Mary Schemm has never had to work so hard to close deals.
The Cheektowaga real estate broker for Realty USA has been selling homes for more than three decades, so she's seen plenty of challenging sales. Sometimes it requires extra efforts to iron out wrinkles.
But in just the last few months, she's had four situations in which the appraisals on a home didn't match what the buyer and seller had agreed to. And strict new rules designed to eliminate pressure and undue influence on appraisers mean the problems couldn't be resolved as easily as in the past.
Ultimately, Schemm was able to justify the sale price in one case. But the appraiser wouldn't budge on the others. One deal fell through, another buyer came up with more money, and the fourth got a home for $11,000 less than agreed to.
"I've been doing this for 32 years, and I've never had four that didn't appraise in a period like this," Schemm said. "It's definitely much tighter."
Realtors and lenders say new appraisal rules, forced on the industry by State Attorney General Andrew M. Cuomo, are slowing down the sales and mortgage process, hindering deals that used to sail through.
The new requirements hold appraisers to higher standards, and severely restrict contact between them and lenders to prevent fraud.
And appraisers aren't taking chances, opting for more conservative valuations of homes with no leeway, not even to accommodate seller financing desired by both parties to the deal.
"The appraisers are being very close to the cost," said Miriam Treger, a branch manager for RealtyUSA. "Part of what a house is worth is what somebody is willing to pay for it. If a house is worth $130,000, is it worth $132,000?"
As a result, what was once considered too easy -- getting a higher sales price or loan amount approved than what a house was originally appraised for -- can now be quite difficult.
That has meant brokers must either produce more information or "comparable sales" examples for appraisers, or work with buyers and sellers to renegotiate deals, as Schemm did.
"It's really slowed down the whole entire process, and sometimes properties are having to be reviewed two or three times," said Susan Lenahan, a leading real estate broker in Buffalo for MJ Peterson. "They take a whole lot longer. They have to be reinspected. And when you have multiple properties involved, like in a chain, people are really put out."
Brokers and lenders agree that the changes were necessary after the mortgage and housing crisis exposed the shenanigans of the past. But they say the changes may have gone too far in the other direction. "It's just too stringent," Schemm said.
"It will never go back to the way it was, which is good," Lenahan said. "But it's really a problem for good, honest people."
But some appraisers say nothing's really changed. "Do we still get appraisal requests that have values on them? Yes. Do they still want us to target certain numbers? Absolutely," said Ted Catalano, senior appraiser for Independent Appraisal Service in Kenmore. "So even though there's not supposed to be any contact, the pressure's still pretty intense."
>Easing the pressure
The new rules, known as the Home Valuation Code of Conduct (HVCC), were put into place last year to assure the independence of appraisers and protect them from improper influence by mortgage brokers, lenders and others with a financial interest in a deal.
That's in response to a serious concern by Cuomo and other regulators that such pressure on appraisers to agree to a particular home valuation helped support or fuel the real estate bubble by inflating prices.
"The HVCC was meant to eliminate the pressure on appraisers to hit certain values," said Thomas Kirchmeyer, president of appraisal firm Kirchmeyer & Associates. "Why would the lender want to risk approving a loan on a property that's not worth what it sold for?"
Critics say that kind of influence was rampant in the industry for years. And it drove rash or speculative lending, while contributing to predatory or even fraudulent practices.
In fact, Cuomo sued mortgage information and research company First American and its appraisal subsidiary, accusing them of knowingly caving in to pressure from Washington Mutual to use appraisers who inflated home values to support loans. The suit said First American wanted more business.
"Appraisers that always gave the lender what they wanted would get most of the work," Kirchmeyer said. "How do you think we got into this foreclosure mess in the first place?"
So in March 2008, following a year-long investigation into mortgage fraud, Cuomo teamed up with a federal regulatory agency to force mortgage finance giants Fannie Mae and Freddie Mac to agree to only buy loans from banks that meet certain standards.
Those standards mandated adherence to the appraisal code of conduct, which was revised before it went into effect in May 2009. It applies only to non-government-insured single-family mortgage loans. But since the two "government-sponsored enterprises" buy at least 60 percent of all mortgages made in this country, that agreement effectively changed the entire industry.
Also, the Federal Housing Administration is applying the code to FHA loans, as of Jan. 1.
"I believe it's been very constructive," said Robert L. Vacanti, president of Northeastern Appraisal Associates in Williamsville, a large national appraisal firm that has more than 2,000 appraisers in all 50 states within its network. "Anytime there's a fire wall and anytime there is something that ensures appraiser independence, there's less pressure on the appraiser."
At its core, the code bars anyone tied to the lender from influencing or trying to influence an appraisal by withholding payment or future business, threatening to do so, or promising future business or payments depending on the valuations reached. Lenders also can't provide stock or other benefits to appraisers.
It also prohibits lenders from asking for or providing a particular value to be reached, or providing estimated values or comparable sales, though they can provide a copy of the contract.
"It's all to protect the interest of the lender and ultimately the consumer," Kirchmeyer said. "Now, the order cannot even have an estimated value or target amount for the appraiser to see, resulting in a true unbiased opinion of value."
But more broadly, individual loan officers and mortgage brokers, who may benefit financially from the loan sale, are no longer allowed to even choose, hire, pay, or communicate directly with appraisers.
Real estate agents also cannot choose, retain or compensate appraisers, but they can talk to them to provide information or address problems.
"There was a time when we could just tell the appraiser what we wanted and they could make it happen," said Mary Certo, another RealtyUSA broker. "Now, in light of everything that has happened in the lending arena, we do not speak to them unless there is a problem."
Instead, the lender must hire appraisers through either separate, non-commissioned staff with no connection to the sale of the loan, or through the use of independent, third-party appraisal management companies. Such companies act as middlemen, taking contracts from lenders and farming them out at random to individual appraisers around the country.
"Nobody that has a stake in the outcome of an appraisal can place the order," Kirchmeyer said.
>New industry emerges
That has resulted in the rapid growth of a whole new industry and a rush by appraisers to ensure they would stay relevant. Many large appraisal firms, like Northeastern and Kirchmeyer, even started their own management companies. So not only do they do the actual appraisals in their local areas, but they also manage appraisal assignments for an array of lenders, assigning the work both to their own staff as well as through regional or nationwide networks.
"We decide who the order goes to, not the lender," Kirchmeyer said.
Management firms say that makes for a more efficient system. "I think it's much more effective than it has been in the past," Vacanti said. "The bank can communicate with us directly and not chase several hundred appraisers."
But it has its own complications. For one thing, working through a middleman means it takes longer to get information to the appraiser. "Closings are tending to take a little bit longer, and agents are working very hard to get deals to the closing table," Riordan said. "There's more obstacles, more hurdles and more time spent."
>A lack of familiarity
And many lenders now outsource their appraisal work to a single national management firm from out of town, who in turn is not always familiar with individual markets and variations from city to city. "If you have a large national company coming into an area where they don't know the marketplace, it could be a nightmare," said Brooke Anderson-Tompkins, president of 1st Priority Mortgage, a division of RealtyUSA.
Regulators attempted to address that over the summer, requiring that the appraisers have clear experience in the geographic area in which they are working. But there are still significant variations within counties or even within cities.
"It's a problem for us that some of the appraisers aren't as familiar with the area," Treger said. "Each neighborhood, especially in Western New York, has its own characteristics and traits."
"In the city, things can change very rapidly, block to block. You really need someone who's very knowledgeable," said Tim Riordan, an associate broker at MJ Peterson. "We're getting appraisers from as far away as Pendleton and Java who aren't as intimately familiar with city neighborhoods."
Lenahan said she's had an experience with one out-of-town lender that saw the disaster declaration for Erie County stemming from the flooding in Gowanda. As a result, she said, all properties with that lender had to be reinspected. "They think that the city of Buffalo is Gowanda," she said.
Also hindering the process is a newer requirement that appraisers use more recent comparable sales, from within the last three months. That's fine in large markets with lots of sales, but critics say it doesn't work as well in areas where the volume of activity is less, especially if the property itself is unique.
That's why real estate brokers defend their desire to provide appraisers with more information, especially comparable sales they feel are appropriate and valid comparisons.
"We certainly understand there was too many problems with banks being in cahoots with appraisers. We don't want that at all," Treger said. "It's just a matter of being able to prove the value, not ask for a favor."