Federal law could jumble NYC appraisals

A federal law that will soon bump up the involvement of appraisal management companies nationwide could have a negative impact on the accuracy of valuations in the New York City housing market, local appraisal experts told The Real Deal.

In order to curb pressure put on appraisers by lenders or mortgage brokers to “hit the number,” or price a home to ensure a loan will be approved, federal legislation coming into effect May 1 will require lenders who wish to sell their mortgages to Fannie Mae to comply with a Home Valuation Code of Conduct. The code was approved to ensure the independence of appraisers, and it calls for third-party firms, called appraisal management companies (AMCs), to oversee more of the hiring of appraisers, on behalf of lenders. The rules apply to non-government-insured single-family mortgage loans originated on or after May 1.

Click here to see PDF of Home Valuation Code of Conduct

New York City appraisal experts Jonathan Miller, CEO of Miller Samuel, and Jeffrey Jackson, cofounder of appraisal firm Mitchell, Maxwell & Jackson, both contend that an increase in the use of AMCs in the Manhattan market is likely to drive up the number of appraisals done here by appraisers from outside the city who are unfamiliar with the market, which in turn will cause more erratic valuations.

“Intrinsically, there’s a higher degree of uncertainty [in Manhattan], unless you have tremendous experience and data,” Jackson says. “The problem is that anybody with a state-issued appraisal license has the exact same level of qualification to appraise here, whether they live in New York or Buffalo or Albany or Rockland County”  

An AMC typically gets paid a flat fee by the lending institution, often between $500 and $600, and keeps the difference between that fee and the cost of the appraisal, which is often half the price of the fee or lower. This system encourages a business model whereby the AMC seeks the lowest cost appraisers qualified for the valuation.

Jackson points to several complications of the Manhattan market that could cause outside appraisers to miss the mark in either direction, including the absence of a multiple listing system, the lack of fully disclosed financial information in co-op-owned buildings, and the vast fluctuation in prices between nearby properties that, due to their proximity and similarity on paper, would be considered “comparables” to somebody not familiar with the Manhattan market.

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Jackson cites the example of two Upper East Side co-ops that are two blocks away from each other: 740 Park Avenue and 190 East 72nd Street.  

“Within all defining characteristics, [to an outsider] they are similar properties in the same zip code,” he said. “But if you know the two buildings, 740 Park is $2,000 to $4,000 per square foot, and the other one is $1,000 to $2,000 per square foot.”  

Jackson added: “There are very few appraisers in New York who do have the expertise, and the research, technology and databases required” to make accurate appraisals here.

Miller, who likely falls into that slim demographic, also says the new code will likely increase the randomness of evaluations in the city, jokingly referring to the new HVCC as simply “havoc.”  

“[After May 1], you’re going to have a much lower level of competence, with appraisals all over the map,” Miller said. “In my professional experience, the majority of product [reported through] AMCs is not worth the paper it’s printed on.”