Rules to Regulate Home Appraisals Stymie Industry, Home Buyers
Anyone who’s ever purchased a home knows that the appraisal is a key component. Buyers rely on the appraisal to ensure that they’re not overpaying for their prospective home, while lenders need to make sure they’re not lending more than the home is worth.
But these days, getting an appraisal can be trickier than ever.
Illustration by: Matt Mahurin
As of May 1, new legislation called the Home Valuation Code of Conduct makes getting an appraisal costlier and more time-consuming for would-be buyers to procure — and the added time can even prevent purchasers from getting the best possible mortgage on their new home. This creates a stumbling block for home buyers at a time when the market can ill-afford to discourage buyers. And that’s not even the worst problem.
Advocates for the appraisal industry say that a move towards less-qualified appraisers prompted largely by the requirements of the new regulations mean that already depressed home prices are being undervalued even further. The problem has gotten so severe that even real estate trade groups that called for enhanced oversight in the first place are now working to dismantle its key provisions. And the controversy, some say, also shows how difficult it can be to reform even some of the most egregious practices blamed for creating the housing bubble in the first place.
“Initially we were in full support of the concept because we have for several years now been trying to get the powers that be to recognize that there were significant pressures placed on appraisers to meet certain values,” said Leslie Sellers, president-elect of the Appraisal Institute, a voluntary membership organization that certifies appraisers. Sellers added, “The unintended consequences have created havoc.”
Reforming the appraisal process goes back to earlier this decade, as home prices around the country inflated to what turned out to be unsustainable levels. Appraisers complained on blogs and industry message boards of being pressured by mortgage brokers, lenders and even builders to “hit a number,” in industry parlance, meaning the other party wanted them to appraise the home at a certain amount regardless of what it was actually worth. Appraisers risked being blacklisted if they stuck to their guns. “We know that it went on and we know just about everybody was involved to some extent,” said Marc Savitt, the National Association of Mortgage Banker’s immediate past president and chief point person during the first half of 2009 as the industry geared up for the rollout of the legislation.
Critics of the new regulations say problems started right at the beginning. Instead of being developed at the behest of and in collaboration with appraisers, HVCC was borne out of a settlement deal between the New York Attorney General’s office and Fannie Mae and Freddie Mac, the two giant government-sponsored entities that together make up the engine of the mortgage business. Why the GSEs were targeted by the state of New York is still unclear. The Center for Public Integrity has filed FOIA requests for correspondence between the two entities and the Attorney General to try and find out. Most players in the industry assume that Fannie and Freddie came under fire for buying and selling loans backed by inflated appraisals without verifying if the values were legitimate.
Prior to May 1, many appraisals were ordered by mortgage brokers. It was a convenient, if sometimes overly cozy, relationship. Brokers would go to local appraisers in the hopes of getting a valuation that would reflect a deep knowledge of the town, neighborhood and even street on which the property was located. Some lenders ordered appraisals directly, often through middlemen called appraisal management companies. The HVCC shook up the status quo by forbidding brokers to order appraisals; instead, that task now falls to lenders. Lenders, many of them big, national banks, have turned to appraisal management companies to manage the ordering process rather than try to forge individual relationships with literally thousands of individual appraisers across the country.
As a result, these appraisers have had to align themselves with the AMCs or run the very real risk of going out of business. Although the HVCC currently is only scheduled to be in place for 18 months, once banks create the new AMC-based infrastructure to manage appraisal ordering, it’s likely that individual appraisers will be left out of the loop for good.
The appraisers, not surprisingly, aren’t happy.
First of all, they point out, pressure to “hit a number” came not just from brokers but from lenders and even appraisal management companies as well. The HVCC in its current structure only addresses part of the problem while concentrating power in the hands of the AMCs. The other problem is that AMCs themselves aren’t exactly blameless. In fact, the New York AG’s initial investigation included not only the GSEs and mortgage lender Washington Mutual, but an AMC, too, a firm called eAppraiser.
“This is the bizarre part,” said Brian Davis, a Bloomington, Ill.-based appraiser and founder of the blog Appraisal Scoop. “The original problem was pressuring of appraisers by an appraisal management company, and this puts AMCs in the catbird seat.”
Davis isn’t alone in his view. “AMCs have a lot of money to gain in this. Even if the HVCC is overturned at some point a lot of appraisers are going to be out of business,” said Joseph Eaton, staff writer at the Center for Public Integrity. “It puts the AMCs in a great situation.”
Given that one of the corporations is embroiled in the initial scandal, many in the real estate industry question why the resulting legislation assigns such a major role to these entities.
“More qualified appraisers are dropping out, and using lower appraisals creates lower value down the line,” said Leslie Sellers of the Appraisal Institute. To cover their overhead, Sellers says AMCs are paying appraisers less but charging lenders — who pass the cost along to buyers — more per appraisal. As a result, less-experienced appraisers are taking on the lion’s share of the work, while appraisers who demand a higher fee turn down the AMCs’ offers for more lucrative work.
In addition, these novice appraisers may be valuing homes in areas outside their scope of expertise. Particularly in densely populated areas, even an appraiser who knows one neighborhood well could be completely unfamiliar with another neighborhood or town a short drive away. Industry insiders like the Appraisal Institute’s Sellers also says AMCs demand turnarounds of as little as 24 hours, leaving appraisers little time to do research on unfamiliar locations.
This combination of factors will lead to an artificial depression of home prices beyond the trough created by the subprime crash, Sellers says. Whereas an experienced appraiser would know his or her market well enough to not include foreclosures and short sales when evaluating comparable sales, someone who drove in for the first and only time that day would have no way of discerning these small but crucial details. While no one in the industry denies that homes were valued beyond what they were truly worth during the go-go years, appraising them at fire-sale prices only adds to the market’s pain.
Appraisers’ harsh words for the program were echoed by the National Association of Mortgage Bankers. “Although the HVCC doesn’t mention AMCs, it’s kind of a back door promotion of the AMCs. AMCs are unregulated, and they’re controlling the entire housing market,” charged NAMB’s Marc Savitt.
Even more worrisome, the second part of the HVCC, the creation of an enforcement entity to be called the Independent Valuation Protection Institute that would field complaints of appraisal coercion, has been placed on the back burner due to budgetary concerns. “We need to put some real teeth into this thing,” Savitt said.
Compounding this lack of oversight, a lack of regulation in the AMC industry means that even appraisers who actually are disciplined for artificially inflating home prices can get right back into the business by setting up shop as an appraisal management company and hiring others to do the work for them.
Industry watchdogs point to yet another way the HVCC open the door to impropriety: banks themselves are allowed to own up to 20 percent of the appraisal management companies who do work for them. While Jeff Schurman, executive director of the Title/Appraisal Vendor Management Association, an industry trade group that counts AMCs among its member base, calls potential conflicts of interest a “non-issue,” others voice skepticism that an AMC wouldn’t feel pressure to deliver for its parent company.
Even the companies one would think would be jumping for joy — the AMCs themselves — are decidedly lukewarm about the HVCC. “Our comments were very critical for a couple of reasons,” says Jeff Schurman of TAVMA. A big complaint TAVMA shares with most other real estate industry groups is the issue of portability. Previously, a would-be home buyer could get an appraisal through their broker, then shop around to get the best deal on a mortgage. Now, since the lender is in charge of ordering the appraisal, the home buyer can’t use it if they decide they can get a better deal from another bank. Instead, they’ll have to pay for a second appraisal ordered by that lender. This not only means an added cost for buyers, but it’s a potential disincentive for lenders to compete on rates, since buyers will be reluctant to switch lenders after they’ve already spent as much as $750 for an appraisal.
With all of these issues coming to the surface, perhaps it’s no surprise that the industry is battling hard to alter or outright scrap the HVCC. The current president of the Appraisal Institute has been meeting with representative of Fannie Mae and Freddie Mac to try and tweak the verbiage and the requirements contained in the regulation, while a bipartisan bill in the House of Representatives calls for an 18-month moratorium on the regulation. While almost no one in the industry denies the need for oversight in the appraisal process, the HVCC places significant strain on an already damaged housing market.
*Martha C. White is a freelance journalist in New York. *