Realtors want consumers to find value in appraisals

Nation's Housing

May 26, 2002|By KENNETH HARNEY

When you buy a house or refinance a loan, do you have any idea how your mortgage lender pinpoints the market value of your property?

Sure, you usually pay $300 to $400 for what is listed on your closing documents as an "appraisal." But do you know what type of property valuation the lender actually purchased and relied upon for the purpose of extending you a mortgage?

Was it a full-fledged, traditional valuation performed by a state-licensed professional appraiser? Or might it have been something a lot less detailed -- and much less costly?

Under a far-reaching new policy adopted May 18 by the country's largest real estate trade group, lenders not only would have to tell you which valuation methods they used on your property, but would have to show you the actual copies of all the reports as well.

That way, if a lender used an "automated valuation" from a property data vendor, you'd know about it and get to see it. Ditto for various abbreviated reduced-cost methods widely used to establish property values. Under the new resolution adopted by the National Association of Realtors, the current veil of secrecy about alternative appraisal methods would effectively be lifted.

You would be able to see, for example, that one valuation method used by your lender concluded that the house you're buying is worth less than you're paying, while a second agreed with the contract price. Or you might discover that although you're being charged for a full appraisal, the lender actually only obtained an automated valuation, costing a tiny fraction of what's on your settlement sheet.

The resolution adopted by the association would require lenders "to inform a borrower of the methods used to value a property to determine the amount of the mortgage loan." It also recommends that "borrowers should have the right to obtain a copy of each value estimate or value opinion obtained." The resolution will only become effective if the NAR is successful in lobbying Congress and financial regulators to revise current rules.

Under the federal Equal Credit Opportunity Act, homebuyers already have the right to request a copy of the appraisal used by the lender to value the property. Lenders are required to deliver the copy "promptly" after a borrower's request. But federal law does not specifically address the wide variety of alternative valuation methods increasingly used by lenders.

These range from automated valuations pulled electronically from databases within seconds to "broker-price-opinions" (BPOs) based on the estimates of real estate agents or others not licensed to do appraisals. BPOs frequently cost about $50, and electronic property data estimates cost from a few dollars to $30.

Other discount alternatives to traditional, full-property appraisals include "exterior-only" drive-by checks, "condition and marketability" reports and "short-form" appraisals. All of these tend to be deliverable in much shorter periods and at substantially lower costs than are full appraisals. Lenders frequently rely on one or more of them to arrive at a valuation for the purpose of extending a mortgage.

Differing valuation methods typically come up with different numbers. For example, say you sign a contract at its full asking price of $250,000. A drive-by performed by an unlicensed appraiser pegs the market value at the $250,000 contract price. However, an automated valuation of the house produces an estimate of $245,000, and a full appraisal performed by a licensed professional comes in even lower -- $240,000.

Under current procedures, you'll probably never see any of these variations -- including the two that suggest you're overpaying by anywhere from $5,000 to $10,000. Wouldn't it be helpful to know about the range of value estimates the house you have under contract produced? And if you knew about the differences early on, you might even want to renegotiate the transaction. Or, if the lender used an alternative valuation method to reduce the loan amount below what you need, you could ask that a full professional appraisal be performed.

The Realtors' resolution emerged from the association's appraisal committee and is the official policy of the politically potent, 800,000-member lobby.

Will lenders oppose the new full-disclosure approach? Some may grouse about the added paperwork. But the biggest mortgage player of all -- Fannie Mae -- is sympathetic. Although the company hasn't reviewed the text of the Realtors' new policy, a spokesman said Fannie Mae "supports greater transparency" for consumers on "all the costs associated with the mortgage transaction."

Kenneth R. Harney is a syndicated columnist. Send letters in care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071. Or e-mail him at kenharney@aol.com.

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