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Low Appraisals are Sabotaging Home Refinancing and How to Avoid the Problem

With current 30 year mortgage rates under 3.5% many home owners can save thousands of dollars per year in interest by refinancing. However, many homeowners have been locked out of refinancing by low appraisals that do not reflect the rising real estate market in Greater Boston. In this issue we outline the causes of this problem and how to overcome low appraisals.

Low appraisals are occurring throughout the United States. In a new poll of its members, the National Assn. of Realtors found that 33% of their salespeople reported appraisal problems during the month of May, 2012. Moe Veissi, president of the association, said poor appraising "in markets that are no longer in decline is the single most important valuation obstacle to seeing a real recovery." The primary causes of low appraisals are:

Home Valuation Code of Conduct

During the housing boom, appraisers were sometimes pressured by mortgage originators to overvalue homes. The Home Valuation Code of Conduct (HVCC) was enacted in May 2009. The intent was to eliminate conflicts of interests between mortgage originators and appraisers. According to the Appraisal Institute, institutions that deliver loans to Fannie Mae or Freddie Mac must represent and warrant that the appraisals obtained adhere to the requirements in the HVCC regarding appraisal management, ordering and review by lenders. The HVCC was eliminated two years ago. However, the underlying changes are still in place.

One of the major impacts of the HVCC was that lenders vastly increased the use of Appraisal Management Companies (AMCs). AMCs are intended as a firewall between the lenders and appraisers. The problem with this process is that AMCs often hire appraisers that are not familiar with the location. There are many local factors that significantly affect value that non-local appraisers are not familiar with.

A Rising Market

The residential property market data in Cambridge and Somerville indicates that the market is rising and that there is potential for near term appreciation. Our most recent analysis (September, 2012) of the Cambridge and Somerville markets indicated that both markets are sellers' markets. Both markets had 2 months of inventory. Inventory levels have been very low for all of 2012. In October (see reports below) Cambridge inventory was down 34.5% from 2011 and Somerville inventory was down 57%.

According to a recent article in the Los Angeles Time: "Frank Gregoire, former chairman of the Florida Real Estate Appraisal Board and an appraiser in St. Petersburg, says that many appraisers are reluctant to make the upward adjustments they know to be justified by recent positive appreciation trends because they fear criticism that they are potentially overvaluing the property - exposing lender clients to costly "buy-back" demands by Fannie Mae or Freddie Mac, or future litigation."

Lack of Preparation for the Appraisal Inspection

Most lenders require that the appraisers inspect the exterior and interior of the home. To ensure the highest appraised value it is important that the home look its best, and that the appraiser be provided with information that supports the value of the home.

Subjective impressions have a strong influence on the appraiser. For best results the appraisal inspection should be handled just like a showing to a buyer. Preparation for the appraisal inspection should include the following:

- Maximize curb appeal

- De-clutter and clean the home.

- Light staging such as flowers, bowls of fruit, fresh towels, etc.

- Don't forget the obvious: make the beds, do not leave dirty dishes in the kitchen sink, put the toilet seats down, remove the pets from the home, etc.

- Make the appraiser comfortable: turn on the heat on in the winter, turn on gas fireplaces, run the air conditioning, etc.

- Research comparable sales that support the value of the home. Many appraisers are not local and do not know the comparable sales. In our experience appraisers welcome this data because it saves them time. The best practice is to get advice from a local real estate agent. They will know what comps will be acceptable to appraisers. A Zillow estimate will not be of any value to an appraiser since Zillow's methodology is not based on appraisal standards.

- Provide an itemized list of improvements with associated costs. Also provide copies of permits for major work such as additions, new windows, new kitchens and bathrooms, etc.

Based on our experience, homeowners get better results when a real estate agent advises them on preparing for the appraisal inspection. Real estate agents know the appraisal process and what information appraisers need.

Our Free of Charge Offer

If you, or anyone that you know is considering re-financing your home we will prepare a free of charge Comparative Market Analysis report (CMA). The CMA will provide an estimate of Fair Market Value that you can send to your lender to determine if you have sufficient equity to qualify for a refinance or cash out second mortgage.

 If you have already had a low appraisal our CMA report can help you to decide if it is worth challenging the appraisal (note: in our experience, appraisers are very resistant to revising an appraisal), or asking the lender to order a second appraisal. The other option to start the process over with another lender. This option usually involves additional fees. We can also refer you to excellent local lenders.
Please contact me at eabrams@yourguidehome.com if you are interested in this valuable service.
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