When the final chapter on this housing crisis is written, I hope that I am still around to see those who were responsible for its cause and the feeble attempts to fix it held responsible.
One of the worst fixes is the Home Valuation Code of Conduct. Enacted in 2009, HVCC was spearheaded by then New York Attorney General Andrew Cuomo. His objective was to rein in appraisal abuses by the lenders sending loans to Fannie Mae or Freddie Mac.
A noble goal, but by the time this so-called fix went into action many of the worst offenders were either shuttered or had lined up for a bailout. For those of us interested in the history of the housing crisis, let me remind you of Cuomo's repeated calls, during his tenure as HUD secretary, to prod Fannie and Freddie into buying ever more loans made to risky borrowers for the sole purpose of expanding homeownership.
The HVCC drove business to appraisal management companies, which were designed to be independent third parties, uninfluenced by the mortgage lenders. Mortgage lenders now require originators to place their appraisal orders with an AMC, who then contracts with an appraiser to perform the work on behalf of the borrower.
Today many of these AMCs are directly or partially owned by mortgage wholesalers and large national banks. They hide behind the firewall of an independent company, but if they own that company, either in whole or a piece, who are they kidding?
Imagine needing a medical doctor and having to go through an intermediary who will decide which doctor you may visit, and that doctor is chosen primarily on his fee charged, not expertise.
Consumers are paying more for residential appraisals. The appraisers who are doing the work are receiving a fraction of what they once earned. Unfortunately this structure has chased away many good appraisers who are unwilling to do more work for much less money.
I currently have a client who paid $500 for a single-family residential appraisal. Prior to HVCC this report would have cost my client $350. Then they were forced by the lender who also owns the AMC, to spend an additional $240 on a field review of that very report, done by an appraiser also chosen by the same AMC. The field review confirmed the exact dollar value of the first report.
Early on in my mortgage banking career, I felt the need to fully understand what went into a residential appraisal in order to be able to explain a report intelligently to my clients. I enrolled in 75 hours of education with the Appraisal Institute. After completing the curriculum, I earned the necessary education requirements to become an appraisal trainee. The next step would be to then apprentice for 2,000 hours under a licensed appraiser and complete more classroom education.
I came to appreciate the unique task the residential real estate appraisers perform. They are charged with giving an opinion of value on a piece of property at a specific date. This opinion is based in part on conditions within the subject property and comparable sales in the immediate neighborhood. They must comply with standards set forth by the Uniform Standards of Professional Appraisal Practice. The value derived will be used in my world to secure a loan. They are the umpires of the real estate world. There is no crystal ball.
As an independent licensed mortgage lender I developed a thick Rolodex of appraisers with expertise in specific communities over the past 14 years. It is now worthless. I am no longer able to directly order an appraisal or even speak to an appraiser on behalf of my client.
Since the HVCC was enacted I have seen a steady decline in the quality of residential appraisal reports. I have witnessed appraisers who are traveling from out-of-state and without any basic knowledge of the subject community. Understanding the area in which you have accepted an assignment is a basic rule of appraising.
Appraisers are under pressure from their new bosses at the AMCs. An extremely knowledgeable appraiser confided in me that he is forced to produce more comparables within a specific time period, judge the future value of a home in a declining market and most recently provide aerial photographs for the subject property.
The AMC is requiring him to perform this miracle in a shorter period of time and for less money. Today a residential report may contain as many as 9 comparable properties to support the value. That means researching and inspecting 9 different properties in addition to the subject. He further explained that some of the appraisal requests from the lenders underwriting the loan conflict with USPAP.
Keep in mind that appraisers are working for a smaller fee then they received prior to HVCC, but the same overhead. In the past if a lender needed more comparables or further work, the appraiser could bill the client. Not so with the AMC. They are working for a flat fee. As a result they search for the path of least resistance with a report so the lender does not ask any questions, which would require more work.
Whether working with an independent lender or large retail bank, consumers need a quality appraisal for their home. It is time to dismantle the HVCC and let the real estate appraisers make the proper calls on value without any influence other then their professional standards.
Richard Booth is a certified mortgage banker with America’s First Funding Group LLC, a residential and commercial lender in Neptune, N.J.