How To Pick On Appraisers
Many in the real estate community are upset with the newly implemented Home Valuation Code of Conduct (HVCC) and want it suspended or revoked so we can go back to the good-old-says when it was okay to threaten and pressure appraisers.
The HVCC was an agreement worked out between New York Attorney General Andrew Cuomo, Fannie Mae, Freddie Mac and their then regulator, the Office of Federal Housing Enterprise Oversight (OFHEO).
Appraisals are hugely important to real estate brokers, agents, buyers and sellers. If the appraisal is for less than the sale value then the buyer must put up more cash to qualify for a loan, the sale price must go down or both — unless, that is, the sale falls through. In other words, if you’re a buyer you want an appraisal to assure that you do not overpay for the property –a protection which is undermined and eroded when the appraiser is pressured and threatened to come up with the “right” number.
There are a number of points under the Cuomo agreement, but three important items look like this:
___ Mortgage Brokers are prohibited from selecting appraisers. Since the mortgage broker profits when the loan is originated, it follows that such folks are only going to select appraisers who come up with the “right” price valuation.
___ Lenders are prohibited from using “in-house– staff appraisers to conduct initial appraisals. This is a built-in conflict of interest since the lender (meaning, usually, not a mortgage investor but rather a party that originates a loan and then sells it as quickly as possible) wants appraisers to approve any and all deals, otherwise the lender doesn’t eat.
___ Lenders are prohibited from using appraisal management companies that they own or control. This is another overt and obvious conflict of interest — and still another way to screw buyers who are not getting the protection for which they paid if an appraisal is less than accurate.
The solution, say many in the real estate community, is to get rid of the HVCC. Why? Well appraisal costs have risen — that, of course, is not a problem if brokerage fees go up and bank revenues increase. Also, sales are being delayed because it takes time to do an accurate appraisal. Given a choice of speed or accuracy, many in the real estate community prefer whatever it is that produces fees and commissions.
The real issues are different. First, since many purchasers are now represented by buyer brokers and agents it is an outright and absolute conflict of interest for those who represent purchasers to advocate weaker appraisal standards. Second, why on earth should lenders ever be allowed to own or control appraisal companies? This is like guarding a hen house with wolves.
A good appraisal and a professional home inspection are vital consumer protections, well worth the dollars they cost. And if it takes a little more time to get them done right and without pressure on the appraiser or inspector, so what? A home is a long-term investment, why not wait a few more days to assure that purchasers are not paying more than they should?
___ Lenders are prohibited from using “in-house– staff appraisers to conduct initial appraisals. This is a built-in conflict of interest since the lender (meaning, usually, not a mortgage investor but rather a party that originates a loan and then sells it as quickly as possible) wants appraisers to approve any and all deals, otherwise the lender doesn’t eat.
___ Lenders are prohibited from using appraisal management companies that they own or control. This is another overt and obvious conflict of interest — and still another way to screw buyers who are not getting the protection for which they paid if an appraisal is less than accurate.
The solution, say many in the real estate community, is to get rid of the HVCC. Why? Well appraisal costs have risen — that, of course, is not a problem if brokerage fees go up and bank revenues increase. Also, sales are being delayed because it takes time to do an accurate appraisal. Given a choice of speed or accuracy, many in the real estate community prefer whatever it is that produces fees and commissions.
The real issues are different. First, since many purchasers are now represented by buyer brokers and agents it is an outright and absolute conflict of interest for those who represent purchasers to advocate weaker appraisal standards. Second, why on earth should lenders ever be allowed to own or control appraisal companies? This is like guarding a hen house with wolves.
A good appraisal and a professional home inspection are vital consumer protections, well worth the dollars they cost. And if it takes a little more time to get them done right and without pressure on the appraiser or inspector, so what? A home is a long-term investment, why not wait a few more days to assure that purchasers are not paying more than they should?
© Copyright 
Comment by Rita B on 28 June 2009:
I completely agree.
The frenzied outcry to HVCC confirmed for me how much something like HVCC was needed.
There are a number of huge problems that need to be hammered out though. Unfortunately, the provision that lenders can’t be partial owners of an AMC was not included in the final version of the HVCC. THAT’S a problem. Many lenders are only allowing the appraisal to be done by “their” AMC. No conflict of interest there!
At this point, HVCC is not having the intended affect of producing unbiased appraisals HOWEVER, I have some small hope, if properly tweeked, it could.
Comment by Mike Seward on 28 June 2009:
I am an appraiser and have some thoughts on your article.
The article’s first item implies that ALL mortgage brokers are dishonest and will only pick dishonest appraisers
The second item makes the same implication about lenders.
As Rita said, the third item was removed after the first draft.
The article mentions the fact that appraisal costs have risen. The “appraisal cost” the borrower pays to the lender has risen, but the fee paid to the appraiser has substantially declined by as much as 50% due to lender’s use of management companies. The increased time to complete appraisals is also due to the use of management companies adding extre layers to the process.
The article mentions buyer’s agents advocating weaker appraisal standards. Actually they’re advocating stronger appraisal standards. Before May 1st, the agent could expect the lender’s appraiser to be competent, experienced and to have local knowledge. Now the appraiser that shows up to appraise the property can be from hundreds of miles away, inexperienced and have no knowledge of the subject’s market area.
This is a case where the cure is much worse than the disese. The ones that are being hurt here are the consumer, the honest, experienced appraisers and the honest and ethical lenders.
Comment by Peter G. Miller on 28 June 2009:
The article doesn’t infer any such notion regarding ALL mortgage brokers, and that was certainly not the intent. My mortgage broker, as an example, isn’t pressuring anyone to do anything.
The point regarding buyer brokers is that they should be advocating stronger appraisal standards. Thus when industry groups which include large numbers of buyer representatives come out against HVCC they are surely not helping real estate agents and brokers who have a fiduciary obligation to the purchasers they serve.
Comment by Raymond Denton on 28 June 2009:
>>Since the mortgage broker profits when the loan is originated, it follows that such folks are only going to select appraisers who come up with the
Comment by Peter G. Miller on 28 June 2009:
Mike –
I agree that all loans should be covered under HVCC.
Comment by Tim Dick on 30 June 2009:
Peter, you make some very good points, but you have your facts wrong about the HVCC prohibiting lenders from using AMC’s that they own or control as this provision was struck out of the final version of the HVCC before it went into effect. This has resulted in the biggest banks using AMC’s which they own outright or in partnership with the big title insurers. As a result, they are essentially “skimming” the appraisal fee and often paying the actual appraiser one-half or even less than the fee collected from the borrower. Aside from ripping off the borrower, this has resulted in often only the newest and least experienced appraisers working for these companies since more experienced appraisers typically refuse for less than 1/2 the fee that they can get from other business sources.
Comment by Peter G. Miller on 30 June 2009:
Tim –
Thank you for the update.
Then, plainly, we need to get that provision back in.
Please understand that I am not opposed to making the HVCC better, I am opposed to reducing borrower protections, mortgage investor protections and lender shareholder protections.
Peter
Comment by Tim Dick on 1 July 2009:
Peter,
I believe that the only way to solve the “appraisal problem” which afflicts the mortgage lender industry is to enact and strictly enforce regulations which hold lenders 100% repsonsible for appraisal quality. Lenders need to be required to repurchase any loans and “eat” the loss on any loans whenever appraisals used to underwrite and fund those loans are found to be deficient, even if such deficiencies are found years later. This is the only sure way to force lenders to select honest and competent appraisers who will perform credible valuations of the collateral. Nothing else will work to solve the problem. The HVCC, while good in intent and while solving the problem of mortgage broker influence on the appraiser has actually encouraged most lenders to give up control over quality in the appraisal process by outsourcing the appraisal to either non-affiliated AMC’s which are almost completely unregulated and whose main motivation is not appraisal quality, but finding the cheapest appraisers possible so they can increase their margins, or, alternatively, using AMC’s owned in whole or part by the lenders, which then are just utilized as an additional profit center. Either way, lenders are able to use the AMC’s to intimidate and influence appraisers just as easily as they did before, only now they have a veneer of “plausible deniability”. The HVCC is a complete and utter failure which is even worse than no reform at all since it presents the illusion of fixing a problem, when it has done nothing of the sort.
I believe that the HVCC should be scrapped and replaced with a better constructed system of regulation that is well thought out by the leaders in the appraisal industry in consultation with federal regulators. The HVCC was a poorly conceived effort pushed by Andrew Cuomo in what amounted to little more than political grandstanding and an effort to reward his cronies in the AMC industry. (Just in case you did not know, Andrew Cuomo served on the board of directors of a large AMC which went by the name of AMCO at that time). Don’t you find it more than a little curious that an investigation by Cuomo into improper pressure on appraisers by an AMC (First American EappraiseIt) in collusion with Washington Mutual resulted in a settlement agreement that birthed the HVCC, which encourages lenders to use AMC’s? I encourage you to look into Cuomo’s past associations with the AMC industry, beginning with his days as the Secretary of HUD. I refer you specifically to FHA mortgagee letter 97-46 (issued on 12/8/1997 when Cuomo was HUD secretary) which allowed AMC’s to skim part of the appraisal fee paid by the borrower and overturned FHA mortgage letter 97-22, issued only 7 months earlier, which specifically forbid lenders from charging the borrower more than the fee which was actually paid to the appraiser.
Comment by Liz Freeman on 2 July 2009:
I think the HVCC was the result of good intentions, poorly executed. It didn’t solve the old problems and created plenty of new ones. The appraisers I worked with as as LO were fair and I accepted it if the value came in lower than expected. Because I picked good ones, not the “hookers” who managed to eventually get themselbes blacklisted with most major lenders in no time for inflating values. And remember appraisal review committees? It’s not like the lender didn’t have the option of protecting itself if it wanted to.
I have worked for brokers and have my issues with themand NAMB–largely because they aren’t on the hook for any deal that goes sideways and thus have more incentive to push the ethics envelope–not unlike those who securitized their loans as well.
But the consequences of this law (written by people who obviously had a poor grasp of the real estate and mortgage lending industries) were disastrous for consumers. My husband is an LO with a large bank and some of the appraisals that come in 9when they bother to return calls and actually go do the work) were appallingly bad.
The problem is that for an appraisal to take place, someone has to order it and someone has to perform it. Enter the Appraisal Management Company, or AMC. These guys take the order from the lender, Realtor, whoever, and farm the assignment out to an appraiser contracted with them. For an approximately 40% commission. Yep, the cost of appraisals went up and refinancing became a lot more expensive for consumers.
And guess what? According to National Association of Mortgage brokers (NAMB) president Mark Savitt in his recent testimony before the Committee on Financial Services, these guys are virtually unregulated. In fact, many industry experts have speculated that a lot of former shady operators in subprime lending turned right around and got into the AMC business. But the main issue is how much this bill has hurt and cost the consumers it was meant to help.
Then there is the quality issue. As in all professions, there are good, bad, and ugly appraisers. And according to NAMB, two problems really up the chance of a homeowner getting a poor quality appraisal on the home. “First, because AMCs contract to pay appraisers such low fees, those appraisers most often willing to work with the AMCs are inexperienced and therefore less likely to make an adequate home valuation than a more tested and experienced appraiser. Second, AMCs are assigning appraisers from different municipalities, counties, or even states to appraise target properties. These appraisers, in addition to likely being inexperienced, are also unfamiliar with the neighborhood and the community and are consequently unable to produce an accurate appraisal.” Meanwhile, small independant appraisers who know their areas and produce professional work have been driven out of business.
Finally, there is the cost issue. The BORROWER pays for the appraisal. According to NAMB, HVCC will cost borrowers about $2.8 billion over the next year if it stays on the books. There are many documented instances of the “middleman” approach causing delays in closing, forcing borrowers to pay extra to extend their lock or redraw loan documents–on average, an additional $561.95. And appraisal fees have risen significantly–on average a minimum of $150 since the implementation of the HVCC. Add this up and it is apparent that consumers are paying an average cost increase of $711.95 on every loan originated under the HVCC since it went into effect May 1.
Fortunately, a bill is being kicked around in Congress called HR 3044, which would put an 18 month moratorium on the HVCC. It was just a bad solution and needs to be replaced with something that will actually do what the original bill intended.