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| Buyer/Seller FAQ |
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What's new at Hottle & Co. Appraisal Service? NAR URGES GREATER DISCLOSURE OF HOME VALUATION METHODS Excerpted from May 27, 2002--Realty Times Article by Kenneth R. Harney as published in Real Estate Valuation. If Congress agrees with a new policy recommendation by the National Association of Realtors, all home buyers and mortgage refinancers will have the right to review key real estate documents that they virtually never see today. For the first time, consumers will get copies of every form of property valuation the lender uses to make their mortgage. That includes the formal appraisal, plus any broker-price-opinions (BPOs), "short form" appraisals and other non-traditional collateral assessments performed in connection with the loan. A resolution adopted in Washington by the Board of Directors of the NAR calls for the following: "Lenders be required to inform a borrower of the methods used to value a property to determine the amount of the mortgage loan, and that borrowers should have the right to be provided with a copy of each value estimate or value opinion obtained." The NAR intends to press Congress and federal regulators to incorporate the same full-disclosure policy into the rules that govern home purchase and mortgage transactions. Under current federal law, mortgage borrowers have the right to request a copy of the appraisal obtained by the lender in connection with the mortgage. But increasingly lenders are using non-traditional forms of property valuations--especially "automated valuaton models" (AVMs) and exterior-only "drive-bys" performed by non-appraisers. The biggest sources of mortgage money in the US--Fannie Mae and Freddie Mac--are heavy users of AVMs in their electronic underwriting systems. Freddie Mac owns a private company that provides AVM-based value estimates to mortgage lenders. Fannie Mae allows some lenders to perform a minimal drive-by, exterior check on properties that Fannie Mae has already valued using an AVM. Many large private lenders use low-cost AVMs extensively for refinancings and home equity loans, especially when the borrower's credit record is strong and the house is located in a metropolitan market. Some lenders use multiple collateral valuation methods as cross-checks in underwriting a single loan. They may use a BPO, an abbreviated or short-form appraisal along with an AVM-none of which are ever seen by the borrowers who ultimately pay for them. Yet, says NAR Appraisal Committee head Frank K. Gregoire, these "different valuations frequently come up with different conclusions." One method, to cite a hypothetical case, might value a house at $150,000. A second might indicate the property is worth $155,000. A third might peg the true market value at $144,000. "Realtors and their clients often do not fully understand the purpose of the appraisal or value estimate," says an NAR Appraisal Committee report. "Buyer's agents often make offers contingent upon an acceptable appraisal unaware that the mortgage lender may be relying on an alternative valuation product which is not an appraisal. Often, when an initial estimate or opinion of value does not support the sales price or the value needed to support the loan or terms quoted by the lender, additional estimates and opinions of value are solicited by the lender or originator. "These are often concealed from the borrower and the agent," says the Appraisal Committee. Part of the purpose of the new, full disclosure recommendation by the NAR is to remind home buyers and Realtors of the "safety, security and utility" of a full, traditional appraisal performed by a state-licensed or certified appraiser. A professional appraisal--far more so than an AVM--"may be useful to buyers in assuring them of the validity of the price paid for the property, securing the proper amount of (hazard) insurance, as well as in estate and tax planning," says the Appraisal Committee. "After the purchase, a (property valuation) estimate derived by an alternative method is of no use to the borrower." Another purpose of the new NAR resolution: to eliminate the problem of marked-up appraisal charges on buyers' settlement sheets--a $350 charge, for instance, when the lender made the loan using a $20 AVM. With full disclosure, says Gregoire, buyers "will know what they really need to know" about how their home was appraised--if indeed an appraisal was performed. LETTER TO THE EDITOR--REAL ESTATE VALUATION--MARCH/APRIL 2002 Dear Editor: I have read many recent articles about Automated Valuation Models (AVMs) and the pros and cons associated with this process. What I haven't heard or read from, is the professionals that currently use this process, the Assessors. AVMs are a tool that has been used for years by assessment professionals. It is a tool that should not be taken in a lighthearted manner. Misapplication of one or two variables can produce a misleading estimate and it is a tool that involves training to properly use. It also requires tremendous intellectual honesty to use this system of valuation. It normally takes the staff of my office two years of intense training before they fully understand and can use this complex system of valuation with ease. The mistaken notion that you plug in all the sales and punch out the "average" answer is far from the truth. In the wrong hands, this system is going to cost the American people, just like the S & L bail out, hundreds of millions of dollars. I would suggest a series of courses now offered by IAAO on Residential Modeling and using SPSS to measure value. A word of caution: remember that AVMs are an assessment tool to value mass quantities of properties; this process was never designed to do single point valuation. Anthony J. Martinez, IFAS Yavapai County Assessor back |
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