Mortgages & Creative Financing

Fannie Mae Outlaws Appraisal Cutting

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23 Articles Written

I didn’t realize that underwriters cutting appraisals was still a problem.  I mean, I remember it being a big deal when it seemed that everyone I knew wanted to refinance and take their equity out to spend on whatever they wanted.

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But I thought those days were long gone.

Turns out maybe not.

It must still be happening because recently Fannie Mae came out and announced that they are outlawing the practice of appraisal cutting by underwriters.

Appraisal Cutting – How The Game Works

A typical example that shows how appraisal-cutting game works might look like this:

Joe Homeowner wants to refinance his house and take cash out.

  • He gets an appraisal done and the appraised value of the property is established by the appraised value of $200,000.
  • Old loan payoff + fees for refinance = $110,000.
  • 85% of $200,000 = $170,000
  • $170k – $110k = $60 available for cash / debt consolidation / whatever

The deal is put together by the loan officer and turned into underwriting. The underwriter might look at the deal and decide (for whatever reason) that they don’t like the appraised value and somehow decide that the property is really only worth $190,000.

So because the new underwriter said so, the appraised value of the property is now $190,000.

What does that mean to Joe Homeowner who thinks that he is going to get $60,000 in cash to do whatever he wants with?

It means that the new calculation looks like this:

  • $190,000 x 85% = 161,500
  • $161,500 – $110,000 = 51,500
  • $51,500 < $60,000 by $8,500.

So just because the underwriter had a hunch/feeling/idea that the property should be worth less than what the appraiser thought Joe Homeowner gets $8,500 less than he thought he would get.

Appraisal cutting.  It is a good thing it doesn’t happen anymore – there were quite a few surprised Joe Homeowners when they got less than they thought they would.

    Aaron Norris
    Replied over 9 years ago
    This made investing in the Inland Empire very difficult in 2009 for us and our hard money clients. We’d get 6 offers at asking price (we always price very realistically) and the review appraisal would come in really low. AND, appraisers were so worried about being black listed, they became super conservative as well. Horrible mix. I’ve had several fights right here on BP about the definition of market value but I think fully informed buyers choosing your home should count for something. Some of these banks really hurt themselves by cutting appraisals in 2009. By the way, this was before the appraisal game where buyers would come in high knowing the appraisal would get cut in escrow. These appraisal issues are what started it. How many of you had to deal with that one!?
    Jay Jay
    Replied over 9 years ago
    I don’t understand how appraisal cutting is a problem. We got into trouble from lending people too much money before, now they want to outlaw the practice of being conservative? We need to abolish the GSEs.
    Edwin Brown
    Replied over 9 years ago
    Appraisal cutting was a problem because banks could back you into a corner and practically force you to take the lower value. It was especially unfair when the new appraisal rules were put into practice. They mandated randomly assigned appraisers to remove any undue influence and then the bank still cuts the appraisals. Also, 99% of appraisals in my town are paid on the front end and non transferable so if the underwriter cut your appraisal and you wanted to move to a new lender you were out $450 and 45 more days of interest.
    Taylor White, PHD
    Replied over 9 years ago
    Its definently a problem. If the appraiser, who is licensed for that specific job, says a home value is “X” – then that´s what its worth. What qualifications does the underwriter have at appraisal? If they dont like – or agree with the value – they should get it re appraised by someone else.