A major legal brawl is breaking out
over how homes are appraised, at what cost and by whom. The outcome could directly affect the price you pay for your next piece of real estate, and the amount of mortgage money you can obtain.
The fight centers on an unusual agreement reached in March among Fannie Mae, Freddie Mac, their federal regulator and New York Attorney General Andrew 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 purchase or securitize.
The code, which is scheduled to take effect on Jan. 1, would shake up the entire appraisal system:
•Mortgage brokers, who originate roughly 60 percent of all new loans, no longer would be allowed to select or pay appraisers. That could force some mortgage shoppers to pay for multiple appraisals rather than just one.
•In-house appraisers at banks and mortgage firms no longer would be permitted
to do 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 and Freddie would spend $24 million over the next five years to create and staff a new “independent valuation protection institute” to monitor appraisal standards and provide a complaint hotline for appraisers and consumers.
What’s the big problem here, you might ask? Inflated appraisals — often involving either pressure by loan officers or fraudulent collusion by appraisers themselves — played a role in at least some of the mess we’re seeing in many housing markets.
Prodding Fannie and Freddie to undertake appraisal reform is a good idea, right? Critics say: Not if you look at the details.
When the two mortgage companies and Cuomo recently asked for public and industry comment on the settlement, they were inundated with often angry responses.
Major financial and banking trade groups are not happy. In a letter, eight groups including the American Bankers Association, Mortgage Bankers Association and the Consumer Mortgage Coalition called the whole idea “bad policy” and demanded that Fannie’s and Freddie’s federal regulator withdraw its support for the agreement, effectively killing it.
In their witheringly critical letter, the groups said the settlement, sanctioned by the Office of Federal Housing Enterprise Oversight (OFHEO), violated multiple federal statutes and permits a single state, New York, “to unlawfully exercise authority that resides exclusively in the federal government.
Fannie, Freddie 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 argued. By “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 now held by competent, ethical professionals.
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 as well.
The National Association of Mortgage Brokers said removing them from the appraisal equation would force buyers to pay more for appraisals and spend more time
on applications.
Under the Fannie-Freddie plan, “consumers would be financially tied to the first lender they, or their mortgage or real estate professional, submit their application [to],” according to the brokers. “Any subsequent application may require a new appraisal,” doubling or tripling the cost and time involved.
Other critics charge that the Fannie-Freddie plan opens the door to greater use
of low-cost appraisal substitutes such as
automated valuation models (AVMs), computer-driven estimates that can be far off
the mark.
Where is all this headed, and why should you care? Fannie, Freddie and Cuomo say they will look at the critiques and make modifications if necessary. But federally regulated banks and mortgage companies are so angry that they are likely to challenge the legality of the entire settlement in court and demand an injunction.
In the end, after all the smoke clears, there’s a shot at an improved, consensus appraisal system: much tougher penalties for lenders who pressure appraisers, much tougher penalties for appraisers who give in, and more accurate appraisals for the consumers who pay for them.
Ken Harney is a real estate columnist with the Washington Post.