…the title…imagine the voice of Captain Jack Sparrow’s first mate…arrr

OFHEO and NYS Attorney General Andrew Cuomo reached a deal today that may help create an environment for appraisers to be independent. Karen Freifeld and Sharon L. Lynch’s Bloomberg News article Fannie, Freddie to Overhaul Appraisals in Cuomo Deal says:

“The goal of the office is to find out what went wrong and how to fix the problem,” Cuomo said today at a news conference. “What we identified as the common denominator, if you will, was appraisal valuation.”

“We believe the appraisals were often fraudulent because there were conflicts of interest and pressure on the appraisers,” Cuomo said.

Cuomo strategy was to get the GSEs to agree and the other markets will follow.

And long time mortgage lending critic NY Senator Charles Shumer chimes in:

Accurate, independent appraisals are very important to ensuring the safety and soundness of Fannie Mae, Freddie Mac and the mortgage market,” Lockhart said in a statement. “The agreements should help restore confidence in the mortgage market by enhancing underwriting practices, reducing mortgage fraud and making home valuations more reliable.”

In James R. Hagerty and Amir Efrati’s WSJ article Fannie, Freddie Set Stricter Appraisal Rules quotes me:

“In my opinion, 70% to 80% of appraisals that were done during the housing boom are probably not worth the paper they’re written on because the appraisers…were rewarded with more volume,” said Jonathan J. Miller, a New York appraiser and longtime critic of industry practices. He estimates that home values are overvalued nationwide by at least 10% because of inflated appraisals.

My significant concerns over appraisal management companies aside, important element of this agreement are spelled out in the Home Valuation Code of Conduct.

The first part of the code was what interested me most:

No employee, director, officer, or agent of the lender, or any other third party acting as joint venture partner, independent contractor, appraisal management company, or partner on behalf of the lender, shall influence or attempt to influence the development, reporting, result, or review of an appraisal through coercion, extortion, collusion, compensation, instruction, inducement, intimidation, bribery, or in any other manner including but not limited to:

  1. withholding or threatening to withhold timely payment for an appraisal report;

  2. withholding or threatening to withhold future business for an appraiser, or demoting or terminating or threatening to demote or terminate an appraiser1;

  3. expressly or impliedly promising future business, promotions, or increased compensation for an appraiser;

  4. conditioning the ordering of an appraisal report or the payment of an appraisal fee or salary or bonus on the opinion, conclusion, or valuation to be reached, or on a preliminary estimate requested from an appraiser;

  5. requesting that an appraiser provide an estimated, predetermined, or desired valuation in an appraisal report, or provide estimated values or comparable sales at any time prior to the appraiser’s completion of an appraisal report;

  6. providing to an appraiser an anticipated, estimated, encouraged, or desired value for a subject property or a proposed or target amount to be loaned to the borrower, except that a copy of the sales contract for purchase transactions may be provided;

  7. providing to an appraiser, appraisal management company, or any entity or person related to the appraiser or appraisal management company, stock or other financial or non-financial benefits;

  8. allowing the removal of an appraiser from a list of qualified appraisers used by any entity, without prior written notice to such appraiser, which notice shall include written evidence of the appraiser’s illegal conduct, a violation of the Uniform Standards of Professional Appraisal Practice (USPAP. or state licensing standards, substandard performance, or otherwise improper or unprofessional behavior;

  9. ordering, obtaining, using, or paying for a second or subsequent appraisal or automated valuation model in connection with a mortgage financing transaction unless there is a reasonable basis to believe that the initial appraisal was flawed or tainted and such basis is clearly and appropriately noted in the loan file, or unless such appraisal or automated valuation model is done pursuant to a bona fide pre- or post-funding appraisal review or quality control process; or

  10. any other act or practice that impairs or attempts to impair an appraiser’s independence, objectivity, or impartiality.

arrrrgh, matey (sorry – but I have been waiting for years for some progress on this).

Update: Large lenders agree to new appraisal codes [UPI]

Update 2: In Deal With Cuomo, Mortgage Giants Accept Appraisal Standards [NYT]


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4 Responses to “More Than Just Guidelines, OFHEO/Cuomo Agree On The Code”

  1. Chris Vlad says:

    A noble cause indeed. However, the unintended consequences will be the complete demise of the mortgage broker industry and the appraisal industry. The management companies will profit for a while. The appraiser will be paid minimum wages and the decent appraisers will find something else to do for a living. The banks will end up with garbage appraisals done under extreme turn around time requirements and by appraisers that will work for food. Here is a clear example. Just this week I was contacted by a management company because on of our large bank clients will be using their services. In our area, a typical residential appraisal costs in the $325 to $350 range. The management company indicated that their appraisers receive between $150 and $175 per appraisal and delivery time is 24 hours. When all the lenders will use management companies they will probably pay under $100 for a complete appraisal. Having appraisals done cheaper, faster and of increasingly poor quality will result in the elimination of the appraiser. This entire exercise seems to be only a step away from using only computer generated valuations.

  2. Kevin says:

    I have to agree.

    It seems the smart thing for appraisers to do would be to organize and form a union – that seems like it might be the only way to protect fees and, in turn, protect the quality of work as well as the reputation of the profession. Unfortunately, I think that is not at all likely to happen.

  3. Richard says:

    I agree with Chris.

    This is all about the almighty dollar and someone having behind the scenes agenda ( maybe owning stock in Zaio.com or being on the board of a defunked appraisal management company – AMCO ). We need to scrutinize the originator of this whole mess. We all know Mr. Cuomo is a lawyer, but so was Spitzer. Who is Mario Cuomo exactly? What is his true motive? Why is willing to ruin people’s lives and careers? Why is he willing to destroy a whole industry? Hmmmm…I wonder.

  4. Jonathan J. Miller says:

    Richard – It’s Andrew, Mario is his father. There’s no intention to ruin people’s lives. Hey, no one should be forced into collusion or not get work. The system is fundamentally flawed. Its been going on so long its accepted as ok.