Appraisal Debacle

Before delving into today’s topic it’s important to point out the dilemma facing the Federal Reserve’s Open Market Committee. After meeting this week the Fed indicated that inflation is a bigger problem than the possibility of a slowing economy. What does this mean? It means we’re likely see interest rate increases in the near future.

What do you suppose rate increases will do to an already sputtering economy? It’s not a pretty picture. This wasn’t exactly a surprise to those of us paying attention. In the February 24, 2008 edition of the Weekly Newspapers, I wrote the following: “There is growing concern that a sustained duration of low rates could spur inflation more than previously anticipated. That is a very big problem because it could mean the Fed might be forced to raise interest rates even before the economy regains its momentum. There is a word for this. It’s called stagflation. It means a period of inflationary pressures on prices but little or “stagnant” growth in the economy.”

Last Wednesday, during a television interview, the respected investor Warren Buffet said, ““I think the `flation’ part will heat up and I think the `stag’ part will get worse,” discussing the current stagflation we are experiencing.  Banks, who are still facing loan delinquencies and other problems will have to pass on increased borrowing costs to the consumers. The big question is whether they will be able to increase the rates they pay on deposits at the same time. We’ll keep you posted!

Appraisal Debacle
I recently spoke to the Florida Keys Board of Realtors at their Town Hall Meeting. Before my turn to speak I was shocked to hear that a speaker earlier in the program implied that Mortgage Brokers couldn’t order appraisals anymore. As of the writing of this column that statement is factually incorrect. An agreement between the Attorney General of New York and Fannie Mae (FNMA) stipulated that, in New York, appraisals could only be ordered through Appraisal Management Services (AMS,) not directly from appraisers themselves. Fannie Mae has begun the implementation of this procedure for all loans they purchase. It is not in place yet and more importantly, it doesn’t apply to loans purchased by other investors.

Larger problems loom with the program and the likelihood that it will stand a court challenge has yet to be determined. Why you ask would someone challenge a seemingly innocuous procedural issue? First and foremost it is a bad deal for borrowers and will drive up the cost of appraisals.  Why? Because as it stands right now, a Mortgage Broker can order an appraisal for you and use that appraisal at any of the several banks he’s working with to place your loan. If a bank orders your appraisal and you decide to switch banks, the bank who ordered your appraisal must release that appraisal. If they won’t do that you’ll have to pay for another one at the new bank you’re working with. That’s right; the new procedure limits your ability to shop comparatively for your loan.
Besides possibly forcing consumers to pay twice for the same appraisal, there is little question that the procedure will increase the base cost of appraisals. The Appraisal Management Services are not necessarily appraisers in and of themselves. They will be taking the orders from Brokers, Bankers, etc., and then ordering the appraisals from the same appraisers who perform them now. Are they going to do this for free? Of course not, the AMS will charge a fee on top of the appraiser’s standard fee. This, in and of itself, will increase consumers’ cost.

There are some legitimate concerns regarding Brokers or Bankers influence on appraisers with whom they do business. There were certainly some bad apples that broke the rules and committed fraud. Sound appraisal review policies and the availability of voluminous information on the web could help prevent the problems of the past without having to resort to procedures that hurt consumers.

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