Appraisal concerns were at the top of the agenda this week as NAR President Charles McMillan on Monday met with the New York State Deputy Attorney General and his staff to express industry concerns over the Home Valuation Code of Conduct. The HVCC agreement, which secondary mortgage market companies Fannie Mae and Freddie Mac have entered into with the New York Attorney General to curb faulty appraisals, has generated widespread concern. The agreement influences practices for assigning appraisals throughout the country because Fannie and Freddie apply it to all of the mortgages they handle. McMillan was also meeting on the issue with the head of the Federal Housing Finance Agency, which regulates the two secondary mortgage market companies. Separately, a post in the NAR Voices of Real estate blog on the state of the market generated more than 180 comments in just over a week, many from real estate professionals and others who shared their concerns over appraisals.
Though the first paragraph may seem a bit misleading since HVCC didn’t give rise to AMCs, they’ve been around for years, there is an interesting point by the author regarding the creation of national policy.
‘First Do No Harm’ Should Apply to Attorneys General
Two articles from June 9 hammer home the same lesson: Nothing good comes from the governance of American commerce through the New York attorney general’s office.
In the article “Appraisals Roil Real-Estate Deals in the U.S.” (U.S. News), we learn that a deal that Fannie Mae and Freddie Mac agreed to last year under pressure from Attorney General Andrew Cuomo has already given rise to an industry of “appraisal-management companies.” The firms take a sizable cut of up to 40% of appraisal fees to dole out appraisals, leaving the appraisers with smaller fees to do more work. All of this will, of course, lead to higher appraisal costs without any evidence that the quality of appraisals will improve.
In the article “Stock-Research Reform to Die?” (Money & Investing), we get an update on the deal that former New York Attorney General Eliot Spitzer cut with big Wall Street firms in 2003 to spend $460 million to provide free, independent research to retail clients. The former SEC official who implemented the program was quoted as saying that “a lot of money was spent and not very many people were using” the research. A grand total of 16 people retrieved reports from Credit Suisse in one year, for example.
The genius of the Founders was in creating a system that, however imperfect, reaches results through the checks and balances of the three branches of government, combined with a system of federalism in which the respective states and the federal government operate within their spheres. The present and former New York attorneys general think that they have designed a better mousetrap: governance by their office alone, for the whole nation, through the threat of indictment or other legal action that the target businesses cannot afford. I’ll go with the Founders. Can anyone stop this before the New York attorney general thinks up the next great idea?
Printed in The Wall Street Journal, page A14
Included is an article posted on June 11, 2009. Share your feedback!
Pipeline — A roundup of credit market news and views
Thursday, June 11, 2009 American Banker
By Allison Bisbey Colter
Frank Gregoire, an appraiser in St. Petersburg, Fla., was appalled but not surprised to read in the Tampa Tribune last month that a property in Tampa was appraised by someone in Panama City — about 390 miles away.
As do many appraisers, Gregoire complains that the Home Valuation Code of Conduct is encouraging lenders to outsource the ordering of appraisals to management companies. In order to keep costs down and protect their margins, these middlemen often dole out assignments to appraisers who are inexperienced or unfamiliar with the local market, he and other appraisers say.
In picking appraisers, “the first criteri[on] is price … the second is turnaround time and, if it is considered at all, competency is the third and least” criterion, Gregoire told American Banker this week.
Appraisal management companies typically want appraisals delivered in 24 to 48 hours, he said. “I don’t believe that in today’s market you can produce a well-prepared document in that period of time.” Gregoire said he takes four days to two weeks to prepare an appraisal. “The amount of work and documentation necessary for an appraisal now is unbelievable.”
For example, short sales, in which distressed borrowers, with lenders’ consent, sell their homes for less than they owe on their mortgages have made it harder to compile data on comparable sales. “It’s very difficult … to extract from the market data an adjustment that reflects how much below market that [property] sells because those people were under the gun” to sell, Gregoire said.
He sits on the appraisal committee of the Realtor group, which is drafting a proposal to regulate appraisal management companies under the Financial Institutions Reform, Recovery and Enforcement Act of 1989. The valuation code, which took effect last month for all home mortgages sold to or guaranteed by Fannie and Freddie, bars loan officers, mortgage brokers or real estate agents from any role in selecting appraisers.
Appraisers aren’t the only ones complaining about the code. On Tuesday the National Association of Mortgage Brokers issued a “call to action,” urging members to contact Fannie, Freddie and the Federal Housing Finance Agency to explain how it has affected their business. The NAMB estimate the code is costing consumers over $2.8 billion a year in extra fees created by long delays and higher appraisal costs.
Ken Harney has an interesting article on the increase in fees that are being proscribed to home-buyers. He includes this section on appraisals:
On top of these extra fees, borrowers are now starting to get hit with two sets of cost-raising appraisal rule changes. Fannie and Freddie have begun requiring all appraisers to complete an extra “market condition” report that includes detailed statistical analyses of local sales and pricing trends — above and beyond the regular appraisal data. Many appraisers are charging an extra $45 to $50 for the time required to complete the form. Home buyers and refinancers can expect to pay the higher fees.
On top of that, beginning May 1, Fannie and Freddie are refusing to fund loans with appraisals that do not follow a set of new rules known as the Home Valuation Code of Conduct. Among the procedural changes: Mortgage brokers no longer can order appraisals directly, but instead must allow lenders or investors to use third-party “appraisal management companies” to assign the job to appraisers in their networks.
How does that affect the consumer? Consider the notification one Connecticut brokerage firm recently received from a major lending partner: Starting April 15, all good faith estimates provided to applicants must indicate a flat $455 charge for appraisals arranged through the appraisal management company. The broker previously charged $325. Consumers will now have to pay the appraisal fee upfront — before any inspection or valuation is completed — using a credit card, debit card or electronic fund transfer.
What happens if the appraisal comes in low and the applicants can’t qualify for the refi or purchase program they sought? Tough luck: They’ll have just two choices: Pay another $455 for a second appraisal — with no assurance that it will solve the problem — or cancel the application.
The extra market report that is referred to in this article, is the 1004MC form, that Fannie and Freddie are requiring appraisers to fill out. Anecdotally, I’m hearing that if you’re in a major market, it’s not that difficult to fill out the form. However, if you’re in a smaller market with fewer comps, the form can become quite burdensome.
(H/T – Calculated Risk)
The Center for Public Integrity has posted a great report on the developments of the appraisal profession over the last few years.
The report discusses how appraisal pressure has influenced the housing market and includes this section on the Home Valuation Code of Conduct:
Appraisers who work for themselves or small businesses say the code will end their careers since mortgage brokers and other loan generation staff can no longer contact them directly. Instead, they say the code in effect directs all business to appraisal management companies, the unregulated middlemen that are often subsidiaries of lenders.
Appraisers say the management companies passed on pressure from lenders in the past, including in Cuomo’s case against eAppraiseIt, and see nothing in the new code to stop it from happening.
“It’s a bit of irony that the solution is the same thing that got us here,” said Bill Garber, director of government and external relations at the Appraisal Institute, a trade association representing appraisers.
The Home Valuation Code of Conduct, Garber added, is lip service to cleaning up the industry. Appraisal management companies “are just as capable of pressuring appraisers as anyone else.”
Appraisers also dislike the plan because some appraisal management companies take a hefty administrative fee and pay low rates to appraisers, which experienced appraisers say will force them out of the business and turn the industry over to less experienced appraisers who are more likely to make mistakes.
Pressure will still come from the management companies, said Dodd, the Virginia appraiser. “They could give a damn about the consumer. They don’t care if the consumer pays ten, twenty, or thirty thousand more than it’s worth.”
Cuomo hasn’t answered critics of the new code, and his office did not return calls from the Center for Public Integrity.
I’m somewhat surprised the Center for Public Integrity could not find one person to defend the HVCC. Not even Cuomo’s folks want to talk about it?
Here’s how the report concludes:
In February, Miller received a call from a different lender. This one wanted him to remove pictures of a cracked sidewalk he included in his appraisal. This would be prohibited under the Home Valuation Code of Conduct. But Miller expects lenders will figure out a way around the rules.
“They don’t want good appraisers,” he said. “They don’t want good numbers, even now.”
And again my question is, “Who is enforcing the HVCC?”
Fannie and Freddie will now allow mortgage brokers to order appraisals through a lender’s designated AMC.
From Freddie Mac’s Home Valuation Code of Conduct FAQ:
Can a broker initiate an appraisal request through a lender’s designated appraisal management company (AMC)?
This process is permissible provided all of the following criteria are met:
The AMC is specifically authorized by the lender to act on its behalf and the AMC is not acting on behalf of the mortgage broker,
The AMC selects, retains, and provides for payment of all compensation to the appraiser on the lender’s behalf,
The appraiser’s client is the lender and the appraiser correctly identifies the lender as the lender/client on the appraisal report,
The lender has policies and procedures in place that comply with the Code, and
The lender ensures that the AMC has policies and procedures in place that comply with the Code.
This keeps a firewall between the appraiser and the broker, but allows the mortgage broker to obtain an appraisal if necessary. The big question though, is how any of this is enforced. I still haven’t seen any news about that.
From Appraiser News Online, Freddie Mac is restricting how lenders can use broker price opinions:
On March 31, Freddie Mac revised its Seller/Servicer Guide to strictly prohibit its lenders from using broker price opinions to value properties for mortgage purchases. Though Freddie had refrained from using BPOs as a matter of policy, the changes made to section 44.7 of its Selling Guide leave no room for loopholes.
The revised Selling Guide states that to be acceptable for a transaction, each mortgage file must contain one of the following reports:
- A written appraisal report
- A written inspection report
- A print-out of the Last Feedback Certificate with the Minimum Assessment Feedback of Form 2070 or PIA
Also clearly stated in the revised language of Freddie’s Selling Guide is the requirement that the Seller may not use tax-assessed valuations or BPOs to determine value.
You can access the entire Selling Guide, here.
The Boston Globe Magazine has an interesting piece on appraisers. The article encourages consumers to closely monitor the appraisal process.
While this is not a horrible idea, there is a fine line between asking an appraiser to consider new information and pressuring that appraiser to reach a predetermined value.
The article also includes this section on the Home Valuation Code of Conduct.
Under the new guidelines, appraisal management companies (AMCs) will act as middlemen between mortgage companies and appraisers and hold greater influence over the entire process. “We think it’s going to hurt the quality,” says Peter Vadala, president of the Massachusetts Board of Real Estate Appraisers. “These AMCs put pressure on the appraisers to do two things: Do an appraisal cheap and do an appraisal quickly.”
The National Association of Mortgage Brokers filed a lawsuit against the Federal Housing Finance Agency in late February, arguing that proper contact among mortgage brokers, lenders, and appraisers helps ensure high-quality, cost-effective, efficient appraisals. Appraisal firms like Newton-based Lipof Real Estate Services make a similar case. “The essence of the [new code of conduct] was doing good,” says company president Rick Lipof. “It was to take the pressure and intimidation off the appraisers.” But for appraisal management companies, he says, “the goal isn’t to find the most competent appraiser to make sure the value is right. The companies look for the appraiser who can turn it around in a day for the cheapest price. What do you think you get for that? You get what you pay for.”
Lenders and consumers want appraisals that are fast, cheap and accurate. Appraisers can accomplish two of those qualities, but never three.