Congress extended the tax-credit programme to the end of April this year. But the magic has not survived the winter.

America’s weak labour market deserves much of the blame. Job losses continue to drive loan defaults. Foreclosures declined from January to February, but remained above 300,000 for a 12th consecutive month. Bank sales of foreclosed properties are depressing prices further and dampening the industry’s hopes (see chart). The latest data show declines in both builder confidence and new housing starts.

The weather hasn’t helped. Fierce winter storms hit house-hunting in January and February. But with prices, sales, construction and builder confidence all losing ground and foreclosures still frequent, there is growing concern that the housing-market stabilisation of 2009 was entirely a product of market interventions, most of which are about to end.

This pessimism may be overdone. With the deadline to take advantage of the housing tax credit looming and with better weather on the way, potential buyers kept indoors by February snow may rush into the market. Construction has been so depressed for so long that a flurry of buying could quickly trim inventories, supporting prices and construction and touching off a virtuous cycle in housing markets. And America’s housing correction has been more thorough than those elsewhere, leaving homes much cheaper.

But the window for a turnaround is closing fast. The Federal Reserve’s $1.25 trillion programme of buying up mortgage-backed securities ends this month, and mortgage rates are expected to rise thereafter. With budget politics dominating headlines in Washington, another housing-tax-credit extension is unlikely. After April, housing markets will largely be on their own. By autumn payments will be adjusted upwards on a new bulge of mortgages, while interest rates may rise further ahead of expected tightening by the Fed.

Meanwhile Washington’s foreclosures policy continues to fail to rise to the magnitude of the problem. The administration’s programme to restructure distressed mortgages, intended to help up to 4m households, has produced only 170,000 permanent modifications.

A renewed decline in the housing market is not inevitable, but it is starting to look increasingly likely. And if prices start to drop once again, causing both household wealth and construction employment to fall, while boosting the rate of defaults, the broader economic recovery, which is still fragile, may very well suffer as a result of housing’s woes.

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Distressed properties may not be driving the spring home-selling market, but they can be considered a co-pilot.

Sales of existing homes in Chicago recorded their sixth consecutive month of year-over-year improvement in February, the first month of what is traditionally the start of the buying season. But for every 10 single-family homes and condominiums sold within the city last month, four were distressed properties.

Foreclosures, once dismissed as unseemly, are increasingly in upscale neighborhoods and in move-in condition, and their bargain-priced sales are causing a ripple throughout the market.

In the past six months, the median sales price in Chicago has plummeted 21.6 percent, to $176,500 in February from $225,000 in September, according to data from the Illinois Association of Realtors. For the Chicago area as a whole, the median sales price has dropped 17 percent, to $165,000 in last month from $199,000 in September.

Meanwhile, the Illinois Association of Realtors reported Monday that February sales of existing single-family homes and condos in the Chicago area rose 32 percent last month compared with the same month a year ago. It was the eighth consecutive month of year-over-year sales-volume improvement. Compared with a year ago, the median price fell 10.3 percent.

Within Chicago, sales posted a 41.5 percent increase in February over the year-ago period, representing a sixth consecutive month of year-over-year gains. Sales of Chicago condos rose 44 percent. The February median price for the city as a whole was down 19.3 percent year over year, and down 10.7 percent for condos.

The growing disconnect between sales volume and price is a concern for homeowners looking to list their home for sale this spring, real estate agents say.

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A government watchdog is criticizing the Obama administration for establishing a “meaningless” goal for its flagship mortgage assistance program.

The report issued late Tuesday by Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, says the Obama administration is measuring the performance of the program by a questionable standard.

At the program’s launch in February 2009, Obama officials said it would help 3 million to 4 million homeowners. But with only 170,000 borrowers completing the program so far, administration officials now emphasize that the plan’s goal is to merely offer help to those millions.

“Defining success by how many offers are given can reasonably be perceived as essentially meaningless,” Barofsky wrote. Instead, the program’s goal “must relate to how many people are helped to avoid foreclosure.”

Herbert Allison, an assistant Treasury secretary, acknowledged in a letter written in response to the report that officials’ statements about the plan’s goals “have not always been precise.” But he argued that offers of help is a meaningful measurement because some borrowers who don’t qualify for the government program will still be able to avoid foreclosure.

The Obama program is designed to lower borrowers’ monthly payments by reducing mortgage rates to as low as 2 percent for five years and extending loan terms up to 40 years. The government has set aside $75 billion in subsidies to entice mortgage companies to participate. More than 100 have signed up.

To complete the program, homeowners need to complete a three month trial period and provide proof of their income, plus a letter documenting their financial hardship.

But getting banks and homeowners to complete the process has been tough. Barofsky said in his report that an unnamed Treasury official estimated that 1.5 million to 2 million homeowners would complete the program by the end of 2012.

That, Barofsky noted, “may only be a small fraction of the foreclosures that will occur in that period.”

The report is strongly critical of the government in other areas. Barofsky noted that numerous changes to government guidelines “caused confusion and delay” and said the government did not do enough to advertise the program.

In response, Allison noted that the program “is the largest, most complex mortgage modification program of its kind” and said there was little precedent for how to design such an endeavor.

lasvegason.com

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