"Fed" to Appraisers and Lenders, "No More Funny Stuff"

What's the big deal if the appraisal on the house you're buying is (or isn't) precisely accurate? A pretty big deal. Especially if your home's valuation has been inflated to hit the contract price - an all too common occurrence, according to some appraisers. You could end up with a mortgage that's larger than the resale value of your home. Or, what if the appraiser ignores some significant value-depressing features? You could end up facing thousands of dollars of unexpected repair bills.

The issue has drawn the attention of the federal government, which has set some new tough rules and stiff financial penalties for appraisers and lenders who fail to play by them.

Despite the fact that the new policy applies only to appraisals made on Federal Housing Administration (FHA) mortgages, its ripple effect may become helpful to home buyers throughout the marketplace.

No More Pressure or Cahoots!

The government's action affects not only appraisers but also the lenders who hire them, according to Housing Secretary Alphonso Jackson. If a lender was aware that an appraisal was inaccurate or that a particular appraiser might be inclined to inflate a valuation, the lender will be subject to potential sanctions and stiff fines. If the appraisal was part of a larger effort to defraud the government, anyone involved could end up in prison.

Lender pressure on appraisers to 'hit the number', so to speak, or inflate a home's valuation, is pervasive in the industry, according to experts. Appraisers who don't cooperate with such lenders may get no more business with them, so they can feel pressured to play along with the lenders' game.

FHA mortgages have been especially vulnerable to appraisal tweaking because they typically involve first-time home buyers making small down payments. But, even a modest 'push' in the appraisal can put a first time buyer at risk for having to sell at a loss in the event of unexpected financial difficulties.

And, what if an appraisal overlooks structural problems, for example? It could leave the unsuspecting buyers with sky-high repair bills they cannot afford to pay.

Appraisal industry activists call the government's action welcome and timely, as property value growth rates are expected to slow. What has been a serious, if little-known consumer problem may be curtailed as a result.