New appraisal rules are roiling an industry

Published 5:00 am Sunday, July 26, 2009

In his 18 years working as a residential real estate appraiser in Central Oregon, Scott Buckles said he’s dealt with many industry changes that have affected how he ran his business. But he said none compare with a new set of industry rules that threaten it altogether.

“Nothing ever upset the apple cart like this,” Buckles said.

He’s referring to the Home Valuation Code of Conduct, a new set of appraisal industry guidelines that went into effect May 1. The code was negotiated by New York Attorney General Andrew Cuomo and the federal mortgage agency Freddie Mac and forbids lenders from accepting loan applications with appraisals commissioned by mortgage brokers.

Supporters say the code reduces “appraisal fraud,” or instances when an appraiser colludes with a mortgage broker to inflate the value of a home, either to ensure the transaction isn’t jeopardized by a lower-than-expected value or to generate more earnings from the higher fees an inflated value would produce.

Opponents of the code, including the National Association of Realtors, the National Association of Home Builders and some members of Congress, say it is wreaking havoc on the real estate market with a raft of unintended consequences that are punishing the entire industry because of a few bad apples.

“Some truly bad things have happened in the housing and lending world by a very few unscrupulous people and you get a reaction, and this overbearing reaction has consequences that are very costly,” said Dave Woodland, owner of Signet Mortgage in Bend. “I think we’re just barely starting to see it.”

The code

The code only applies to loans sold to Freddie Mac or Fannie Mae, the government’s other federal mortgage agency that also has adopted the code.

Freddie and Fannie purchase roughly 80 percent of the residential mortgages in the U.S. in order to recapitalize the original lenders.

When a prospective homeowner is ready to buy a house, he or she normally contacts a lender or a mortgage broker to prequalify for a loan. Traditionally, once the prospective buyer has been prequalified and makes a bid on a home, the lender or mortgage broker would hire an appraiser to assess the home’s value to assure the lender it could recoup the loan should the borrower default and the lender was forced to sell the home.

The homebuyer pays for the appraisal, which costs roughly $450 to $500, according to local appraisers.

In the case of mortgage brokers, they would package the appraisal with the loan application and submit it to the lender who would fund the loan.

Because the code no longer allows mortgage brokers to hire appraisers, the responsibility falls to the lender. The code allows lenders to use their own staff appraisers to perform appraisals.

But because the cost of maintaining an appraisal staff during the ups and downs of a real estate market can be great, most lenders outsource their appraisals to appraisal management companies, said Jeff Schurman, executive director of the Pittsburgh-based Title Appraisal Vendor Management Association.

AMCs have existed since the late-1960s and help lenders save money, Schurman said.

But critics say AMCs have proliferated since May 1 to take advantage of the code, leading to inferior appraisals.

“Like all middlemen, they take a cut, and it drives the cheapest and the fastest, and that doesn’t promote quality,” said residential real estate appraiser Rachel Feldman, of Bend.

Buckles said AMCs — there are none in Central Oregon — want to hire the cheapest appraiser they can find. He said he’s been offered appraisal jobs for as little as $200 but refuses to take the work because it’s not worth it, he said.

Other area appraisers, including Patrick Solitz, the owner of Appraisal Associates of Oregon in Bend, confirmed his office also has received offers from AMCs that are below traditional market values.

“Basically, we’re working for less fees than we were making 15 years ago, with more complex reports,” said Solitz.

Buckles and Solitz said if they turn down the work, it sometimes produces situations where appraisers from outside the area come to Central Oregon to assess properties. The particulars of a neighborhood or its proximity to parks and schools often can’t be properly valued by an appraiser who is not “geographically competent,” Buckles said.

The result, critics say, is “undervalued” appraisals that can threaten mortgage transactions or kill them altogether.

Schurman said the glut of distressed homes on the market selling at deflated values is why appraisals are coming in low.

“The perfect storm of things is happening, and (the critics’) response is, ‘It’s the (code),’ but it’s not,” Schurman said. “The code is definitely having an impact in the way appraisals are being ordered and whole comfort level that participants in the market had — I’m not defending the code — but the way the market is going is really dictating what’s happening.”

Fannie Mae and Freddie Mac recently issued additional guidelines that say appraisers must be certified or licensed in the state where they are appraising property and be familiar with the local market. The National Association of Realtors applauded the move, saying in a July 23 statement that its “members were experiencing delayed and lost sales because of poor appraisals conducted often by inexperienced appraisers who were not familiar with the area.”

Some appraisers, like Matt Adams, of Bend, have always worked for AMCs. The pay is not as lucrative, but partnering with an AMC can provide a steady stream of work, Adams said. When he started in the appraisal business in 1997, Adams said he didn’t have the time to establish the personal relationships with lenders and mortgage brokers and chose to work with AMCs.

Adams said he hasn’t been negatively affected by the code but does take issue with its language, which prohibits appraisers from talking to the lenders or brokers who ordered the appraisal. Adams said communication with the lender or broker can convey valuable information about a property. In some cases, such as when a homeowner wants to refinance, the ability of the appraiser and lender to discuss the appraisal beforehand could potentially save the borrower from paying for an appraisal if the appraiser believes the borrower’s sense of the home’s value is overly optimistic.

“The whole point is it’s not about not talking to the lender … (but) not to be influenced by the lender,” Adams said.

Appraisers reached for this story were happy the code attempts to cut out the ability of lenders or brokers to influence appraisals. But they also bemoan how it’s killed business relationships that were sometimes years in the making.

“For many of us, who have been honest and honorable and developed long-term relationships, those got thrown out the window,” Feldman said.

In D.C., seeking to delay the code

At least 30 U.S. representatives are sponsoring a bill introduced last month by Rep. Travis Childers, D-Miss., that would impose an 18-month moratorium on the code. The moratorium would help address some of the code’s unintended consequences, according to the National Association of Realtors. The bill was referred to the House Committee on Financial Services and is waiting to be scheduled for a hearing.

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