Yesterday I spoke to a long-time friend of mine who owns an appraisal company. It seemed strange to think that up until a little over a year ago, I used to call his company frequently to order appraisals, and check the status of pending orders. Since the Home Valuation Code of Conduct was implemented in May of 2009 as a result of a settlement between Andrew Cuomo and Fannie Mae and Freddie Mac, none of us loan originators have been able to order appraisals for loans that were going to be sold to Fannie Mae and Freddie Mac. So for almost a year and a half, I have been getting my appraisals through whatever company the lender chooses and seeing them after the underwriter does.
When the Home Valuation Code of Conduct was first introduced, the mortgage broker industry cried foul since it took the mortgage loan originator (and specifically the small, independent mortgage broker) completely out of the appraisal ordering process. After 11 years in business, rather than calling an appraiser I knew and could rely on, I placed an order through the lender's website and they randomly selected an appraiser from their list. Some of those appraisals were so far off the mark that I was shocked--I still remember the Las Cruces appraiser who appraised a home selling for $360,000 for only $270,000. He compared the property to a foreclosure next door. Other appraisals were surprisingly good. I discovered that appraisers who worked hard and took pride in their work continued to do so even though they were being hired by AMCs while appraisers who had always produced substandard work continued to do so as well.
Supposedly, the Home Valuation Code of Conduct was necessary to keep corrupt mortgage brokers and loan originators from attempting to influence the value of a property by improperly influencing the appraisers. And from the stories that I have heard, there were apparently enough incidences of originators pressuring appraisers to make this a real issue.
However, HVCC decimated the small business owners and made them all subject to being hired by an appraisal management company who dictated what they could be paid. So the rule which was supposed to protect the independence of the appraiser actually harmed the independent small business owner.
As part of the Dodd Frank bill, HVCC has supposedly been eliminated and new appraiser independence rules have been put into place. But the new rules sound an awful lot like the Home Valuation Code of Conduct they replace. For example, no employee or or agent or independent contractor (mortgage broker) shall attempt to influence any appraiser through coercion, bribery or threats to bring in a certain value on a property. In addition, the new rules ban "requesting an appraiser to provide an estimated, predetermined, or desired valuation in an appraisal report prior to the completion of the appraisal report, or requesting that an appraiser provide estimated values or comparable sales at any time prior to the appraiser's completion of an appraisal report." Further, "the Seller will not accept any appraisal report completed by an appraiser selected, retained or compensated in any manner by any other third party (including Mortgage Brokers and real estate agents)." So for those who have been waiting for HVCC to end so that they can go back to the old relationships between originators and appraisers, there is going to be a long wait.
What I find truly interesting about both HVCC and the new appraiser independence rules is while both claim to protect the independence of the appraiser, neither one makes it illegal for a bank holding company to own an appraisal management company or to use an in house appraiser. As long as the loan officer involved in the transaction does not have direct personal contact with the appraiser, this is not considered a conflict of interest. But in reality, if the bank holding company pays the appraiser's salary--either directly or through an appraisal management company--and the bank sends the appraiser a purchase contract for a property, the appraiser is going to probably feel some obligation to appraise that property for the sales price. And appraisers who do not feel any such obligation may find themselves unemployed.
I have noticed what appears to me to be a real shift in the appraisals that I have received over the last nearly 18 months since HVCC was implemented. At first, very few properties appraised for the expected value. That it turn led to a lot of deals falling through. I talked to a title officer last year who said that she had a stack of files in her office that had fallen through because the appraisals were too low that "looked like the leaning Tower of Pisa." When we challenged the valuations of appraisals through the AMCs, we got back notes like the one that I received when I challenged the Las Cruces appraiser. That appraiser emailed back a nasty comment saying that he did not have to please loan originators any more since we could not hire him.
However, lost deals cost money. Lost deals with interest rate loan locks cost the banks a lot of money. So it was probably inevitable that the trend of properties not appraising for value would be reversed. Nowadays, most of the appraisals do come in for value. That may be due to the market stabilizing some, but it seems to me to also be due to a general understanding that appraisals on purchases "must" come in. Earlier this month I completed a purchase transaction through a major wholesaler. I really feared that the property would not appraise since it was a large home on the eastside of El Paso where it can be hard to find comparables for more expensive properties. I placed the appraisal order through the lender who placed it through their appraisal management company. When I got the appraisal back, I was shocked to see that the appraisal had actually come in $17,000 higher than the sales price. When I looked to see who had completed the report, I saw that it was an individual I would never have hired to appraise any property--much less a difficult, complex property such as this one. To me it appeared that she had pushed to match the contract price--actually to exceed the price--rather than to really accurately assess the value of the property. Since I am not allowed to have any direct contact with the appraiser, I was very interested to see how the underwriter would feel about the report. To my surprise, all she asked for was a letter explaining why some of the comparables used were so far away from the subject. The appraiser put notes of explanation in the file, sent the report back, and the underwriter accepted it.
Don't misunderstand--my loan closed and I was happy. But I firmly believe that if I had hired an appraiser who had produced a report of that quality and sent it to the underwriter, at the very minimum she would have required a review and she might have conditioned for a new second appraisal. It appears to me that now that the originator is no longer a factor in the appraisal process, the overall quality of the work does not seem to matter at all. The only thing that matters is that the originator did not have a conversation with the appraiser.
One problem that is supposed to be addressed through the new rules is the matter of appraiser compensation. The new rules are supposed to require that appraisers be licensed in the states in which they work and that they be paid a fair wage for their work. Fair market wages would tend to improve the quality of the workmanship. But there should be some other system besides a rotation to insure that qualified, capable people are rewarded over those who really do not know what they are doing.
The great irony of the entire appraisal mess is that just before the real estate market imploded, Fannie Mae loan approvals were coming back with conditions for limited appraisals, exterior only appraisals, and sometimes no appraisals at all. If the automated system agreed with the stated value of the property, then the borrower could get away without getting the house appraised. Now, three years into the market meltdown, this phenomenon has returned in a big way. A majority of the loans that I do now do not require an appraisal with a value--they allow for exterior photos only (what is called a form 2075). And in some cases, the findings do not require any appraisal or inspection of the property. So the irony of the new real estate market is that neither the appraiser nor the originator is really determining the value of real estate properties--that information is being pre-determined by pre-programmed information in the computers at Fannie Mae.
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