WASHINGTON (Reuters) - Aaron and Beth Stiner are renters, but not by choice and not because they can’t afford to buy a house. They had a move-up home in Phoenix selected and good credit scores. They even had buyers lined up for the home they were selling. Then they entered appraisal hell.

Beth Stiner and her husband Aaron Stiner poses for a portrait in the kitchen of their rental home in Phoenix, Arizona December 11, 2010. REUTERS/Joshua Lott

The first appraisal on their chosen home came in at $295,000, a figure that both the Stiners and the sellers agreed upon. The lender didn’t like it, and ordered up a second appraisal. Based on comparable homes that were in a different neighborhood, the new appraisal came in $25,000 lower -- too low to allow the loan to go through.

They switched lenders and got another appraisal that, at $290,000, would have allowed the deal to go through. Their new lender was skeptical, and ordered up another appraisal. At the same time, the home they were selling was appraised three times, with each subsequent valuation falling.

Four months later, the Stiners and their buyer both gave up. Together, they were out $1,600 for seven appraisals. “As a result, we are now renting our home out, and renting the home we wanted to buy,” says Beth. “We were frustrated and we weren’t going to keep doling out cash for new appraisals. It felt like a game.”

But not a fun game. There are problems in appraisal land that transcend weak housing markets and debt-ridden borrowers, and that are causing home buyers and would-be refinancers to miss out on low rates and dream houses.

“There’s been a pendulum swing in appraisals comparable to the one we’ve seen in mortgage credit, from foolishly lax to overly restrictive,” said Walt Molony of the National Association of Realtors. He reported that as recently as October, one in 10 member agents said they’d had a contract canceled as a result of a low appraisal, 13 percent said they’d had a contract delayed, and 16 percent said they’d had a contract negotiated to a lower sales price as a result of a low appraisal.

“We haven’t seen anything like what we are facing today,” said Mark Linne of Appraisal World, a company that provides automated valuation software and services to appraisal companies and lenders.

New and proposed federal rules governing appraisals, changes in the way appraisals are conducted, and a still uncertain housing market have hit the appraisal part of the process in a way that is adding to housing market instability.

Borrowers are watching their “locked in” low rates expire -- while they pay for one appraisal after another. Lenders are afraid to trust the appraisals they get, and are ordering more and more of them. The appraisers themselves say they’re being paid less to work faster in a more confusing market than they’ve ever faced.

“A lot of inappropriate demands are being made,” says Patrick Gavin, the mortgage broker who was trying to find a loan for the Stiners. “Underwriters want more comparables. They want more narrative and more photos. Meanwhile the clock is tick tick ticking on your loan.”

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LENDERS DEFEND APPROACH

The lenders say they are just playing defense. “We believe the property in question was appropriately valued,” said James Olecki, a spokesman for GMAC Mortgage, the Stiner’s initial lender. GMAC uses an in-house staff of appraisers to review the independent appraisals they receive.

Wells Fargo, the lender that had been approached by the Stiner’s would-be buyer, regularly asks for three appraisals and requires a “loan to value reduction” for properties located in declining markets, said Vickee Adams, a Wells Fargo spokeswoman. “Wells Fargo must ensure that the value of the collateral supports the loan amount.”

The biggest issue for appraisers, lenders and ultimately, borrowers, is how to evaluate properties in neighborhoods with foreclosures, short sales, and not enough solid sales to provide comparable data. “They are appraising a market that is so volatile and different from anything they’ve ever seen,” said Linne. “If you are an appraiser and one-third of the neighborhood is foreclosures, and another third is short sales, and another third is regular, how do you even determine what is fair market value?”

Brokers like Gavin contend that appraisers should mark up the value of homes when comparing them to foreclosures and short sales, because many of those distressed properties are in disrepair or are so complicated to buy that they command unrealistically low prices.

Further complicating the process, appraisers who for years mainly faced pressure to preserve deals, now are facing pressure in the other direction from lenders who want to make sure they have enough equity to cover them even if home prices fall further. Mortgage rates have been near record-low levels, and lenders don’t want to commit to bargain rate deals unless they are a sure thing.

“We are requesting more comparables than we have in the past,” said A. W. Pickel, an Overland Park, Kansas, mortgage banker and past president of the National Association of Mortgage Brokers. “We used to take three, but now we’re seeing four or five. Underwriters are looking carefully at how close those comparables are to the homes in question.”

Pickel said lenders are typically asking for second appraisals when the mortgage amount involved is large or when the appraiser has significantly adjusted the comparable values upward to come up with a home’s value. “And then we’re generally going to go with the one that is lower,” he said. Consumers who need the higher valuations to get their loans are just out of luck.

NEW RULES IN PLAY

The world of home appraisals changed on May 1, 2009, when Fannie Mae and Freddie Mac adopted the Home Valuation Code of Conduct. These new rules prohibited lenders from hand-picking appraisers. To comply with those rules, many lenders have started using appraisal management companies that afford them an arm’s length relationship with the appraiser. The appraisal management companies hand out assignments to their participating appraisers on a random basis. And they get a significant slice of the appraiser’s fee, cutting the amount that actually goes to the on-the-ground appraiser.

It’s not an arrangement that traditional appraisers -- who may have built long-term relationships with brokers and lenders -- like. “They want appraisers to produce a product and we provide a professional service,” complained Francois Gregoire, a Saint Petersburg, Florida, veteran appraiser. “And they want it turned around in 24 or 48 hours. All those personal relationships that I built over the years are out the window.”

Gregoire, who has stopped doing mortgage appraisals because he says they are no longer profitable, asserts that the new rules are resulting in a reliance on appraisers who are inexperienced and willing to travel significant distances to conduct those home inspections. And that results in appraisals that are less sensitive to neighborhood nuance, and less useful to borrowers and lenders.

CONSUMER OPTIONS ARE LIMITED

Home buyers and refinancers can’t always fight the troubling appraisal. Sheila Krueger and her husband Paul Hennings, in Glendale, Arizona, lost a loan when the home they tried to buy appraised for $60,000, though they were willing to pay $70,000 for it. “No amount of work by our Realtor and my husband to show them how this was erroneous would make a difference,” she said.

Four months after putting in their contract on the home, Krueger and Hennings abandoned their hopes of getting an inexpensive Federal Housing Administration loan and closed with an investment loan instead. “We showed up with a check for $25,000 instead of one for $3,000. And now, instead of having $1,500 every month to put into the property, we need to hold onto it for the mortgage payment,” said Sheila.

Of course, home owners and buyers aren’t always the best judge of how much their property is worth. And more rules are forthcoming: The Dodd-Frank financial reform legislation requires the Federal Reserve to protect appraisal independence with regulations that extend the intent of the 2009 code beyond Fannie and Freddie. The Fed’s interim rules, issued in October and slated to go into effect in April, aren’t very different from that 2009 code, Gregoire and other industry analyst have noted.

On December 2, several U.S. regulatory agencies issued new guidelines for appraisals used in mortgages which originate from federally regulated banks, along with a statement noting “financial institutions are responsible for selecting appraisers and people performing evaluations based on their competence, experience, and knowledge of the market and type of property being valued.” The statement also noted that these guidelines might be rewritten once again, once the Fed’s rules are made final.

In the meantime, pros are telling consumers to peer carefully over the shoulders of those appraisers. “It’s important to look at the comparable sales that were used,” says Linne. “If they don’t think they are reflective of market, make the lender aware of that, and be more involved in the process.”

If an appraisal comes in too low, the borrowers can appeal it, and order up (and pay for) another one. They still may not be able to get the loan they want, but at least they’ll know they tried. (Editing by Jim Impoco and Cynthia Osterman)