New rules by Fannie Mae prohibit its lenders from altering appraisals

WASHINGTON - Picture this: You've signed a contract to sell your house. Your buyers say they are approved for their mortgage. But then the appraisal comes in $25,000 to $50,000 under what was agreed in the contract.

The lender insists on cutting the mortgage amount to reflect the lower appraised value. You refuse to negotiate anywhere near the price indicated by the appraisal, and suddenly the deal is off.

Home builders, realty agents, and appraisers say this scenario is not unusual in many markets across the country.

Lenders may be lowering the numbers on appraisals in an effort to avoid accusations that the loans they sell to giant investors Fannie Mae or Freddie Mac are based on inflated appraisals - even slightly inflated.

Frank K. Gregoire of St. Petersburg, Fla., vice chairman of the National Association of Realtors' appraisal committee, said large numbers of legitimate home sales have been "sabotaged by lenders and underwriters arbitrarily reducing the value estimate" provided by the appraiser.

Typically, he said, the lender orders a low-cost electronic valuation based on publicly available statistical data with no on-site inspections to review the accuracy of what was submitted by the appraiser.

If a discrepancy exists between what the computer says and the appraiser's report, the lender's underwriters sometimes cut the number, even if this means knocking the real estate transaction off track.

But this may be about to change. Effective Sept. 1, Fannie Mae is prohibiting lenders who sell it loans from changing appraisers' numbers.

In guidance issued June 30, Fannie Mae said lenders must contact appraisers to "resolve" any disagreements about the valuation. If that's not possible, they should order a second appraisal - not just chop the value supporting the real estate contract.

Pat Turner, an appraiser in Richmond, Va., said the new requirement "is great news for consumers" because loan underwriters hundreds of miles from the property "no longer will be able to change the appraiser's valuation" simply because they pulled a lower number off a computer.

Fannie Mae's new guidelines also attempt to clarify other issues that have arisen during the past year, including widespread use of inexperienced appraisers unfamiliar with local market conditions.

Realtors, builders, and mortgage brokers have complained to Congress that rules adopted by Fannie Mae and Freddie Mac in 2009 encouraged lenders to use "appraisal management" companies to value properties.

Those companies, in turn, often pay appraisers deeply discounted fees - half off traditional prevailing rates in some cases - and require them to complete their assignments far more rapidly than normal turnaround times.

Fannie's letter attempts to clarify its "appraiser selection" standards. Tops on the list: Appraisers should be experienced and "have the requisite knowledge" about local market conditions, plus access to all local data sources. Fannie also emphasized that the demonstrated experience of an appraiser should always trump fees or turnaround times.

Asked whether Freddie Mac plans to issue similar rules on appraisal quality standards, a spokesman said, "We're definitely looking at it."