Many lenders over the past 2 years have reduced the value of the appraised value of homes after reviewing the appraisal report. They did this if they disagreed on the value that the appraisal indicated in the report. This practice is known as appraisal cutting. The underwriter, who never saw the property and usually was hundreds (if not thousands of miles away) and was not familiar with the area either substituted their judgment for the judgment of the appraiser or used automated valuation models to do so.
In a bulletin from June 2010, Fannie Mae is prohibiting lenders from engaging in appraisal cutting as of September 1, 2010. Now, an underwriter who disagrees with the value in the appraisal will be required to contact the appraiser in an attempt to resolve this. If it cannot be resolved, the underwriter cannot reduce the value but must then order a second appraisal. This will prevent lenders from arbitrarily lowering the appraised value and/or looking around to support the lowest value possible.
This should help avoid low appraisals on purchase transactions where a price was negotiated between a seller and a purchaser. It may ultimately result in the slow return of the purchase market as buyers and sellers are able to set the price as has always been the case without worrying about a lender “second guessing” them. In addition, it will also help reduce costs for homeowners who want to refinance their mortgages but are concerned about the lender’s opinion of their value.