Mortgage bankers find fault with appraisal rules

The Mortgage Bankers Association is calling on Fannie Mae and Freddie Mac to back out of agreements with New York Attorney General Andrew Cuomo that would create a code of conduct for home appraisals.

The agreements, also signed by federal regulators that oversee the government-sponsored enterprises, were intended to insulate appraisers from pressure to inflate home valuations.

But by barring lenders from relying on in-house appraisals or those performed by affiliated businesses, the code of conduct would actually reduce oversight and accountability for much of the appraisal industry, the MBA argues.

Furthermore, the industry and public had no opportunity to comment on the agreements with Fannie and Freddie or the code of conduct before they were announced on March 3, the trade association said.

After the agreements were announced, Fannie and Freddie said they would take public comments until April 30.

With a compliance date of Jan. 1, 2009, only eight months away, the MBA called on federal regulators to reopen the process of drafting an agreement, or institute changes recommended by the industry.

The agreements with Fannie and Freddie were the product of Cuomo's investigation into the packaging of mortgage loans into securities sold to Wall Street investors.

New York sued First American Corp. and its subsidiary eAppraiseIT last fall, claiming the companies bowed to pressure from Washington Mutual to inflate property appraisals. WaMu was not named in the suit, and all three companies have denied any wrongdoing.

Under the agreement, lenders that want to sell loans to Fannie and Freddie would be prohibited from relying on in-house appraisal reports or appraisals performed by affiliated appraisal management companies.

Although lenders could authorize appraisal management companies and correspondent lenders to select appraisers, they would not be allowed to rely on reports from appraisers selected by other third parties, such as mortgage brokers and real estate agents.

In signing on to the agreements, OFHEO Director James Lockhart said they were built upon existing federal and state laws and regulations, and "should help restore confidence in the mortgage market by enhancing underwriting practices, reducing mortgage fraud and making home valuations more reliable."

In a letter to the Office of Federal Housing Enterprise Oversight and executives at Fannie and Freddie, MBA Chairman Kieran Quinn said the MBA recognizes that appraisers are subject to "significant pressure by various actors in the mortgage process such as borrowers, real estate agents, mortgage brokers and sometimes even commissioned employees of lenders."

But lenders have an interest in obtaining accurate appraisals, as they can lose money on loans that go bad because of inflated valuations whether they hold their loans for investment or sell them to secondary market investors, because they are usually forced to buy back fraudulent loans from investors.

"These potential losses give lenders a strong incentive to avoid overvaluation of the property that serves as security for loans that they originate," the MBA said. "By contrast, few if any appraisers have the capital to make good on defaults caused by an erroneous or deliberately misleading appraisal."

Current regulations subject the in-house appraisal departments of federally chartered financial institutions to periodic examinations by regulators.

"Under the code (of conduct), this supervisory oversight would be eliminated," Quinn said in his letter. "As a consequence, financial institutions would be required to rely on appraisers with limited accountability, comparatively little or no capital or net worth requirements, or even regular examinations. The code (of conduct) would, in effect, significantly reduce oversight and accountability for much of the appraisal industry, a result that would seem contrary to the (New York attorney general's) objectives."

Although the code would apply only to loans eligible for purchase by Fannie and Freddie, loan originators have modeled their underwriting standards for nonconforming loans on those used by the government-sponsored enterprises because they are accepted by secondary market investors, the MBA said.

The MBA advocates modifying the code to allow the use of in-house and affiliate appraisers if they are in compliance with appraisal regulations and guidelines issued by federal banking agencies. The MBA said it could also endorse a requirement that staff appraisers and affiliated companies be financially independent from loan production staff.

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