Appraisal reform to raise overall fees to borrowers

The good new is that reforms for the appraisal of residential properties will increase the objectivity of the process. The bad news is that it's going to cost borrowers more, mostly because a new appraisal will be required for each application, which mortgage brokers say will make them less competitive because they often submit to multiple lenders. But change may be on the horizon in terms of technology, with a start-up firm proposing to create a database of existing appraisals much like the business model for credit reporting bureaus. From a CNNMoney.com story:

In a recent agreement with New York State Attorney General Andrew Cuomo, Fannie Mae (FNM) and Freddie Mac (FRE, Fortune 500) pledged that they will only buy mortgages from lenders that use independent appraisers. Since these two companies account for more than 70% of all mortgage loans, virtually all lenders will comply with the guidelines.

Inflated home appraisals were a big part of what helped fuel the current housing bubble. For years, appraisers were pressured by mortgage originators, real estate agents, home sellers and borrowers to over-value the homes they appraised....

But while eliminating mortgage fraud will be good for the real estate market in the long haul, this reform will come at a cost to consumers.

Right now, mortgage brokers need just one appraisal for each deal. The broker can then include it with applications to as many lenders as they'd like.

But beginning in 2009, brokers won't be permitted to do that. A different appraisal will have to be ordered by each lender that a borrower applies to. That cost is then passed along to the applicant...

Mortgage brokers could avoid multiple appraisal fees by applying to just one lender at a time; if the first lender approves the loan, then the borrower won't need to pay for any more appraisals.

But submitting applications one at a time can take a lot of time, and some consumers could lose the lower interest rates they had locked in for 30 days.

So while previously the appraisal process might cost buyers about $400, it could end up costing anyone who needs to shop around for a deal - perhaps half of all buyers - as much as $1,000-$2,000.

Mortgage brokers also fear the Cuomo pact will drive borrowers to deal directly with lenders, putting some brokers out of business. They say that will eventually drive up borrowing costs by shrinking competition...

Thomas Inserra, an appraiser and CEO of Zaio, which is creating a national database of home evaluations, and who has testified about appraisal abuse before Congress, has what he considers the most comprehensive and elegant solution of all.

He thinks appraisals should be handled like credit reports, with all home values stored in a giant database that can't be altered by any of the parties in a transaction. This, he said, would ensure accuracy and transparency.

House values would only change only as market conditions dictated or with physical alterations of properties. And, it would be fast.

"By storing compliant appraisals in a database like a credit bureau stores credit scores, Zaio is now delivering appraisals to lenders in seconds rather than the normal five to seven days," said Inserra.

And THAT, in my opinion, is a great idea.