Fannie and Freddie have finally announced (I’m sure to no one’s surprise) the acceptance of OFHEO’s Home Valuation Code of Conduct which bans communication between a loan originator/mortgage broker and the appraiser for conventional 1-4 single-unit family homes. Appraisals must be ordered through a third party clearing-house of sorts. I picture this being similar to ordering a VA appraisal, which is not a pleasant process.
Here’s an example from the Home Valuation Code of Conduct of what will no longer be allowed:
- requesting that an appraiser provide an estimated…valuation in an appraisal report prior to the completion of the appraisal report or requesting that an appraiser provide estimated values any any time….
- providing to an appraiser an…estimated…value for a subject property or a proposed or target amount to be loaned to the borrower, except for a copy of purchase and sale agreement.
- ordering…a second appraisal…in connection with a mortgage financing transaction unless there is reasonable basis to believe the initial appraisal was flawed….
Lack of competition is generally bad for the consumer. And I see this slowing the process down and possible increasing costs…where is the incentive to be effecient or competitive? Who will pay the third party clearing house?
This is technincally effective on May 1, 2009; however, lenders are all ready implementing the new code. This is still very new and we’ll have to see in the weeks ahead how this all works out.
Thanks for the update, Rhonda. Any word as to how this will when state laws are weaker than this new rule?
Since this isn’t a federal law but a settlement agreement, I’m thinking it may only apply to loans sold to fannie and freddie….however, banks/lenders may decide to sell their loans to F&F much later so they may decide to originate according to the new agreement even with loans held at their own company.,
Jillayne, According the Fannie Mae FAQ: As of this date, only Fannie Mae and Freddie Mac have agreed to adopt the Code.
Various lenders may add their own underwriting “over-lays”.
This sounds like a big, expensive, backwards step to me.
I think lenders do want assurance that the appraiser is qualified, and having a clearing house choose anyone for anything means qualified goes to the bottom of the list, and random goes to the top of the list.
I agree with Rhonda, this will add time to loan processing, expense, and will not result in better appraisals. This seems like a knee jerk reaction to me.
Better to let lenders choose their own appraisers, and be at risk for losing approvals by FNMA, Freddie if their loans have a certain default rate instead.
Leanne, I don’t think this was created to protect the lender at all. If anything, it’s to protect the appraiser from the lender. Although I had a slimy fellow who presented himself to me as an agent and then admitted he was an appraiser…he was just after my business and went so far as to hint he would meet what ever home value I needed. His card went into my round file.
This was political grandstanding and it’s a lot easier to go after mortgage brokers instead of the big powerful banks.
For the next few days or weeks (depending on who I working with as the ultimate lender) I can still select the appraiser whom I’ve worked with for the past 9 years. I can ask to have the appraisal back by a certain date to satisfy the purchase and sale agreement (or for what ever reason)…now I don’t believe I can. Maybe I can relay my request to the appraisal management company…but it’s just adding another layer.
How will the appraisal management company determine which appraiser gets “the order”?. I would like to think they would consider who specializes in a certain area…but I’m afraid it will be a lottery or rotation type system.
What it’s designed to do is stop the practice of a mortgage broker calling up two appraisers, asking them for initial values prior to selecting one of them, selecting the higher of the two and then never hiring the appraiser again if they don’t appraise at the value they gave prior to seeing the property.
I’ve heard appraisers complain of that here I think, and I’ve heard of it elsewhere.
I’m not sure who widespread that practice was, but I also don’t see another solution to stop it, other than perhaps to impose criminal liability, but that would have detection issues.
Kary, this was caused by Cuomo investigating WaMU for strong-arming appraisers to meet certain values and then blacklisting them if they did not. This was not brought on by “mortgage brokers”.
It looks like the link to Cuomo’s announcement is broken from my original post…here’s this bit from another site:
Yes, I’m aware of that. When Cuomo made the allegations I was surprised that it was WAMU he was going after, because it was always some mortgage brokers that I’d heard were the problem. It made little sense to me at the time that a bank would be involved in such antics, but after reading a recent article about the things going on at WAMU I’m no longer surprised.
That WAMU was possibly doing that activity doesn’t mean that others weren’t doing it too. And the contexts I’d heard of it prior to Cuomo making the allegations was in the context of mortgage brokers.
This is a situation where the bad actions of a few are affecting everyone.
Kary, the phrase “mortgage brokers” is often wrongly used in the media…I believe in many cases, it should be replaced with “loan originators” to include those who work at banks, such as WaMU.
You may have heard more complaints about mortgage brokers because of misuse of the words…the abuse happens everywhere and this new Code was a result of WaMU.
When I have consumers contact me for help or advice who are in a transaction, I’ve actually had just as many (if not more) be complaints about large banks.
I’m not saying mortgage brokers are innocent, they’re not…neither are banks.
I’d agree with that. On the bank issue I once saw a loan officer try to convince an elderly man that a HELOC was the better than a reverse mortgage he asked about, because the bank didn’t offer reverse mortgages. Fortunately he didn’t seem to be buying it.
Reverse mortgages are costly…but they have no payments due (until death). It’s possible to have a HELOC actually be a better solution however…IMO it’s best for the consumer (Senior, in this case) to explore all options to make an informed decision…not just based on what a certain loan originator has to offer. This is part of the problem with the subprime crisis–some LO’s could not offer FHA and therefore, provided subprime products (some of which might have been better than FHA) without the consumer exploring all options.
A major difference with a HELOC is that the owner could be foreclosed out if future payments were not made, or the line could be terminated preventing them from borrowing to make future payments (what the bank officer was telling him he could do).
Very good point, Kary. I may have to write a post about Reverse Mortgages at RCG… typically they’re used for refinances and not purchases and I try to focus my RCG articles on purchase based transactions… not sure why I do that…but I do. 😉
At least they gave us over a year to work out the kinks in the system.
Does this prevent an agent from giving an appraiser a list of their comps, or telling the appraiser some pertinent facts?
I’ve only done that once and it was a Snohomish condo that had been re-sided. All the recent sales were apparently based on sales during the project, and they were flying off the market in less than 7 days, and priced almost 20% below a nearby condo. The comps I gave were all below my price point, but I wanted the appraiser to be aware how quickly they sold, and also aware of the just completed project.
Scott, I don’t see any major changes and they seemed to ignore NAMB’s suggestions…what I do see are kinks.
Kary, I don’t believe so…but I’d love it if you’d read the 6 pages and provide your opinion–you’re the one w/the attorney background! LOL 🙂
I was being lazy and the thing is boring (in my expert opinion). It seems to only apply to lenders and those related to lenders.
Rhonda:
You and I have talked about this extensively, and we have been going back and forth on this for about a year. I have experienced life as a loan originator required to use an appraisal management company (AMC), and also using independent appraisers.
Here’s my $2. OK, maybe $20…
1. It means the elimination of the independent appraiser. While some may have been bad guys, the majority are hard-working, ethical, and smart. They are the only ones I know. I suppose I should get around more…
The independent appraiser is required to balance the interests of the bank, the borrower and the loan originator. Many banks would blacklist appraisers that inflated values, or did poor work. The new plan makes the appraiser only accountable to the appraisal management company (AMC), who is only accountable to the bank. The borrower gets shafted, the loan originator gets shafted, the independent appraiser gets shafted (lower pay, same work). The only winner is the AMC that skims revenue, by charging more for the appraisal, and paying the appraiser less. Nice.
2. Appraisals will uniformly be more expensive, by about $100-$150. I know, I have been pricing a lot of them, as a refinance I have now requires the use of an AMC.
Worse, there will be plenty of unnecessary appraisals, which will be paid for by borrowers, since originators will no longer be able to obtain an honest value opinion. They will have no choice but to order a refinance appraisal blindly, in order to stay in business.
There will be no “paying at the door
Roger wrote: “There were MANY ways to discourage and punish unethical behavior from the few bad apple originators, or lenders. Not allowing loan originators to even speak with an appraiser will result in poorer results.”
What are those ways? I’ve been trying to think of some without good results. About the only decent one I’ve come up with (over in P-I land) is requiring appraisers to report any inquiry regarding a property to some central clearing house, so that loan originators shopping for appraisers on a single parcel will be spotted. And I also suggested the appraiser not be allowed to know the contract price. I agree this new system is not a good solution–I just haven’t seen anyone suggest anything else that would deal with the problem.
Also, as to your paragraph #1, I don’t think anyone is suggesting the independent appraiser is at fault. It’s those few unscrupulous loan originators that put undue pressure on the appraisers.
Kary, I’ve had appraisers trying to get my business indicate I’d have no problems with getting certain home values. No field is excused from having a few bad apples.
Roger’s correct about refinancing NOW–especially with Fannie’s new price hits that lenders are starting to implement…in addition to the appraisal issue. Condo’s are really going to be hit and so are cash-out refinances…it ain’t pretty and will also stop those who are after that “4.5”.
Rhonda, you’re right about no field being exempt. And there’s a reason “MAI” is said to mean “Made As Instructed.” 😀
Kennth Harney has a good column on this subject.
Glad to see it is finally getting some attention.
http://tinyurl.com/harney-appraisals
He leads with the money issue…borrower is charged $500 for appraisal, but the appraiser only gets paid $200.
Maybe it will get fixed…let’s hope so.
Kary,
All systems of human conduct are imperfect.
All they really had to do was to create a mechanism for appraisers to complain regarding undue pressure. Once the loan originator, and their authority (whether banker or designated broker) had to deal with the hassle, expense, and possible loss of licensing following an investigation, it would quickly stop.
I’ve always understood it was unethical to pressure an appraiser to hit a value. At the same time, it is important to be able to discuss values and issues beforehand, so that a realistic set of expectations can be established, and to discuss the results, so that the borrower can understand the outcome, and best possible future steps.
To use a medical analogy, the proposed system is like forbidding the surgeon from talking with the radiologist.
Yes, it may result in more objective diagnoses, but the overall outcome for the patient will likely be worse.
Roger, I agree with what Jonathan Miller was quoted saying (from the Ken Harney article):
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.”
I have been an independent appraiser for the past 10 years. I have mostly mortgage brokers as clients and cannot believe the answer to the industry problems is to add another middle man. AMC’s must really have one hell of a lobby. What a sweet deal for them. They appear to be no different than HMO’s or Health Insurance Companies. Another middle man that profits for doing nothing while appraisers earn less for doing the same work and carry all the liability and exposure. Here is my question: I do not know any AMC’s and have never worked for one. How am I supposed to get work statring may 1, 2009? I personally believe there will be many appraisers out of work come that time……
Joe Clancy, I think these guidelines are thoughtless and come at a bad time. They are focused against mortgage brokers when it was a bank that was originally charged and it will hurt independent appraisers as well as impact consumers.
Any new news about this?
I was in a room of lending folks, and they seemed not only utterly unaware this was happening, but many thought it was going to be delayed, again.
Chase made an announcement it was going to implement, then promptly shut down it’s wholesale operations (leaving correspondenet in place).
Have you heard of any other lenders insisting on using an AMC, or announcing a timetable for the rollout?
Roger, I believe it goes into effect for loans bought by Fannie/Freddie on May 1, 2009 or later so we should start to see more action with lenders. I’m sure this is being fought on different levels…and I hope so. I think this will really harm the consumer.
Have you seen anything?
Rhonda:
They are staring to roll in…here’s Flagstar’s.
Effective for all loans received in underwriting on or after February 16, 2009 all 2-4 unit property transactions will require an appraisal performed by a Flagstar approved appraisal management company (AMC). For a complete list of our approved AMC’s along with contact information, please
refer to Appraisal Management Companies
Correspondent loans must be purchased and funded by 2/27/2009 or comply with the new requirement. This change applies to conventional and government loans.
Here we go, Roger! The Washington Association of Mortgage Professionals (aka WAMB) will be having their next meeting on this very subject on February 20, 2009 in Bellevue at the Rainier Club. I’ll be there…if any other LO’s are interested, visit http://www.wamb.org for more info.