The Nation's Housing
Home appraisal system could be rehauled soon
Could the controversial appraisal system imposed nationwide by mortgage giants Fannie Mae and Freddie Mac in May -- and now tied to lowball property valuations, busted home sale transactions and higher fees to consumers -- be on its way out?
It just might be. Under a bipartisan amendment approved Oct. 22 by the House Financial Services Committee, the "Home Valuation Code of Conduct" would be terminated early in the existence of a proposed new Consumer Financial Protection Agency.
The amendment would require the agency's director to replace the code with an improved set of rules developed through the regular administrative procedures, with public comment periods, used by all federal agencies. The valuation code, by contrast, was the product of a settlement among New York Attorney General Andrew M. Cuomo and representatives of Fannie Mae, Freddie Mac and the two quasi-private companies' regulator, the Federal Housing Finance Agency.
Cuomo agreed to back off from an investigation of Fannie's and Freddie's appraisal practices in exchange for their adoption of a set of valuation rules. The code's core purpose was to ensure appraiser independence from loan officers, lenders and brokers who wanted them to "hit the number" needed to get the mortgage funded, even if it meant inflating the actual value.
Though virtually no one disagrees with the goal of appraiser independence, critics say the code went overboard and created its own set of problems. According to home builders, real estate agents and consumers who signed protest petitions, the code has encouraged many lenders to use appraisal management companies, some of them owned by or affiliated with the lenders themselves.
Those management companies, in turn, often pay appraisers much less than their standard fees but hit home buyers and refinancers with full charges or higher at closing. An appraisal management company, for example, might pay $175 or $200 for a valuation the appraiser previously received $375 or $400 to complete. The management company then would charge the consumer $400 or more at settlement, pocketing a large portion of the difference.
Management companies argue that they bring significant value to the equation, assembling networks of appraisers, making assignments and handling administrative tasks. But realty agents and home builders say the system often causes more harm than good. The appraisers who are willing to work for rock-bottom fees tend to be less experienced and more likely to accept assignments far from their geographic areas of competence, they claim.
The National Association of Realtors and the National Association of Home Builders have conducted member surveys that found that the appraisal system often produces valuations below the agreed-upon price in sales contracts, causing delays and disputes among sellers and buyers. The organizations also say that management-company appraisers use inappropriate foreclosed and distressed-sale transactions as "comparables" in their valuations of houses being sold in non-distressed situations.
Mortgage brokers complain that the code has cut them out of their traditional role of choosing qualified local appraisers and has forced some loan applicants to pay for multiple appraisals. When applicants are quoted an unacceptable interest rate or fees by one lender, other lenders often won't accept the original appraisal. In other words, appraisals under the code no longer are "portable" as they had been traditionally, when brokers could send consumers' application files to multiple lenders using a single appraisal.
The net effect, said Roy DeLoach, executive vice president and chief executive of the National Association of Mortgage Brokers, "is that we now have a dysfunctional system that's holding back the housing recovery. Incompetent, low appraisals not only hurt individual sales, but depress property values in entire neighborhoods unfairly."
The amendment that would terminate the Fannie-Freddie code still has a long way to go before becoming reality. It was co-sponsored by Reps. Gary G. Miller (R-Calif.) and Travis Childers (D-Miss.) and is an outgrowth of an earlier bill that would have clamped an immediate 18-month moratorium on the code. That larger legislative proposal has 118 co-sponsors and could still move in the House independently.
Legislation creating the Consumer Financial Protection Agency itself faces an uphill battle. Though the House Financial Services Committee bill has the strong endorsement of President Obama and could pass the full House as part of a larger regulatory reform package, its future is uncertain in the Senate, where big banks and mortgage companies are massing forces against it.
What happens if the consumer agency bill falters? DeLoach said housing groups will still lobby for the 18-month moratorium. Equally important, however, he added, "a major committee of Congress has now sent a clear message" to Fannie and Freddie: "Your appraisal code is not acceptable."