New Rules for Real Estate Appraisers

If you have ever bought or refinanced a home, you are somewhat familiar with the real estate appraisal process. In a nutshell, appraisers (who are usually licensed state-by-state), estimate home values based mostly on comparisons ("comps") to similar sales. There are other ways to value rental property or commercial property, but comps are pretty important for residential home appraisals.

Before a buyer gets a mortgage, the home must be appraised. Usually the lender hired the appraiser. Historically, an appraisal was for the lender's protection, not the buyer's, as I will explain below. Recently, however, appraisals did not seem to be helping either the buyer or the lender.

Consider the old days, when you would get a mortgage from your local bank, the bank would be careful not to lend more than the home's realistic value, because the local bank bore the risk if you did not pay. An appraisal told the bank how much it could safely lend on a property. The local bank had a real interest in getting a conservative and accurate appraisal.

Unfortunately, as we all know, these days you are unlikely to get your loan from your local bank. You probably use a mortgage broker, and once your mortgage is funded, it is sold to an investor. So the mortgage broker doesn't have the same incentive to get a conservative and accurate appraisal. In fact, the mortgage broker might be paid a percentage of the sales price, so the mortgage broker, unlike the local bank, might actually be motivated to pressure appraisers to artificially inflate the home's value. See "Home Appraisers Pressured to Fudge the Numbers," Seattle Post-Intelligencer, July 31, 2007.

Some people think that artificially high home appraisals contributed to the housing bubble. New York Attorney General Andrew Cuomo filed suit against mortgage brokers and sought to subpoena proof that brokers hand-picked appraisers to overstate home values. This lawsuit resulted in a new Home Valuation Code of Conduct for real estate appraisers.

These new rules took effect May 1, 2009 (although there isn't really an infrastructure to enforce them yet). The rules apply to loans issued through Fannie Mae and Freddie Mac but do not apply to FHA or VA-insured loans. The rules are controversial and may give buyers a right to sue if they buy based on a bad appraisal. Most importantly, mortgage brokers may not influence appraisers. See "Rules Set to Cut Off Mortgage Originators From Appraisers This Week," Seattle Post-Intelligencer, April 29, 2009.

I'm not a real-estate lawyer but encounter real estate issues from time to time in probate or guardianship cases. But I'm thinking this could be a big change for real estate appraisers and could be a good niche practice area for some lawyers. I'm also thinking that, if I were to buy a house right now, I'd think about hiring my own real estate appraiser.

As always, this is a blog, not legal advice. You should consult an attorney if you have questions about real estate or appraisals.