New restrictions on lenders’ use of broker price opinions (BPOs) contained in the financial regulatory reform bill passed by Congress shouldn’t affect brokers’ BPO workloads.
Although lenders will have to obtain full appraisals before greenlighting most purchase loans secured by a principal residence, BPOs will still be in demand for pricing REOs and short sales, and will continue to be valid documentation for refinancings.
Before the passage of HR 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act, federal banking agencies didn’t require lenders to obtain a full appraisal for residential mortgage loans less than $250,000, FHA- or VA-insured loans, and residential mortgage loans whose appraisals conform to Fannie Mae or Freddie Mac appraisal standards.
HR 4173 will amend the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) to stipulate that BPOs "may not be used as the primary basis to determine the value" when a consumer is taking out a loan to purchase a principal residence.
According to an analysis by K&L Gates attorneys Nanci Weissgold and Kerri Smith, HR 4173 "would essentially prohibit the use of BPOs as the primary basis for determining market value for certain mortgage originations," although BPOs would not be prohibited entirely.
It appears that where not prohibited by state law, BPOs will still be used for refinancings, establishing home equity lines of credit, and in connection with loss mitigation and collection efforts, Weissgold and Smith said.
NAR, which has defended the use of BPOs to value short-sale properties in the Home Affordable Foreclosure Alternatives (HAFA) program, says brokers shouldn’t expect lenders to stop ordering up BPOs, which are commonly used to price "real estate owned" (REO) properties.
"We are pleased with the changes," NAR spokesman Lucien Salvant said. "Broker price opinions generally aren’t used as the primary basis to determine value of residential mortgages, and the new legislation is consistent with the Freddie Mac policy on BPOs. In addition, the legislation doesn’t affect programs like HAFA and HAMP (the Home Affordable Modification Program), or refinances."
Bill Garber, director of government relations for a group representing appraisers, the Appraisal Institute, said the legislation "confirm(s) the importance of utilizing a competent and independent appraisal professions in the mortgage process. It codifies a policy that was released a year ago by Freddie Mac and has been in place at FHA for many years."
Garber said that it is his understanding that depending on how the original not is worked, many loan modifications are actually considered new loan originations, meaning some loan mods may require appraisals.
The bill also sets in motion a process to implement quality control standards for automated valuation models (AVMs) when they are used by lenders to determine the collateral worth of a consumer’s principal home. The HAMP program authorizes the use of both BPOs and AVMs to determine if loans qualify for modifications, Weissgold and Smith note.
HR 4173 directs federal agencies to consult with the Appraisal Subcommittee and the Appraisal Standards Board of the Appraisal Foundation to draft quality control standards for AVMs to ensure a high level of confidence in estimates produced by AVMs, protect against the manipulation of data, and prevent conflicts of interest. The standards are to be enforced by random sample testing and reviews of AVMs.
HR 4173 will also spell the end of the Home Valuation Code of Conduct (HVCC), appraisal rules adopted by Fannie Mae and Freddie Mac in May 2009.
Interim regulations implementing the bill’s appraisal independence provisions and superseding the code are to be drafted within 90 days of the bill being signed into law.
Realtors and homebuilders complained that the code resulted in lenders relying more on appraisal management companies (AMCs), which they charged often employ appraisers who lack experience in the markets in which they are asked to provide valuations.
Weissgold and Smith noted that the appraisal independence standards do not expressly state that lenders cannot accept appraisals from a mortgage broker, loan originator or other interested party.
"Through silence, (the standards) arguably permits lenders and (Fannie Mae and Freddie Mac) to continue to rely on AMCs as a means to provide independent appraisals, regardless of the HVCC’s elimination," the K&L Gates attorneys said.
Fannie Mae on June 30 announced that lenders must use appraisers with local experience who have access to recent sales records in markets where they provide valuations.
The mortgage guarantor also said lenders and AMCs are barred from making unilateral changes to appraisal reports, including the appraised value, and added to previous guidance on the selection and use of comparable sales.