Lately, sale agreements have been cancelled because the property appraised for less than the contract price. The buyer is unwilling or cannot put more money down for fear of overpaying in a percieved down market and the seller has already lost so much percieved value that the seller will not lower the price. The result is that the sale falls apart.

In some cases, the appraiser is not the cause. Fannie Mae and Freddie Mac purchase about half of all U.S. mortgages. If Fannie Mae, who buys the loans from the banks, finds banks are found guilty of price inflation, they force the banks to buy back the mortgage at a substantial cost. But if banks drop the appraisal value, they hope to avoid being accused or suspected of inflating the numbers.

Many lenders today will double-check an appraiser’s work by ordering a low-cost electronic valuation. These automated valuation systems only use public records and take no consideration to condition of the property and upgrades. If the electronic version is lower than the physical version, the banks will downgrade the true appraisal value to protect themselves. The result is that bank’s underwriters arbitrarily have been shaving value off the Buyer’s appraisal. At other times, the bank’s underwriters will ask the appraiser to explain the price difference, which can delay the closing.

Effective September 1st, banks selling their loans to Fannie Mae can no longer simply drop the appraisal value. In guidance issued June 30, Fannie Mae told it’s participating lenders that they must contact the appraiser to “resolve” disagreements. If that fails, banks must order a second appraisal and not rely on the automated software to determine the value. So now the banks cannot simply drop the original value that supports a sales contract.