Appraisals blamed for stifling market: Realtors say that contracts, closings are being canceled

MANATEE — Appraisers, frequently blamed for helping cause the housing boom and subsequent bust by inflating home values, now are being accused of stifling the market’s recovery by doing the opposite.

Realtors and homebuilders say they’re losing sales because of lower appraisals, which they’re blaming on new appraisal guidelines that took effect May 1. Appraisers disagree, saying their valuations remain sound and merely reflect a market that’s in an unprecedented decline.

Caught in the middle are sellers and buyers, whose closings are being delayed or derailed.

“I would say that appraisals probably are the most-common reason that contracts are defaulting right now,” said Barry Grooms of RE/Max Alliance Group and president of the Manatee Association of Realtors.

Appraisals, often done after a buyer and seller agree on a price, are crucial because many banks won’t lend more than the property’s appraised value. So if the appraisal is below the agreed-upon price, the buyer often has to either make up the difference, get the seller to agree to the lower price or negotiate a compromise price with the seller.

Otherwise, the deal collapses — something that’s been happening more frequently in Manatee, according to real-estate agents and figures from the Mid-Florida Regional Multiple Listing Service.

The number of single-family homes under contract and sold rose in tandem through the first four months of this year, the MLS data shows. But in May, contracts rose by 10 percent while closings suddenly fell by more than 20 percent.

The National Association of Realtors and the National Association of Homebuilders say it’s happening throughout the country, and they blame the Home Valuation Code of Conduct.

The code bans loan officers, mortgage brokers or real-estate agents from any role in selecting appraisers for pending sales. It applies to any mortgage that could be guaranteed by Fannie Mae or Freddie Mac, or more than 70 percent of the market.

It was the result of an agreement that Fannie and Freddie reached with New York Attorney General Andrew Cuomo, whose office said it found evidence that appraisers were pressured into inflating values during the housing boom.

Since the change took effect, more appraisals have been unusually low and/or based on an inordinate number of foreclosures and other distressed sales, critics say. Those low appraisals, they contend, are causing sales contracts to fall through, are further depressing home prices and threatens the U.S. housing market’s recovery.

For those reasons, the Realtors group is asking federal regulators to suspend the code for up to 18 months.

“In the past month, stories of appraisal problems have been snowballing from across the country, with many contracts falling through at the last moment,” said Lawrence Yun, the group’s chief economist. “There is danger of a delayed housing market recovery and a further rise in foreclosures if the appraisal problems are not quickly corrected.”

Appraisers defend their work, saying their estimates remain scientifically sound and accurately reflect a declining market.

“We take offense with the notion that an appraisal is only good if it happens to come in at the sales price,” said Bill Garber director of governmental relations for the Appraisal Institute, which represents 25,000 appraisers. “That mentality helped cause the mortgage meltdown to begin with.”

The institute and several other trade groups opposed the Cuomo agreement when it was reached last year, largely because it was quickly crafted without input from them. Since then, the Federal Reserve and the U.S. Office of Thrift Supervision also have called for the deal to be scrapped.

Bradenton appraisers say it’s too early to tell what effect the guidelines will have, but that the new code does has potential flaws.

“There’s some good out of it and some bad out of it,” said Gerald Russell, owner/president of Realty Appraisal Services of Southwest Florida Inc. “Still, I can see where there could be some problems.”

Among his concerns: The possibility that more non-local appraisers who might not be as familiar with the local market will be hired to assess Manatee County homes. That’s a potential result of lenders hiring regional or national appraisal-management firms to comply with the new code.

Those appraisers might be tempted to do a cursory appraisal using nearby foreclosure or other distressed sales as comparable properties, thus skewing home values.

Russell, who specializes in commercial appraisals but has residential appraisers working for him, says that’s often hard to avoid in a market dominated by such sales. He tells his appraisers to be up-front about what their appraisals are based on.

Still, the homebuilder and Realtor associations say changes must be made before the issue becomes a larger problem.

“It’s a can of worms, that’s for sure,” said Russell LeGrande of LaMaison Homes, president of the Home Builders Association of Manatee.