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.
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.