by Nancy Osborne, COO of ERATE®
Sept 25, 2009 - Realtors, bankers and builders recently held a meeting with federal regulators to discuss the fall out from and implications of the new appraisal guidelines which have rocked the real estate industry. The Home Valuation Code of Conduct (HVCC) has been effective since May 1, 2009 and GSEs Fannie Mae and Freddie Mac have been permitted to purchase only those loans which comply with it. Next on tap to go into effect on January 1, 2010, FHA, which is under the direction of the Department of Housing and Urban Development (HUD) must also comply with its own new appraisal rules and guidelines as well. Due to the controversy that has surrounded HVCC, the National Association of Realtors (NAR) has asked regulators for some guidance and consistency in all the new appraisal rules being applied to both the GSEs and FHA.
The Home Valuation Code of Conduct (HVCC) was established last year, under an industry settlement that was reached with New York Attorney General Andrew Cuomo, and requires that GSEs Fannie Mae and Freddie Mac be permitted to purchase mortgages only with appraisals which have not been ordered directly by the lender. Since the HVCC went into effect in the spring, direct lenders have been allowed to order appraisals through their in-house staff appraisers but if an outside appraiser is used, it must now be ordered through an intermediary called an Appraisal Management Company or AMC. Mortgage brokers, who are intermediaries themselves between the lender funding the loan and the borrower, are only allowed to order an appraisal through an AMC.
The intended purpose of the HVCC was to eliminate a perceived conflict of interest a loan originator may have in needing a property to appraise at a given value in order to complete a transaction, therefore resulting in the possibility of putting undue, unethical pressure on a favored appraiser in order to make the deal work. However, the unintended consequence of the HVCC may be that independence has come at the price of incompetence as appraisers who are inexperienced and are willing to work for sub-standard fees are being given the work. Complaints have surfaced that appraisers from as far as 200 miles away have been given the opportunity by some AMCs to appraise properties in areas they are completely unfamiliar with. Many players within the real estate industry have expressed concern that appraisers are being sought out on the basis of reduced fees and fast turnaround times rather than their qualifications and experience. The AMC makes their profit from the spread between what they collect from a borrower and what they in turn pay the appraiser, thereby creating a new unnecessary layer of appraisal middlemen.
The very purpose of the appraisal is to confirm a lender's funding decision as the property is the collateral supporting the loan. One key element which has been largely overlooked in the appraisal debate is that of the responsibility of the loan underwriter. An underwriter is charged with the task of evaluating the elements of risk that a loan carries with it subject to the criteria being used by the lender, including both borrower and property risks. If the comparable sales used by an appraiser are too far away from the subject property or if the appraiser makes adjustments to the comps which are outside of prudent guidelines, it is the underwriter's job to question the appraisal rather than to rubber stamp it with an approval. In years past, when common sense underwriting prevailed, it was fairly common that when any questions arose regarding an appraisal's valuation that an appraisal review or even a 2nd appraisal was requested by the underwriter.
A critical part of the appraisal problem developed with the high number of low or no down payment loans being funded. The margin for error when a borrower is putting little to nothing towards the down payment significantly increases the risk to both the lender and the investor. A primary reason why an appraisal typically comes in right at the sales price is because there is a willing buyer and a willing seller who have contractually agreed on the value of a property, this is the very definition of how the free market operates. When the music finally stopped and property values, for which it was falsely assumed, could never decline, did the unthinkable and began to reverse course, the appraisal once again became the primary focus much as it was during the S & L Crisis of the late 1980s and early 1990s.
All that is likely needed to resolve the problem is to return to the old standards of common sense underwriting. Eliminate the lack of accountability that the lender has to the investor via the mortgage securitization process, require a down payment so the borrower is actually invested in their own property and do some basic due diligence regarding a borrower's income and employment status. Then hire only local, licensed, certified appraisers and look closely at the comparable sales used in the appraisal and that should be all that's needed to remedy the situation. Introducing an entirely new layer of middlemen in a real estate transaction will only serve to create more problems than it could ever hope to solve.
Nancy Osborne has had experience in the mortgage business for over 20 years and is a founder of both ERATE, where she is currently the COO and Progressive Capital Funding, where she served as President. She has held real estate licenses in several states and has received both the national Certified Mortgage Consultant and Certified Residential Mortgage Specialist designations. Ms. Osborne is also a primary contributing writer and content developer for ERATE.
"I am addicted to Bloomberg TV" says Nancy.
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