From Wall Street Journal
MarketWatch July 26, 2009
New Appraisal Code Raises a Row by AMY HOAK
New rules aimed at making home appraisals more accurate are raising costs and prompting longer waits to get to the closing table, some in the mortgage industry say.
The new rules — known as the Home Valuation Code of Conduct and in effect less than three months — have driven up the cost of appraisals, says Keith Stewart, a mortgage consultant with NorthPoint Lending Group in Chicago.
An appraisal that once cost $275 to $300 now runs $375 to $500, he says. That’s because under the new rules a third party, often an appraisal-management company, must serve as middleman between a mortgage broker and the appraiser, says Drew Kessler, director of sales for Rand Mortgage in New City, N.Y.
A bill in the U.S. House of Representatives proposes a moratorium on the new rules, as some in the industry are concerned the code will slow recovery in the housing market.
But the Federal Housing Finance Agency says the new code of conduct is necessary to make sure homes are appraised correctly and fairly. The code went into effect in May and applies to conforming mortgages, which are those that are able to be sold to Fannie Mae and Freddie Mac, the troubled government-backed mortgage agencies.
“Unfortunately, during the 2005-to-2007 period, mortgage lending was much too aggressive and placed pressure on the appraisal process,” the FHFA said in a statement last week. “In some cases, that resulted in unrealistically high appraisals, hurting home buyers as well as investors. The is designed to promote professional appraisals free from inappropriate pressure from lenders, borrowers or brokers."
In short, the rules aim to address a serious problem faced by many appraisers, the pressure to produce a desired value on a property, says Bill Garber, director of government and external relations for the Appraisal Institute, an association of professional real-estate appraisers. In some cases, appraisers were motivated to comply with the request because they didn't want to risk losing business.
"Mortgage-broker pressure on appraisers was real during the past 10 to 20 years," he says. "They are no longer able to order, select or compensate appraisers, and as such, some of that pressure has subsided."
Adds Jim Amorin, president of the Appraisal Institute: "Consumers were maybe paying more for a home than it was really worth because of undue pressure being applied" to the appraiser.
The FHFA also says that rising closing costs aren't due to the new code, but instead can be attributed to lenders' tightened underwriting standards and mortgage-security investors' desire to reduce fraud. They're increasingly requiring additional information or second appraisals.
But the new rules cause other indirect costs, too, Mr. Kessler says. Under the new code, the appraisals are not "portable," meaning a consumer's mortgage broker can no longer use the same appraisal to apply for loans at different lenders. An appraisal done for a Bank of America loan, for example, can't be easily used to apply for a Wells Fargo mortgage, he says.
"Previously, the broker owned [the appraisal]. That has changed. Now, it's in the name of the actual lender," Mr. Kessler says. If a borrower decides to pursue a mortgage with another lender -- after an appraisal has already been procured through a different lender -- the borrower may need to pay for a second appraisal. Even though the borrower typically pays for the appraisal, it is held by the person or firm that orders the appraisal, he says.
The FHFA disputes this complaint, too, saying that appraisals are transferable between lenders under the code although -- and this is key -- whether a lender decides to make a transfer or accept another lender's appraisal is up to that lender.
Reports of time delays are also common among mortgage brokers, and the FHFA acknowledges that the implementation of the code may have slowed the mortgage process a bit. But the agency also says there are other reasons for delays, including increased demands by lenders.
Effort to Improve Quality
Appraisers see good intentions in the new code, but they, too, have concerns about appraisal quality. Some appraisal-management companies decide which individual appraisers to contract for a job based on who can get the job done at the lowest cost -- and perhaps not enough based on experience, says Mr. Amorin. Plus, he thinks there isn't enough emphasis on making sure the appraiser is familiar with the immediate area.
Yet the FHFA says appraiser professional standards already in place require the appraiser to be competent and knowledgeable about the local area.
Whatever industry participants think about the code and its implementation, it's a start to addressing the practices that led some appraisers to value properties higher than they were worth -- an issue that contributed to overpriced markets, Mr. Amorin says.
"Accurate appraisals, produced in line with industry standards and legal requirements, provide key protections for homeowners, [Freddie Mac and Fannie Mae] and investors," the FHFA says. "The poor practices of the past are being corrected and lessons learned are being addressed."