With industrywide concerns growing about the role of faulty appraisals in mortgage fraud, Fannie Mae and Freddie Mac are seeking to hold appraisers more accountable for their work.
On Nov. 1, Fannie updated its appraisal forms to include clearer indications of whether homes have structural damage, clearly state appraisers' liability, and make it easier for state appraiser boards to take enforcement action against them.
Jacquie Doty, Freddie's director of collateral policy, said Monday that the two government-sponsored enterprises are using the same forms, except Freddie will not use the form for coop loans, which the GSE does not buy in meaningful quantities.
Freddie will require appraisers to start using the forms by Jan. 1.
"We clearly have better communicated our expectation for the quality of the appraisal," Mark T. Simpson, Fannie's director of property standards, said in an interview Monday. "The format, the structure of the report, and the certifications should assist lenders in making sure it will be much easier to review an appraiser report to identify fraudulent appraisals."
The new forms call for the appraiser to answer questions about the home's structure - for instance, if the roof is in good shape - with a yes or a no, he said. In the past an appraiser would write up a narrative about the home's structural elements.
"There were areas" on the old forms "that were open comment areas" and left more up to the appraiser's, Mr. Simpson said.
Appraisers generally praised the changes.
"From a big-picture perspective, it makes the appraisal industry more accountable," said Jonathan Miller, the president of the New York appraisal firm Miller Samuel Inc. "The fraudulent appraisers have more of a bull's-eye painted on their back for future litigation."
Diane Valadez, the senior vice president of sales and marketing for eAppraiseIT, an appraisal management firm majority owned by First American Corp. of Santa Ana, Calif., said the enhanced structural reporting "makes the appraiser think more about what people would want to know."
In many cases, "underwriters will come back" to appraisers and ask for such details anyway, Ms. Valadez said. "In some cases, yes, … [the forms] take longer to fill out, but in reality appraisers are doing the exact same practice they were doing before."
However, Mr. Miller said there is only so much the changes can do. For one thing, "this is just a form, and if people are making up information and being misleading on the old forms, it's optimistic to expect this will have a significant impact on the integrity and quality of appraisals submitted."
Also, he said the update is "a baby step" that does not address the main cause of faulty appraisals: the lender-appraiser relationship. "Loan officers or anybody paid on commission should have no direct contact with the appraiser whatsoever."
Mr. Simpson said that the changes would make it easier to track down fraudsters, and that Fannie requires its lenders "to manage the appraisal process in an objective fashion."
Though Mr. Miller called one of the new certifications - a warning that appraisers can be subject to civil fines and penalties - "highly commendable," he had reservations about the other one, which reads, "The borrower, another lender at the request of the borrower, the mortgagee or its successors and assigns, mortgage insurers, government-sponsored enterprises, and other secondary market participants may rely on this appraisal report as part of any mortgage finance transaction that involves any one or more of these parties."
That certification, as it is worded, could significantly increase appraisers' liability to almost anyone else in the mortgage process, he said.
Mr. Simpson and Ms. Doty said they were willing to let appraisers attach a notice to the file: "The intended user of this appraisal report is the Lender/Client. The intended use is to evaluate the property that is the subject of this appraisal for a mortgage finance transaction, subject to the stated Scope of Work, purpose of the appraisal, reporting requirements of this appraisal report form, and Definition of Market Value. No additional Intended Users are identified by the appraiser."
Alan Hummel, the chairman of the government relations committee of the Appraisal Institute, a trade group, agreed with Mr. Miller that the certification about using the appraisal for any mortgage transaction "does create broader exposure." But he also said that for appraisers "liability has always been there," and that the additional notice "helps mitigate that exposure."
Ms. Valadez said the changes have increased interest in insured automated valuation models, which are cheaper than full appraisals.
On the operations front, lenders said little would change.
Rick Howe, a spokesman for Accredited Home Lenders Inc. in San Diego, said appraisers have known about the changes since March, and software vendors have converted their systems, so "most appraisers should be ready to use the new forms."
Lewis Allen, the chief appraiser at H&R Block Inc.'s Option One Mortgage Corp., said it has "done a lot of education on the forms recently" with its staff and updated its systems to accept the new forms.
