Why appraisals will be the problem for refis

I received a ton of responses to my tweet yesterday afternoon that said this: Obama wants refis - the new problem will be appraisals, mark my words. Allow me to explain this in more than 140 characters.

It started by me reading this article in WSJ in which Obama is pushing for refinancing, stating that people should refinance as rates are low and they could save into the thousands per month. I guess it actually started before reading that article as I'm in the processing of refinancing and have needed to go through multiple appraisers to get one that would actually recognize the true value of my home; the only reason I was able to find one is because a house around the corner from me sold at true market value in the last few days and it dragged the comps for the neighborhood up.

Here's the real issue: appraisers were a big part of the mortgage problem. I remember going through a number of purchases and refis where appraisers literally would ask for the amount the appraisal needed to be and would do "drive-by" appraisals without ever setting foot in the house. Now appraisers are under the gun from lenders and legislators and they are running scared. The guy that finally did my appraisal correctly took about 45 minutes during which time he measured the entire exterior of my house, measured the yard, measured every room, diagrammed the inside of the house, and shot digital pictures of all the improvements. As my friend in commercial real estate said, "Ross, he actually did a real appraisal."

The big problem that many homeowners will face as they go to refinance is that appraiser may not be willing to appraise their homes even for the original purchase amount. Imagine if you paid $200K for a house, put in $30K in improvements, needed the appraisal for your refi to be $200K at a minimum, and the appraiser put your home value at $195K, meaning that in order to get the low rate, you would have to bring $5K in principal to the table in order to secure your mortgage.

My mortgage broker told me that, at least in Colorado, they are looking at instituting a process where there is a centralized clearinghouse for appraisers: essentially the broker would call a single number and the clearinghouse randomly assigns an appraiser. In my case, had this been the process, I probably would not have been able to get a good appraisal, at least not until after the other house in my neighborhood had completed its sale.

I'm going to be very interested to see how this plays out because I think that although it is acknowledged that the mortgage origination process if much tougher, appraisals do not seem to have hit the radar yet . . . they will.

Picture from enignot