New Appraisal Process Creates New Obstacles

Roger Showley of the San Diego Union-Tribune published
an article in the last week about how the Home Value
Code of Conduct (HVCC) is affecting the real estate
market. Excerpts of his article are in quotes, my
comments are without quote marks.

"New rules governing appraisals, a key step in mortgage
lending, are leading to mistakes, delays, lower home
valuations, higher costs and worse service for would-be
buyers, industry experts say."

A client’s recent appraisal reinforces this point. The
appraiser was not familiar with the area, and he failed
to include a recent sale of an identical home model
in the appraisal. This would have led to a higher
valuation of the property.

"As of May 1, a new “home valuation code of conduct”
generally bars lenders, mortgage brokers and real estate
agents from communicating directly with appraisers and
requires them to work through a middleman."

The regulation was put into place because the regulators
cannot understand how communication between an
appraiser and a lender, mortgage broker or real estate
agent could be anything but a negative influence on
the appraiser.

"Previously, some appraisers had been pressured to verify
a value or face being blackballed from further work by lenders,
brokers and agents. Some analysts believe these ever-increasing
valuations contributed to the real estate bubble and its
subsequent collapse."

Some appraisers were pressured, some were not offered
additional work by lenders. Business is conducted by
parties that can get things done. If you have a service
provider who cannot meet your needs, why would you
hire them? This does not mean that you tell someone
that they have to falsify their product in order to get
more work – that isn’t right. But you seek out service
providers who can help you meet your goals.

The bubble was created because all parties in the process –
borrowers, brokers, agents, lenders, underwriters, investors
and even the easy money policies of the federal government –
all wanted things to move in that direction. Appraisers rely
on historical data, and evidence that the market had topped
out was only available after property values began to drop.

"The new code was worked out last year between New York
Attorney General Andrew Cuomo and mortgage-finance giants
Fannie Mae and Freddie Mac, which applied the rules nationally."

"In a real estate transaction, a buyer makes an offer that is
accepted by the seller, opens escrow and seeks a loan from a
lender or via a mortgage broker. The buyer pays for an appraisal,
costing $400 or more, and the lender uses the results to determine
how much to lend."

"If the appraisal is lower than the sale price, lenders typically
will not fund the difference, and buyers must increase their
down payments or sellers must lower the price to seal the deal."

"Now, buyers and their agents generally are not allowed direct
communication with the appraiser before the appraisal in completed,
and they say they are having trouble fixing mistakes."

"Because appraisers are paid a flat fee for their work, they are
not inclined to make changes, industry observers say. And lenders
do not press appraisers to raise values, remembering the freewheeling
lending of just a few years ago that resulted in millions of foreclosed
properties."

Lenders are very afraid of making any mistakes. They have bank
regulators looking over their shoulder and micro-managing their
lending operations. They are very conservative in their underwriting
so that they have no concerns about the regulators, or their ability
to sell their loans to FNMA and FHLMC. If that means more
paperwork, or answering questions about a file that really doesn’t
move the needle on any risk assessment, or accepting an appraisal
that may not be accurate because it is low, well, that’s just the
way it is going to be in this environment.

"While defenders of the new system say complaints about incompetent
appraisers amount to an “urban myth,” critics say the system could
impede the housing recovery."

"Just as the new code was going into force, some San Diego
neighborhoods were experiencing multiple offers and overbids,
sometimes prompted by low-ball listings posted by lenders hoping
to ignite bidding wars for their foreclosed properties."

"Because appraisers rely on past sales to evaluate present deals,
there is a built-in lag effect in an appreciating market, in which
sales completed several months ago are lower than current prices
being offered. So far this year, MDA DataQuick reports that the
overall San Diego County median has risen from a low of $280,000
in January to $320,000 in July."

"It takes an experienced appraiser to be able to spot a market turn
such as this, one block at a time, experts say. But agents report that
many nonlocal appraisers are submitting inaccurate valuations
because they do not know the territory or understand current pricing
trends."

"The system's new wrinkle is the “appraisal management company,”
sometimes an independent company that contracts with lenders and
sometimes is partly owned by the lender."

"To comply with the new code, lenders now typically hire these
companies to provide appraisals. The companies in turn rely on
thousands of freelance appraisers, chosen at random on a rotating
basis."

We do not “typically” hire these companies, we are required to do
so. So, we put an appraisal request into the company, they reach
into their black box of available appraisers whether they are
qualified for the assignment or not, the appraisal is performed,
and we have to deal with whatever is delivered. It is rare that the
appraisal will be inaccurate on the high side, so the lender is OK
with accepting an inferior product.

"But while the lenders have reportedly increased appraisal fees from
$400 to $500 in the past year, the increase is going to the management
companies, not the appraisers, who often get less than $200 for their
work, disgruntled appraisers say. The theory is that the appraisers
will make up the difference in more assignments now that they do not
have to spend time marketing themselves."

The appraisers are in a tough spot too. Career-oriented, professional
appraisers are being reduced to a commodity. The experience that
they have has been de-valued and they are compensated about half
of what they were previously able to earn for themselves.

"Meanwhile, real estate industry leaders are acting on several fronts.
A bill awaiting Gov. Arnold Schwarzenegger's signature would require
an estimated 150 appraisal management companies doing business in
California to register with the Office of Real Estate Appraisers. Bob
Clark, who runs the office, said the measure would allow his staff to
collect and investigate complaints concerning the state's 16,200 licensed
appraisers. In Congress, two bills would either replace the code or
impose an 18-month moratorium on its implementation. With neither
likely to pass, appraisal industry groups hope to seek modifications."

So the system has developed Appraisal Management Companies, which
in the hopes of consumer protection are no longer consumer-oriented.
And the state wants to regulate the AMC’s and appraisers (read: more
licensing fees to the state) to collect and investigate complaints against
appraisers. The state already has the ability to do that, because appraisers
are licensed currently. But we lose the freedom to conduct business
ethically, and differentiate ourselves with our experience, knowledge,
and professionalism and our abilities to coordinate a team of like-
minded service providers who work for the client: you, the borrower.