Bad news: Appraisal $15K too low

DEAR BERNICE: We are selling our home to a nice young couple for $192,000. Our loan amount is $179,800. We have just enough money to close the transaction and pay off our existing loans. The buyers have 10 percent down and were applying for a 90 percent first. Our agent just called us and said the appraisal came in $15,000 low. She was quite angry. She said that the appraiser normally worked in an area 60 miles from here and had no experience with our area. The comparable sales he used were from a different school district and in a much less desirable area. We don't have any more cash to put into the deal and the buyers don't either. What can we do? Everyone still wants to close. --Chris M.

DEAR CHRIS: Although it may not seem like it, you're lucky that your buyers still want to buy your home. What normally happens when the appraisal comes in low is that the buyers walk away from the deal.

Even in strong markets, getting accurate appraisals can often be difficult. The challenge you are describing may be partially due to recent changes in the law. These new changes are causing tremendous problems for both clients and agents alike.

In the past, a lender might use an in-house appraisal if it planned to keep the loan in its portfolio. If the lender planned to sell the loan, which was usually the case, an independent appraisal was normally required. The lender could call the appraiser directly to place the order.

Because of the financial meltdown and the credit crunch over the last two years, regulators put a new set of rules into play for mortgages slated for purchase or guarantee by Fannie Mae or Freddie Mac.

The new rules, called the Home Valuation Code of Conduct (HVCC), prohibit mortgage brokers originating loans destined for purchase by Fannie and Freddie from ordering appraisals directly. Loan officers working for banks and other lenders must also delegate the process of ordering appraisals to other in-house staff, or go through an appraisal management company.

The code, which went into effect May 1, appears to be creating more problems than it is solving. For example, the appraisal is now tied to the lender rather than the borrower. This is a huge detriment to consumers, because, as in your case, if there is a problem with the appraisal, you may have to start the entire process over with another lender.

The code does not prohibit Realtors and lenders from talking to appraisers -- they can still request that appraisers consider additional data or correct errors in their report. But the system is creating other problems as well.

Agents are complaining that they aren't getting confirmation calls back from appraisers, that the cost of appraisals has increased anywhere from $75 to $100, and the people being assigned to conduct the appraisal are not experienced in the area. Furthermore, under the old system, appraisals could often be done in a matter of days. With the new system, appraisals can take more than a month to complete.

What can you do in your case? There's certainly no harm in trying to figure out if there is a way to come up with additional money to close the transaction. I had one transaction where my clients had a 2-year-old car that was paid off. They put a new loan on the car to close the transaction. The challenge is that increasing your indebtedness can change your qualifying ratios. This could potentially keep you from qualifying. Sometimes it's a matter of selling appliances or having the seller and agents carry a small second mortgage -- I've done this many times and have always been paid on them. ...CONTINUED

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