What Are the New Guidelines for Home Appraisals?

New guidelines for home appraisals took effect in May 2009, as part of the Federal Housing Finance Agency's effort to rectify severely overvalued home appraisals. The new regulations are an attempt to keep appraisals accurate and not influenced by agents or lenders. In order to understand the new guidelines, it's imperative to learn what the problems with the old guidelines for home appraisals were.

Lenders And Appraisers
Appraisers depend on references from lenders to conduct appraisals of property so they can accurately assess the property's value and structure mortgage loans accordingly. A lender earns money by the number of mortgage loans that are approved. When a property has a high appraisal (worth equal to or more than the amount of the mortgage loan), it is more likely to be approved-but that doesn't guarantee that the appraisal was accurate in the first place, especially if all parties involved are earning money from the deal. Lawmakers were interested in creating a check and balance between independent and impartial appraisers and lenders earning commission on loans.

Reform
Pressure from lenders on appraisers was intense, causing appraisers to sometimes inflate the value of a property to ensure keeping the lender's business. It was difficult to prevent the ethical conflicts, and as a result, a housing bubble was built on over-inflated property values. Brokers were also able to hire appraisers directly, giving them leverage on negotiations to "ensure" property appraisals came in at the numbers they wanted.

Home Valuation Code Of Conduct
The new regulations, called the Home Valuation Code of Conduct, don't allow mortgage brokers to hire appraisers directly. Instead, brokers must work through the mortgage lender and an appraisal management group. The involvement of the appraisal management group is intended to reduce influence from outside parties. During the process, the parties cannot discuss the value of the home with each other. The new guidelines for home appraisals also allow better enforcement for rule-breakers, with an Independent Valuation Protection Institute to handle complaints from appraisers and lenders who feel another party is not in line.

However, many real estate industry groups are not pleased with the new guidelines, claiming that they will lead to property appraisals that are too low, which can be equally detrimental to the business. Plus, those looking to sell may become frustrated if their home is appraised at a lower value than they expected if an appraiser is unfamiliar with the area. It will take some time to evaluate the long-term impact of this change, but you will want to ask your agent and lender about the appraisal process to avoid surprises.