Second Appraisals No Longer Required for High Dollar FHA Loans
Realtors and lenders celebrate the death of the dreaded second appraisal rule.
Until recently, FHA loans in excess of $417,000 in declining market areas required two appraisals, regardless of whether they were for purchases or refinances. This practice was troublesome in the Santa Clarita area, since often the second appraiser was less experienced and less local than the first appraiser was.
Thankfully, FHA Mortgagee Letter 2008-09, Second Appraisal Requirements, has been rescinded in its entirety as of November 18, 2009. This applies to new purchases, refinances and cash-out refinances of homes in what the FHA considers to be declining market areas.
Second appraisals are still required for suspected property flipping as defined in FHA Mortgagee Letter 2006-14, Property Flipping Prohibition Amendment. In this ruling, the FHA requires a second appraisal when a property is resold between 91 and 180 days following acquisition by the seller, if the resale price is 100 percent (or more) higher than the price paid by the seller when the property was acquired. Or, in other words, if the homes is resold for a profit. Rehab and other fix-up costs may be considered for the appraisal if submitted by the lender.
So, what is a declining market area? Nobody seems to know for sure, as there aren’t any clearly established guidelines. It’s up to the appraiser to decide, and often the appraisers are more concerned about covering their fannies (CYA) than they are about giving an accurate picture of the property’s value. Until this new FHA ruling, a little checkbox on the appraisal report would send the entire file into mortgage hell, often resulting in the financing being denied.
Santa Clarita Realtor Linda Slocum is a Certified Distressed Property Expert (CDPE) and Certified Residential Specialist (CRS) specializing in Santa Clarita residential real estate and short sales. You can reach her at 661.670.0349 or at Linda@SantaClaritaRealEstateBlog.com. To search for Santa Clarita homes, use our neighborhood search tools or visit HoneyStartPacking.com.
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November 27th, 2009 at 7:27 pm
Ms. Slocum,
Let me play Devils Advocate for a moment. What if the one and only appraisal,that is now going to be the only appraisal, provides an inflated value for a property. The 2nd appraisal provided “check” of the veracity of the first appraisal. Now there won’t be that “check”
Yes, I know there is this issue of appraisers not knowing the market areas in which they are appraising. This is the fault of the Lenders who do not check the qualifications of the appraisers they hire. Now, without the 2nd appraisal “check and balance”, nscrupulous lenders will now be able to “hand-pick” an appraiser to bring the value in that the lender wants.
Is this really an improvement?
Be ready to have FHA tumble like a house of cards. There are so many fradulant loans being put thru FHA that its only a matter of time before FHA has major problems also.
Oh, wait a minute – thats no problem. I forgot, if FHA is going to fail, the Fed will just throw a few trillion dollars at it to prop it up. OK, no problem really!
John C. Carlson
CA Certified General Real Estate Appraiser
Diamond Bar, CA
http://www.jccrea.com
November 28th, 2009 at 8:22 am
John, I respect your concern, but lately the 2nd appraisers in our area have been out-of-towners who didn’t know what they were looking at and manipulated the comps to get the job done quickly. The issue at the moment is not over-inflated appraisals, it’s below-market appraisals done by appraisers who knowingly falsified their data. We’ve had them add square footage to the comps (thus lowering the price per square foot), take comps that were miles away when valid comps were nearby, and create comps out of thin air rather than expanding their scope to include more valid data. If the appraisal industry would take action against this type of appraiser, than we wouldn’t have so much concern about falsified data and out-of-area appraisers, or about the FHA second appraisal.
November 30th, 2009 at 3:31 pm
Ms. Slocum,
Not only do we as the “appraisal industry” have to do something about this, but you, as Agents, and Borrowers, as consumers, have to do somethig about this.
You, as Agents, have to vociferously object to this incompetant work by reporting this fraud, yes this is fraud, to the Office of Real Estate Appraisers @ http://www.orea.ca.gov. You can also make a report to the District Attorney and FBI. When enough reports are received about a single appraiser they are supposed to look into it.
As a group, I would also think about keeping tract of these fraudsters and hiring an Attorney to sue them. I’ve been working with Attorneys for E&O Companies for the past year defending appraisers who have been sued. A growing part of my practice is now working with groups who are going to be prosecuting appraisers.
I would caution you to be sure that fraud is involved before going to war. Again, you want to make sure fraud is involved, not that the 2nd appraiser did a better job than the 1st appraiser. However, from what you posted about adding square footage to the comps and creating comps out of thin air, there seems to be no question that this is fraud.
Ask yourself this question: Why would a 2nd appraiser do this, purposly undervalue a property. It may be that the appraiser is part of a group that is purposly trying to undervalue properties. Delve into this a little deeper and keep me posted. If I can be of help to you, give me a call.
John C. Carlson
CA Certified General Real Estate Appraiser
Diamond Bar, CA
909-861-6186
http://www.jccrea.com
December 15th, 2009 at 11:02 am
John, I really don’t think these appraisers were intentionally undervaluing properties due to some sort of collusion. More likely they were simply being lazy, refused to delve further into the comps for the area, and were non-local so they didn’t know the different development areas.
If these appraisers are falsifying data now, regardless of the reason, that likely means that they’ve been doing this for a long time and have just never been caught before.