Kenneth Harney on New Appraisal Standards
When you apply for a mortgage to buy or refinance a house, should you be concerned that your appraiser is being paid much less than the $300 to $600 you're charged, perhaps half?
Should you know who pockets the rest, or that cut-rate fees are too low to attract the most experienced appraisers?
Should you care that the appraiser might be pushed to come up with a number so quickly -- almost overnight in some cases -- that he or she doesn't have the time to do a proper inspection and accurate evaluation of comparable properties, pending sales contracts and local market trends?
These questions are at the core of a swirling controversy created by the release of new appraisal standards by Fannie Mae and Freddie Mac, the giant mortgage investors. The "home valuation code of conduct," issued by the companies' federal regulator late in December, is under attack by the industry it purports to protect, professional real estate appraisers. It's almost certain to turn into a political issue in the new Congress and may be the subject of a federal lawsuit.
The code, scheduled to take effect May 1, is the product of a settlement involving New York Attorney General Andrew M. Cuomo, the Federal Housing Finance Agency and the two congressionally chartered mortgage companies the agency oversees.
The settlement came after Cuomo threatened Fannie Mae and Freddie Mac with an investigation aimed at ferreting out alleged appraisal overvaluations and evidence of illicit pressure on appraisers to "hit the numbers" needed to close loans. As part of the deal, the two companies and their federal regulator agreed to create a set of standards to ensure that appraisals are accurate and insulated from pressure -- whether from lenders, mortgage brokers, real estate agents or third-party appraisal management companies.
But trade groups representing appraisers are unhappy about key details. Four of the largest appraisal organizations, including the Appraisal Institute and the American Society of Appraisers, issued a joint statement alleging that the code will force lenders to shift their valuation assignments to third-party appraisal management companies, abandoning the traditional system of using local appraisers selected by mortgage loan officers. The code bans brokers, who originate a substantial share of new mortgages, from involvement in selecting appraisers.
Management companies, the groups complained, "place appraisal quality last while shifting the cost of appraisal . . . services to the consumer without any disclosure." Often, management companies require appraisers to perform valuations for $180 to $200 -- far below their regular fees of $300 to $600 -- and deliver their report within 24 to 48 hours of an assignment.
Borrowers are charged the full fee at settlement with no knowledge that a third-party management company is taking a large percentage of what appraisers normally are paid.
The Title Appraisal Vendor Management Association, which represents third-party managers, denies that lower fees result in less accurate home valuations. Jeff Schurman, the group's executive director, said "there's no evidence of that," and if there were, major banks and mortgage lenders would not hire them. Appraisal management firms offer lenders valuation services anywhere in the country they're needed, Schurman said, and they deliver them quickly. He added that the portion of the appraisal fee the management companies take is "reasonable" given the overhead savings they provide lenders.
But some prominent appraisers are scathing in their criticism of management firms. "Their quality is terrible -- all they want you to do is crank it out at the lowest cost," said Jonathan Miller, president and chief executive of Miller Samuel, one of the largest appraisal companies in the New York City area. Only "the least experienced people" are willing to do the work, he said, "and the product is unreliable."
George Dodd, an appraiser based in Virginia, said "the most experienced appraisers [will be] the hardest hit" by the new code "because of our unwillingness to sacrifice integrity and quality." Rather than work for peanuts, Dodd said, "I can flip burgers at McD's for more."
Where is all this headed? The National Association of Mortgage Brokers plans to appeal to Congress to reverse the code's ban on broker selection of appraisers, and it is considering a lawsuit challenging the code. Appraisers also are expected to seek changes, either from Fannie and Freddie's regulator, or from Congress.
Why should this matter to you? Miller says quick, slipshod appraisals can severely undervalue some properties -- forcing buyers to come up with bigger down payments -- and can scuttle refinancings. Or they can overvalue houses that should be selling for less.
Either way, it matters.
Kenneth R. Harney's e-mail address is KenHarney@earthlink.net.