In a recent post on Matrix, [Talking Points] The National Appraisal Clearinghouse I published the memo text in full for the first time in public domain (that I am aware of). I got a lot of calls and emails from appraisers, organizations as well as links from other sites with a slew of commentary.
The focus of the feedback seems to be on the “clearinghouse” concept in the talking points memo by Fannie Mae. The clearinghouse has the potential to be a huge morass of bureaucracy because it is presented as vague in purpose.
The common perception by most within the appraisal industry that I have spoken with or have provided commentary is that the clearinghouse will become:
- a giant appraisal management company-like entity that will essentially prevent appraisers from establishing relationships with clients. The appraiser becomes a number in an automated system based on whether or not the appraiser holds a valid license and turns around the report in a required period of time (sounds like an appraisal management company).
- appraisal management companies [AMC] would become enabled as a result of this talking points memo because lenders went to mortgage brokers and appraisal management companies to begin with to reduce overhead. By eliminating mortgage brokers from the appraisal ordering process, they would be forced to use appraisal management companies since they do not want to manage appraisal panels like they did before. They shifted mortgage origination to mortgage brokers to reduce overhead cost and risk and attempted to shift collateral risk to third parties in the process.
I’d say that both of these issues expressed by the appraisal industry are absolutely of significant concern if AMCs become enabled as a result of the implementation of this memo, it spells disaster for any sort of relevant solution to the problem of disconnect between the valuation of property and the mortgages that are lent against them.
Here’s the specific text from the memo on the clearinghouse and some thoughts on each point.
3. A CLEARINGHOUSE of appraiser information, conduct and activity will be established.
my comment: The purpose seems to either overlap or supersede the function outlined in FIRREA for the licensing of appraisers to be managed by each state. At the state level, budget constraints do not allow them to go much beyond managing license compliance. After all, it is not practical, fair or realistic for a state to tell an appraiser, “Gee, you overvalued this property by $12,000.” State agencies are not given adequate resources to be able to police all appraisers. It has been my experience, at least in New York, that the Department of State has been competent and fair, despite the lack of resources. The function for each state is to provide oversight to make sure appraisers are correctly licensed, their courses taken are approved and to answer complaints by consumers for shoddy appraisal practice. That means dealing with legitimate complaints as well as those from crackpots hoping to smear an appraiser because they were unhappy with a value conclusion. However, that does not address the quality problem with mortgage brokers and AMCs.
a. All lenders will be required to provide post-purchase copies of appraisal documents to the Clearinghouse.
my comment: Of course, with digital documents and scanning capabilities, this process is fairly simple (we’ll get to who pays for this later).
b. It will be an independent entity with an executive and board of directors (no Fannie Mae employee involved).
my comment: This point is important, and as an independent entity, it should include majority representation by appraisers and appraiser organizations as well as lender representation. No mortgage broker or appraisal management company representation since they are part of the reason for the need for this entity to begin with.
c. It will staff a hotline for industry and consumer complaints.
my comment: I see this as redundant to the state function and not able to serve much of a purpose that will prove effective in resolving problems. I think this should remain on the state level and the clearinghouse aggregates complaint data from the states as part of its reporting function. Remember that this organization is essentially one step removed from the state level and could really only refer complaints to each state to handle.
d. It will provide annual reporting publicly.
my comment: From the stand point of summarizing aggregate data, this is an effective tool to create awareness of progress with this serious problem with the mortgage industry. However, it should not be used to publish complaints about individual appraisers unless it can publish complaints about lending institutions, mortgage brokers and AMCs.
DISASTER WAITING TO HAPPEN
Appraisal management companies [AMC] should be pretty happy about their prospects if the talking points memo as presented, becomes standard practice, because they become essential to lenders if mortgage brokers are not allowed to order appraisals for lending purposes. The same quality problems with appraisals will remain, if not get worse.
In other words, the appraisal quality produced by AMC’s is just as bad as the work generated for mortgage brokers. I think it would be a disaster and a monumental waste of energy, given all the progress that New York State Cuomo has made in correctly identifying the real issues at hand if AMC’s become more relevant.
Ideas for consideration
- If appraisal management companies [AMC] are contractually given incentives for handling a higher volume of appraisal orders by lenders, they are automatically ineligible to manage appraisals that are sold to Fannie Mae.
- Cap the AMC participation to a nominal percentage (ie 10%) of mortgages accepted by Fannie Mae.
- Create a national consortium of review appraisers who do not work for AMCs that would review AMC product. Perhaps this could be an offshoot Quality ratings could be established to determine whether the AMC product meets standards for Fannie Mae.
Other ideas or suggestions welcomed.
Aside: I would love to be officially part of the government clearinghouse effort because, as someone recently told me, “the devil is in the details” and I think it is important to have appraisers on the front line actively involved in fixing the disconnect problem.