Home appraisals – the source of considerable mortgage-related stress during the acute phase of the housing crisis – could create a formidable speed bump as the housing sector starts to recover.

Low appraisals – where the home's appraised value is less than the sales price – are causing deals to fall through, Bloomberg News reported Wednesday, as banks and other lenders shy from issuing mortgages for homes that don't have appraisals that approximate their sales price.

Lawrence Yun, chief economist for the National Association of Realtors, told the Baltimore Business Journal Wednesday the appraisal problem is capable of hampering a housing sector recovery.

"Lenders are using appraisers who might not be familiar with a neighborhood, or who compare traditional homes with distressed and discounted sales," Yun said. "In the past month, stories of appraisal problems have been snowballing from across the country with many contracts falling through at the last moment."

New era for appraisals

Lenders that sell loans to mortgage purchasers Fannie Mae (FNM) and Freddie Mac (FRE) agreed to establish new rules for home appraisals to prevent improper tactics or 'creative appraisals' - past practices that many economists and housing sector analysts believe helped create the problematic U.S. 2003-2007 housing bubble.

Lenders agreed to the new mortgage rules in an agreement struck with U.S. Attorney General Andrew Cuomo, after Cuomo's office found that appraisers inflated values under pressure from banks and other mortgage lenders. Those new rules require lenders to order a second appraisal on 10 percent of the loans they sell to Fannie and Freddie, and warns against accepting the higher of two valuations.

A reverse effect?

The new rules are intended to rein-in a segment of the lending process that many believe was subject to pressures to inflate home values. The problem is, however, "they may be having the reverse effect, by being too conservative," so says economist Peter Dawson, whose specializations include residential real estate.

Here's one example: a 3-bedroom house in White Plains, N.Y. is listed at $550,000, the seller accepts a $500,000 offer in June, but the home appraisal comes back at $415,000, in part due to an increase in home foreclosures in the area and a glut of unsold, comparable homes. The deal then falls through, due to lack of lender commitment. "In this market, the buyer's offer means nothing unless it's in cash. And that's hurting home sale activity and home prices," Dawson said.

Housing Analysis: The view from here argues that if the stock market's rhythm of a panic sell (fear) correcting a speculative bubble (greed) applies to the housing sector, look for home appraisals to tend toward the conservative side, moving forward, at least until we have a sustained U.S. economic recovery underway.

Further, the realist would say more rigorous, conservative home appraisals are overdue and are necessary and appropriate, given the excesses of the previous housing bubble, and their argument is compelling. But investors should also understand that these rigorous appraisals – in some cases low appraisals - will serve as another drag on the sector, hurting sales, and further delaying the recovery of a sector that's also battling a high inventory of unsold homes and the nation's highest unemployment rate in a generation.

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