Appraisal Changes Face Resistance
May 12, 2008

The outcome could directly affect how much you pay for your next piece of real estate and how much money you can borrow.

The fight centers on an unusual agreement reached in March among Fannie Mae, Freddie Mac, their federal regulator and New York Attorney General Andrew M. Cuomo. The agreement took the form of an out-of-court settlement under which Cuomo terminated an investigation of the mortgage-finance giants' appraisal practices in exchange for their adoption of a far-reaching "home valuation code of conduct" covering all loans they buy or package into investments.
The code, which is scheduled to take effect Jan. 1, would shake up the entire appraisal system:

• Mortgage brokers, who originate about 60 percent of new loans, no longer would be allowed to select or pay appraisers. That could force some mortgage shoppers to pay for multiple appraisals.

• In-house appraisers at banks and mortgage firms no longer would be permitted to perform appraisals for loans to be funded by their organizations.

• Lenders would not be able to use appraisals generated by management companies -- firms that contract with networks of appraisers nationwide -- if they have a significant financial stake in the management company.

Under the agreement, Fannie Mae and Freddie Mac would spend $24 million over five years to create and staff an "independent valuation protection institute" to monitor appraisal standards and provide a complaint hotline for appraisers and consumers.

What's the problem these measures try to address? Inflated appraisals -- often involving pressure by loan officers or fraudulent collusion by appraisers themselves -- played a role in at least some of the housing-market mess.

Prodding Fannie Mae and Freddie Mac to undertake appraisal reform sounds like a good idea, right? But critics say: Not if you look hard at the details.
When the two mortgage companies and Cuomo asked for public and industry comment on the settlement, they were inundated with often-angry responses.

Who's not happy? Major financial and banking trade groups, for starters. In a joint letter, eight groups, including the American Bankers Association, the Mortgage Bankers Association and the Consumer Mortgage Coalition, called the whole idea "bad policy" and demanded that Fannie Mae and Freddie Mac's federal regulator withdraw its support for the agreement, which would effectively kill it.
In their witheringly critical comment letter, the groups said the settlement, sanctioned by that regulator, the Office of Federal Housing Enterprise Oversight, violated multiple federal laws and permits a single state -- New York -- "to unlawfully exercise authority that resides exclusively with the federal government."

Fannie Mae, Freddie Mac and thousands of banks and thrift institutions are federally regulated and cannot be ordered to change key loan underwriting procedures by a state government, the groups argue. "Forcing the dismissal of thousands of highly-skilled appraisal professionals because they are employed by" banks would "wipe out millions of dollars of investments," along with jobs held by competent, ethical professionals, they said.

Five national appraisal organizations agreed and said mortgage brokers should not be prohibited from hiring independent appraisers because the current system -- if strengthened by greater use of review appraisals to double-check accuracy -- works efficiently for consumers and the mortgage industry.

The National Association of Mortgage Brokers said removing its members from the appraisal equation would force buyers to pay more for appraisals and to spend more time on applications.

Under the plan, "consumers would be financially tied to the first lender [to which] they, or their mortgage or real estate professional, submits their application," according to the brokers. "Any subsequent application may require a new appraisal," doubling or tripling the cost and time involved.

Other critics charged that the plan would open the door to greater use of low-cost appraisal substitutes such as automated valuation models -- computer-driven estimates that be can far off the mark -- in place of on-site valuations by professional appraisers.

Where is all this headed, and why should you care? Fannie Mae, Freddie Mac and Cuomo say they will look at the critiques -- they only received most of them April 30 -- and make modifications if necessary. But federally regulated banks and mortgage companies are so angry that they are likely to challenge the settlement in court.

After all the smoke clears, there's a shot at consensus on an improved appraisal system: much tougher penalties for lenders who put pressure on appraisers, much tougher penalties for appraisers who give in and more accurate appraisals for the consumers who pay for them.

By Kenneth R. Harney

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