June 23rd 2010
The Wall Street Journal
Changes Backed by Cuomo Target Inflated Property Values; Critics Complain Sales Can Be Derailed
The ink had just dried on a contract last month for the sale of a two-bedroom Harlem apartment when real-estate agent Charlie Lewis got the bad news: The co-op at Ellington on the Park was appraised at a value around 15% below the agreed-on sales price.
An appraisal that low usually meant one thing—the planned sale would go bust. But Mr. Lewis of Warburg Realty Partners says he appealed to the lender, arguing that the apartment was compared with those in older buildings, that its outdoor space wasn’t given enough consideration, and that the appraiser from outside the city had misconceptions about Harlem prices.
“We knew something was wrong,” Mr. Lewis recalls. The bank agreed to send another appraiser, who valued the apartment at close to the contract price. Mr. Lewis says the deal is expected to close soon.
Not every broker has been that lucky. Since changes adopted a year ago in the way appraisers are appointed, New York real-estate agents have been complaining about an influx of outsiders who don’t understand the intricacies of Manhattan real estate and have repeatedly low-balled prices in their appraisals.
Under the new industrywide rules, mortgage brokers, real-estate agents and loan officers are banned from choosing their own appraisers. The result has been an increase in the use of out-of-town appraisers and—brokers and developers say—a greater likelihood of lower-than-expected property estimates that can put agreed-upon sales deals at risk.
“It’s gone from a very smooth process to a bumpy one,” says Ron Moelis, chief executive officer for L + M Development Partners, a New York firm that specializes in affordable housing benefiting from government subsidies and tax abatements.
He says that out-of-town appraisers can’t get up to speed quickly enough on the city’s complex regulatory environment, leading to repeat appraisals and a few deals falling through.
The new rules went into effect in May 2009 after they were adopted by Fannie Mae and Freddie Mac as part of a settlement with the New York Attorney General Andrew Cuomo’s office, which was examining their appraisal process.
John Milgrim, a spokesman for the attorney general’s office, said Fannie Mae and Freddie Mac have found that the code “has protected home buyers and has improved the independence of appraisers by reducing opportunities for fraud [and] protecting consumers in the mortgage process.”
But many in the real-estate industry dislike the new appraisal rules. House and Senate negotiators on Tuesday appeared likely to roll back at least some of these new appraisal rules, known as the Home Valuation Code of Conduct, as part of a federal financial-overhaul bill.
The new appraisal rules are in effect nationally, but real-estate professionals say the impact has been particularly acute in New York, where appraisals can vary widely from block to block and many individual properties are unique.
Measuring an apartment’s square footage is straightforward, but determining how much value to assign to a partial park view or how much renovations will likely cost can require local knowledge, brokers say.
Some think the brokerage industry brought this on itself. Appraisals are supposed to offer an unbiased assessment of a home’s value to protect a buyer from overpaying and banks from making risky loans. It’s widely believed that inflated appraisals contributed to the housing bubble when loan officers or brokers selected friendly appraisers in hopes of getting a high enough valuation to close a deal.
Even so, many New York real-estate professionals complain that the solution has created its own set of problems. While the new code permits banks to set up internal controls for selecting an appraiser, most larger lenders have opted instead to farm the choice out to an appraisal-management company. These companies—which are often owned by large banks—select their own roster of appraisers.
“These management companies often decide who to pick based on who will work for the lowest fees,” says Michael Vargas, principal at the New York City-based Vanderbilt Appraisal Co. “That doesn’t foster the highest quality appraisals.”
Jeff Schurman, executive director of the Title/Appraiser Vendor Management Association, a national trade group that represents appraisal-management companies, disagrees.
“An appraiser has to decide if he knows the area and has the data sources to do it,” he says. “An appraisal-management company won’t continue to use an appraiser if it’s not getting quality.”