Proposed Appraisal Changes You Should Be Aware Of

Kenneth Harney, who writes a syndicated column
for the Washington Post Writers Group penned a
column recently from which I am borrowing liberally.

During the "go-go" days of making loans without
much concern about the quality and qualifications,
the appraisal process at times was compromised to
some degree by various market pressures.

There is a new proposed regulation, called the Home
Valuation Code of Conduct (HVCC) that was part
of a settlement involving New York Attorney General
Andrew M. Cuomo, and Freddie Mac (FHLMC) and
Fannie Mae (FNMA). It is scheduled to go into effect
May 1, 2009.

This came into play because Cuomo wanted to
investigate FHLMC and FNMA for alleged appraisal
overvaluations, and evidence of illicit pressure on
appraisers to "hit the numbers" needed to close loans.
Appraisers found themselves facing the prospect of
delivering appraisals at predetermined values, or not
being hired again to perform appraisals by unscrupulous
loan originators.

Part of the standards was to create Appraisal Management
Companies (AMC) to insulate the appraiser from any one
having a direct interest in the valuation and the outcome
of the process, including lenders, mortgage brokers, or
real estate agents.

The HVCC will effectively eliminate all of the business
relationships that have developed over years of working
together. Instead, mortgage loan officers, who tradit-
ionally would be the one to make the appraisal assign-
ment, will be forced to shift the assignment to third-
party AMCs.

It actually bans brokers from any involvement in
selecting appraisers, or having conversations with them
that could be construed as trying to influence the value.
Even the innocent practice of asking an appraiser to give
a range of what the raw data indicates before asking the
borrower to pay for a full appraisal will not be allowed.

There are some significant consequences for borrowers
if the HVCC goes forward and is implemented.

* The fee that you pay for the appraisal will actually
be split between the appraisal management company and
the appraiser. A professional appraiser typically
earned about $400 for a single-family (non-custom)
home appraisal. Now, the AMC will receive a good
portion of the fee, and the appraiser will probably
be asked to work for about half of what they earned
before. Or, the AMC will add their fee on top of the
traditional fee and the cost to you, the borrower,
will go up.

* Experienced, career appraisers may be priced out of
the market if they are not willing to work for about
one half of what they normally earned. This will
put many more inexperienced appraisers on the rosters
for the AMCs to select from. Appraisers who are
less experienced may create less reliable valuations.

* The AMC is selling their value by expediting the process
and offering quick turn-around times. If Appraiser A
does not respond quickly to a request, they will move
down to Appraiser B, and so on until they find someone
who can get the job done within their time frames. The
appraisers who are the busiest, which may translate to
being the most experienced and in demand, may not get
the assignment. The appraiser waiting for the phone to
ring will get the business.

* The appraiser may be asked to complete their evaluation
more quickly and not have an opportunity to do all of the
research that is warranted to assess the comparable proper-
ties, sales contracts and local market trends. This
will not lead to a better valuation process.

* Professional appraisal groups have argued that the AMCs
place quality last while they press appraisers to finish
the appraisal quickly, many times within 24 to 48 hours
from the time of the assignment. If the appraiser does
not have time to verify the important details of their
assignment, the result will be unreliable.

* Low appraisals will reduce a borrower's ability to
negotiate an acceptable refinance, and force buyers
to come up with larger down payments. It is much less
likely that an appraiser will err on the side of being
too high on a valuation.

There are still steps being taken before the HVCC proposal
takes effect. The appraisal groups and the National
Association of Mortgage Brokers plans to appeal to
Congress to change what they find most objectionable.

The old system worked very well for honest loan originators
and appraisers. If the lender used their quality control
systems to discover a concern over the valuation presented,
they always had the opportunity to request a review
appraisal by someone that they trusted and compare the
results.

This new AMC system puts more barriers in place to have
business conducted with effective communication, and it's
hard to believe that any of us will be happier with less
communication about something as important as your home
financing.