No More ‘Drive-By’ Appraisals—On Some Loans
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No More ‘Drive-By’ Appraisals – On Some Loans
During the housing market’s go-go years, the practice of “drive-by” appraisals, in which property appraisers didn’t physically inspect the interior of a home, was commonplace.
It’s since become far less so, as mortgage lenders remain extremely cautious about the loans they are making. They want to make sure that they have an independent estimate of the market value of a home, so it stands to reason that an appraiser should actually take a look at the home’s interior. Most of the complaints about the appraisal industry these days are of a different nature – that appraisers are too conservative about how they value homes.
Rules proposed by federal regulators on Wednesday would ban the practice of “drive-by” appraisals and require a physical inspection of the home. But the rules, required by the Dodd-Frank financial overhaul of 2010, would only apply to a small slice of the mortgage market – loans defined by regulators as “higher risk.”
Regulators define high risk ones in which the rate is at least 1.5 percentage points above a market average.
However, lenders don’t make many loans above this threshold: In 2010, the most recent year for which data are available, such high-risk loans made up only 3.2% of the overall lending market, according to the Federal Reserve.
The regulators, including the Fed and Consumer Financial Protection Bureau, also said they aim to combat fraudulent property flipping schemes in which a developer buys a property, makes minimal repairs and tries to sell it at an inflated price. In an effort to combat this property flipping, the regulators propose to require lenders making higher-rate mortgages to obtain an additional appraisal at no cost to the borrower.
An appraisal exists to protect a lender; it is different from a home inspection done on the borrower’s behalf to see if there are any needed repairs before closing.
Separately, the consumer bureau proposed that lenders should be required to provide consumers a free copy of their appraisal no later than three days before the property sale closes.
That proposal, another Dodd-Frank requirement, has become standard practice around the appraisal industry in recent years, said Bill Garber, director of government and external relations for the Appraisal Institute, an industry trade group. Until around 2008, lenders didn’t provide a copy of an appraisal to borrowers unless they received a written request, but new standards for the industry changed that practice. Alan Zibel
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