SAN DIEGO — It’s a message Realtors have heard before: Market conditions, not new rules for appraisals on loans slated for purchase or guarantee by Fannie Mae or Freddie Mac, are most often to blame when valuations come in at less than the agreed-upon sales price.
But after making that case at the National Association of Realtors’ annual conference in San Diego, a panel of officials with Fannie, Freddie and their federal regulator were faced with a procession of frustrated agents and brokers who said the rules have had, and continue to have, unintended and serious consequences for their business.
For the most part, those who are responsible for implementing the code — which could remain in place for almost a year — stuck to their position that falling home prices, not the code, are largely to blame for problems Realtors perceive with the appraisal process.
But the panel, which also included a top executive at a leading appraisal management company, did offer advice to Realtors on how to make sure their views are represented in the appraisal process, and how to challenge valuations they disagree with.
The Home Valuation Code of Conduct was intended to protect appraisers from coercion by lenders, and supporters say it’s been effective in that regard. But critics say the code has also led lenders to transfer much of their valuation work away from independent appraisers, and over to appraisal management companies, or AMCs.
Some AMCs allegedly don’t pay enough to attract experienced appraisers, and/or don’t allow sufficient time to produce a thorough report. When AMCs employ appraisers with little experience in the neighborhoods they are assigned to work in, they often use foreclosed or distressed properties as "comparable sales" without making the necessary adjustments, industry groups have complained.
The result is that sales fall through when appraisals don’t validate the agreed-upon sales price, because the bank won’t fund the loan.
Mark Johnson, the chief operating officer of LSI, a large AMC with a network of 20,000 appraisers that is a division of Lender Processing Services Inc., said the company doesn’t engage in practices that have given some AMCs a bad reputation among some Realtors, such as sending appraisers to distant assignments in areas they are unfamiliar with.
Assigning an appraiser to value a property in a distant market is cost-prohibitive, both in terms of gas and travel time, Johnson said. LSI uses GPS technology to track how far appraisers in its network travel to assignments, he said. The average, depending on the market, is 8 to 12 miles.
"As a practical matter, (LIS appraisers) are not allowed to drive more than 25 miles unless they have express permission from us," Johnson said. "We expect the appraiser to stay in his own backyard."
If they are to travel outside of that area, they must be able to demonstrate they have experience and knowledge in markets they value properties in, Johnson said. While acknowledging that not all AMCs employ such standards, he thinks some of the horror stories about AMCs are overblown.
"Who has driven 50 miles to an appraisal?" Johnson asked. "I can’t find the guy."
McAllister, Okla.-based broker Shirley Donaldson said she’s worked with many appraisers who have traveled farther than that.
"I’ve been a broker for 30 years, and I’ve never seen such a mess," Donaldson said of her recent problems with appraisals, including one recent instance where an out-of-town appraiser’s valuation came in at $40,000 under the negotiated sale price. …CONTINUED
"All the appraiser had to do was go to the (multiple listing service), and pull up a few houses," Donaldson said. "He did not know the condition of the houses, he did not know the neighborhoods. We could do nothing but submit more comps, which he refused, and the lender refused — my buyer had to go to another lender."
Since May, Donaldson said she’s had appraisers come from Bartlesville (136 miles away from McAllister), Oklahoma City (130 miles away) and Tulsa (90 miles away).
Donaldson said growing fees for appraisals are also a concern. The bill for the appraisal on one recent transaction involving a $59,000 home was $767 — a significant burden for clients "counting pennies" to buy a home on the lower end of the market.
"I have all these closing statements I would be happy to send you," she told the panel.
Los Gatos, Calif.-based Realtor Suzanne Yost said she has "never tried to influence any appraiser in my entire career," which spans 30 years. But three of the last four appraisers she’s had to work with in the last few months "have been unacceptable."
"The appraisers I’m being sent now are not the ones I’ve worked with for the past 30 years, who know the area and know the market," she said.
In one instance, Yost said an appraiser in another county demanded that she supply him with comparable properties before he would visit the property in question in person.
"He said to me he wasn’t going to waste his time driving out there, that he would have to make two trips," Yost said. "I called the lender, and said I want an appraiser in the same county, and that appraiser called my buyer, and (falsely alleged) I was acting illegally and ethically."
Yost said another appraiser "said he couldn’t talk to me, because he was told by the AMC that I was ‘a problem.’ "
Panelist Steve White, co-owner of Keller Williams VIP Properties in Valencia, Calif., said he and his approximately 500 agents "are routinely faced with low appraisals, and often combative dealings with appraisers and AMCs, due to inaccurate implementation or interpretation" of the code.
In one recent multiple-offer situation, White said an appraiser who wasn’t familiar with the market was "somewhat hostile" and refused to consider the like-for-like comps offered by White’s agent, who represented the seller. The appraisal came in at $425,000 — 8 percent less than the $460,000 asking price — and the seller was unwilling to lower the price, he said.
Another buyer came through with another offer at the asking price, and this time the appraiser "was happy to have comps from the agent," White said, and the deal closed for $460,000 — although on less favorable terms to the seller.
Some experienced appraisers have left the industry because of the low fees paid by AMCs, White said. Working with AMCs creates a new layer of bureaucracy and provides a vehicle for the lending industry to get into valuations, through their ownership of AMCs, he said.
"Perhaps the biggest irony in all this is that the Home Valuation Code of Conduct was created due to the threat of a lawsuit over the alleged wrongdoings of a lender that doesn’t exist anymore," White said.
Life after the code
Fannie and Freddie adopted the Home Valuation Code of Conduct on May 1, in the wake of an investigation by New York Attorney General Andrew Cuomo into alleged coercion of appraisers by lenders. …CONTINUED
Cuomo had filed suit against First American Corp. and its subsidiary eAppraiseIT, charging that during the housing boom the company bowed to pressure from Washington Mutual to hand-pick appraisers who wouldn’t derail sales (WaMu was not named in the suit, which is still pending, and all three companies have denied wrongdoing. WaMu declared bankruptcy in 2008, after its banking division was placed into receivership by bank regulators and then sold to JP Morgan Chase).
Fannie and Freddie agreed to adopt the code after Cuomo’s office subpoenaed the companies in connection with a larger investigation into the practices employed by Wall Street firms in bundling mortgage loans into securities sold to investors.
Because the code has lenders ordering more work from AMCs, it’s also having an effect on loans not necessarily slated for purchase or guarantee by Fannie and Freddie, such as mortgages insured by the Federal Housing Administration (FHA). FHA has issued new rules for appraisals, which take effect Jan. 1, that are intended to bring its policies in line with the code, while addressing some of the industry’s concerns about AMCs (see story).
Panelist Robert Murphy, Fannie Mae’s senior business manager for credit policies and controls, said many of the problems attributed to the code are a result of misinterpretation, including the mistaken idea that it bars Realtors from talking to appraisers or providing them with comps.
"You guys have the data, and yes you are able to give the appraiser all the data they need," Murphy said, although the appraiser must verify that information with an independent source.
"We recognize that you have a role in mortgage financing, and that one of those roles is the data you possess," he said. "At the end of the day, we’re looking for an accurate depiction of the market value of the property, (one that is) as accurate as possible."
Fannie Mae has tried to dispel myths about the code, he said, publishing a list of answers to "frequently asked questions." The 10-page FAQ notes that it is up to appraisers to determine whether foreclosure data "is applicable and appropriate or not."
Freddie Mac has published a similar FAQ, and Fannie and Freddie’s regulator, the Federal Housing Finance Agency, published a notice in July addressing "misinformation" about the code, which the agency said was "serving the intended purpose."
"Contrary to some suggestions, the code does not lead to lower appraisals for property," FHFA said in the notice. "The code insulates appraisers from pressures that led to higher or lower appraisals and should now lead to more accurate valuations. This is in everyone’s interest.
"Declining home prices began long before the deployment of the code and relate to many other factors. Current efforts at mortgage market stabilization are a central focus at FHFA and (Fannie and Freddie), but that needs to be achieved by keeping borrowers in their homes, not urging appraisers to improperly overvalue homes."
Beyond the code
Addressing Realtors as a member of Saturday’s panel, FHFA’s top lawyer, Alfred Pollard, struck a more sympathetic tone. But he did not stray far from the agency’s stance that falling home values are at the heart of the industry’s frustrations over appraisals.
"A lot of what I’m hearing today … these things are really happening," out in the marketplace, Pollard acknowledged.
"We came to listen as well as speak," Pollard said. "You were heard … We are not here to defend something so much as to get it right."
Lawmakers have introduced bills that would either suspend the code or give a Consumer Financial Protection Agency proposed by the Obama administration the authority to draft new rules governing appraisals that would supersede the code (see story).
But Pollard said it’s important to distinguish between problems caused by the code and issues caused by other factors, including market conditions, the policies of individual lenders and underwriters, and licensing and regulation of appraisers and AMCs. …CONTINUED
Absent intervention by Congress, Pollard said the code will sunset on Nov. 1, 2010. But "If the code went away this afternoon, what about these other issues? Are they not still there? Do they not merit our attention?"
That was a sentiment echoed by some Realtors in the session, who said they worried that even after the Home Valuation Code of Conduct is no longer enforced, lenders and other underwriters will continue many of the practices that they instituted when it was introduced.
Individual banks and underwriters are free to set standards for appraisals that go beyond even what’s called for in the code or by USPAP, the Uniform Standards of Professional Appraisal Practice.
Jacqueline Doty, Freddie Mac’s director of collateral policy, said home prices were already falling when the code was implemented, and "we were already concerned about appraisal quality."
In April, Fannie and Freddie, which had previously recognized USPAP as the minimum appraisal standard, began requiring appraisers to include additional analysis about a property’s surrounding market in a Market Conditions Addendum.
In the Market Conditions Addendum, appraisers are required to analyze trends in inventory, median sale and list price, days on market, list-to-sale-price ratio, seller concessions, and the extent of foreclosure and real estate-owned (also known as REO or bank-owned) sales.
"We would have been doing this with or without the code," Doty said, noting that lenders are also doing more due diligence on appraisals.
LSI’s Johnson said that after a decade of appreciation, home prices have corrected at a much more rapid pace. When appraisals don’t support sales prices, it’s often because the property being valued is in a rapidly declining market.
He said, "The letters I get from Realtors go something like this: ‘Mark, obviously your appraiser stinks, he didn’t come in at value,’ " on a property that sold for 10 or 20 percent more only six months ago.
"The other letter I get from Realtors — and I think you are right — is that when HVCC launched on May 1, (loan) production tanked," Johnson said.
According to NAR member surveys, 76 percent of Realtors said it took longer to obtain completed appraisals after May 1, and 69 percent said the time required to get to closing increased by more than a week.
But Johnson said the slowdown in the loan approval process was the result of a glut of applications by existing homeowners to take advantage of low, government-subsidized mortgage rates and refinance their homes.
Rates on 30-year fixed-rate mortgages hit a record low of 4.78 percent in April, largely because of a Federal Reserve program to purchase up to $1.25 trillion in mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae.
According to the Mortgage Bankers Association, mortgage originations increased 70 percent from the fourth quarter of 2008 to the second quarter of 2009, growing from $369 billion to $626 billion.
Mortgage originations are seasonal, and home purchases typically surge in the spring. But refinancings accounted for 68 percent of all mortgage originations from April to June, up from 45 percent in the last three months of 2008, the MBA said.
"The main reason the loan production slowed down is (there were) too many loans in the pipeline," Johnson said. …CONTINUED
"We do push the appraiser" on turn times, Johnson said. "Our goal is for you not to miss your rate lock with your client."
Some critics say AMCs push appraisers too hard to turn reports around quickly. But Johnson said LSI maintains stringent quality-control measures, in part because it makes representations and warranties to investors and "we are on the hook if the appraisal is bad."
When there are disagreements over a valuation, LSI employs a formal "reconsideration of value" process that’s in place industrywide.
"We look at your facts and compare them to the appraisers, and if you are right we push it back to the appraiser and ask them to reconsider what they’ve done," Johnson said.
However, "We can’t just take your comp — it must be more recent or more similar" than comparable properties selected by the appraiser, he said.
Johnson invited Realtors with concerns about the code to call a toll free HVCC hotline, (877) 246-3498, or send e-mail to firstname.lastname@example.org.
Other Realtors addressing the panel reported difficulty getting appraisers to return their calls or even identifying who had been given an assignment.
Realtor Art Johnson complained that, in his experience, lenders will not even tell Realtors who the appraisal management company is, and "they are not interested in our opinion of who we see as bad appraisers."
LSI’s Johnson said it’s hard for Realtors to determine from a single encounter with an appraiser whether the person is competent.
"We can’t shoot these (appraisers) because we don’t like the values" they produce in their appraisals, Johnson said.
That said, LSI has investigated complaints from Realtors, Johnson added, and in some cases has taken measures including removing them from the pool of those eligible to receive assignments.
"I didn’t know the lenders weren’t telling you who the AMC is," Johnson said. "They generally are reluctant to tell you who the appraiser is … I don’t disagree with you. If you think there’s a bad appraiser out there, you should be able to at least say to the lender, ‘Let me know who the AMC is, let me share the transaction information with them.’ "
One Realtor from Seattle reported hitting roadblocks when lenders questioned an appraiser’s valuation.
"I’ve had transactions where I hear the appraiser came in at value, then I get a call that the underwriter didn’t like the appraisal value," the Realtor from Seattle said. "They went to Zillow, looked at (comps that were actually short sales), and decided the value of the property wasn’t there."
Freddie Mac’s Doty called any such decision by lenders "not acceptable." If lenders aren’t comfortable with an appraisal, they need to get another one, she said.
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