Appraisal rules backfire in down market
Appraisal management companies blamed for undervaluation
By Jack Guttentag, Monday, July 27, 2009.
Flickr photo by woodleywonderworks.Enacting rules to curb abuses arising during a housing bubble, which don't take effect until the succeeding financial crisis, can easily do more harm than good. This is the case with new rules requiring that property appraisals be insulated from pressures exerted by any of the parties with a financial interest in an appraised value: primarily lenders, mortgage brokers and Realtors.
Appraisals are informed judgments regarding the value of specific properties. They are not perfect because appraisers must work with incomplete information. Further, appraisers are subject to bias, and more so if less complete information is available to them.
During periods of rising house prices, such as 2000-06, many appraisers erred on the upside because they were part of a community that expected further price increases. This tendency was sometimes reinforced by pressures exerted by lenders, Realtors and mortgage brokers. None of them wanted to see deals torpedoed by appraisals below the prices buyers had agreed to pay.
In late 2007, New York Attorney General Andrew Cuomo sued the appraisal subsidiary of title insurer First American for allegedly conspiring with WaMu, a major mortgage lender at the time, to inflate appraisals. Because WaMu sold a large portion of its mortgages to Fannie Mae and Freddie Mac, Cuomo embarrassed the agencies into issuing a Home Valuation Code of Conduct (HVCC). The code declared that the agencies would then purchase only those mortgages supported by an "independent" appraisal.
The objective of HVCC was to insulate the appraisal process from influence by any of the parties with an interest in the outcome. Mortgage brokers and Realtors could no longer have any contact with appraisers, and lenders had to obtain appraisals in some manner that prevented them from exercising any control.
The problem with this well-intentioned rule is that it was issued in December 2008 to become effective May 1 of this year, or squarely in the middle of the worst housing market since the 1930s.
With house prices declining, the upward bias in appraisals that had prevailed during the bubble had morphed into a downward bias. Many deals are not getting done because appraisals are coming in too low, and HVCC is seriously aggravating the problem.
To protect themselves from liability, most lenders are ordering appraisals from appraisal management companies (AMCs), which intermediate between the lender and the appraiser. The AMC selects and pays the appraiser, receives and evaluates the appraisal, and passes it to the lender, which has no direct contact with the appraiser.
Because AMCs operate nationally but do not have appraisers everywhere, more appraisals are being done by appraisers who are not familiar with the local market. Appraisers working for AMCs are also paid less per appraisal than independents, which may induce them to invest less time.
Less knowledge by appraisers means more scope for bias, and in a declining-price market, the prevailing bias is toward lower values. ...CONTINUED
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Submitted by David Zugheri on July 27, 2009 - 8:18am.
The broad reaching concept of taking a commissioned sales person out of the appraisal process is a good one. It doesn’t matter if you are selling diamonds, real estate or mortgages, the appraiser should be left independent and free from influence. There is nothing in HVCC that prohibits mortgage bankers from using appraisers that they have done business with for many, many years prior to May1. Although I feel that there could be some minor adjustments to the code, HVCC has not affected our organization (www.envoymortgage.com) in any way. It has actually allowed our underwriters more time to look at other parts of the loan file like credit, income and assets. David Zugheri Envoy Mortgage
Submitted by Derek Eisenberg on July 27, 2009 - 8:39am.
Jack, this is the 6th article on this topic:
Out-of-area appraisers are out of luck 2009-07-23
Freddie Mac issues appraisal bulletin 2009-07-14
Bill would suspend new appraisal rules 2009-06-29
No praise for new appraisal process 2009-06-29
Appraisal issue coming to a head 2009-06-26 00:00
There is a problem but the HVCC is not the cause.
1) Out of area appraisers inevitably miss a new highway or a sex shop far more often than an industrial site being cleaned up and converted into a park. Out of area appraisers notoriously over appraise not underappraise.
2) The HVCC has no changes for banks or mortgage bankers who have skin in the game (lend their own money). They can still order appraisals themselves. The HVCC affects brokers who take no risk.
3) Most values are coming in low for 2 reasons:
a) More stringent underwriting from cautious banks that indirectly pressure appraisers in a different fashion; to come in low. Go after the underwriting procedures not the appraisers.
b) A glut of foreclosures have increased the housing supply creating low cost alternatives that even if not used as comps, create competition for regular sales and drive down prices. Giving bankruptcy judges for just 12 months, the right to slash mortgage balances would help. When the banks foreclose they hurt themselves worse as when they remarket, they increase supply even more and get even less for the house. Lowering the principal on these debtors and stemming the tide of supply caused by foreclosures would stabilize prices.
So why are the National Association of Realtors (NAR) and Appraisal Institute (AI) who are typically on different sides of the argument aligned against the HVCC? The NAR wants mortgage brokers to put their good old boy on the job who will hit the number like the old days. Of course this won't help because the underwriters get last licks and that's really where the appraisers are being pressured. The AI does not like the buying power consolidated in the 4 big management companies two of which are owned by the biggest banks and two of which are owned by title companies. The AI wants more providers offering work to appraisers so that no small group of firms have the power to dictate and drive down fees. Fees would rise if more firms could order appraisals. Both the NAR and the AI have agendas and (while the AI may care about accurate values) neither are focused on the quality of the appraisals in objecting to the HVCC; just the furtherance of their agendas.
If both would just focus their lobby efforts on decreasing supply, the market would be at equilibrium and everything would go back to normal.
Derek Eisenberg
Certified General Appraiser
Broker of Record
Continental Real Estate Group, Inc.
http://www.mls2u.com
Submitted by Robert A. Hulme on July 27, 2009 - 8:40am.
Timing is oh so important. We certainly didn't help the housing market today, with all these dramatic changes, but I am sure we will see some positive effects down the road.
www.AmericanForkHomesForSale,com
www.PleasantGroveUtHomes.com
Submitted by Ruth Vogt on July 27, 2009 - 9:10am.
Were there bad appraisals done that over stated values in years past? Yes, most definitely. And there were probably brokers that placed undue pressure on appraisers to bring values in a little higher, or leave on conditions. But as is the often the case, we've passed legislation that over corrects and created problems that weren't even considered.
"Portability" for one. If a lender isn't able to perform closing for any reason, the backup lender must order a new appraisal. Chances are, someone is going to eat the appraisal fee on the first appraisal done. And if the appraisal was paid for in advance by the consumer, now they have TWO appraisals to pay for! (And never mind the fact that if the first appraiser didn't bring in the value, they can simply cancel the application with the first lender and the next lender would never know because they are prohibited from accepting that appraisal under HVCC!)
Secondly, the AMC's aren't regulated either! How in the world is that going to stop anything? But what IS happening in too many cases is that the AMC charges a fee for their service. Thus the appraiser has the option of accepting less for their work, or charging more! And guess who gets to pay for the higher fee? Yep, the consumer.
I could go on (and did in my recent blog at www.
TalkingAboutLoans.com)but let me just say that we should have put more thought in the ramnifications of HVCC before passing it. HR 3044 is a bill that is being proposed to put an 18 month moratorium on HVCC, to do just that! Please do some research, and contact your representative to support this bill. We have a few too many wrinkles to work out before HVCC truly works in the manner it was intended!
RuthieV
www.TalkingAboutLoans.com
Submitted by Ronald Ogden on July 27, 2009 - 9:23am.
The problem with HVCC is not that the timing is off, but that it was implemented at all. Arms-length appraisals will only increase the cost of a home purchase, in the many ways that you have listed in your article.
I'd much rather see stronger policing of the appraisal industry from the Appraisal Foundation itself and in higher standards in the USPAP.
Ron Ogden, Associate Broker
RE/MAX Metro - Salt Lake City, Utah
Salt Lake City Utah Real Estate
Dwell Utah Real Estate Blog
Submitted by Sid Kirkland on July 27, 2009 - 9:29am.
The intentions for the HVCC were well intended, but unfortunately, everyone was so focused on getting it passed that no one put the time and effort into considering the consequences. It is riddled with problems that need to be corrected. If it means suspending it temporarily while the kinks are worked out, then that is what should be done. The implications from the existing plan are creating more problems in the industry than they are solving.
Sid Kirkland, GRI, RDCPro
Broker Associate
Submitted by Tom Molinari on July 27, 2009 - 9:49am.
Derek Eisenberg's comments above nail it! A clearer or more concise assessment of the HVCC situation could not be made.
I am an appraiser and Derek has laid out what appraisers are up against today. Large AMCs, working on a national basis, choose appraisers based upon low fee bids and quick turn around times. Absolutely no deference is given to experience and quality most of the time. AMCs are paying the appraisers 40% to 60% of market fees for the area and the more experienced appraisers, who know how much work needs to go into a credible appraisal, just won't accept the lower fees.
Underwriters and upper level appraisal review managagement, often times thousands of miles away from the proeprty being appraised and with no first hand local market knowledge, are putting pressure on the appraisers to be very conservative and suggesting the use of alternate comparable sales.
Much of the value issue today is the result of the foreclosure market. When a high percentage of sales in a specific neighborhood are foreclosures they put downward pressure on all listings. If two price ranges exist within a neighborhood - one for distress properties and on for " normal" listings - Realtors need to point this out to the appraiser and provide separate CMAs proving that two separate prices ranges exist concurrently.
If anything good has come out of the HVCC, it is the education of the rest of the real estate community of what the appraiser is confronted with on a day to day basis. I hope that this discussion of the current state appraisal community will, at a minimum, lead to a policy of lenders choosing the most experienced, knowledgeable, and educated appraisers to perform their appraisals rather than choosing appraisers on the basis of low fees and turntimes.
Tom Molinari, Appraiser
WWW.HomeAndRanchAppraisals.Com
Submitted by Sue Horowitz on July 27, 2009 - 10:46am.
The operative phrase in the appraisal discussion appears to be 'undue pressure' that may influence the appraiser/appraisal. Yet, an appraiser is reliant upon relevant, accurate, and complete information in order to render a valid appraisal (". . .[an] informed judgment regarding the value of [a] specific propert[y]"). In this regard, I have in the past been requested to supply data to an appraiser. My role has been simply and purely to supply data/information/facts /statistics. The appraiser is ultimately responsible for evaluating the data and applying it as he/she deems professionally appropriate. This additional information that the appraiser may otherwise have been unaware of can be invaluable in contributing to the final goal of a complete, informed, unbiased appraisal.
Submitted by Matt Carter on July 27, 2009 - 12:24pm.
Derek: If you include articles by columnists like Jack Guttentag and Kris Berg, this is the eighth article on the Home Valuation Code of Conduct (HVCC) to run in Inman News since June 3. A couple of the articles you refer to were actually letters to the editor. Here are links to recent Inman.com articles on the HVCC:
Home sales show third month of gains -- Appraisal issues still rankle NAR (July 23)
Freddie Mac issues appraisal bulletin (July 14)
Appraisers shunning FHA work (July 10)
Bill would suspend new appraisal rules (June 29)
Appraisal issue coming to a head (June 26)
When stimulus is meaningless (June 24)
Appraising the new appraisal problem (June 3)
Inman.com also covered the events leading up to the adoption of the rules on May 1:
New rules for Fannie, Freddie appraisals (April 29, 2009)
Report: Lenders blacklisted appraisers (April 15, 2009)
Mortgage bankers find fault with appraisal rules (May 1, 2008)
Fannie, Freddie agree to adopt new appraisal standards (March 3, 2008)
Due diligence provider will tell all in N.Y. probe (Jan. 28, 2008)
Wall Street firms queried in New York mortgage probe (Dec. 5, 2007)
Submitted by Danny C. Flucke Jr. on July 27, 2009 - 2:36pm.
HVCC is simply another example of politicians "enforcing change" to our industry - When they have ZERO actual business experience - Especially within the real estate and lending markets.
HVCC was a knee-jerk reaction that was rushed into enforcement. It was obviously NOT very well thought out. (If you are establishing AMC's to "eliminate undue influence" - Then why are lenders allowed to own them?)
Waaaaaay back in mid-2007 we were actively lobbying for the current "125%LTV" programs to help clients through the refi process. What program did we finally offer a YEAR later...? The 105%LTV program - After home values had already depreciated another 35 to 40%. Too little much too late.
Now we finally can offer the 125%LTV programs - But it's too late for more than half of our clients since they blew past the 125% level six months ago.
I learned very early in my career to never complain unless you have an alternative solution. So here is my $.02 cents....
We should simply adopt the long standing "streamlined" refinance policies currently used for other government backed programs.
If the client has 12 perfect and current mortgage payments - They receive the lower rate/payment. Zero credit issues. Zero appraisal issues. Zero home value issues. Zero income or asset issues.
But that is too easy. And besides - Without creating more and more layers of government controls (under the guise of "protecting and improving") - There are no paydays for the politicians or their multi-million dollar campaign contributors.
Fannie and Freddie were run by and overseen by either 1) incompetent idiots or 2) outright crooks - Which left both agencies in shambles. Those in charge were then "promoted" into prominent positions within the new presidential administration. Now they want to reach back re-regulate our industry into oblivion.
Every new government inspired layer brings good news and bad news. The good news? Selfishly - It weeds out more and more competition as less competent, efficient, and/or solidly funded lenders close their doors. The bad news? Fewer options for our clients and an increasingly more difficult business enviroment to continue to exceed our clients (and business partners) expectations.
CommonSense-And-Politics are the new Oil-And-Water. They simply do not mix...
Danny C. Flucke Jr.
Senior Partner
Nationwide Mortgage Experts, LLC
Direct: (714)624-9479
DCFJ@NationwideMortgageExperts.com
www.NationwideMortgageExperts.com / www.NaMoEx.com