A new federal rule could give millions of homebuyers insights they’ve never had before about a crucial element of their mortgage application: the appraisal, including the electronic cross-checks and reviews now used by lenders to determine the amount of the loan they’ll approve.
The new rule will also give buyers the time and ammunition to challenge appraisals they suspect contain errors. Starting this weekend, lenders nationwide will be required to inform mortgage applicants that they can receive a free copy of whatever appraisals, reviews, computer valuations and other data are used in the transaction. You’ll be entitled to see this material “promptly” after the appraisal report is completed, or three days before your loan closes, whichever is earlier. The lender will have to inform you of your new rights within three business days after receipt of your mortgage application.
This contrasts with the current system, where lenders don’t have to provide you a copy of the appraisal unless you request it. The additional valuation data — which may include follow-up review appraisals by a second appraiser, multiple “automated” valuations and “broker price opinions” provided at low cost by realty agents — currently are not subject to disclosure, even though they may have played a role in the final decision on your loan.
Now everything will be mandatory. You’ve got to be provided any significant information that was integral to the valuation of the property, even if you had no idea it existed and didn’t ask to see it.
The new rule implements changes to the Equal Credit Opportunity Act made by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. It will be overseen by the Consumer Financial Protection Bureau. Unlike earlier rules, the disclosure requirements will be limited to mortgages that are first liens on a home, including reverse mortgages and construction loans. If you’re applying for a second mortgage or second-lien home equity credit line, the bank will not have to provide you appraisal materials, although you are still free to ask.
So what might this mean to you in practical terms? Potentially plenty. Say your appraiser works for a management firm that uses low-cost, inexperienced appraisers. By chance it turns out that your appraiser lives 80 miles away and is not familiar with local real estate trends. Then the valuation comes in low because the appraiser used inappropriate “comparable” properties, including a house that sold at a depressed price because the owners were in financial distress.
Under the new rule, your lender will have to send you a copy of the full appraisal report, soon after receiving and reviewing it, including exhibits and attachments. Alerted early on, you, your realty agent and other advisers should have time to spot errors and then challenge the validity of the appraisal and demand corrections.
Among the questions you might ask: Why did the appraiser select one or more comparables that bear minimal resemblance — lot size, square footage of the house, age, location, view, interior improvements — to the house you’re buying? Why were the physical dimensions of the property inaccurately measured? Why did the appraiser add no extra valuation credit for the solar panels on the roof and the extensive energy-conserving equipment throughout the house? Why didn’t an underwriter or review appraiser hired by the lender flag foul-ups like these?
For their part, experienced appraisers generally welcome the new mandatory transparency for consumers. Some of them have fought for years against lender overreliance on poorly trained appraisers who receive only a modest portion of the $450 to $500 that lenders charge consumers at settlement. The rest goes to the management company and some portion may be pocketed by the lender itself.
“I am thrilled,” says Pat Turner, a senior residential appraiser in the Richmond, Va., area, “to have my appraisal stuck beside an [automated valuation] or a broker price opinion,” which will now be mandatory. “Let everyone see the clear distinction of time, effort, expertise and accuracy of a truly professional appraisal.”
But there’s some potential quicksand for unwary borrowers. The rule allows you to waive your right to receive your appraisal materials early on, and instead get them on the day of the closing.
That’s not a smart move. Why give up your guaranteed opportunity to carefully review the appraisal shortly after it’s completed — when you can do something about errors — rather than rush through it during a paper blitz when your eyes are glazed over?
Kenneth Harney is executive director of the National Real Estate Development Center.