I am hopeful that the severe losses announced by Fannie Mae and Freddie Mac over the past 24 hours will stimulate some sort of shake up in the mortgage industry to prevent what happened over the past several years to not happen again.

$3.6B here, $2.5B there,
soon or later its real money

I have been a long time proponent of the lending process to be open and honest about actually knowing how much the collateral is worth that mortgages are issued against. If the value is in the property, then whats the problem? It’s an underwriting decision, not a valuation placement whether to make the deal when guidelines are strayed from. Appraisers are to simply report what is happening in the market and move on to the next assignment as a disinterested third party.

It’s all about appraiser neutrality – thats essential to maintain credibility of values.

Sharon Lynch at Bloomberg News in her article Fannie Proposes Ban on Lenders’ In-House Appraisers presented my thoughts on the current problem:

About three quarters of residential mortgage appraisals are arranged through brokers who only get paid if a loan closes, Miller said today in a phone interview. He called the practice “laughable” because it creates a financial incentive for mortgage brokers to push appraisers toward higher valuations. Higher appraisals also mean more homeowners qualify to refinance their homes and take cash out, he said.

and broke the story about the placement of a Fannie Mae talking points memo on the American Banker web site yesterday which lays out the key points in the negotiation with NYS AG Cuomo.

“It would be a monumental change because it would require a shift in the way that the lending industry does business,” said Jonathan Miller, chief executive officer of Manhattan-based appraisal company Miller Samuel Inc. and a longtime proponent of creating a firewall between residential appraisers and mortgage originators. “I think it would be tremendous.”

I fretted in an earlier post that the large losses would slow down progress for reform, simply because any reform would slow down transaction activity until the lending industry adjusted to them and that would hurt the GSE’s near term financial performance.

Here is the text of the talking points memo (items in bold appeared in bold in the original memo):

THE NATIONAL APPRAISAL CLEARINGHOUSE TALKING POINTS

In November, 2007, the New York Attorney General’s Office sued First American (and its subsidiary, eAppraiseIT) for allegedly inflating the appraised values of homes.

The lawsuit is part of a broader investigation into alleged fraudulent practices in the mortgage industry, specifically related to appraisal practices.

Fannie Mae wishes to cooperate with the New York AG’s investigation and, as part of a cooperation agreement, will likely agree to a number of items, the most significant being:

  1. Requiring as part of our reps and warrants, and as a precondition of the sale of any mortgage to Fannie Mae, that the lenders or brokers do not have and did not utilize either in house appraisers to conduct the subject property appraisal NOR do they have any wholly owned subsidiary or other subordinate entity that performs appraisals.
  2. Requiring as part of our reps and warrants, and as a precondition of the sale of any mortgage to Fannie Mae, that LENDERS not rely on appraisals provided by brokers, either for purchase transactions or refinancing transactions. This would, in effect, require lenders to always secure their own appraisal of any property purchased through a broker.
  3. A CLEARINGHOUSE of appraiser information, conduct and activity will be established.
    a. All lenders will be required to provide post-purchase copies of appraisal documents to the Clearinghouse.
    b. It will be an independent entity with an executive and board of directors (no Fannie Mae employee involved).
    c. It will staff a hotline for industry and consumer complaints.
    d. It will provide annual reporting publicly.
  4. These requirements will go into effect for loans acquired by Fannie Mae after September 1, 2008.

In my next post, I am going to expand on what I think the ramifications of this are. Of course, the big assumption is whether this deal will even happen.

UPDATE: Catch the comments on Mortgage News Daily about this post.

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18 Responses to “[Talking Points] The National Appraisal Clearinghouse”

  1. John K says:

    Well, this has nothing to do with what you’re talking about, but thought I’d mention it, anyway.

    About “billions”. I read about Congressman Frank’s and Senator Dodd’s proposals to “help out” banks and/or borrowers – it got me all bent out of shape because I think it solves little while creating a lot of problems.

    But, then I see that their estimates are $10 – $20 billion in spending … and I think, well, gee, that’s nothing, really, in the scheme of things. A rounding error in the federal budget or if you think about the entire housing market.

    But then I get mad again. I dunno.

  2. ROB says:

    Unless there is a minimum appraisal fee then I see more problems coming from this then good. How is the government going to order an appraisal? What would be different from whats going on with AMC’s now? They are the worst of the worst in terms of pressure and poor training. Somebody better clarify this quick because there is no such thing as a disinterested business, eappraisit, valocity,… the pressure will be greater will fewer players, you either go with the PROGRAM or you never get a call again. This would be a wonderful thing for the lenders, they can hand pick the outside company with the GOOD appraiser, err value hunting, cheap fee taking, form fillers. We need to start enforcing the laws we have instead of making more useless unenforced laws.

  3. Rob – the clearinghouse, at least the way it is described, has nothing to do with ordering appraisals. Re-read item 3. Someone else told me the same thing today. Of course, if you are right, it would be even worse than the morass that exists today.

  4. [...] Credibility coming back to appraisals? The consequences – intended and unintended of this development – may be enormous. [...]

  5. ROB says:

    Sorry about the misread. But

    From #2 “require lenders to always secure their own appraisal”

    Will that be with a 24 hour turn-time and a low fee? I think it will.

  6. DMC says:

    The AMC’s have had the biggest negative impact to the lending industry. As an appraiser all they care about is ever lowering fees and 24 to 48 hr turn time at the value. Until they are out of the system it will be the same old same old at $180 for a 1004 appraisal report.

  7. Terry says:

    I’ve been a table funding correspondent lender for 15 years and I’ve yet to find an appraiser who will “fix” value for me. Your premise that mortgage brokers are pushing appraisers to set value, in my opinion, means the appraiser is the one to blame, not the mortgage broker. Certainly, there are “crooks” in every aspect of every business. Maybe you should get rid of them and not penalize those that have never had an issue following the lending guidelines. What is “laughable” here is some method to order appraisals through wholesalers or a governmental agency. Setting up something similar to a VA or FHA approval process with a working website to select appraisers on a random basis means you have no clue what you are getting in the quality of the appraiser/appraisal work.

  8. Terry – Please. You are either very naive or detached from reality. No personal offense intended but when a system places control of quality in the hands of those on commission, the dollars win. Its human nature. If 80 of 100 appraisers are impervious to pressure, the remaining 20 will eventually get most of the work until many of the other 80 are forced out of the business for economic reasons. The new entrants to the business are more like the original 20 were and they become the majority. Thats what has happened over the past decade.

    Rob and DMC – you are spot on. Its the clearinghouse becomes a way to give AMCs control – it’s likely the end of the line for credible, honest appraisers.

  9. JOE says:

    I think Terry which comments on March 1st, 2008. Who has been a lender for 15 years is just a staight out liar. Terry comments that he or she has not yet to find an appraiser who will fix value. That means that he or she has tried, therefore the problem does exist. I believe Terry is just mad because now he or she will not be able to control a appraiser or appraisal value on a property. I have had on numerous occasions mortgage people call to see if I would push value. I never did and never will. The problem exist. I feel sorry for all the mortgage people and any appraisers being investigated by the FBI for mortgage fraud. But I look at the bright side, it elimiminates the bad with more work for the good. I don’t know what will happen with the new changes, but do aggree on most comments and concerns by the other appraisers. I wish the best for all of you good honest appraisers out there. For the appraisers which pushed values for a buck, well you better hope the the FBI does not come knocking at your door.

    Terry we don’t need people like you in this industry. I wonder if the FBI will be at your door.

  10. RM says:

    Some thing has got to be done. The fees are not fit in the rural areas for an appraiser to make a return on the investment s/he has invested in the appraisal or a return of the investment. In the area I cover AMC are offering fees of $125 to $150 for appraisals. If done correctly and the correct amount of research and drive time put into an appraisal report. You can have three or four full days easy. With gas over $3 a gal you have spent you fee for just gas and drive time.

    As far as pressure, it’s every day. The MBs, Los, Banks, want comp checks, pencil searches, CMAs and the last they thing they want is a guarantee a value before they will send you the order. If you complete the appraisal and send it in and it did not hit the high end of the comp check or CMA then the either will not pay or want you to refund the fee to the home owner. If you don’t many times they start to report you to the state agencies or the MARI-INC. In the case of MARI-INC you are never notified that derogatory information has but place in a file with your name on it and it is available to members. You have no chance of rebuttal until someone tells you MARI-INC has a file on you. Even Fannie Mae and Freddie-Mac and government agencies like HUD use this data base to screen appraisers. Poor information in a file you are never put on the fee panel or notified in many case of why not, that you had derogatory information in your file.

  11. Jeniffer says:

    I hope that it is not too late to suggest some other way of dealing with this. What if appraisal ordering stayed exactly the same as it is now, except if the client is any mortgage broker, AMC, or lender that sells the loan, a review has to be done by a randomly selected review appraiser from a pool that is monitored by an independent entity? This would prevent the original apppraiser from trying to do a bad appraisal in the first place, and if the original client had to pay for the review, it wouldn’t cost tax payers anything.

  12. Laurel L says:

    Wow, what a mess. If the AMC’s have anything to do with this new “clearing house” of appraisers, then we’ve accomplished nothing.

    Quantrix is actually owned (in part) by Chase! What good does that do the appraiser? Sure, there is no “target value” on the appraisal order but…the loan officers still call us up and tell us what the values should be (hint, hint) just in case we were thinking of coming in at the actual market value. And they want it faster and cheaper. They have just cut the fees again to the point where it feels like I’m not even breaking even.

    If you start a type of rotation where it is done by zip code or MSA and truly rotate, then I can see where you might get some more accurate valuations. I am assuming the State Certs know what they’re doing…and I could be a little optimistic here.

    Eliminate AMC’s and their high pressure tactics. They muck up the works mostly, get the instructions wrong, order 1004′s for condo units, forget to give you a unit number, or sales contract, contact phone numbers, etc etc.

    PS I agree w/ most of what Rob said. I also like the review idea….I’ll take those assignments!

  13. Me says:

    Terry, if you are even being truthful, just know that just because YOU haven’t experienced something doesn’t mean it is not happening. I hope the FBI comes a knockin’ sooner rather than later.

  14. Keith says:

    My most recent experience with a request from my broker/client to hit “a number” ended up with me not being paid for an appraisal. My lender/client found another appraiser who was willing to “play ball”. The deal closed and the borrower is in a property which was over valued by about $30,000. It would appear that Terry, in his/her 15 years as a broker, has been unable to find another appraiser as my broker/client did. Johathan Miller hit the nail on the head when he said there needs to be a firewall between the appraiser and mortgage originator.

  15. ross says:

    I, for one, would like to know what eAppraiseIT said to Cuomo. All of the AMC’s like LSI, eAppraiseIT, etal, which happen to keep a substantial part of the fee (unknown to the borrower), have created a new class of form fillers who base their business model on high volume, low quality. Too many of these in existance. I get calls every from trainees who want more experience and training. Scary

  16. RalphyO says:

    Jennifer, I think that is a brilliant idea………… and I will add to that. If the appraiser(s) performing the job receive negative reviews by the several “randomly selected reviewers”, the appraiser should be called by the board to explain the reasons. This will also help cut the fat out of the industry.

    However, if the “bad” reports happen to coincide with a particular mortgage/lender company, this will serve as a red flag and the mortgage/lender company should have “all” their files reviewed by designated authority, this will also help cut the fat out of that industry too.

  17. In my previous life, I worked in the manufacturing sector, supplying parts to the aerospace industry. During the early 80′s, we had assigned buyers. We would wine and dine them when they came to town and suck up for business. We did very good work I think, but this was how business was conducted. Soon, the system changed and changed for the better. Programs were initiated that rotated buyers and created a new and rigorous scoring system. Suppliers were rated primarily for their product quality, compliance with regulations and timeliness. The suppliers with a higher score would be given weighted favor in the bidding process. I believe this is how it should be and hope a similar fate is in store for the appraisal industry. “The sky is falling” philosophy can be a self fulfilling prophecy in times like this, but history shows things really do improve. Look at FIRREA, before and after. I’m optimistic !

  18. Hal Scott says:

    Hello All, I’m here in CT. I have read much of what was said prior in this blog and like what I’m hearing. We need to discuss the issues and also find a way to have them heard. First issue I’ll throw out is, big deal that they create managament firms. There is a need to create a buffer between the appraiser and the mortgage maker. Here’s a problem I see. The management company can also pressure the appraiser and also not forward appraisal assignments. What’s going to stop the company from not sending work if they hear from their client that this appraiser or that appraiser did not get the number? Also what if the appraiser complains? You don’t think you’ll be on another list. The one not to use. I’m optimistic also though I hope to keep feeding my family.