Another reason the housing recovery may take a while.

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Most of us are aware of the mortgage abuses that were a large part of the current economic crisis. We’ve heard that getting mortgages is hard right now. But we tend to think that we won’t personally be affected if we are good credit risks and bought within our means. Recent changes in the rules covering appraisals can make that assumption incorrect.

Appraisals are based on a relatively simple notion: that an objective estimate of the value of a property can be determined by gathering information about other “comparable” properties that have sold recently. To be comparable, a property needs to be similar in physical characteristics, and in a similar neighborhood. The devil, as always, is in the details. What is a comparable property? And how recent is recent?

During the bubble, appraisers were under pressure from all directions. Realtors and sellers always want high appraisals because they support higher sales prices. Underwriters and buyers normally provide a conservative counterpoint, but lost their usual caution; underwriters wanted to close mortgages fast, and buyers thought prices would always go up. As a result, some appraisals became inflated.

In response to the perceived abuses, and the fact that prices in some markets have fallen substantially, new regulations require that the “comps” for appraisals be from sales no more than one year old. In addition, low down payment mortgages are much more difficult to attain.

What does this mean to the person who currently owns a house? That the houses used as comparables are less likely to be come from similar neighborhoods, especially if you are in an area where prices have remained stable. So if you want to refinance to take advantage of low rates, or are hoping to sell your house soon, there’s a good chance that your appraisal will be lower than you expect. Refinancing may not be easy, even if you have excellent credit. And if you want to sell, you may find that you can’t get the price you think is fair because the buyer can only finance 80% of the appraised amount. So even the credit worthy person who bought within his or her means may not escape unscathed.

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