I am hearing of lender clients having to wait too long to get their appraisals, values coming in below contract prices and major anger in the appraisal / lending world.  What is causing the Havoc?  All fingers seem to be pointing to the HVCC.  The HVCC is the new Home Value Code of Conduct – an agreement between Fannie Mae, Freddie Mac, their regulator and the District Attorney (Andrew Cuomo) of New York State.    In response to a problem with over-valuations of real estate as at contributory factor in the many bad mortgages that have caused a collapse of the financial world.

The “Code” requires a 3rd party to seperate the loan originator on a mortgage loan from the appraiser assigned to value the property. .  This was intended to remove the pressure some loan officers placed on the appraiser to help them make the loan.  Appraisers have in the past been asked to give a value estimate on a property before seeing it, before a formal appraisal request is made; other times the appraiser was informed of the “value needed” as a target value to hit.  Appraisers who were not considered ‘team players” often  lost clients, or were denied payment for work done.  Lenders went as far as to establish “black lists” of appraisers, not because they were bad at what they did, but because they were considered “deal killers”.

Too often the preferred appraiser, was the one most likely to over-value, for that best served the needs of the client who works for a commission based on loans funding.  Plans to license and regulate loan originators is only now really being considered.  In the crazy days leading up to the mortgage mess, too many people were making lots of money (making loans) to care if they were good  loans or bad loans.  And it only became a “problem” when loans started to fail in large numbers.

So on May 1, 2009, it was required that all loans delivered to Fannie Mae or Freddie Mac must certify the “code” was followed.  Because few lenders had a good third party ordering system, Appraisal Management Companies (AMC) become the preferred method of ordering appraisals.  The AMCs in order to attract lender clients, often required the appraiser to accept lower appraisal fees, and expected the appraisals to be completed in short periods of time.  More experienced appraisers bulked at the fees and turn times and refused the assignments; resulting in the work often going to the less experienced or even out-of-the-area appraisers.

Now, it is important to understand with any profession there are people who are good at what they do, and others that are not.   Appraising might seem easy to the less experenced appraiser, it is only with time and experience that we learn good appraising takes more time and understanding the factors that affect real estate value.  And any job done on the quick, is likely to be troublesome, especially if the worker is inadequately paid for the job.

As part of the “Code” there needs to be a level of quality control over the appraisals, and I believe this is where the real problems are happening.  We need to know who or what is doing the quality control.  There are computer programs that can search for violations of appraisal guidelines or inconsistences in a report.  However, in the real world it is not always possible to stay within the guidelines.  For example there are guidelines about how far away is too far for a comparable property sale used in an appraisal; but when there is a shortage of sales of similar properties – the appraiser has to expand the distance search to find good data.  As long as the appraiser has a good reason for what they have done and why – a guideline is just a guideline – not a requirement.

Other times the appraisals might be reviewed by non-appraisers, or less experienced appraisers willing to do review work on the cheap.  It is human nature to believe the way we do something is the only way something should be done – appraisers with a good backgrounmd in appraising and a good sense of fairness can look at work done by another that is reasonable, but not completely the way they would have done it.  Less experienced reviewers can be quick to find fault if the report does not minic the way they work.  One thing that is often over-looked is the appraiser actually saw the property (possibly inside and out); and the reviewer (at best) might have driven past the property months (or even years) later.

So what I think is happening is the quality control is finding possible (or real) problems with the less experienced appraisers (willing to do the work), who do not have the skill or guts to defend their work , so they back off (down) in the valuations or plug in (unreasionalbe) data requested.  These may be the same appraisers who “hit the needed values” requested by their previous clients.  It might be an issue of low self worth (afterall they are accepting low fees and unreasonable requirements) and that has resulted in bad valuations under the old system and under the new system.

Older appraisers are being pushed out of the business, either by clients to don’t value the truth, or are not willing to pay more for “quality” appraisals.  So why should we care?  We should care that bad loans are prevented – for every loan that goes bad not only hurts the owner of that loan, but also the family who loses their home.  All the irresponsible lending allowed homes prices to skyrocket, and with reality (the the difficulty of homeowners to make their payments) hit and homes were lost to foreclosure; and prices dropped – do we see the danger done by (among other things) agressive real estate valuations.

Much of the anger about the HVCC is coming from loan makers, mad with the extra cost of appraisals, the longer wait to get the appraisal back (which seems to be a back log in the quality control process) and add to that values coming in below the contract prices – likely to killing the deals.  Appraisers are mad about the lower fees they are being pushed to accept, if they want to continue doing mortgage appraisals.  And some appraisers who have not locked up work with AMCs and are now finding the rosters are closed.  And now I am hearing about the AMCs being slow in paying their appraisers and one case where the client did not like the value and the AMC has chosen not to pay the appraiser (this actually is NOT allowed in the Code).

The “code” does require the borrower receive a copy of the appraisal at least 3 days before the loan closes.  Things you might want to check: how far is the appraiser’s homebase from the property location (the appraiser’s address is on the signature page); is the person who saw the property the person who signed the report (who signs the report certifies they saw the property – if they did not they have violated appraisal law); is the information in the appraisal correct, look especially to the neighborhood and market conditions – too many appraisers fill these spots with generic comments; and share the appraisal with your real estate agent and ask if the choice of comparables used are recent, similar and appropriate.  If you find problems in the appraisal complain to your lender.  If the appraisal is preventing your loan, you might want to hire an independent appraiser to review your appraisal and bring that review to your lender.

Beverly A. Bayer, SRA

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