One reason you can't get a mortgage

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NEW YORK (CNNMoney.com) -- For real estate appraisers, determining what a house is worth has become increasingly difficult, which is making it even harder for buyers to purchase homes or for homeowners to refinance.

The main tool in the appraiser's kit is the sale prices of homes in the area. If they can find similar houses nearby in similar condition that sold recently for, say, $300,000, they can assume that the home they are appraising is worth a comparable amount.

But with sales volume falling, there are fewer homes with which to compare. In fact, sales of new homes crashed in January to the lowest level in 45 years, and existing home sales fell to a 12-year low.

And even when there are recent sales figures, they often don't hold up as a reliable baseline. Appraisals are estimates of market value at a given time, and with prices in free fall, values "age" quickly.

"We just don't have a flow of transactions to be able to come up with credible values," said Jonathan Miller, president of Miller Samuel, a noted New York appraisal firm. "Closed sales are now largely irrelevant because they're so far behind the market."

In fact, Marc Savitt, president of the National Association of Mortgage Brokers, recently had a bank underwriter object that none of the appraiser's comparable homes were near enough.

"They told him they wanted comps within a mile," said Savitt. "But, the market the way it is, there haven't been many sales and there were no recent comps within a mile."

So in lieu of good sales figures, appraisers often consider contract prices, the ones first agreed to between buyers and sellers. But those are not much better because many sales don't close.

And listing prices are "hit or miss," Miller said, because most sellers overestimate the value of their homes. Columbia business professor Eric Johnson calls that the "endowment effect," which causes people to place higher values on properties once they own them.

Sellers set their listing prices far too high, as a result, and that leads to a big chasm between list and sale price. In the New York region, for example, there's a 16% gap, on average.

During the boom, pressure was put on appraisers to inflate values so that sales would go through. Sellers, buyers, real estate agents, loan officers and mortgage brokers all had a vested interest in getting the sale completed. So if appraisers weren't cooperative and raise their values, they often got frozen out of deals.

Now, there's pressure on appraisers to be too conservative, so many homeowners are finding themselves unable to purchase a new home or refinance their existing mortgage.

"Lenders want the appraisal at the lower end of the range," said Joni Herndon, a Tampa, Fla.-based appraiser. "The lender may want it at $100,000 and the appraiser thinks it's worth closer to the high end of his or her range, say $115,000."

If the lender does reject the appraisal, one of three things usually happens. "Lenders can order a second appraisal, the seller can lower the price on the house or the buyer can come up with more cash," according to Jim Amorin, president of the Appraisal Institute, the industry's professional standards organization. "In some cases, none of those happens and the loan doesn't go through."

One way appraisers are addressing stale comps is by using a "negative time adjustment." If a comparable property sold for $200,000 three months ago in a market where prices are falling at a 12% annualized pace, the comp can be reduced in value by 3% to reflect the market.

In some areas more than half the appraisals come in with these adjustments, according to David Adamo the CEO of mortgage broker Luxury Mortgage,

Another option is an "automated valuation model," which uses a mathematical formula to set home values. They establish a baseline home price by examining sales prices and the square footage of recently sold homes in the neighborhood. So if a house is 1,500 square feet in a community where the average home sells for $200 a square foot, the AVM puts the appraisal value at $300,000 and increases or decreases it as new sales data is recorded.

However, these valuations don't take into consideration a home's condition or appearance - or even verify the square footage - so the results can be very far off.

Plus, "those AVMs can have trouble keeping up with the market, too," said Nanette Traylor, an underwriter with Salt lake City-based mortgage lender Castle & Cooke Mortgage.

But finding accurate appraisals is more important than ever now that the Obama administration has announced its Homeowner Affordability and Stability Plan. The first prong of this program allows homeowners with Freddie Mac or Fannie Mae loans to refinance into current record-low rates even if they are slightly underwater, meaning they owe more on their mortgages than their homes are worth.

However, eligibility will directly hinge on appraisals: Anyone who owes more than 105% of the value of the home won't qualify. That adds to the pressure appraisers may feel to "hit the number" so people on the bubble can slide in and refinance.

"There's clearly a heightened sensibility among lenders today," said the Appraisal Institute's Amorin. "They're saying, 'We better take a really good look at the collateral."