Sounding Bored is my semi-regular column on the state of the appraisal profession. This week I play a simple game of absolute havoc.
With the comment period of the Cuomo Fannie Mae agreement officially closed, it’s time to reflect on what it means to us. The word “havoc” is disaffectionately derived from the HVCC acronym for the Home Valuation Code of Conduct (Hat tip to Ann O’Rourke).
There has been a lot of anger originating from the appraisal profession, most of it warranted but some of it based on misinformation or misinterpretation. I think the Attorney General of New York, Andrew Cuomo and his staff were the first government entity to actually understand what appraisal pressure was, why it is bad and how if proliferated. For the first time someone started with the appraisal process and “followed the money.”
By forcing the GSEs not to purchase mortgages whose appraisals were ordered by mortgage brokers, they succeed in breaking the impact of self-dealing on property values.
I get pretty annoyed when mortgage brokers say they will go out of business without being able to order the appraisal and it will cost the consumer more. That thought is based on a premise that the appraisal result is influenced by the person ordering it who in turn is paid a commission. Please.
Dave Bigger of a la mode (who makes an awesome appraisal software product) was quite outspoken about this agreement several days before the close of the comment period.
In case you don’t know yet, the new regulations came out of a lawsuit brought by the New York Attorney General against Washington Mutual and eAppraiseIT, centered on coercion of appraisers.Â In a settlement agreement spawned by the suit, the GSEs (Fannie Mae and Freddie Mac), and the Office of Federal Housing Enterprise Oversight (OFHEO) agreed to change national appraisal rules in exchange for the Attorney General’s office terminating its investigation of the GSEs. Unfortunately, while we believe the agreement has the best of intentions, the hastily written embedded regulations (called the “Home Valuation Code of Conduct”, or HVCC) do not solve the problem and in fact severely punish appraisers, and ultimately consumers.Â If there ever was a case of the cure being worse than the disease, this is it.
He makes a great case with one significant flaw based on this comment:
The value of the client relationships you’ve nurtured, many timesÂ for decades, could disappear immediately under the HVCC as lenders are forced to shift their orders to AMCs.Â You won’t even be able to speak to your current clients’ loan officers again if the HVCC is left as-is.
Here’s the problem with this argument: The mortgage lending system has no business allowing loan officers and appraisers to interact. This is old school and one of the reasons we are in this credit mess. Speaking to a loan officer is no different than speaking to a mortgage broker. It’s called collusion and has been in place so long, many of us don’t see it anymore.
Here’s the real problem with the HVCC concept and the deal in general: Appraisal Management Companies will be enabled by enforcement of this deal. This poses a significant threat to the appraisal industry for the wrong reasons yet I don’t see how this can be legislated out of the lending process.
Appraisal Management Companies survive on appraiser willing to work for fees that are typically half the market rate. Keeping costs low is certainly no crime, but it has been my experience that the appraisers who generally work for AMC companies don’t need to have much overhead because they don’t need to do any research. They fill out the form and arrive at the borrower’s estimate or the sales price. There is no penalty to the AMCs to reward this practice. I think the AMCs need to rep and warranty the mortgage or they have no skin in the game.
It has been my experience that employees in AMCs that interact with appraisers are very young and inexperienced (cheap) and are paid based on the average turn times and fees of appraisers under their control.
The AMCs are subject to pressure from their lending clients which is what brought Cuomo to take action in this matter (WaMu/eAppraisIT) just like appraisers are. There are no checks (no pun intended) and balances.
If mortgage brokers can’t order appraisals for mortgages, then the responsibility falls to the lenders again (which is not a bad thing since they are lending against the collateral being appraised). So who is the bank going to call to order hundreds of thousands of appraisals across the US next year? They have already severed most of their appraisal relationships by using AMCs or emphasizing wholesale lending channels for new business.
Banks will be forced to use AMCs to complete appraisal reports for their loans. Poor quality will replace poor reliability. We get to the same place as before but take a different path.
That means little good news for the good guys.